Economics 103Lecture # 22

Candide

A last chance to preach.

Do you remember on the first day when I said:

This will either be the best or worst course you ever take.

Because it is a course about thinking like an economist … not a course about economics.

I hope you agree that I was telling the truth.

Economics is a systematic way of looking at the world, and interpreting what is around you.

You have to think about the world some way. There’s no such thing as an open mind.

Suppose you thought

All swans were white.

If you saw 10 of 11 swans, and

they all were white, you would take this as evidence confirming your belief.

You would believe very strongly that the 11th swan was white.

But suppose you believed there is always one black swan.

When you see ten white swans, you are convinced the next one will be black!

Same evidence, but each draws a different conclusion based on their beliefs.

So it is with social science. We interpret the world around us anyway …

… we might as well use the right way.

Another example, punctuate the following words:

woman without her man is a savage

Did you write:

Woman, without her man, is a savage.

Or did you write:

Woman! Without her, man is a savage.

How you approach a problem hinges on what theoretical background you bring to that problem.

Many years ago I was interviewed in a magazine and said the following:

“Economist Doug Allen reports that the Canadian welfare rate structure increases the probability of single parenthood, births out of wedlock, and divorce. `What is perhaps most surprising here,’ commented Prof. Allen, `is not that women … would respond this way, but rather how sesitive this response is to relatively minor changes in benefits.’ … an annual increase of $1000 would result in an increase of about 100,000 Canadian women on welfare.”

The following week there was a letter to the editor:

“Your Feb. 17 cover story, and the poor bashing expert referred to in it, were an insult to all persons possessing compassion and intelligence. For miserly so-called “economic reasons” you vilify the welfare-recipient for claiming his birthright. You and your fascist, bigoted, poor-bashing moan about a piddling amount of money as though it were some great wasteful expense. Shame on your economic myopia and lack of sensitivity. It’s perfectly obvious that increasing welfare rates can only help the economy. I dare you to stop using welfare recipients as economic scapegoats.”

Did I miss something?

The point is that the assumptions we make are important.

I’ve argued all semester for seven ideas:

1. Maximization: all motivated by greed.

2. Substitution: everyone has their price.

3. Diminishing Marginal Value: you like things less at the margin, the more you have.

4. Opportunity Cost: the value of the next best alternative.

5. Diminishing Marginal Product: output increases at a falling rate.

6. Rate of Time Preference: people are impatient.

7. Optimal Organization: we design exchange and production to minimize cheating problems.

I’ve tried to show you that these ideas apply to absolutely anything

Economics is about life.

Master them and you too could be

An economist!!

But why do I have you read Candide?

First, I think you need to come to grips with the Panglossian Dilemma

Voltaire is criticizing the likes of Adam Smith, and other 18th century “optimists”.

“In spite of pride, in erring reason’s spite. One truth is clear, whatever is, is right.”

Alexander Pope.

But this sounds like the Coase theorem, the $500 bill idea, equilibrium, maximization, etc.

Is an economist just another Pangloss?

Technically no. We say the world is efficient, not the best.

This isn’t the best of all possible worlds, but it ain’t worth fixin’ either.

So I would say in spirit, we are Panglossian … so what.

“Some men look around them and ask why. I dream of things that could never be, and ask why not! JFK

What’s wrong with asking why?

If you want to play “why not” just don’t do it with an econ hat on.

Second I think you should be able to find economic applications anywhere

Here are some of my favorites.

`Gentlemen,’ said Candide modestly, `I deeply appreciate the honour, but I haven’t enough Money to pay my share.’`People of your appearance and merit, Sir, never pay anything,’ said one of the men in blue; `aren’t you five feet five inches tall?’

There’s no such thing as a free lunch.

Those who have never seen two well-trained armies drawn up for battle, can have no idea of the beauty and brilliance of the display. Bugles, fifes, oboes, drums, and slavoes of artillery produced such a harmony as Hell itself could not rival. The opening barrage destroyed about six thousand men on each side. Rifle-fire which follwoed rid this best of worlds of about nine or ten thousand villains who infested its surface. Finally, the bayonet provided `sufficient reason’ for the death of sever thousand more. The total casualties amounted to about thirty thousand. Candide trembled like a philosopher, and hid himself as best he could during this heroic butchery. P. 35.

-prisoner’s dilemma.

- red/blue uniforms, lines, etc.

The King laughed. `I don’t understand your European taste for our yellow mud,’ he said; `but take all you want, and much good may it do you. P. 83

Law of demand or DMV.

`This noise,’ said Pococurante, `can give half an hour’s amusement; but if it lasts any longer it bores everyone. P. 119.

Same thing.

Small as the estate was, it bore heavy crops. There was no denying that Cunegonde was decidedly ugly, but she soon made excellent pastry. Pacquette was clever at embroidery, and the old woman took care of the linen. No one refued to work, not even Brother Giroflee, who was a good carpenter, and thus became an honest man. P. 144.

Comparative Advantage and gains from specialization.

`How much do you want,’ Candide asked him, `to take me to Venice directly? There’s myself, my servants, my luggage, and those two sheep there.’ The captain suggested ten thousand piastres, and Candide agreed without hesitation.`Oho!’ said the prudent Vanderdendur to himself. `This stranger is ready to give ten thousand piastres all at once, is he? He must be pretty rich.’So he cam back a moment later and intimated that he could not leave for less than twenty thousand.`Very well,’ said Candide. … `Bless my soul,’ said the captain, under his breath, …’ So he came back once more …p. 88

Price discrimination requires information.

`Yes,’ said Martin, `but theirs is another kind of folly. You realise of course, that these two nations are fighting over a few acres of snow on the borders of Canada, and that they spend more money on this glorious war than the whole of Canda is worth. P. 110.

- sunk costs.

`But surely,’ exclaimed Candide, the French admiral must have been just as far from the English as the English admiral was from the French!’`True enough,’ was the answer; `but in this country we find it pays to shoot an admiral from time to time to encourage the others.’ p. 111.

-incentives in light of incompatible ones!

After supper, the Marchioness took Candide to her private room and led him to a couch. `So you are still devoted to the Lady Cunegonde?’ She asked?`Yes, madam,’ answeed Candide.The Marchioness replied with a tender smile:`You answer me like a young man from Westphalia. A Frenchman would have said,`It is true that I once loved Lady Cunegonde; but on seeing you madam, I find I love her no more.’’`Very well, Madam,’ said Candide, `I will answer as you wish.’ `Your passion for her,’ continued the Marchioness, `started from the moment you picked up her handkerchief. Be so good as to pick up my garter.’`With all my heart,’ said Candide, picking it up. `And now I shall be glad if you will replace it for me.’ said the lady; and Candide replaced it for her. P. 105.

Substitution.“If you can’t be with the one you love.

Love the one you’re with.”

They spent a month at the palace, but not a day passed without Candide saying to Cacambo: `It is quite true, my good fellow, that the house where I was born won’t bear comparision with the mansions of this country; but still, I shall never be happy without Lady Cunegonde, and I dare say you have some mistress or other in Europe. If we stay here, we shall be no different from anybody else; but if we go back to the old world with a mere twelve sheep laden with Eldorado stones, we shall be richer than all the kings of Europe put together. We shall have nothing to fear fro Inquisitors, and we shall easily rescue Lady Cunegonde.p 82.

- maximization if ever there was any.

Which leads me to the following. (Wall Street).

``In the countries wehre it has been my fate to wander and in the inns where I have worked I have met a vast number of people who detested their existence, but I have met only twelve who have voluntarily put an end to their misery. … Just to amuse yourself, persuade each passenger to tell you his story, and if you find even one who has not often cursed his life and told himself that he is the most miserable man alive, you can throw me into the sea head first. P. 57.

Maximization does not imply happiness.

Maximization does not imply justification.

We use the principle of maximization because it is good at explaining behavior.

Economists are not saying greed is good by itself.

Sometimes greed leads to good things … more trade.

Sometimes greed leads to bad things … “lovin’ the one you’re with.”

Perhaps this is what Voltaire is meaning when he closes the book with “Till your own garden”.

As you go about your life as a maximizer, perhaps you should ask yourself if you’re happy?

-why are you at SFU?-why do you want to be an accountant?-What is your Lady Cunegonde?