Arnold Kling  

Economics, Standing on One Foot?

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Andrew Samwick writes,


Economics consists of exactly two ideas: optimization and equilibrium. Optimization is the process by which all economic agents--households, workers, firms, governments--achieve their objectives subject to constraints on their resources. It leads to the familiar condition that an activity is undertaken until its marginal reward equals its marginal cost. Equilibrium is the process by which the competing efforts to optimize by these agents form a stable arrangement. An equilibrium is defined by relative prices, and those prices typically form the basis of either the marginal reward or the marginal cost in the individual agents' optimization processes. So "seeing the economics" means figuring out what is driving the optimization and equilibrium in a given context.

I think that optimization and equilibrium are two very important concepts in economics. However, I think that they can be over-emphasized. See this essay.


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COMMENTS (2 to date)
John writes:

I think perhaps the problem with Samwick's assertion is that he is refering to academic economics rather than economics as a science. In my college economics courses, the emphasis was always on optimization and equilibrium because that is what the underlying theory uses to break down problems for closer scrutiny. It was tacitly understood (though not emphasized nearly enough) that concepts like perfect competition or simplifications such as no trasactions costs do not exist in the real world.

Randy writes:

Arnold,

Good essay. It occurs to me that greater value is being created by this and other blogs than by all the Ph.Ds combined. I say this because it seems to me that the greatest value of economics will be when its general principles are widely understood. Imagine all the socialists in the world suddenly developing entrepreneurial instincts. Also, if a Ph.D is all about the math, then most of them will be replaced by computers in the next few years.

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