Big econ problems, great learning motives

   There may be various reasons for learning some economics. But why should one take the difficult subject economics as their major at undergraduate (or even higher) level? This question might not be asked 20-30 years ago as there were not many alternatives to economics, or the alternatives are still at its infancy (so not a serious rivaling subject for economics). Now, business administration, finance, or even quantitative finance, quantitative marketing, and financial engineering/technology are popular subjects for students' choice. We may need to wonder why students would still like to take economics as their majors. 

   I like economics and have never liked other subjects that are closely related to economics mentioned above. To me, there has never been a motivation problem for learning. What attracted me was economics in itself. This also appears to be true for many other economists. In particular, economics seemed to be a subject necessary for someone who intended to resolve certain problems at least in certain periods of time. 

   What problems must require economics? In my view, there were two problems that in the past occupied many talented persons' attentions so that they thought economics was a must. These two problems created two high times for economics studies. 

   The first problem is the Great Depression in 1930s. 

   Obviously, this problem is related to economics. Also, this is an economic problem that affected everyone's daily life in a most dramatic way at that time. This is not like other economic crisis (such as that in 2008) where one may not feel any pains if they have never made financial investments. Yes, normally unemployment rate will increase during crisis and so even those who haven't invested may be affected. But a 10% unemployment rate (in US during the 2008 crisis) is very different from 25% (in US during the Great Depression). When a quarter of people lost jobs, everyone could feel the pain. Even if your family was lucky to keep the job, one of your neighbours, and so your friends, couldn't. Furthermore, this is not a local issue (in US). Many other countries had similar experiences. 

   In fact, among the first generation of Nobel-prize economists, most were motivated to study economics, more or less, due to their experiences during Great Depression. Big names include Paul A. Samuelson, Milton Friedman, Kenneth Arrow, Ando Modigliani, etc. Reading their biographies, you can find that they were attracted to economics due to the unprecedent economic crisis. 

   Of course, this wave of studying fever in economics gave more motivations in macroeconomics than microeconomics. Macro is more directly relevant to solving economic crisis. At first, Keynesians took the helm. But a continuous use of Keynesian policy (fiscal stimulus) would easily generate (high) inflation when crises were over. Monetarists then got the upper hand. But Keynesians were still influential. Hot debates remained. Perhaps people like controversies. Debates could attract more people to join the camps. Economics was a very attractive subject partly because there was much for debates. And of course, what was debated was also highly relevant to normal people's livelihoods. People found these debates truly useful. 

   But the debates have been gradually fading over time. Around 1990s to 2000s, the mainstream macroeconomics was basically unified. Most macroeconomics accepted a technical principle where macro theory should find its foundations on microeconomics. The micro-founded macro theory is eventually represented by a technical edifice known as (Stochastic) Dynamic General Equilibrium model (DGE or SDGE). Since then, debates remain. But more are about techniques. Normal people will not have interests in these issues. 

   Yes, every time economic crisis (re-)appeared, some more people will be attracted to economics, but not for long. These (mini-)crises are also not unmanageable. We don't need new economics to handle them. They are not problems attractive enough to make economics a widely noticed subject.

   Now, let's turn to the second problem.

   The problem appeared perhaps quite early but had not become apparent until the end of the World War II: the emerging central-planning economic system and how well or worse when it was compared with market economic system. 

   As a result of Russian Revolution in 1917, (former) Soviet Union, covering more than today's Russia, was gradually built afterwards. It became a superpower only after the WWII. Formally using central planning for resource allocation, its economic performances were impressive for (not) a (short) while. All these were very notable issues. People may start to think: is central planning a workable or even superior alternative to market economies? Exploring the answer obviously requires economics. 

   While the first problem (from Great Depression) stimulates mainly macroeconomics, this second problem is more microeconomic in its nature. Perhaps today's economics students don't know that microeconomics is so much about resource allocation due to the syllabus focus change. But it was, at least until late 1980s.  

   In fact, some benchmarking results in microeconomics, namely the First and the Second Fundamental Theorems in Welfare Economics, were established in 1950s, the high time for the debates over central planning vs market economy due to the emerging superpower of Soviet Union. These theorems confirm the advantages of market economies in efficiency aspect and that market outcomes need not always be unfair. These theorems are still taught as a core part of microeconomic theory at graduate schools. 

   Of course, some hotly debated matters at that time are no longer popular today. 

   For example, Fredrick Hayek (Nobel-prize winner in 1974) has casted the most severe doubt on the ability for a central planner to obtain local knowledge for its resource allocation works. Oskar Lange and Abba Lerner, on the other hand, believed that a central planner may make use of the excess demand/supply data to mimic what markets under private ownership can attain (efficiency), but avoid the downside of markets (unfair outcomes). 

   Such a debate doesn't interest economists, and potential economics students, anymore, due to an obvious reason -- the collapse of Soviet Union around late 1980s and early 1990s.     

   Nonetheless, economics still appeared to be an attractive subject for a related, but not completely the same, matter -- how can an economy heavily relying on central planning turn itself into market-oriented economy? The issue actually happened as early as in early 1980s: China started to reform its economy, introducing private markets and foreign investments in it. Though this was a great issue, it was more a local issue at that time. The collapse of Soviet Union suddenly brought the issue to a global level as many East European countries needed also to move away from central planning towards market systems. Economics was desperately demanded. 

   But this high time has also faded. Reforms for these countries have been on track for long, or at least required no reforms as substantial as before any more. The debates over central planning vs market economy, or the way how a centrally planned economy can be transformed into market economy, is no longer an attractive issue both inside and outside the economics circle. At the end, the two welfare theorems will be remembered forever as they are now a core part of advanced micro. But the Hayek-Lange-Lerner debate was forgot by most. 

   Now, without these great problems, economics also become not as attractive as in the past. Of course, economics is still an attractive subject, just not as attractive as before. And interested students may also be attracted by alternative subjects, such as business studies and finance. Economics is a necessary subject that business or finance students must take, but it may not be a major subject for them. 

   Does it mean economics study (as a major subject) has a dim future? Of course, I don't think so. It is just that it is not as bright as in the past. As an economics teacher, I certainly want economics to be more popular among students. But things always have its high and low times. You can't have unrealistic expectation. 

   Meanwhile, there may also be new things that generate new questions for which only economics can answer. I am not sure if the new market relations (and the associated crises) generated by new technology will require more economics in some time in future. But there would be such instances.   

       

What interests (macro)economics learners, but not economists?

    Perhaps not many economics learners are aware that economists may not like to teach what learners want to learn. First, economists may not think some problems are important but students think that they are. Second, economists may not think some parts of the theory are interesting but students think that they are. These discrepancies matter to the learning experience of students. Let me share with you some of my observations here. I'll concentrate mainly on macroeconomics examples in this post (probably I will give examples in microeconomics in future if I can identify some good examples). 

   First, what will be counted as GDP or a specific component in GDP, and what won't be? 

   I found many students are interested in this question. They often ask me if a specific item should be counted as private or public, consumption or investment, etc. Of course, I will try to answer their questions. But let me tell you that I and, no double, many other economists are not quite interested in these questions. The reason why is that these questions are not of too much theoretical interests in economics. Yes, national income accounting, or GDP accounting, is not simple. Its foundations were laid down by the great economist Simon Kuznets. Yes, from 0 (none) to 1 (presence), inventing GDP accounting is a great achievement in economics. But accounting in itself is not normally something economists would be interested in. Some knowledge is necessary (for macroeconomics) but the detail is not very interesting. 

   Furthermore, practical stuffs in the accounting is sometimes quite arbitrary. It is hard to explain why or why not. For example, durable consumer goods (e.g. automobiles) are counted as an item in private consumption. But (new) residential properties are counted as private investment though the goods are essentially also durable goods. Should the good be considered as consumer or capital good? I don't think there is a very clear-cut line. Yes, properties cost much more to the users and it conforms more with our daily-life perception of what "investment" means (we say we invest in a property but not invest in a car). But perception is often not reliable. If residential property can be considered as a good not for consumption, why can't a car? 

   Yes, I have written some posts about GDP accounting. But that's because I think some blind spots in learning can be identified, not because I am interested in GDP. 

   Second, why is the general price level sometimes assumed to be fixed, say, in the short run?

   In macroeconomics, short-run models are quite different from models for longer time horizon. A key element that makes the difference is that price is fixed or stable in short run. But why price is fixed in the short run? 

   In general, economists are not very interested in this question. They are interested in the consequences of price stickiness but not the causes of it. Well, when I was a student, I am quite curious about why price may be fixed. For example, at the time when I learned macro, books or teachers often said that Keynesian models assume price is fixed while the Classical models do not. They would emphasize that this makes a big difference between the two schools but they did not say much about why price may or may not be fixed. 

   In fact, this "empty space" in fact was "used" as a criticism of one school to another. Classical school indeed criticized Keynesian school for its fixed-price assumption as arbitrary or ad hoc, accusing that Keynesian couldn't explain why price is sticky when adopting an assumption inconsistent with the economics tradition (classical assumption of flexible price). Keynesian school, at that time, didn't have serious studies on price stickiness but accused the Classical school of turning a blind eye to the fact that price is sticky in the real world. 

   So, you see: the fixed-price assumption is of importance. But still, not much serious investigations have been conducted on it. At that time, as a student, I wondered why there was no better justification for which assumption is more right if it is such a crucial assumption. 

   Perhaps the most famous explanation for price stickiness is Gregory Mankiw's menu cost, the cost of adjusting prices (such as printing new menus). But menu cost is more an idea than a product of extensive empirical researches.  

   As far as I know, only Alan Blinder, a Princeton economist, and his co-authors have done something more serious in exploring the question. They have written a book "Asking About Prices: A New Approach to Understanding Price Stickiness". This is an interesting book. But I doubt how many economists have ever heard about it. Well, as mentioned, they are not quite interested in this question. I do make use of some findings from this book to introduce the fixed-price assumption in my class. I think my students may also be like me: they will be curious about why the assumption is true and when it will be true. 

   Third, what is the process that brings about an outcome (in equilibrium)? 

   Most students know that economics emphasizes equilibrium analysis and treats equilibrium as a description of what happens in the real world. But most students don't know that economists often ignore the process that leads the economy to move towards the equilibrium. 

   In elementary courses, students learn the demand and supply analysis. The equilibrium is learned as the intersection point of demand and supply curves. They also learn that if price is higher (lower) than the equilibrium level, quantity demanded is smaller (larger) than quantity supplied and so price will move down (up). The impression is that economists have already explained to students the process leading to equilibrium (price adjusting up or down). 

   This impression is wrong. 

   Economists are often simply concerned with the existence of the equilibrium in a system (such as in demand-supply model), but not the process. Even for demand and supply analysis, it is notorious that the model lacks a description for why price will move as described so that equilibrium can be achieved. Earlier economists assume that there is an auctioneer who performs the job. It asks bidders and sellers to submit their wanted quantity and quantity on offers. It revises prices up or down based on information collected. No deal will be struck until the offers and bids are equal. As such, the auctioneer can ensure that an equilibrium is resulted. 

   But the existence of an auctioneer is, for most goods, a fiction. Of course, it exists in some formal exchanges but certainly not in most commodity markets. 

   Other ideas about the process were raised. For example, someone may act as an intermediator when demand does not equal supply. They will buy and sell for an arbitrage profit. Alternatively, goods may be re-traded even after a contract has been signed between buyers and sellers. The re-contracting activities leads the economy to move towards the equilibrium. 

    Do students, or the readers of this blog, have ever heard these ideas before? I think most of them haven't as textbooks will not cover them and so do most teachers. Without exaggeration, I would say economists are normally not quite interested in these ideas about process. Perhaps they may know the auctioneer idea but mostly likely they don't know other ideas. But they also don't want to emphasize the auctioneer idea as they know that it is unrealistic in most cases. 

   Basically, economists want only to make sure an equilibrium exists, and at most also the stability of it (whether the economy will return to the equilibrium when encountering a small deviation from it). 

   There may be a reason for economists to ignore process. But my teaching experience leads me to believe that students want to know the process. They may not even understand the whole analysis if they are not told how the equilibrium will be achieved. That's why I always try hard to tell them something about the process. 

   For example, in Keynesian goods market model (Keynesian cross), some students may find it puzzling if I simply tell them that Y=C+I+G+NX=Z in equilibrium. You need to tell them how the equilibrium is achieved. You may need to explain that Y (output) > Z (demand) leads to unplanned inventory accumulation (so producers will produce less) and Y<Z leads to unplanned inventory decumulation (so producers will produce more). 

   Similarly, you can't simply say, under imperfect (perfect) competition, price is the cost together with a (zero) markup. You need to describe the process: if the price is higher than the cost by too high (small) a markup, firms will enter (quit) the market and push down (up) the price. 

   Yes, I think in quite a number of occasions, economists don't provide the answers students want and students are not interested in the stuffs economists teach them. In a way, I think this is due to students' and economists' different ways of thinking. Students are more story-based. They need to know the stories behind when you claim that something will happen. Economists are more mathematical based. If the math works, they are satisfied. 

   I will not say the economists are wrong. I am also an economist. But if they (and I) want to teach, and convey their messages to students, they may need to reflect more on how to teach.    

        

Most econs learned math from him. He self-learned math

   Alpha Chiang -- the author of Fundamental Methods of Mathematical Economics, the all-time best-selling math textbook for economics -- has shared many stories with us in his biography My First 90 Years. These stories may not be interesting to many students of the present generation, who are too young to know much of the persons or events involved. But I think one thing is surely motivating from this book, to me and to today's economics students: This most widely acknowledged math teacher for economics students (via his textbook) indeed didn't have a good math background (before he planned to write the book), didn't get too much training in math even when he took courses at PhD level, and so his math was virtually almost completely got by self-learning.  

   In this biography, his description about his math knowledge is not detailed. But certainly we can get from the book that his math training was inadequate before his self-learning. Both his master and PhD education did not teach him much about math. In 1950s, Prof Chiang studied for a PhD degree at the economics department of Columbia University. Here is how he described the math education there:

   "The other source of frustration at Columbia, a more grave one, was the lack of mathematics course(s) to prepare the graduate students in economics to tackle the professional economics journal articles that had become increasingly more mathematical. I often found myself in the unenviable position of being able to read only the 'introduction' and the 'conclusion' of the article, but not the mathematical analysis in the body of the paper. And that was not only true for one or two articles, but was true for most articles assigned to us. And I suspect that I was not the only one facing this frustration. The option of taking courses in the mathematics department was not open to me; I could not afford the time and expenses. I became more and more resolved to launch a serious study of mathematics on my own." (p.169)

   Perhaps some undergraduate students may have the same experience: being able to read only the "introduction" and "conclusion" of an economics paper. But notice that Prof Chiang was describing his experience for his PhD education, and what he read were journal articles published by 1950s (supposedly not too much math involved at that time). If even a PhD student did not get sufficient training in math to read the papers of only low-level math at that time, we can imagine there was even less training for undergraduate students at that time. 

   Then, how he learned the math later? Well, only when he started to teach economics at Denison University, he self-learned it. Let's also see how he described the difficulty and frustration from self-learning:

   "Following the good advice of Professor Leland Gordon, my Chairman at Denison University on my first full-time teaching job, I spent all the summer months on self-study. Learning from mathematics books on my own proved to be much more difficult than I anticipated. Mathematicians as a group seem to me to be overly stingy with words. If a clear explanation of an idea should require 11 words, they would try to use 7. The saving of a few words often introduces a measure of ambiguity into the writing, making it necessary for the reader to wonder and guess what the author meant to say. On many occasions, when encountering a brevity-induced ambiguity, I would first try to figure out the exact meaning of the book statement, and then, to satisfy myself, rewrite the statement for greater clarity. Usually, this involved not much more than adding a few key words. Why save those words?

   "The phrase in mathematics books that annoyed me the most is: 'It is obvious that...' Such a phrase is usually only a lame justification for the author to skip a few steps in the explanation. In one story (or joke) I heard, a well-known mathematician paused at one point of his lecture after saying, 'It is obvious that...,' then turned to the blackboard, and mumbled, '...just a minute.' Then, ignoring the class, he did a series of calculations by himself for 20 minutes, then turned around and continued with a smile of satisfaction: 'Yes, it IS obvious!' (p.170)

   Prof Chiang later went to Yale University for a further study plan. Yale at that time has a Cowles Foundation that was a pioneer in integrating math and econ. It was also especially well known for its expertise in econometrics (a statistical discipline for economics). In those early days, the importance of math in economics had been growing but there might not be sufficient number of economists with the most adequate training. By visiting Cowles, these economists had the opportunity to learn the most fashionable math usable in economics.  

   At Yale, Prof Chiang originally intended to study econometrics. But he soon find math more interesting. 

   "But soon I found that econometrics did not excite me. As a result, I redirected my time and energy to my long-conceived plan to write a book on mathematical economics, tying various mathematical 

methods to different types of economic analysis." (p.139)

   So, we now have Fundamental Methods of Mathematical Economics. I think Prof Chiang's story of self-learning math is motivating. He is now the math teacher of most economics undergraduates (via the textbook). Of course, we appreciate that Prof Chiang is special: he mentioned in his biography that he was a perfectionist, having a drive to complete things perfectly. And of course, he was an excellent student from the very beginning. But yet he also faced a greater difficulty in math than us today: there was no good math textbook for economics students at that time and he had to learn math as late as he was already a teacher (normally the younger a person, the easier one can learn). Given this, I think students today can have much to learn from his story. In particular, if Prof Chiang can self-learn math without a good background, students can also learn math with his good textbook and teacher's guidance.     

   

Are human beings wealth maximizers?

   Occasionally I hear a "theory": economics assumes wealth maximization in explaining human behaviours. This is stated sometimes by economics learners while a small number of economists may also sometimes make statements seemingly supportive to this "theory". 

   I of course know that economics does NOT assume wealth maximization for explaining human behaviours -- they assume utility maximization instead (but since the readers of "hi,economics" may not have learned the concept "utility", I do not intend to discuss utility maximization in this post). The "theory" of wealth maximization is, however, popular among certain circle of economics learners or scholars. 

   I indeed encountered a (smart) student who argued with me that wealth, instead of utility, should be maximized by rational decision-makers -- if someone doesn't choose to maximize wealth, the choice is irrational. 

   Such a viewpoint is not new to me, and I think the student was influenced by a scholar whom I know the identity. Anyway, I had to spend some words to explain to him why wealth maximization is not a tenable assumption. My explanation involves a persuasive but rather difficult argument, known as St. Petersburg paradox, by a mathematician Nicolas Bernoulli. As this is a difficult argument, even if it is persuasive, I don't think the argument can be widely used whenever I encounter believers in wealth maximization.

   Recently, I encountered a simple and forceful argument made by David Friedman, the son of the famous (late) economist Milton Friedman. David is not only an economist but also a legal scholar. He got a PhD in physics and originally taught physics. Later he turned to study laws and eventually taught law and economics in law schools. Perhaps thanks to his (academic and family) background and talents, he often makes some points that are interesting though not what a standard economics textbook will say. 

   In a microeconomics textbook written by him, he says: 

   "A similar error is the idea that economists assume everyone wishes to maximize his wealth or his income. Such an assumption would be absurd. If you wished to maximize your wealth, you would never spend any money except for things (such as food) that you required in order to earn more money. If you wished to maximize your income, you would take no leisure (except that needed for your health) and always choose the highest paying job, independent of how pleasant it was. What we almost always do assume is that everyone prefers more wealth to less and more income to less, everything else held constant. To say that you would like a raise is not the same thing as to say that you would like it whatever its cost in additional work." (Chapter 4, Price Theory: An Intermediate Text)

   I would say the point is so clear and simple. A key point is also that assuming more wealth is better is not the same as assuming wealth should be maximized. Confusing the two assumptions may generate big mistakes. As the two assumptions look similar, this may explain why a number of economics learners (or some scholars) may mistakenly believe that economics assume wealth maximization. 

   I wonder why I can't make this same point when encountering a criticism from my student mentioned above. 

   What is a mockery is that some scholars in the field of "law and economics" exactly think that economics assumes wealth maximization. David himself is a such a scholar but he is free from marking the same mistake by some of his fellow scholars. 

Is John Rawls an economist?

    A fellow economics teacher recently told me that, when he asked his students in his own class "Which economists you like most?", most of them said "John Rawls". He also added: some of them said "Paul Krugman". 

   This fellow teacher told me this because he thought that, in our department (economics), only I would mention John Rawls in class (economics). He was impressed by my "influence" on students' "economics" knowledge. I think he is right in an aspect: only I will mention John Rawls in class. But I am not sure if I should be considered to be "influential". Well, at the time he told me this, my reply was (half-jokingly): I haven't told my students that John Rawls is not an economist. 

    What's the point for me to tell you this in this blog? There is an interesting (or funny) issue here, and we may interpret it positively or negatively. 

    The negative aspect is of course that John Rawls is a philosopher but students consider he is an economist (and like him most). This reflects that students cannot distinguish philosopher from economist (let me declare interests: I did told my students - in fact emphasized - that John Rawls was a philosopher in my class). At the very least, they didn't pay attention to the identity of economists, or they didn't care. In fact, some economists are often proud of their theories that are scientific, not philosophical, and proud of the scientific methods used in economics. If students didn't care about this difference, these economists would be sad to learn this. 

   Also, this may simply reflect that students don't have many other names in their mind and so they basically keep only the names mentioned by their teachers who can impress them. If students are very interested in economics, more likely they will have big names in their minds. This was obviously the situation when economics was an attractive subject in the past (at least this was true when I was an undergraduate). At that time, most students knew who were Milton Friedman, Paul A. Samuelson, and Kenneth Arrow, etc. Some also knew Gary Becker, Ronald Coase, etc. Certain students might consider some economists were their "heroes" or even "idols". 

   Of course, time has changed, and all these big names mentioned above did pass away. 

   To an economist like me, who has ever experienced these golden days, the current situation is not very cherishing. Students nowadays are normally busy in coping with the syllabus and have less time and so will pay less attention to something that is of only hobby value, but not of exam value. 

   Nonetheless, there are also some positive aspects. 

   First, I in fact do not think recognizing some economists as "hero" or "idol" is good. As an economist and a scientist, I don't care very much "who says what" but care "what is said". The name in itself should not be a guarantee for academic or scientific value. What is said (by whoever) is more important. Indeed, when a scientific subject becomes more mature, it may also turn to become more de-humanized, emphasizing less about the personal contribution, but the contribution in itself. In fact, this appears to the current way where economics is studied and taught. It emphasizes less on persons and but more on the results. Teachers will also mention less frequently the names but only the theories or results. In a way, this perhaps makes the teaching boring. But it could be a right approach. 

   Another "positive" aspect is that both Rawls and Krugman are not free-market economists. I don't mean that free-market economics is not good. Some of them are certainly good. However, it appears that laymen, and even economics students, often have an incorrect impression that economics is just about promoting free markets. This is incorrect as economists are not always one-sided. But now what students mention is not a free-market economist. This may reflect that the old prejudice for economics already starts fading out, at least for my economics students. 

Is labour supply curve upward-sloping?

   Demand curves are downward sloping. This is already a basic knowledge for everyone who has learned economics. Do we need to know why demand curves are downward sloping? Someone think that we do not need to if there is no any exception to this law (no upward sloping demand curve). In fact, high-school economics syllabus does not require students to understand the reason why. Meanwhile, some others think that even if there is no exception, we should still know the reason why. 

   As I have discussed in a past post, my viewpoint is that know-why is very important. I am not sure my arguments given in that post is convincing enough. Anyway, I think that more people will appreciate that know-why is important if we cannot explain an important phenomenon without a theory of know-why. This post is exactly concerned with this phenomenon - why labour supply curve is upward sloping but it can be, actually sometimes is, downward sloping? 

   Isn't labour supply about supply curve? Why is it related to demand curve? The reason is simple: if one does not work, one can enjoy the leisure time; if one works, one sacrifice the leisure time. Hence, labour supply and leisure demand are two sides of the same coin. When one demands more leisure time, one supplies a smaller amount of labour service. When one demands less leisure time, one supplies more labour service to the market. 

   OK, now the demand curve for leisure should be downward sloping if all demand curves are downward sloping. If leisure demand curve is downward sloping, then labour supply curve is upward sloping because labour supply is the opposite of leisure demand. Meanwhile, if labour supply curve may be downward sloping, leisure demand curve may be upward sloping. If this is true, we have an exception to the law of demand -- the demand curve for leisure is not downward sloping!

   Then, are there any labour supply curves downward sloping? Yes, there is plenty of empirical evidence showing that labour supply curves may sometimes be downward sloping. In particular, people find that the supply curve is backward bending -- when the price of labour service (wage) is not too high, the supply curve is upward sloping; but when wage is high enough, the curve becomes downward sloping. In economics, this phenomenon is not considered to be a surprising result. It is not controversial and can be easily explained! Why? Why do we consider demand curve should be downward sloping but don't consider backward bending labour supply as a surprising result?  

   The whole thing is related to the reason why demand curve is downward sloping and the explanation that I have already given in a past post - substitution effect and income effect. When the price of a good increases, it triggers people to replace the good by another good whose price is not changed. If both goods (e.g. apple and orange) can help you achieve the same goal, you will avoid the more expensive good (apple), and buy another good (orange) more, when price (of apple) rises. This is substitution effect. Meanwhile, a higher price of a good means that the same income cannot buy so many goods as before. This effect is like a reduction in your income (although your income is not actually reduced). If the good is a normal good, income reduction leads you to buy fewer of this good. This is income effect. Hence, taken together, demand curve is downward sloping. 

   Now, leisure is a normal good. When you are rich, you prefer enjoying more leisure. 

   When wage (the price of enjoying leisure time) is higher, you tend to enjoy less leisure time. Instead, you replace leisure by material consumption that can be increased by working more and earning more. This is substitution effect. When wage is higher, this effectively increases your income as you can earn more by working the same hours. The income effect for leisure is positive. This means you tend to enjoy more leisure time (and supply a smaller amount of labour service). Taken together, substitution effect and income effect work in opposite direction. As such, higher wage may not reduce leisure demand. It may increase leisure demand (leisure demand curve is upward sloping) if the income effect dominates the substitution effect. This also means labour supply curve may be downward sloping. 

   Now, you can see: the same framework of substitution-income effect can explain why normally demand curves are downward sloping and why labour supply curve may be backward bending. Demand curves are normally downward sloping because most goods are normal goods. Labour supply is backward bending because leisure is also a normal good but a higher price of leisure increases one's income. A higher price will not reduce income, unlike the cases for other goods, because one can sell leisure time for earning income. This example illustrates clearly why the framework of substitution and income effects is so important and useful. 

   There is one more thing requiring explanation. A backward-bending labour supply curve means that the curve is downward sloping only when the wage is high. When the wage is low, the curve is still upward sloping. Why income effect of leisure is relatively bigger and so will dominate substitution when wage is high enough? One suggestion is that people will begin to tire when working long hours. Hence, at some point, they would rather enjoy more leisure time than work more. In fact, the point is that poor people working long hours also tire. But when their wage is low, the income effect from wage rise is not strong enough. When wage is low, some increase will not enable the worker to earn much more. But this income effect should become more pronounced when wage is already high. So, evaluating the hardship of tiring and more income, workers may think that avoiding the hardship is more important. This explains why income effect is more pronounced when wage is already high.