Economic thinking in the real world
Economic thinking can help a lot with everyday decision making, but some choices are beyond its capability. Or are they?
Many of the decisions we make — from the trivial to the hellishly complicated — can be reduced to one of two types. One corresponds with the question whether a particular choice is a sensible one or whether the alternative is better. The other one relates to how we handle a scarce resource like money or time, and in particular how do we allocate it in such a way that we get the most out of it.
Both are based on a perspective that approaches every decision as involving costs and benefits: we don’t get anything for nothing, so we must sacrifice something we have in order to acquire something we want. What we sacrifice is typically a scarce resource — money or time, but also effort, energy and so on. When I was younger, so much younger than today, and not yet all that well versed in economic thinking, when on holiday in the south of France, I once drove 60km (and back) to an ice cream parlour where, a few years earlier, I had enjoyed a particularly nice lemon sorbet with vodka. Economic thinking would have showed the true cost of the treat: well over an hour’s travel, and about 8 litres of petrol. The sorbet was very enjoyable, but in hindsight I am not sure it was really that enjoyable.
Economic thinking can also help us make trade-offs between different possibilities. If our house needs redecorating, we have a choice between doing it ourselves or paying a decorator to do it. Of course, we need to decide whether the decorator’s price is reasonable, but someone who thinks like an economist will also ask is what the true costs and benefits are of either option. Doing it ourselves means sacrificing two weekends of spare time (the cost), and saving the decorator’s labour cost (the benefit). Hiring a tradesman (the cost) means we actually keep that spare time (the benefit). Looking at it this way alerts us to the question what else we could do with either our time than spending it decorating (and how much money would it be worth to us), or our money…