Economic Fables
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Last annotated on August 27, 2016
IntroductionRead more at location 41
Note: toccante ricordo del padre ragioniere e della sua dedizione alla partita doppia. il voto contrario alla laurea in contabilità e il ricordo del padre ragioniere. la teoria economica è sopravvalutata da chi la usa sul giornale una definizione di economia: interessante. curiosa cos è un modello? è una fiaba. irreale semplicistica incompleta e pure a suo modo istruttiva il rigore del linguaggio: 1 rende il tutto più interessante ed umano 2 dà illusione di scientificità usi distorti del modello: prevenire le critiche dei nn iniziati esempio di tre modelli 1: modello di hotelling. come si posizionano i giornalai sul vialone? equilibrio di nash. modello di downs 2: modello dei tre sarti. competizione. mano invisibile 3. modello della casbah. eqyilibrio. curva dei contratti a che servono i modelli? tre teorie 1 a prevedere 2 ad allenare l intuito x poi consigliare 3 a comprendere alcune cose parziali ma interessanti anche se nn ci consentono nè di prevedere nè di consigliare. comprendere xrò ci rende felici ariel opta x 3. si vergogna a dirsi economista. nn legge mai la pagina economica. preferisce essere un cantastorie. al limite un filosofo 1 e 2 nn convincono ariel. le previsioni e i consigli lasciamoli ai saggi. rievocazione di alcuni saggi conosciuti a gerusalemme INTRO@@@@@@@@@@ Edit
My father was 21 when he received his only professional degree, bookkeeper.Read more at location 72
And he tried to convince me to study accounting, or at least economics.Read more at location 93
My father had wide ledgers with colored lines, lots of columns, and thirty rows corresponding to thirty apartments and tenants.Read more at location 103
I was 21 years old. I was so bored. The totals swung between a deficit and a surplus and did not balance. I was impatient. I felt suffocated. I wanted to flee. My father said we had to start over again from the beginning.Read more at location 135
My late father’s only training was in buchalteria. In my childhood, without a computer, I would spend many hours helping him to balance the books, adding debits and credits, and he would occasionally explain to me the rationale of the discipline he so wanted me to study.”Read more at location 143
Some might assert the cliché that accounting is an academic subject, but with all due respect to this new pillar of the scientific experience, I wonder how anyone can compare accounting to mathematics and biology and philosophy and linguistics. These are the subjects that we should be encouraging the outstanding students to study, rather than the elective course on “Accounting for Residents Committees”.Read more at location 150
I would like to start with what I believe every academic should do when appearing in public, especially when speaking about political and controversial issues – to clarify the extent to which he is incorporating his professional knowledge in his remarks, whether he is expressing views with the authority supported by academic findings, and what part of his comments are nothing more than his personal thoughts and opinions.Read more at location 175
Everything I say here is personal, based upon the entire range of my life experience, which also includes the fact that professionally I engage in economic theory.Read more at location 179
economic theory has nothing to say about the heart of the issue under discussion here. I am not sure that I know what an option is; I am not attempting to predict the rate of inflation tomorrow nor the productivity index in manufacturing the day after tomorrow.Read more at location 181
I would like to state that economic theory is exploited in discussions about current economic issues, and I don’t like it…, to put it mildly.Read more at location 184
During my third year of study, I met the second teacher who is responsible for my academic pursuit, Menachem Yaari. As part of my work on a seminar paper, Yaari referred me to a wonderful book by Amartya Sen called Collective Choice and Social Welfare. This book has a very unusual structure. Each chapter has a parallel chapter with the same number but with an asterisk. In the chapter without an asterisk, a textual discussion is conducted about the various axioms of social choice theory, while in the chapter with the asterisk the textual discussion becomes a chain of precise definitions, arguments and proofs. When I read this book, I realized two things: First, that economics is interesting – a real revelation for me. And second, that the connection between our everyday world and the world of mathematical symbols is far deeper than I had thought previously during our coffee-bar debates.Read more at location 208
The word model sounds more scientific than the word fable or tale, but I think we are talking about the same thing.Read more at location 219
The author of a tale seeks to impart a lesson about life to his readers.Read more at location 221
It is possible to dismiss any tale on the grounds that it is unrealistic, or that it is too simplistic. But this is also its advantage.Read more at location 222
free from irrelevant details and unnecessary diversions.Read more at location 223
Economic theory spins tales and calls them models. An economic model is also somewhere between fantasy and reality. Models can be denounced for being simplistic and unrealistic, but modeling is essential because it is the only method we have of clarifying concepts, evaluating assumptions, verifying conclusions and acquiring insights that will serve us when we return from the model to real life.Read more at location 227
Formal language imposes self-discipline on the storyteller.Read more at location 234
A description of an economic model is like the introduction in a tale, presenting the heroes, their interests and the setting in which they operate.Read more at location 237
However, formal language also has its disadvantages. It creates the illusion of being scientific. Those unfamiliar with formal models tend to regard them as representing “absolute truth,” though they are nothing more than tales.Read more at location 243
From my teaching experience I have learned that even the best economics students with the highest affinity for the subject have difficulty with the language of formal models, perhaps due to their persistent confusion between the formal model and its interpretation,Read more at location 245
when it comes to questions of economic policy, the model’s formal mantle enables economists to create the false impression that their pronouncements are scientific and authoritative,Read more at location 247
The barrier between the secret formal language and ordinary human speech almost completely prevents anyone who is not a member of the economic fraternity from criticizing “professional” economic claims.Read more at location 249
Two newsvendors compete for the custom of their city’s newspaper readers located along the city’s main street.Read more at location 252
In a simple version of the model, the freedom of action of each vendor is limited to choosing the location of his stand.Read more at location 254
At lunchtime, each newspaper reader takes a break from his other pursuits and realizes that he cannot get through the day without reading the newspaper. The reader sees where the two newsvendors are located, and sets out to buy a newspaper from the closest one.Read more at location 259
The diagram below illustrates the distribution of customers between the two vendors.Read more at location 261
the principles by which the tale’s conclusion is tested – that is, the solution of the two unknowns – can be found in the solution concept. The conventional solution concept for situations like the above is called a Nash equilibrium.Read more at location 267
the location of each vendor must be the best one for him given the location of the other one.Read more at location 271
When one vendor is located in the center, the other will have less than half of the market share if he does not set up his stand in the center too.Read more at location 273
Nash equilibrium is achieved when both vendors set up their stands in the center.Read more at location 275
We are thus left with a single equilibrium: the two vendors set up in the center. This situation, a single-equilibrium model, is ideal from the perspective of the narrator of the economic tale because the result of the equilibrium can then be regarded as the inevitable conclusion of the tale.Read more at location 279
the competition leads to an outcome that is not ideal from the buyers’ standpoint. If one of the vendors sets up at a location other than the center, none of the buyers will suffer and some will benefit, i.e., those who are now closer to the nearest one.Read more at location 281
For example, instead of a main street of a city, economists apply the model to a situation in which two cola manufacturers must choose the sugar content in the productRead more at location 284
The conclusion drawn from the model in this case is that both manufacturers should produce an identical product.Read more at location 285
Political scientists interpret each location point on the main street as a political position in a one-dimensional space (political right versus left, for example). Each candidate positions himself on the political map, aspiring to receive the maximum number of votes.Read more at location 286
if there are two parties operating in the political space, and if the subject of dispute is primarily one-dimensional, the platforms of the two parties will be identical, in the center of the political spectrum.Read more at location 290
Imagine an island with six hundred residents, all dressed in identical clothes that require mending every month. Three tailors work at mending the clothes. For as long as anyone can remember, the residents of the island have been divided equally between the three tailors.Read more at location 294
even with great effort, none of them can do more than three hundred repairs a month. The residents feel that there is “hidden unemployment” in the tailoring sector.Read more at location 298
It seems that two tailors would be enough and that it would be better if one of the tailors were to quit tailoring and find himself another job.Read more at location 300
One day, the idea of the free market reaches the island. The traditions are shattered and the decrees canceled, and each tailor can decide on the price he charges for repairs.Read more at location 307
What will happen on the island in the new situation? The continuation of the Tale of the Three Tailors must provide answers to the following questions: Which tailors will remain in this occupation?Read more at location 311
we will use a solution concept called competitive equilibrium.Read more at location 313
this condition demands that precisely two tailors remain in this business.Read more at location 319
We will now see that there is competitive equilibrium when the price of a repair is $2.50 (or any other price between $2 and $3), and only tailors B and C remain in this business sector.Read more at location 323
An “invisible hand” generates the competitive equilibrium price and mobilizes the self-interest of the tailors and the islanders to correct the inefficiency created by the traditions and decrees that were recently canceled.Read more at location 330
Several assumptions in this story are not obvious. First, is it indeed so clear that the tailors will lower their prices after the cancellation of the traditions and decrees? We expect them to act only in pursuit of their own personal interests.Read more at location 338
Second, let’s assume that the tailors are not so wise and fall into the trap the competitive atmosphere lays for them. Is it clear that the consumers will indeed choose the least expensive tailor?Read more at location 345
The change generated by the competitive economic regime on the island did indeed lead to growth in the “national pie.”Read more at location 355
However, the improvement also led to a change in the distribution of income. The situation is worse for the tailors and better for their customers.Read more at location 355
Is the income distribution better now? Are the tailors now receiving fairer compensation for their work? Is the price for mending clothes now more reasonable? There are no objective answers to these questions.Read more at location 356
A pie is to be divided between two diners; let’s call them A and B. Both want as much of the pie as possible. Without an agreement on how to divide the pie, both will remain without anything.Read more at location 360
Each day, one side offers a proposal and the second responds, accepting it or rejecting it. Every time one side rejects the proposal submitted to him, he must submit a counter-offer, but not before the next day.Read more at location 365
From the perspective of each of the two parties involved, each day that passes without an agreement is like losing a part of the pie.Read more at location 368
Let us stipulate that from A’s perspective, the loss incurred from each day of bargaining is equal to 2% of the pie. B is more impatient and from his perspective the loss from each day of bargaining is equal to 3%Read more at location 369
Here we will use the solution concept called perfect equilibrium.Read more at location 377
The model perhaps clarifies the common intuition that a player whose time is more expensive is in a weaker negotiating position vis-à-vis a player whose time is less expensive.Read more at location 409
I was inspired by the market in the Old City in Jerusalem where I occasionally bargained when purchasing a Bedouin rug or Armenian plate. I really hate to bargain. Once, when I was fed up with the bargaining games in the market, I said to a trader, “Why don’t we play a different game: you make an offer and I’ll simply say ‘yes’ or ‘no’ ?”Read more at location 415
“Tell me, did you think that I thought there was some offer I would make and that you would accept?” And then he added: “For generations, we have bargained in our way and you come and try to change it?”Read more at location 420
what is the connection between an economic model and reality?Read more at location 423
According to one view, an economic model is supposed to serve as a basis for making predictionsRead more at location 424
According to this approach, a model is supposed to be an objective description of the real world, not a tale.Read more at location 426
If the model does not provide enough good predictions, it must be augmented with additional details. But the increased complexity of the model exacts a steep price: it is hard to understand and is difficult to solve.Read more at location 427
According to another view, the objective of the economic model is to sharpen perception. A model is an intellectual exercise.Read more at location 429
Just as a soldier use simulations in training, the economist exercises his intuitions on a model before offering advice. The use of formal models helps to develop our intuitions about the way things occur in life.Read more at location 430
These economists did not rely on a particular model, but claimed that their work with formal economic models sharpened their senses.Read more at location 433
But I am quite sure that if instead of devoting my adult life to economic models I had engaged in a non-academic profession, I would view life from standpoints that are less abstract but no less useful.Read more at location 436
Students look for a purpose in the material they study, because “Otherwise, why study?”Read more at location 438
We economists are delighted when we find evidence of purposefulness in our work, because we are full of guilty feelings about devoting our lives to meaningless studies when the world faces innumerable problems.Read more at location 440
According to this approach, an economic model is not essentially different from a model in logic. A model in logic is not a prediction of how humans judge whether a phrase in ordinary language is true or false. It is not a recommendation for a thinking person and it is not designed to educate people to think correctly. I contend that economics studies the logic of life, but does not engage in predictions or recommendations.Read more at location 442
We are satisfied even if the economic model is merely interesting.Read more at location 446
I do not think that the bargaining models that I myself have studied have significant predictive value; I am not more qualified than any reader (but also not less qualified than my colleagues) to give advice on how to conduct negotiations, and I do not feel that dealing with these models has sharpened my ability to understand the process of bargaining in the market.Read more at location 448
At most, we find links between natural ways of thinking and bargaining processes. That is all. Yes, I admit that it is tempting for me to think of myself as a teller of tales, a philosopher, a researcher of the social sciences, in fact, anything but an economist.Read more at location 451
Whenever I am asked “What is your profession?” – for example, on the form for entering the U.S. – I do not answer “economist” but instead adopt the neutral title of lecturer.Read more at location 453
an economist. I have limited knowledge of current economic issues. During most of my life, these issues have not interested me. I usually toss the economics section of the newspaper in the bin together with the sections on sports, fashion and health.Read more at location 456
On the other hand, I am obsessively occupied with denying any interpretation contending that economic models produce conclusions of real value. I feel attracted to economics as a branch of philosophyRead more at location 459
My perspective on economic models is completely subjective and describes me no less than it describes economic theory.Read more at location 463
I borrowed Samuel Hugo Bergman’s book “Introduction to Logic” from the labor union library. This book did not make me a master of debate and did not equip me with a wealth of rhetorical tricks. The only thing I remember from it is the description of tin soldiers lining up in the courtyard. A resounding defeat in a classroom debate on “Youth Movements, For and Against” (I was “against”) made it clear to me that personal charm is more helpful in winning an argument than understanding the law of syllogism.Read more at location 471
the intellectual Yaacovson, who wrote a book explaining the rationale of the Jewish commandments — all these characters instilled in me a sense of great awe for those people who understood the complexities of human interaction so well. As far as I’m concerned, the opinion of such people is just as authoritative for making social and economic decisions as the opinion of an expert using a model.Read more at location 478
If the models we develop in yellow notepads or on blackboards constitute a basis for predicting human behavior, it would be miraculous in my eyes.Read more at location 484
There are no miracles in economics, but there are wonders. In my studies in the Department of Mathematics in Jerusalem, I learned to see wonders in the world of formalities.Read more at location 485
