Metaeconomics Basics: Helping Make Sense of the Blog
Updated: Feb 8
(Updated, February 2023) Or, Metaeconomics for Dummies, as in the spirit of the popular Dummies series of books. One especially relevant book in that series is Behavioral Economics for Dummies by Altman (2012). The Altman book is a great place to gain familiarity with the empirical science underlying Metaeconomics: Tempering Excessive Greed (Lynne, 2020), and the Metaeconomics on this www.metaeconomics.info website. Lynne (2020) along with a number of other journal papers published on the way (see the vitae in the About section) give the analytical system used in this Blog.
Several of my readers have commented that the Blog is just too complex, “…with path OG compared to path OM, and bliss on path 0Z.” I can empathize --- at least try to walk-in-your-shoes, which is what Metaconomics is all about --- so, here goes.
Economics Started Out as an Explanation of Household Behaivor
The Greek root of the word "economics" points to it being about the decisions within a household. So, we start there. Let us say that you and your significant-other are considering enjoying some bread and wine during a happy hour tomorrow afternoon. And, in during the recent time of sequestering, because of the Pandemic, it was not that uncommon to have a happy hour, every afternoon!
So, how does a mainstream Microeconomist, the Econ --- what you learn in Econ 101 taught by the Econ! --- make sense of such behavior? Well, an Econ represents the situation (has the curves dancing around inside the head, just naturally!) for each person in Figure 1: Each person has their own Figure 1, their own "indifference structure." Each person is deemed to be completely indifferent as between the amounts of bread and wine on any one of these curves, getting the same amount of satisfaction --- equal payoff in happiness, we might say --- at any point on a particular curve, so it is called an indifference curve.
So, the Econ sees each person in the happy hour event totally independent of the other, and each could care less what the other person might be doing, eating and drinking, during that "happy" hour event (doesn't seem very happy to a MetaEcon, who sees Humans having happy hours!). The Econ claims we each do our own thing without ethical reflection. It is only about the self, about the arrogance of self-love, about the self-interest only. It does not matter if the other goes along with it or not: It is all about the self!
So, what determines which point is chosen by each self? The Econ claims what drives the choice is only the relative price of the two goods, represented in the slope of the income line, the budget allocated for bread and wine, the YoYo (no pun intended: Can't get the Wix editor to make a superscript!) in the figure. So one eats a bit more bread when the wine is expensive: If the price ratio changes, like the wine price increasing relative to a stable bread price, that line twists down, pivoting on the top point, so one drinks even less wine.
If the wine price decreases for that favorite wine, that income line twists up, again pivoting on the top point, so one drinks a bit more wine relative to bread. And, if income goes up (or the budget for wine and bread is increased), the line shifts up, and you eat and drink both more bread and more wine. If income goes down (or one reduces the budget for bread and wine during happy hours), it shifts down, and you eat and drink less wine and bread. Simple.
So, the key point is, to an Econ: You are just as happy at any point on a particular indifference curve, until you look at relative prices. The relative payoff at each point is different, so you choose the one that best matches the relative prices --- it works for you "economically." The relative prices vs relative payoff at each point locates the path 0G. You move up that path 0G to ever higher payoffs --- higher indifference curves --- until you have spent your budget, spending the budget at that efficient point A. There is no other point in the Figure 1 space that can make you happier.
Another important idea is illustrated in Figure 2, that of the demand curve, which is derived from Figure 1 choices. One would just twist this income line up and down for different prices of wine to plot a demand curve for wine, as in Figure 2: You know the old story, people will buy more wine as the price drops, so the demand curve slopes down. Also, if income --- or, the budget for bread and wine --- increases, the demand curve will shift out. All of this movement comes from Figure 1, along that self-interest path, showing how the consumer gains from consuming bread and wine.
Also, the supply curve illustrated in Figure 2 slopes up: It is ever more expensive to provide more wine to the market. The market clears at a point where the supply and demand cross, for price P and quantity of wine W. This is the most famous figure from economics, the "scissors" of supply and demand, and, also perhaps the most useful economic idea ever drawn into a figure.
You now have the essence of what an Econ believes and teaches in Econ 101. Every person has a Figure 1 for every combination of every pair of two goods. Every person not only has a set of curves like this, but every person is also completely independent of every other person: We each merrily eat our bread, and drink a modest amount of wine (we are highly disciplined), all by our-selves (even if in the same room during happy hour!), paying attention only to our self-interest. It is like living the reality of a Pandemic sequestration by yourself all the time, Robinson Crusoe alone on the island (and, after Friday arrives, living a segregated life).
Emphasizing: The demand curve is plotted from that self-interest path. It crosses the supply curve. The price and quantity are revealed in the market, which is presumed to act efficiently. Happy times, indeed, for the Econ, completely on her or his own. Do as you please. Liberty and freedom has no other-interest tempering it.
MetaEcon See Humans
Most Humans are not only Econs, but also have another side, a social side, a doing the right thing side, a moral and ethical side, as a real --- at least a good and ethical one! --- Human does so have (confirmed in empirical Behavioral Economic science, again see Altman, 2012). Happy hour would likely have two people like that, two Humans, as even considering meeting tomorrow afternoon is about looking to the possibility of being happy through sharing something, at least a bit of something. MetaEcon 101 would account for the Human, not just the Econ.
MetaEcon 101 would point to the fact that each person, especially one who likes happy hours might be quite social. Said person is at least somewhat community oriented, and is a person who might enjoy a shared payoff from drinking wine with friends, especially with the significant other, tomorrow afternoon. Also, said friends --- the significant other especially--- might also feel said way, so both have lots of overlap in the other (shared among the friends, but yet internalized within the own-self)-interest. Said people get along, doing at least some things everyone can go along with, perhaps even go shopping, together, today to pick out the favorite wine for tomorrow.. Such a social and community oriented person is illustrated in Figure 3. Each person has a Figure 3, too, not just a Figure 1. Every person has an other (shared with others, yet it is within our own)-interest.
The same general analysis applies, but now each person is enjoying payoff from hanging-out with others (the significant other during happy hour) on path 0M (as well as payoff in self-interest on path oG, which MetaEcon 101 clarifies is enjoyed jointly). The economic rules still apply, it is just on a different dimension of the psych --- the behavioral economic psychology of a Human is quite different from that of the Econ --- now recognizing the part that enjoys payoff from doing something that everyone can go along with. Bread eaten in the self-interest is important: Hanging out with friends, especially the significant other --- that is why we call said person significant, two people sharing an other-interest --- is also important. When the significance, the other-interest said people share fades, it is no longer happy hour!
In fact, to some Humans, said shared other-interest is the most important: Said person maximizes the other (shared, yet internalized)-interest at point C. Such a person sacrifices heavily in the domain of self-interest to serve the shared other-interest. Notice how the other-interest is still within the same person: It is internalized within the own-interest of each person, albeit shared. The shared other-interest gives payoff in joint goals, joint outcomes, like a pleasant shared sense that the happy hour worked well for everyone.
Would this be a truly happy hour? Probably not. Too much attention to the shared other-interest requires huge sacrifice in the self-interest. So, what do? How will you and yours find balance in this relationship, at least enough to have truly happy hour tomorrow?
Resolving the Balance in Self & Other-interest
The plot thickens, and becomes easily solved, with Dual Interest Theory in Metaeconomics guiding the thinking. The most fascinating feature of the new plot (and Adam Smith would approve) is that one cannot pursue one interest without the other, so we have both sets of indifference curves overlapping. We put Figure 3 on top of Figure 1 and we produce Figure 4: Ahha, you say: Complexity! Humans are complex, as Figure 4 depicts --- which is reality --- as compared to the Econ in Figure 1. Each person coming to happy hour can be depicted in the abstraction that is Figure 4, each with a unique self-interest but with hopefully --- if mentally stable, and not a completely self-hedonistic-naricisstic person operating in effect on the vertical axis, and at best on a path 0G close to it --- an overlapping other-interest. For sake of discussion assume the shared other-interest is identical. So, what happens?
Well, if each ignores the shared other-interest on path 0M it is going to be an unhappy hour. If each ignores their self-interest on path 0G it is going to be an unhappy hour. Maximizing other-interest is not satisfying, just as feeding the arrogance of self-love with bread and wine while ignoring the other-interest also does not work! The only way to have a happy hour is for each to sacrifice a bit of self-interest and a bit of other-interest, moving toward the best path 0Z. A MetaEcon puts new meaning to what it means to be altruistic, now each sacrificing a bit in both domains of interest, which is essential in order to achieve efficiency, peace (between said people), and, yes, happiness for both people (and everyone else in attendance at the happy hour).
Metaeconomics clarifies we each like our bread, but we enjoy it a lot more when we eat the bread along with a bottle of wine shared with our friends, especially the significant other, and especially if we both enjoy the same kind of wine (same shared other-interest). All the other rules still apply: We pay attention to the relative price of wine to bread, and we still have an income constraint, but we go to point B rather than point A or C.
Notice, too, that wine and bread are nonallocable, which leads to the joint interest: One cannot gain only self-interest or only other-interest. Payoff to both interests arises jointly within the Human brain. Also, then, consumers are interdependent, through the other (shared with other consumers)-interest, and consumers are also interdependent with the producers of bread and wine, as well as the wine producers are interdependent with the bread producers.
As Adam Smith tried to make clear, and few listened: The market operates within the context of the jointness, nonseparability, and interdependence of everyone. It is not by benevolence we get our bread and wine, but by the attention to the interdependence which tempers the arrogance of self-interest, as represented in that which everyone can go along with, which is in the other (widely shared, and, thus ethical)-interest. The liberty and freedom to choose is tempered onto a path 0Z, a path defined by that which people can go along with. The significant other tempers your pursuit of self-interest a bit, and you temper the self-interest of the significant other, and both of you arrive at a truly happy hour on path 0Z.
Economic Efficiency Can Only Be Achieved with Good Balance in Self & Other-interest on Path 0Z
Intriguingly, too, economic efficiency can only be achieved on path 0Z. An Econ claims economic efficiency is achieved on path 0G: Not. In fact, path OG is the path of excessive greed (Scrooge, anyone?), with anyone on it needing to temper it with the other (again, shared with others, yet within our own-self)-interest (as the Ghosts helped Scrooge understand) in order to be happy and peaceful (and efficient) on XMas morning!
And, as Adam Smith made clear, a capitalism & democracy would crash under path 0G efficiency conditions: People needed to go along with it --- people are not much in favor of the arrogance of self-love, self(ish)-interest only, excessive greed, and it needed to be tempered --- which happened on the peace, happiness, and efficient path 0Z, not on path 0G. Smith made it clear one needed to go to the station of the impartial spectator and reflect.
By the same token, too much other-interest on path 0M is also not efficient. An aside: It is about Collectivism on path 0M and Individualism on path 0G. Neither work. Individualism & collectivism in good balance (and writ large, a free but tempered market & inclusive democracy based government) works.
Sacrifice in Each Domain is Essential to Economic Efficiency, Peace, and Happiness
To emphasize: As pointed to earlier, notice that finding a happy, peaceful (reduce political economic chaos to a minimum), and efficient outcome requires a bit of sacrifice in both domains. Every person has to give a little, not be too selfish, but also not be too selfless: To be really happy, in any hour, especially a happy hour with wine and bread, means satisfying the condition that "a Me needs a We to Be, but without a Me there is no We." "You go walking your way and I go walking mine, we meet in the middle..."
We find the satisfactory balance in the dual interest: And, when we do so, we maximize the own-interest, like Adam Smith made clear. Maximizing the own-interest --- which meant tempering the self-interest --- ensured the moral and ethical dimension (the moral sentiments) played a role in tempering the excessive greed: There it is! It takes ethical reflection to achieve happiness, peace, and economic efficiency.
Metaeconomics in Production Giving Rise to the Supply Curve
Now, in some of my Blogs I use the production version of said Figures, which serve to explain where the supply curve comes from. I replace the axis with inputs --- nonallocable inputs --- to produce joint products like joint private market & public government products, e.g. cars & roads. If you want me to do a Production Metaeconomics for Dummies teaching element, let me know! You would see similar appearing figures, with the last one showing that every production process has a joint self & other-interest, joint private & public-interest: Like burn carbon fuels & manage carbon dioxide releases to the Spaceship Earth system; like produce corn & wildlife in the same field on a farm. Also, on the production model, see several of my published papers (see the Vitae available in the About section of the Website), including Lynne et al. (2016), as well as Chapter 8 in Lynne (2020).
And, the perhaps best ever Microeconomics book from which to learn basic principles of both consumption and production, demand and supply is McCloskey (1985), which is still available. For more technical details on Metaeconomics, in another location on this Website, go here: Dual Interest Theory And, for the Mathematically inclined, see the Mathematical Metaeconomics Appendix in Lynne (2020).
Does this help? Let me know how I can help you make better sense of Dual Interest Theory in Metaeconomics, as something that transcends and otherwise supplements without replacing Single Interest Theory in Microeconomics.
References:
Altman, M. Behavioral Economics for Dummies. Mississauga, ON: John Wiley and Sons Canada, Ltd., Kindle, 2012.
Lynne, G. D. Metaeconomics: Tempering Excessive Greed. New York: Palgrave Macmillan, 2020 (see ways to purchase the book in the Blog on this site: https://www.metaeconomics.info/post/just-in-time-for-xmas-presents ).
Lynne, G. D., Czap, N. V., Czap, H. J., and Burbach, M. E. . "Theoretical Foundation for Empathy Conservation: Toward Avoiding the Tragedy of the Commons." Review of Behavioral Economics 3 (2016): 245-79.
McCloskey, D. N. The Applied Theory of Price. Second Edition. New York: MacMillan, 1985.