No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter One: Introduction to Economics 21 ASSUMPTIONS Understanding the assumptions is critical in any analysis, and especially for economics. We all have presuppositions and whether we understand it or not, we each have a worldview which shapes the way we think. At this point I want to cover a few of the assumptions that will be made. In some cases, I will offer proof in subsequent chapters; for now, I just want to provide a common frame of reference. An assumption of methodological individualism is that only individuals make choices, suffer losses, and accrue gains. Of course we often hear that Walmart made a profit, or General Motors suffered a loss. And it’s true that those corporations did suffer losses or receive gains. But the relevant economic actors are always individuals, whether it’s the shareholder who will decide to increase or decrease their capital investment, or the company’s Chief Executive Officer (CEO) who will decide whether to expand or contract business operations in a given market. As the economist Ludwig Von Mises so graphically put it, “the hangman, not the state, executes the criminal.” Other social institutions are also not economic actors—whether the Federal Reserve or the Department of the Treasury. Individual agents will ultimately make decisions (whether as a result of group votes or on their own initiative), and will do so based on the incentives they face. Thus, only individuals choose; societies never do . The assumption of methodological individualism does not preclude individuals from considering the social implications of their actions. It does not mean that societal norms and values don’t heavily influence the choices individuals make; they often do, and they can be very powerful. Those with a Christian worldview understand that we are both individuals as well as part of the body of Christ. We are individuals created in the image of God and purchased by Christ’s blood, yet we’re also a social collective with differing gifts that should be in unity as the Godhead is. The point of the assumption of methodological individualism is simply this: social considerations guide individual choices by shaping incentives and values, but at the end of the day, an individual must choose. Another key assumption of modern economics is that value is subjective . You can think of this as another way of saying “beauty is in the eye of the beholder.” You value an iPhone in a certain way, and I may have a different value for it. There is no way to say that your value is correct and mine is false, because my value is always right...for me . But the same goes for you as well. Value is not objective; that is, it is not determined by a standard outside our own thinking. This is often a hard concept to understand, especially when others value things radically different than we may desire. For instance, why are baseball players paid so much, while teachers are paid relatively little? Isn’t teaching a much more socially valuable function? Maybe...maybe not. Who can judge? Of course Christians have an objective source of truth; truth that can shed light on objective valuation. To the extent that our thinking corresponds to God’s thinking, methodological individualism: the assumption that the causal factor of economic action is the individual responding to incentives