Wanderings and Maunderings

The question, as posed in exactly which Econ class I cannot recall, goes something like this:

"Bill Gates earns (some ridiculous amount of money) every day. It takes him one second to pick up money he finds on the ground. How large a pile of money does there have to be before Bill Gates would earn more by picking up the money than by ignoring it?"

I, along with every other student in that Econ class, got the answer wrong. Flush with our newfound understanding of marginal costs and benefits, we performed the fairly simple operation of dividing that ridiculous sum of money by the number of seconds in a normal day, and added a penny. Simple, right? And the prof told us we were correct, so we happily squidged along in our smugness (and awe of how rich Bill Gates is, that he actually should not* pick up a pile of twenty thousand dollars, because he'd lose money by doing so).

Oh, what fools we were. What we all (and the professor) failed to realize, is that Bill Gates does not stop earning that ridiculous amount of money if he stops to pick up the $20K pile of cash, or if he drops by a Jack in the Box and orders a Sourdough Jack, or if he goes to bed and sleeps away eight or so hours. That money just accumulates for him.

The correct answer to the question is, picking up one single penny on the ground makes Bill Gates richer by a penny, just as it does for you, me, or the five-year-old around the corner.

The lesson? Analyze a question for its content, not just for its structure. Think, Ubu, think! Good dog.

*I believe I used this exact phraseology at the time, to impress one of my acquaintances with how cool economics, or I, or maybe even the inestimable BillG, was. God, I must have been insufferable**.

**Hard to believe, I know.

So it seems I need to talk about this, and my space is probably more appropriate than cluttering up somebody else's any more than I already have.

When you go to college and start studying something, no matter what it is, the first few classes you take tell you lies. They're not doing it to mislead you, they're doing it because you don't have the background and training to understand the advanced concepts yet.

In physics, when you start to talk about light, they get out the big rubber band to teach you about wavelength and frequency, resonance and the Tacoma Narrows Bridge. "Light is like this", they say, even though light is almost *nothing* like that.

In geology, they tell you about C14 dating, point out that C14 findings are consistent with other methods of dating artifacts--such as deposit layers, and leave it at that. They don't have time to explain the drawbacks of C14 dating, or that where C14 dating falls down, they have other, well-tested methods.

In economics, they whip out the supply and demand model of a market, wave their Invisible Hand* at you, and talk about what happens when you vary elasticity, taxation, cost curves, and the like. They don't itemize their assumptions, because they distract from your understanding of the basic concepts.

So here, for your edification, is an incomplete list of the assumptions they *don't* tell you about in your early Econ classes that are required for the market to work the way they say it works:

( Is anyone surprised that this went long? )

Note to folks coming over from Facebook (or elsewhere): Anonymous comments are welcome here if you don't have or want an LJ account, but please do me the favor of identifying yourself in your comment. Thanks!