It’s time. The references have gotten too old, the minor changes have started to become inconsistent with each other, the parts that never ring quite right but I never get around to changing are finally chafing too much, and on top of all of that I’m being told that I have to incorporate AI into my teaching somehow. It’s time to give my Principles of Microeconomics class an overhaul.
And because I very foolishly am incapable of just taking one of the hundreds of perfectly fine textbooks and slides and teaching the thing, I’m once again wondering how I can do this myself the best I can. Although I’m definitely not planning to write another principles of micro textbook. We have way too many of those anyway. But I am writing this to try to share my thinking on a way to present the principles of microeconomics, and also as a way to work the presentation out for myself as I revise the class. What are the students not getting that I can get them to understand using the overall framing of the key elements of the class? You can see my current set of slides introducing these principles here (apparently Google Slides converts Powerpoints into having huge bullet points, by the way).
This time around, I’m reframing the basics of the field to address something that I think makes principles of microeconomics far harder than it needs to be. At its core, this course is really just about understanding one thing: that given a choice, people will choose the thing they prefer, and then extrapolating from there. Making a choice is something my students do every day. And yet when it comes to class it becomes alien.1
Why Bother?
As such, I’ve decided to boil the course, and to some extent the field of microeconomics in general, to a few key principles. This is part of a grand tradition of presenting microeconomics as a neat bullet-point list, whether that list has ten items as in Mankiw, one as in Hazlitt, two as in Quiggin, however many Krugman and Wells or Frank and Bernanke had, and a bunch of others.
What’s different about mine? My goal is to present the building blocks of economic thought in a way that is as relatable to students as possible. I want them to be able to understand the way that economists think about what people do and why, and the easiest way to do that is to get them to link what they already do in their lives to what we say people do in our models and thinking. With that in mind, I had two things in mind when making the list:
First, the list should be helpful when it comes to reasoning through a problem, ideally any problem in the course. When trying to figure out how, say, supply and demand works, you should be able to run through the list and find something that helps put you on the right track, or help you relate to the actors in the problem and make use of your mighty human powers of empathy.
And, as it happens, one way that a set of principles can help you through a problem is by presenting economic principles in a way that doesn’t encourage students to fall back on what they’ve heard economics is before. Do economists think people are just big ol greed monsters, and that greed is good? The great majority of economists are going to say no to both questions, but also be aware of what it is we’re doing that makes that a widespread misconception. So let’s say what we actually think in a way that doesn’t lead students down the tempting wrong path.
Second, the list should be about principles, not conclusions. Taking Mankiw as an example, two of his principles are that markets usually work pretty well, and that sometimes the government can improve things. Those are things you’d expect to see covered in a principles of micro class. However, they’re not principles! Those are conclusions you can use economic principles to come to (or reason through to figure out the cases where they are or are not true). Worse, including these kinds of conclusions as principles has a tendency to raise student defenses if they don’t like that particular conclusion. After all, you’re basically staking a political claim as an assumption. At the very least do your students the honor of arguing your way there from a set of plausible building blocks.
My principles do not contain conclusions. They are pure building-block material.2 The first and third are basically axioms: assumptions we make and build on. Two and four are extremely important corollaries of those axioms: things you’ll notice if you think carefully about #1 and #3, but which are so enlightening once you get them I’m going to put them in the list rather than risk you not noticing. And the fifth is, of all things, methodological.
My Principles of Economics
All that said, the list is:
People have agency: People have their own goals and are usually good at finding ways to pursue those goals.
The alternative matters: The same thing can be bad or good depending on whether the alternative is better or worse.
Goals are personal: People pursuing their own goals sometimes works out well for others, and sometimes works out poorly, but that’s not why they do it.
Policy changes incentives: You can’t really force other people to do something, but you can try to make them want to do it.
Simple usually works: Humans are too complex to fully understand, but you can get pretty far anyway without having to know all the details.
Principle 1: People Have Agency
How I Would Explain it to Students
We are, to a great extent, in control of our own behavior. This is easy to remember when we’re talking about ourselves, but of course it’s true about everyone. Sure, our choices may be constrained in some way; a rich person may have more options than a poor person, for example. But in the end, each person gets to make a choice about what to do given the options available to them.
Economists believe that you’ll be better at understanding why people do what they do if you remember that they are the ones who chose to do it. People have their own goals that they like to pursue, and most of the time, people are pretty good at finding ways to pursue those goals.
Why I Put It On the List
It would hardly be a list of economic principles if it didn’t mention something about people making choices. Economists model behavior as being the result of choices that individual people. This is one thing that sets us apart from some of the other social sciences!
This is often phrased in a format similar to “people follow incentives.” However, I think the confusing near-tautology of that presentation (incentives are, almost by definition, things that people want to follow) sort of misses what is actually interesting about the idea, which is that people make choices. This crystallizes I think the ways economists actually think about incentives: we ask “if I were in this model, what would I want to do?” - we humanize, or at least personalize, the characters in our analyses, and try to step into their shoes. Thinking of other people as actual humans with an internal life, goals, desires: we do that, perhaps contrary to the stereotype! This principle makes that clear.
Further, this phrasing addresses a difficulty I often see students have in class: forgetting that any behavior or choice we’re describing is going to be decided by the person doing it, and if we want to think about incentives, we need to think about theirs. Yes, it is nice when a store offers us a sale. But they’re not doing it because we want a sale. Yes, it’s more efficient when firms in a competitive market don’t hold the price above the competitive level, but they’re not doing it because society prefers it. If/when they prefer a less efficient outcome, they give us one! In each case they’re doing it because they want to do it.
Principle 2: The Alternative Matters
How I Would Explain it to Students
Nothing has value in a vacuum. Asked if something is good or bad, an economist will always reply: “compared to what?” Washing the dishes sounds pretty awful if you’re choosing between washing the dishes or watching your favorite show. But it sounds great if you’re choosing between washing the dishes or being chased by a bear.
Since, as economists, we think People Have Agency and get to choose what they do, if we want to figure out whether people will wash their dishes, we will get very different answers in situations where the alternative is TV than in situations where the alternative is the bear.
Alternatives matter. You are equally likely to convince someone to do something by making that something more appealing, or by making its alternative less appealing.
Why I Put It On the List
I mean we can’t skip over opportunity costs can we? This one’s a shoo-in.
But why do I put it like this? “The Alternative Matters.” A lot of introductions to this idea are, I think, too abstract or rely on someone already sort of thinking like an economist. Putting this idea - that the choice to do something really depends on what you could do instead - in the form of costs (as we might do by calling it “opportunity costs” or saying that the cost of something is what you give up to get it, as Mankiw does), injects a very economicsy idea of costs I think too soon. Economists think about costs in a way that is, I think, actually quite similar to how normal people think about it, except that they wouldn’t call those “costs” (which implies a monetary meaning, especially once they realize they’re in an economics classroom). Bringing up opportunity costs as “costs” at the level of a principle I think is less enlightening than avoiding the word until we’re clear what we mean by it, and worse, since they likely don’t already think about every decision as being framed in terms of costs and benefits, implies a narrower, monetary, scope for this insight than it deserves!
“The Alternative Matters” gets to the highly intuitive heart of the idea. Yeah, obviously the alternative matters, the student knows that. Duh. Now we have a jumping off point to show them how far they can go if they take that idea seriously.
As a sidenote - how about the omission of marginal choice from the list? Surely that’s glaring! Well, I think you can construct them in a fairly intuitive way from principles 1 and 2 here. Introducing this whole marginal thing as a principle before we’ve even had a chance to flex our thinking-about-people-making-decisions level on big, chunky, easy decisions is just confusing, especially when we can build ourselves up to it from the principles we already have anyway!
Principle 3: Goals are Personal
How I Would Explain it to Students
We know that people have goals and are good at pursuing them (from principle 1). Those goals, however, are their own goals. They may not match yours. They may not match the goals of society. This means two major things.
First, different people have different preferences. One person may choose to work their whole life and make a lot of money. Another might move out to the woods, far away from everyone, and live in a cottage with no electricity. Neither of them is wrong. They just want different things, and we can probably guess from their behavior what it is they want in life.
Second, one person’s goals may not be aligned with another’s. Your boss wants you to work as hard as possible. You would probably rather work less hard, and you Have Agency to choose how hard you want to work. So your boss can spend all day wanting you to work hard and it won’t make a difference: it’s your goals that matter. Similarly, you can want people to pollute less, or be nicer, or whatever, but they have agency too, and its their goals that will determine what they do.
Importantly, this is not a moral argument. Economists don’t say people should only care about their own goals. But rather that they do make choices on the basis of their own goals, not others’ goals (and this doesn’t mean they can’t care about other people: improving the well-being of others is often a part of our goals!). And you can’t make other people behave more to your liking just by wanting it real bad, even if you’re right.
Why I Put It On the List
This one is another attempt to put students in someone else’s shoes when considering their behavior. The first corollary here, that people’s preferences are different, is a nice reminder, as well as a reassurance to students who come into class thinking that economists only care about money and just think people are greedy (a common stereotype).
The second is I think a framing device that gets too little play in principles courses: misaligned incentives. Sure, we talk about all kinds of applications of misaligned incentives in a standard principles of micro course: externalities, rent-seeking, pricing power, game theory if you cover that… really, almost anywhere that inefficiency comes up. But in my experience we don’t introduce this overall organizing idea that these are all examples of misaligned incentives! Why not? I have started linking these ideas together under this banner for students for the past few years (and I’m sure at least a few of you reading this have been doing this longer than me) and I think they find it very helpful. On the list it goes.
And we may as well explain another omission that often ends up on these lists: the idea that trade can benefit both parties, which at least off the top of my head I know is on Mankiw’s list as well as Krugman and Wells’. This was the one I waffled on the most, but ended up leaving it off partially out of parsimony, and partially because it felt too much like a result instead of a principle. You can use Principle 3 here to construct part of the idea that trade benefits both parties pretty directly, but mostly the obvious part (if I want this and you want that, we trade and are both better off) and not so much the production/comparative advantage part, which requires another leap from there. I still decided to leave it off, but I can see a reasonable disagreement here.
Principle 4: Policy Changes Incentives
How I Would Explain it to Students
We know from principle 3 that people have their own Personal Goals that they want to pursue. However, we (where “we” is society, or the government, or a company, or even specifically you) might want people to behave differently than they currently do. However, since People Have Agency (principle 1), we can’t make them do what we want. Someone in charge can say you have to do something but, like, no you don’t. You have agency. Governments and religions have said “you can’t steal stuff” for millennia, under threat of incarceration, violence, or hellfire, but people still do it.
However, while we can’t force people to do things, we can change their incentives in order to make it so that someone will choose to do the thing you want.
Economists think that policy intended to change what people do needs to keep in mind that People Have Agency. The purpose of policy is to set the incentives so that doing the “right” thing becomes more attractive, or, because The Alternative Matters, so that the “wrong” thing is less attractive. People making policy also can’t forget what the alternative is! If you want employers to pay their employees more, don’t forget to first check whether they’d prefer firing someone to paying them more.
Why I Put It On the List
The treatment of policy at the principles of micro level really is about not letting policy be magic. The standard critique of price ceilings to lower prices is that - oops - sellers will choose to reduce production. The justification for Pigouvian taxes is that they encourage people to choose to produce fewer negative externalities.
Like with Principle 3, though, we don’t make explicit that all of this comes from the same core insight about policy,3 which is that all policy really does is change incentives. Telling people what to do doesn’t make them do it if the incentives aren’t right. And the stereotypical economist glee about policies that backfire or don’t do what was intended are really about re-emphasizing this idea that you can’t forget that people get to choose their own actions!
Not to mention, if you’re the kind of professor who enjoys challenging your students’ political preconceptions, coming in with specific policy prescriptions in the principles list like Mankiw does is a defense-raising endeavor. But simply linking the question of how to make policy with our core ideas about people choosing their own behavior won’t likely have the same effect, while also being a broader insight that applies even when you’re not thinking about, say, market restrictions. Plus, it should be just as effective at challenging unexamined ideas like wanting to ban things we don’t like without thinking about what incentive changes a ban-as-policy actually implies, or designing policy to change how people do thing X without remembering that an available alternative for that person is often to just not do X at all. The participation constraint is far undervalued in policy discussions!
Principle 5: Simple Usually Works
How I Would Explain it to Students
This course is all about examining human behavior. Humans are complex. Like, really complex. Crack open our brains and you’ll find all kinds of psychological quirks, cultural ideas and norms, history, and a bunch else. Economics tends to abstract away a lot of that complexity and explain someone’s behavior by just asking what their goals and alternatives are. That’s mostly true for economics in general, and is extremely true in this introductory class. Aren’t we leaving out a lot? Yes.
Economists understand that we’re necessarily leaving out a lot of complexity by taking this approach, but tend to believe that you can do a pretty darn good job explaining what people do, and coming to insights about what people do that are true-most-of-the-time, without having to open that big confusing can of worms. In fact, sometimes the can of worms can be so difficult to deal with that it can confuse us and we’ll do a better job by leaving it closed. This is especially true since we’re rarely interested in explaining any specific single action by a single person but rather are trying to explain what lots of people do in general, at which point a lot of individual human quirks can get washed out.
This principle is perhaps the easiest of the five to find fault with, and throughout this course you’ll probably come across stuff where you think we treat it too simply and might be able to envision an exception to how people are likely to behave. But we’re not going for perfection here - we think humans are too complex for that anyway, and economists tend to take a stance that we’ll do a better job if we don’t get too caught up in that stuff. If, after we’re done with our work, we end up being really far off the mark, we can ask what are the truly important complexities we’re leaving out for a given question, and bring them back in at that point.
Why I Put It On the List
This is sort of the odd one out, and doesn’t resemble the other four, or indeed what I see on other lists of microeconomics principles. That’s because it’s not so much a principle of economics-as-a-topic, but rather a methodological principle about how economists tend to approach problems by trying to simplify as much as they can. So simple that we can solve human behavior with calculus! This is another way that economists set themselves apart, as opposed to some other fields where embracing the full depths of human complexity is the goal.
I think this is an important inclusion on the list because it clarifies why we do things the way we do. In principles of micro, the course, we ask students to ignore exceptions, imperfections, and complications in analysis all the time. We know that truly perfectly competitive markets don’t really exist, but we study them anyway. We know that sometimes when people do something odd they really are making a mistake rather than revealing some unusual preference, but we don’t even consider that. Those are only two examples of many.
Anyone who has taught principles of micro has seen the pushback from students on this level of simplicity, either in the form of defiance towards the concept of the class, or in the form of an inability to allow themselves to ignore minor details about a realistic choice scenario even when instructed to. Part of this, especially the latter, is that it’s hard to take something we know so much detail about - making choices, say, about what to buy - and intentionally ignoring a lot of that detail. But another part is that they may not even realize that, yes, we want them to do that. And there’s a reason we want them to do it. We do it! We think this is good! And even if they don’t think it’s good, please will they at least stick with the idea for the length of the class, and be aware of why we’re doing it this way, and why we think it’s good.
Conclusion
So there’s the list, what it is, and why I made it that way. It’s tilted towards trying to sum up principles-of-micro-as-a-class moreso than 100%-of-the-economics-field, and it’s also tilted towards trying to get students not just familiar with what the field is, but the building blocks for how we approach questions about the world. A lot of us keep saying that the principles of micro course is more about thinking like an economist than it is about any specific model or finding. I think this list of principles, both in terms of what I choose to highlight and how I choose to present it, gets closer to matching that emphasis than what I’ve seen before.
I suppose we’ll see! I’m currently revising the rest of my course and will be teaching the new version next year. Maybe I’ll update you all on how it went.
And I don’t believe this is for perfect-rationality vs. behavioral-economics reasons. It’s true that people, including my students, don’t make choices in perfectly rational ways 100% of the time. But outside of a few corner cases (like the non-cooperative result in the one-shot prisoner’s dilemma), the kind of behavior we teach about in principles of micro does match the “what you’d naturally expect you’d do” kind of behavior you’d really expect would make the whole class come a lot more naturally! Having taught behavioral economics as well, it’s usually a lot harder to convince students that they, too, will behave in behavioral-economicsy ways than to convince them that they, too, will behave in principles-of-microeconomicsy ways. Oddly, the difficulty is on the flipside (and this influences my principles): it’s quite easy to convince students that other people will behave in behavioral-economicsy ways, and quite difficult to convince students that other people will behave in principles-of-microeconomicsy ways, or at least it’s difficult to get them to put themselves in another person’s shoes enough to think through the implications of how someone else might behave in a principles-of-microeconomicsy way.
Alright fine if you want to get philosophical you could certainly get more underlying-building-block than this but c’mon it’s a principles class. I think this counts.
Or at least policies targeted at changing behavior; you might argue that fiscal policy for example could be an exception.