Metaeconomics Basics: Helping Make Sense of the Blog
Updated: Aug 14
Or, Economics for D______, as in the Empathic Spirit of the many books with said title, especially relevant here, 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, in press), and the Metaeconomics on this www.metaeconomics.info website, which together (along with a number of other journal papers, 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.
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 happy hour tomorrow afternoon. And, in these days of sequestering, because of the Pandemic, it is not that uncommon to have a happy hour, every afternoon!
So, how does an economic makes sense of such behavior? Well, an economist 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.
And, as mainstream economics would have it, we are considering each person 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. 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 economist claims what drives the choice is 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, key point is: 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 --- 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 economic 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 mainstream economics teaches. 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.
Yet, this same person might 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 one! --- Human does so have (confirmed in empirical Behavioral Economic science, again see Altman, 2012). Happy hour would likely have two people like that, as even considering meeting tomorrow afternoon is about being happy sharing something, at least a bit of something.
In fact, each person who likes happy hours might be quite social, a person who is quite community oriented, a person who might enjoy a great deal of payoff from drinking wine with friends, especially with the significant other, tomorrow afternoon. Also, said friends --- the significant other --- might all feel this way, so both have lots of overlap in their other (shared among the friends, but yet internalized within their own-interest)-interest. They get along; they do things everyone can go along with. They might even go shopping today to pick out the favorite wine for tomorrow, together. Such a social and community oriented person is illustrated in Figure 3. Each person has a Figure 3, too. 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. The economic rules still apply, it is just on a different dimension of the psych --- the behavioral economic psychology of a real Human is quite different from that of the Econ assumed in mainstream economics --- the part that enjoys payoff from doing something that everyone can go along with, which is internalized. Bread in the self-interest only is important: Hanging out with friends, especially the significant other --- that is why we call them significant, they share an other-interest --- is also important. When the significance, the other-interest they share fades, they get separated! In fact, for some it is the most important: We maximize the other (shared, yet internalized)-interest at point C. We sacrifice heavily in each of our 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.
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?
The plot thickens, and becomes easily solved, with Metaeconomics. 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: Ah, ha, you say: Complexity! The Human represented in Figure 4 is complex --- reality --- as compared to the Econ in Figure 1. Each person coming to happy hour has a Figure 4, each with a unique self-interest but with hopefully an overlapping other-interest. For sake of discussion assume the shared other-interest is identical. So, what happens?
Well, if each ignores their shared other-interest it is going to be an unhappy hour. If each ignores their self-interest 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.
Metaeconomics clarifies that we are not happy when we pursue either self-interest only or other-interest only. We 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. In fact, we gain a kind of peace-of-mind from resolving the inherent tension and conflict within our own-self between the self&other. Happiness for both arises on some path 0Z. 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 joint interests: One cannot gain only self-interest or only other-interest from either one. Payoff to both interests arises jointly. 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 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-interest. The liberty and freedom to choose is tempered onto that which people can go along with on path 0Z: The significant other tempers your pursuit of self-interest at bit, and yours tempers the other, and both arrive at a truly happy hour on path 0Z.
Intriguingly, too, economic efficiency can only be achieved on path 0Z. Mainstream economics claims economic efficiency is achieved only 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 their other (shared with others, yet within our own-self)-interest (as the Ghosts helped him understand) in order to be happy (and efficient). And, as Adam Smith made clear, a capitalism&democracy would crash under such 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, and it needed to be tempered --- which happened on the peace, happiness, and efficient path 0Z, not on path 0G. By the same token, too much other-interest on path 0M is also not efficient. An aside: Collectivism on path 0M and Individualism on path 0G? Neither work. Individualism&collectivism in good balance works (and writ large, market&government).
To emphasize: Notice that finding a happy, peaceful and efficient outcome requires a bit of sacrifice. One is gaining less in self-interest and less in other-interest at every point on the happy path 0Z. Every person has to give a little, not be too selfish, but also not be too selfless: To be really happy, in any hour, 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..." It is about balance between the pursuit of self-interest and the pursuit of other-interest. We find the satisfactory balance in the dual interest: And, when we do so, we maximize the own-interest, like Adam Smith said we needed to do. This ensured the moral and ethical dimension played a role in tempering the excessive greed: There it is! It takes ethical reflection to achieve happiness, peace, and economic efficiency.
Now, in some of my blogs I use the production version of said Figures, which also serve to explain where that supply curve comes from. I replace the axis with inputs --- nonallocable inputs --- to produce joint products like joint private market&public government products. 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 producing 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 (in press). 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.
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, in press.
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.
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