S E52: Useful Economics in Everyday Life

[MUSIC] Over the past few seasons of Think Like An Economist, we've been taking you all on a journey of learning economics with us from the basics about supply and demand to the bigger concepts in macro policy like how governments and central banks make decisions which affect millions of people. We really hope that you've noticed we've been teaching you about a lot more than just Econ 101. We've been thinking about how to actually apply all these principles in your everyday life. You know, people just didn't always ask me, "What is economics?" and they think it's about money. It ain't about money or at least it's not just about money. It's not really about money at all, it's about how people make decisions. And not just decisions about money but decisions about every aspect of your life. That's the underappreciated beauty of economics. There's just a few concepts that you can learn to make better decisions in just about any aspect of your life. Should I take on more debt as a student to do some traveling? Should I quit my job to start my own business? When should I start a family and when should I start saving for my retirement? Should I play the stock market or put my money in mutual funds? And so in today's episode, we're going to talk a little bit about useful economics, about how we teach useful economics to our students and about how our students can learn to make economics useful for them. We all need to remember that economics isn't about this big thing called the economy. This is about the tools we can use to transform our own lives. I'm Justin Malthus. And I'm Betsy Stevenson. And this is… Think. Like… And… Economist. Journalist, Nestor and Tevikoli Far is with us. Who was once also an economic student herself. Yeah, that's right. And so Betsy and Justin, I've had a really eye-opening time doing this podcast with you. Because I remember when I was an undergraduate. And so much of economics is about people and decision-making. But I just remember a lot of what we learned to students was about these big concepts in policy making. And it often felt really overwhelming and abstract in the lecture hall. Talking about macro-integrators and things like that. Your approach is really different and also really, really useful. Oh, thanks, Nest. I think economists do often teach you the assumption that their students are all going to go off to become professional economists themselves, perhaps working government or at a big organization. And that they'll be involved in making policy on some level or at least that's the level on which they want them to understand economics. The reality is that everyone will make economic decisions like how much to spend versus save or how many jobs to apply for or rather to start your own business. We make economic decisions even if we don't become professional economists. And so that really needs to inform how we teach and learn economics. You know, there's a quote by the economist Alfred Marshall, which we really like. And he says that economics is the study of mankind in the ordinary business of life. And so that's our job. Let's apply economics to the ordinary business of life. And so today's podcast we're going to tell you a little more about our teaching philosophy. So that can help shape your learning philosophy as you dig further into economics. I've also been really pleased to hear that thousands of economics instructors at high schools and universities around the world are listening to think like an economist and asking their students to listen. So today's episode is really for you. Let me reflect on my path a little. Three things have really influenced my own approach to teaching economics. And they got me thinking about how to teach in economics that would be really useful. The first is that I moved to being a professor at the University of Michigan and I teach our big introductory economics course and interacting with students and seeing their progress and wanting them to get something out of the class really mattered to me. The second is Betsy and I wrote an introductory economics textbook and that forced us to think deeply about what our subject is and when it's useful. And finally, I became a dad and that really shifted things for me. I started to think more about my students and their role in the world and what it is they wanted and how I could best equip them. Students like my kids to go on and live more productive and fruitful life. The truth is Justin did become one of those dads who's like, look, am I getting my money's worth from this education? Even though he hasn't started to pay for college, he could see that that's where it was going. You know, that started to shape. Like how do we teach? Are we teaching in a way where, you know, not to be too crass about it, but is there an ROI on this investment? To say it, now the way economics isn't about me, it's about you. We want to put our students in the driver's seat so that they can see that every decision is an economic decision and they can use the tools of economics to make the best decisions for them. Let's dig in a bit more about what useful economics is exactly and how you teach it. But also how we listening can best apply these useful tools of economics to our everyday decision making. You're talking about how we can think like an economist. Exactly. Well, like Betsy said, economists often assume their students are going to go into policy, but we need to realize that most of us aren't going to become Janet Yellen and advise a bunch of presidents. Well, I'll speak for yourself, Justin. Right, most of us, Betsy. Most of us though, even if we're not advising presidents, we're taking part in the economy. While we're studying, we're consumers of goods and services, including education, also housing and food. Our students make decisions on whether to buy imported products, be it various fruits at the grocery store or high-tech equipment from Japan or Korea, and these prices are going to change, as exchange rates change. We all have to decide how to allocate our time, every single one of us. So as a student, think about how many hours to study versus how many hours to spend on a part-time job. That's thinking about money today versus money in the future, or thinking about social activities or getting involved in a sports team. So trying to think about the trade-off between consumption of goods and services by earning money and consumption of leisure. And when they graduate, they'll be supplying their labor, they'll be working, and when you hire people to help you out, you're also a demanding labor too. It's interesting because you're highlighting just how active we all are in the economy as everyday people who are going about everyday tasks and decisions, or going about the ordinary business of life as Alfred Marshall put it. Yeah, and that is key. We're all actors in the economy, rather than simply being spectators. Which is how I often felt when sitting in an economic lecture. Yeah, and so teachers really need to make clear that our students aren't passively looking at this big, scary, nebulous machine called the economy. They're taking part in the economy all the time. It's actually one of the things that really irritates me when we turn on the TV and listen to the news or read in the paper or sit in some econ lectures. The people are made to think there's this thing out there called the economy, and that economy matters and we have to take care of it and nurture it, and sometimes it's more important than we are. It's completely false. We are the economy. That perspective leads us to focus on each of us making good decisions. We do this in microeconomics where we look at how people can make the best decision they can to make their lives better by making good choices. As economists, we apply these econ tools all the time. For example, we like to think incrementally or as economists call it thinking on the margin. That's about one extra. Yeah, like should I spend one more hour studying? Should I eat one more cookie? Things like that. We also think about trade-offs. Should I spend today or should I save money so that I can spend tomorrow? We need to remember that the principles of economics can provide guidance across all sorts of decisions. The economic toolkit is broadly applicable. That's right. What's neat is that all comes down to just a few key principles that we turn to again and again. These are the core principles which we explored right at the start of think like an economist. So just to recap, they're the opportunity cost principle, the cost benefit principle, the marginal principle and the interdependence principle. Our inspiration here comes from another economist. This time it's the great Nobel Prize-winning Gary Becker who said that there are only a few principles that really guide most economic analysis. Gary was right and that's what we want to emphasise. And so how does this all affect how you teach economics? What means that Justin and I focus on those core principles and just apply them over and over and over again relentlessly until it becomes a habit for students. So whether it's asking when you should have a child or what career to choose or even how to spend the rest of your day, we can use those tools so that we can make organised good decisions. Justin, at the start you said that there are a few factors which got you into thinking about useful economics such as becoming a dad and thinking more about things from a student's perspective. Now, other reasons why economists like yourself are keen to teach useful economics. The world has changed a lot over the past few decades. Technology is with us and the power of computers has grown enormously. So we as social scientists can do a lot more than ever before, and that ability is only growing. The rise of computers also means we have more data available, and that changes how we teach economics in some pretty important ways. It used to be that data was scarce, and economic theories helped us fill in the blanks where there wasn't data. Today, we have a ton of data about everything. That loyalty card you signed up for at the supermarket knows a lot about your family's eating habits. Your phone probably knows how much you walk on average every day, your subway card knows how much you traveled and from where. By gathering these data from tens of thousands of people who use the subway daily, subway stations can make decisions about how many staff to hire and where. Public health authorities contract the spread of disease, and businesses contract which parts of town are becoming more popular. It almost sounds like the problem today is that there's too much data. In some sense, I think you're right. There is too much data, and that's actually why economic theory is more important than even when data was scarce. So we have a new role for economic theory for today's students. It's a way of organizing and making sense of these reams of data, this tidal wave of data that threatens to overwhelm us. So all this data can be used to either confirm or refute different ideas about how people make decisions, and it's given us a lot of insight into people's behavior, and that's actually some of where behavior economics has come from. It's part of economists now becoming more realistic about people. Gone are the days of economics professors starting lectures with a phrase, "Let us assume all actors in this example are rational." I always hated that assumed people are rational. I always think it sounds like you're sitting there in the first day of medical school, and they turn to you and say, "We're going to simplify this by assuming people are immortal." The current reality means we don't have to make assumptions about how people act. We can observe them, and so then we can describe the reality of behavior. We know that people aren't rational, but what they are doing is doing their best to make decisions that will improve their lives rather than make their lives worse. That's the only thing we need now that we have all sorts of data that can also help us pinpoint the ways in which people make systematic mistakes. And so this more realistic economics is also a more useful economics. You've given some examples about how we can use economic principles in our everyday lives because we're all actors in the economy, not just passive spectators. Now is there an example of a everyday dilemma where we can try and apply some of these economic principles in a really unexpected way? Sure, let's start with comparative advantage. Now some people might think that's a crazy thing for us to start with because people often think it's not very intuitive, but actually once you start applying it to your everyday life, it is intuitive. The problem is that students usually sit in a pretty boring lecture about comparative advantage and they learn about how England and Portugal have to make decisions about trading cloth and wine and who should focus on producing which. The conclusion is that each country should specialize in the good it can produce at the lowest opportunity cost. So that really highly stylized example is kind of off-putting, but the truth is you use the theory of comparative advantage in your everyday life because comparative advantage is about how you allocate tasks. Who's going to cook dinner? Who's going to wash the dishes? Who's going to walk the dog? And knowing how to allocate tasks is critical if you're going to live in a family or live with other people or work in a team or be part of society. You can make better decisions about who should focus on what in a way that will benefit everyone. So this is a really good example of something that we learn in an economic lecture that actually has so many everyday uses that we don't even think about. Extinality is another big one. This is often taught as being about pollution. That's the big example we all learn. So we learn about how there's a factory producing products and it's next to a stream. And so the factory makes all these products but pollutes the stream and that affects the plants and the fish and the local ecosystem and the environment as a whole. And it's really good and important that we consider the environment so I'm glad we teach our students this. The thing is, extinality is applying so many other contexts too. In fact, extinality are all around us because there are about the ways in which we can have impacts on other people that we might not consider when we're making our decisions. Think about something like trying to decide whether you should go into the office if you're not feeling very well. You know, you might be thinking, "Oh, I'm pretty functional. I'll get through my day." But are you thinking about how you might get other people sick? By coming into the office when you don't feel great, you run the risk of several people catching your cold and not being able to work as well. So your overall team would be less productive. And it's important if you're a manager that you take account of the different ways in which we affect each other. And what we're talking about people catching virus as well, vaccines have some pretty enormous positive externalities. Right. So we can affect people in negative ways or we can affect them in positive ways. But the key idea in economics is we don't always get to the right outcome when we're not taking account of the impact of our behaviors on other people. Let me say that positively. When we understand externalities, we can redesign, make better decisions so we take account of each other and get to better outcomes. Or design public policies that help us do that. And so the same ideas that inform environmental policy can inform how you better manage folks around the office. Or in your family. You know, whilst we've been recording, I've realised that maybe I have been thinking like an economist throughout my life more than I thought. So one example is that I once told a friend of mine to do a cost-benefit analysis when she was having some major relationship dilemmas. I fit that went down well. She thought I was pretty heartless. But you know, I think she did do a cost-benefit analysis because she broke up with him soon after and was a lot happier. Sounds like she was also smart enough to ignore the sunk costs of all that time she'd spent with him. Yes, no exactly. And the other thing is that I've noticed that myself and my friends who studied economics, we tend to make decisions more quickly. And I wonder if that's because people often think about various decisions they can make and then they feel paralysed because every decision has some sort of a downside. Well every single choice has an opportunity cost. And I think that's why economists emphasise opportunity cost so much because there's nothing out there that doesn't mean that you're giving something up. And so everything has that opportunity cost. But I do think the tools of economics, because they make you more organised, can help you make good decisions quicker. I agree with everything Betsy just said, but it may sound a little unfamiliar to new economists among us. My students, when they first learn these principles, sometimes they feel paralysed by them. And I ask them to start practising and once they become second nature, making decisions becomes a whole lot easier. Betsy, Justin, this is all really useful. Thank you so much. This has been great fun. It's been fun talking with you about economics now. And it comes at a low opportunity cost. A high benefit. If I were thinking at the margin I might stop this conversation soon. There's three of us on the line, so there's a lot of independence here too. Please make him stop.