I was recently able to help family friends, a father and daughter, with a little family conflict using a bit of microeconomics. The problem was this. The daughter, let’s call her Marianne (not her real name) needed dental work. Her Austrian dentist was fully prepared to fix Marianne’s dental problem for a fee in the neighborhood of € 1000. Marianne’s father, let’s call him Franz (not his real name), tends to go to a dentist in a neighboring country and is very happy with his service there. He ascertained that his dentist would charge something in the neighborhood of € 100 for the same dental work. Marianne is a 20 year old student and still relies on her father to pay things such as dental bills for her. When I met them recently they were arguing over which dentist she should go to. In what follows I will explain their positions, and how a little bit of microeconomics helped with the resolution of this conflict, why it worked, and when it would not necessarily work.
There is a period of time each summer when many members of my wife’s fairly large family all come together in one large house. People take turns (to some degree) cooking dinner. In this post I describe what happens when dinner is ready and try to explain it using a bit of game theory.
This is about driving on Cornish lanes (small roads in Cornwall, UK). I offer two things in this post: informed casual observations (in place of rigorous data collection) about how people navigate these lanes and a bit of game theory to explain my casual observations.
Much of (micro)economic theory is based on the following ideas. People make conscious choices. These choices depend on what these people want. People typically want, keeping all else the same, more money. To quote (in a rough translation) a popular Austrian comedian, Alf Poier, on this matter: “I quickly realized that money is quite valuable and doesn’t take up much room.” This also means that in order to get more money, people would be willing to give up other things that they want.
And we just saw an incredible demonstration of that with the UK-wide introduction of a 5p charge for every plastic bag in essentially all supermarkets from the beginning of 2016. The effects of this policy have started to become evident. It seems that the introduction of the 5p charge for every plastic bag has reduced plastic bag consumption in supermarkets by roughly 80%.
Reading on (you may want to read my previous post before this one), I found another beautiful example of hypothesis testing in literature with a pretty clear p-value calculation. I am now reading P. G. Wodehouse’s “Right Ho, Jeeves”, first published in 1934 I believe.
A democratic market economy theoretically achieves the highest possible level of freedom and wealth. Focussing on our country, this concept indeed worked out not too badly. However, we are still far away from the perfect world stated by the theory. Furthermore, for a few years we seem to be stuck in an economic as well as a democratic crisis. Though, when the theoretical conclusions are derived by the compelling logic of mathematics, how can they fail?
The answer is pretty simple: They don’t. The differences between theoretical and empirical outcomes are caused by the differences between the models’ underlying assumptions and real social and political conditions. In this regard, one important assumption for efficient democratic as well as economic behaviour is sovereignty. It can be understood as the power and possibility to make a rational choice and force its proportional consideration by others.
Among others, in the real world sovereignty therefore requests sufficiently informed and well educated people as consumers, voters and all kinds of democratic and economic agents. Therefore, it is not just about merit goods and external effects when a government establishes compulsory education. It rather is an essential foundation for the successful operation of a democratic market economy.
In the younger past the quality and effectiveness, or at least the average outcome of our educational system seems to be decreasing. Simultaneously, our youth possesses more and more self-determination. To this effect, teenagers have to make decisions about their path-dependent future, while they just do not know how strong the latter will depend on their capability to acquire and use knowledge. For knowledge itself is power. A certain proportional amount of power definitely is a necessary condition for sovereignty. Finally, sovereignty determines individual and aggregate outcomes in a democratic market economy.
Therefore, besides several other arguments from labour market and institutional economics, already the basic theory of democracy and the market economy justifies an extension of compulsory education. The empiricism finally recommends it for today. Of course, there will be costs in the short run, financially as well as politically. However, the alternative upcoming social costs arising in the long run would be many times higher. So be paternalistic today, in order to save democratic and economic freedom in the future!