EC109 (Microeconomics) – Guest Lectures
1st – Uses of microeconomics in policy-making (Jonathan Cave)
1. Economics at the shadow government:
- Keynes: “Practical men who believe themselves to be quite exempt from any intellectual
influence, are usually the slaves of some defunct economist. Madmen in authority, who
hear voices in the air, are distilling their frenzy from some academic scribbler of a few years
back”
2nd – Utility and subjective well-being (Eugenio Proto)
A. Ordinal and Cardinal theory of the Utility:
1. Utility in Economics:
- Jeremy Bentham in “An Introduction to the Principles of Morals and Legislation” (1781):
utility can be measured ® OR: Neoclassical Revolution (1900): clear separation between
Psychology and Economics (Economics = natural and not a social science ® rejection of
the hedonistic assumptions of Bentham utility (ordinal and not a cardinal object)
2. Happiness and Utility (implies Cardinal Utility and Interpersonal
Comparison):
- ordinalism: utility determined by choices ® if I choose A to B = u(A) > u(B) C. Subjective Wellbeing (empirical correlates):
- cardinalism: objective measure of the Utility necessary for Public Choice (Arrow - answers to subjective well-being questions ® correlated with: physical evidence of
impossibility theorem) but unnecessary to determine a demand function affect (ex. smiling, laughing), heart rate measures, sociability, electrical activity in the
brain, independent evaluations by friends, self-reported health, sleep quality, and
- Pro-ordinalism: what if you like one good twice as much as another? ® But: Assume personality
that: A is your current situation, B is A plus an Ant Bite, and C is A plus being eaten by a
crocodile ® Ordinalism: can say u(A) > u(B) > u(C) but not that u(A) − u(B) < u(B) − u(C) D. SWB = measure of the utility:
B. Subjective wellbeing measurement: 1. Cross sectional evidence:
- Data shows = positive effect of county GPD and personal income on SWB (ex.
- (Hedonic wellbeing) Taken all together, how would you say things are these days–would larger income–SWB slope in developing or transition than in developed
you say that you are very happy, pretty happy, or not too happy? economies)
- (Hedonic and evaluative) All things considered, how satisfied are you with your life as a - Easterlin paradox: no significant relationship between SWB and aggregate
whole these days? (1 Dissatisfied to 10 Satisfied) income in time-series analysis (lack of effect of GDP on SWB) (ex. developed
- (Evaluative wellbeing): Imagine a ladder with steps numbered from zero at the bottom to countries where data is available = true)
10 at the top. The top of the ladder represents the best possible life for you and the
bottom of the ladder represents the worst possible life for you. On which step of the 2. Puzzle solutions:
ladder would you say you personally feel you stand at this time? - ¯ of happiness on income using cross-section survey data (from one country) ®
positive coefficient on income
- ¯ happiness on GDP using cross-countries aggregate data ® positive coefficient
1st – Uses of microeconomics in policy-making (Jonathan Cave)
1. Economics at the shadow government:
- Keynes: “Practical men who believe themselves to be quite exempt from any intellectual
influence, are usually the slaves of some defunct economist. Madmen in authority, who
hear voices in the air, are distilling their frenzy from some academic scribbler of a few years
back”
2nd – Utility and subjective well-being (Eugenio Proto)
A. Ordinal and Cardinal theory of the Utility:
1. Utility in Economics:
- Jeremy Bentham in “An Introduction to the Principles of Morals and Legislation” (1781):
utility can be measured ® OR: Neoclassical Revolution (1900): clear separation between
Psychology and Economics (Economics = natural and not a social science ® rejection of
the hedonistic assumptions of Bentham utility (ordinal and not a cardinal object)
2. Happiness and Utility (implies Cardinal Utility and Interpersonal
Comparison):
- ordinalism: utility determined by choices ® if I choose A to B = u(A) > u(B) C. Subjective Wellbeing (empirical correlates):
- cardinalism: objective measure of the Utility necessary for Public Choice (Arrow - answers to subjective well-being questions ® correlated with: physical evidence of
impossibility theorem) but unnecessary to determine a demand function affect (ex. smiling, laughing), heart rate measures, sociability, electrical activity in the
brain, independent evaluations by friends, self-reported health, sleep quality, and
- Pro-ordinalism: what if you like one good twice as much as another? ® But: Assume personality
that: A is your current situation, B is A plus an Ant Bite, and C is A plus being eaten by a
crocodile ® Ordinalism: can say u(A) > u(B) > u(C) but not that u(A) − u(B) < u(B) − u(C) D. SWB = measure of the utility:
B. Subjective wellbeing measurement: 1. Cross sectional evidence:
- Data shows = positive effect of county GPD and personal income on SWB (ex.
- (Hedonic wellbeing) Taken all together, how would you say things are these days–would larger income–SWB slope in developing or transition than in developed
you say that you are very happy, pretty happy, or not too happy? economies)
- (Hedonic and evaluative) All things considered, how satisfied are you with your life as a - Easterlin paradox: no significant relationship between SWB and aggregate
whole these days? (1 Dissatisfied to 10 Satisfied) income in time-series analysis (lack of effect of GDP on SWB) (ex. developed
- (Evaluative wellbeing): Imagine a ladder with steps numbered from zero at the bottom to countries where data is available = true)
10 at the top. The top of the ladder represents the best possible life for you and the
bottom of the ladder represents the worst possible life for you. On which step of the 2. Puzzle solutions:
ladder would you say you personally feel you stand at this time? - ¯ of happiness on income using cross-section survey data (from one country) ®
positive coefficient on income
- ¯ happiness on GDP using cross-countries aggregate data ® positive coefficient
