Useful Economics in Everyday Life

I'm Malaya.
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 I've noticed we've been teaching you
about a lot more than just econ one oh one.
We've been thinking about how to actually apply all these
principles in your everyday life.
You know, people justin 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. Economics is about the tools
we can use to transform.
Our own lives.
I'm jes Amulphus and I'm Betsy Stephenson, and this is
think like.
An economist.
Journalist. Nest and Tabacoli fires with us, who was once
also an economic student of self.
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 you know,
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, you know, talking about macro indicators and things
like that. Your approach is really different and also really
really useful.
Oh, thanks, Naz.
I think economists do often teach with the assumption that
their studentshre are going to go off to become professional
economists themselves, perhaps working government or at a big organization,
and then 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, 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 for 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 well think like an
economist exactly. Well, like Betty 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 yelling and advise a bunch of presidents.
Well, I'll speak for yourself, justin.
Right, most of us, Betty, 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 by important products, be it various fruits at
the grocery store or high tech equipment from Japan or Korea,
and these prices are going to change, is 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, are 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'll also be 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 active in the
economy rather than simply being spectators.
Which is how I often felt when sitting in an
economics 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,
that 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 at 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 like should I spend today or should
I save money so that I can spend tomorrow.
And 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, And what's neat is it 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 emphasize.
And so how does this all affect how you teach economics?
It 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 organized, good decisions.
Justin in 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.
Technologies 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 the spread of disease, and businesses can track 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.
And 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 overwhelmness.
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 behavioral 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 assume people are rational. I always
think it sounds like, you know, you're sitting there in
the first day a 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.
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 we are
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 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 economics lecture that actually has so
many everyday uses that we don't even think about.
Externalities 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,
externalities apply in so many other contexts too.
In fact, externalities are all around us because they're about
the ways in which we can have impacts on other
people that we i 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 while we're talking about people catching virus is 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 realized 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, Dinamas.
I 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 my 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 paralyzed because every decision has some
sort of a downside.
Well, every single choice has an opportunity cost, and I
think that's why economists emphasize opportunity costs 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 organized, 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 paralyzed
by them. Then I ask them to start practicing, 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, nurse.
And it comes at a low opportunity cost a high benefit.
If I were thinking at the margin, I might stop
this conversation soon, but there's three of us on the line,
so there's a lot of interdependence here too.
Please make them stop