Adam Smith, a Scottish philosopher, is regarded as the first real economist.
The Wealth of Nations was published in 1776, the same year as the American Declaration of Independence.
Smith's famous excerpt: Individuals acting in self-interest often unintentionally promote the public good, a concept known as the "invisible hand."
This idea is foundational to capitalism.
The Invisible Hand
Individual self-interest can lead to societal benefits.
Smith's assertion does not imply self-interest is always beneficial but highlights potential positive outcomes like innovation and increased productivity.
Microeconomics vs. Macroeconomics
Microeconomics: Focuses on individual actors (people, firms, households) and their decision-making regarding scarce resources.
Scarce resources: Food, water, money, time, labor.
Studies how these decisions affect prices and markets.
Macroeconomics: Looks at the economy in aggregate.
Concerns policy questions (e.g., taxation, regulation) and their impact on overall productivity.
Involves top-down analyses of economies.
Mathematical Rigor in Economics
Economics strives for mathematical rigor, with simplified assumptions for analysis.
Assumptions: Rational behavior, self-interested actors, maximization of gain.
These simplifications aid in clarity and visualization (e.g., charts, graphs).
Cautions in Economic Modeling
Simplifications can lead to overconfidence in conclusions.
Important to remain aware of the assumptions and limitations of models.
Macroeconomics involves aggregating complex human behaviors, making it particularly unpredictable.
Mathematical models are valuable but should be seen critically and with understanding.
Quotes on Economics
Alfred Knopf: "An economist is a man who states the obvious in terms of the incomprehensible."
Reflects the complexity added by mathematical modeling in economics.
Importance of maintaining common sense and intuition.
Lawrence J. Peter: "An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today."
Highlights the unpredictability and subjectivity in economic predictions, especially in macroeconomics.
Conclusion
Economics, while often mathematically rigorous, is not as exact as sciences like physics.
Subjectivity in economics is tied to the assumptions made in models and analyses.