I have written two posts on the use of macroeconomics. Why didn't I write about the use of microeconomics? In fact, I have written many, though not with a title "the use of ...". Posts that classified as "daily life" indeed use mainly microeconomics and so are a demonstration of the use of microeconomics. Thus, there may be no need to write independently about the use of microeconomics.
Yet, there is so far not a general discussion about the use of microeconomics. We may know that many microeconomic concepts help us understand the world. But an overall picture is lacking. Are some concepts useful but most are not? What are the useful and useless concepts?
At this point, we must clarify what we means by "useful" and "useless" here. It is hard to imagine that economists would develop some concepts as "useless". But what we mean here is about "useful" for common people in doing analysis relevant to them. They may be businessmen, investors or policy-makers. Of course, they could also be students who want to explain what happens in daily life. But they need not be economists.
From this perspective, we may ask ourselves another question first. This is related to how useful the microeconomics would be. The question is: historically, is the development of microeconomics mainly made from a businessmen's perspective, investors' perspective, policy-makers' perspective, or just a common person's perspective?
You may say none is true as it must be made from a scientist's perspective. We can never deny that economists use scientific methods to study the world. But economics is not like physics. Our concern about society is not comparable with our concern about the physical world. Furthermore, the world (or society) is big (many phenomenon exist). Studying which aspects in it first must involve a choice. The solutions must meet some expectations first. So, at least for the initial stage of a subject, the focus must be more narrowly set so as to serve certain purposes. Well, once the initial stage is set, sometimes its influence can last for very long, even if its initial concern is no longer primary.
Then, back to the original question: which perspective? You may think it is businessmen's. But that's not quite true. Though David Ricardo, perhaps the second father of economics next to Adam Smith, is a businessman, I can't see his theory of comparative advantage is made from a businessman's perspective. It is more about a nation's interest than businessmen's interest.
I am not an expert in economic thoughts, but I can assess based on what we will teach in microeconomics textbooks today and trace its source of development. Along this line, it won't be difficult to discover that the theories are mainly made from policy-makers' perspective.
Perhaps this surprises you as your impression about economics is that it is about business. Perhaps you study economics as you study business. But the fact is: the use of economics in business is a much more recent phenomenon than its use in policymaking. Until at least the second half of the 20th century, most economists are still much more keen to suggest policies to the governments than serving the business sector. Of course, today this may not be true. But what was true initially may have a much greater impact on the later stage than you may expect.
Perhaps you suspect the microeconomics that you have learned is really made from a policy-maker's perspective. Your first micro topic is about consumer's choice. What is it related to policymaking? Then, you encounter the theory of firm and the mode of market competition. Wouldn't it be related to business much more than policies?
I won't say these topics are not related to business. Of course, they are. But let me explain my point.
First, the consumer theory aims mainly at explaining the consumer behaviours. Wouldn't it be more about business than policymaking? Aha, I think you have made a mistake. Have you noticed that actually there is a course known as "consumer behaviours" offered in the department of marketing. If you have ever taken such a course, you will know the course is not about economics. It is truly about business.
So, what consumer behaviours will be explained in a microeconomics course? The major focus is the law of demand but of course other issues may also be involved. Well, the law of demand is only about the negative relation between price and quantity. Mentioning this needs only one minute. Not much can be taught! No, it is about explanation. It is about substitution effect and income effect. So, it is not that straightforward.
But the foundation of substitution effect and income effect (and any other effects) is indeed "rational choice". Consumers are assumed to be making rational choice. In essence, it is about purposeful choice, not purposeless action. Rational consumers will choose the means to maximize the attainment of one's purpose (technically known as "utility").
So, maximum satisfaction is the foundation. But won't you ever wonder why it must be maximum? In fact, some economists (notably the Nobel prize winner Herbert Simon and others) have tried to introduce an alternative, saying that people simply try to be "satisficing", a word combining "satisfy" and "suffice". It assumes that attaining certain level of satisfaction will suffice; maximum satisfaction is not what choosers pursue. In other words, it is only about bounded rationality, not perfect rationality.
Alternative models like above have caught some attentions but have never been more popular than the rational choice model of maximum satisfaction. Why? Perhaps the latter's predictive power is higher or the latter is simpler. But let me share with you an observation from another Nobel prize winner, Roger Myerson. In a lecture given in 2002, he said:
"Perfect rationality is certainly an imperfect description of real people's behavior. But our goal is not just to predict human behavior, but to analyze social institutions and evaluate proposals for institutional reform. To look for potential flaws in an institution, it can be helpful to analyze the institution under the assumption that the individuals in it are not themselves flawed, because otherwise arguments for institutional reform become confused with arguments for reeducation of individuals....
"If individuals are not motivated to maximize their own welfare (as measured in our model) or if they do not understand their environment (as predicted in our analysis) then any loss of welfare that is predicted in our analysis may be blamed on such dysfunctional or misinformed individual behavior, rather than on the structure of social institutions...." This is not to say people are not truly rational but we have to artificially assumed that they are. This is to say that perfect rational model can produce reliable predictions but other models may also do this. So, the point is: it is not just to predict human behavior. Even if there are alternative models that can also predict behaviours well, choosing the rational choice model has an extra advantage: we can focus on finding what's wrong in the institutions. Hence, finding what's wrong with individuals is for long not a focus of economics (but a focus of psychology). Today, this attitude has changed a little (behavioural economics embraces these individual flaws). But that's another issue.
Hence, the point is: economics choose a model (rational choice) that can both predict behaviours well and suitable for finding flaws in the institutions. The later motivation is clearly made from a policy-makers' perspective.
Another important point from consumer theory is consumer surplus. Have you ever wonder why you should learn such a concept? Do consumers need to measure the consumer surplus from a deal so as to decide if one should accept a deal? Of course, they don't. Do businessmen measure consumer surplus so as to decide their pricing strategies? I don't think so. They may be interested in the shape of the demand curve and so set prices based on the shape. But consumer surplus is not their focus.
Yet, from a policy-maker's perspective, measuring consumer surplus is needed. Of course, producer surplus is also needed. Combined together, social welfare is measured by them. If a policy changes the combined consumer surplus and producer surplus, how big is it? Is it worthwhile to change it? That's what a policy-maker needs to know.
This naturally leads to the theory of firm and the mode of competition. The theories contain many details but the intention is not to teach businessmen how to do their own business well. Economists have to go through these details first but eventually what do they want to know? They demonstrate that perfect competition is better than other market structures, in particular, monopoly. How do they know? Yes, by consumer surplus and producer surplus. Perfection competition generates more while monopoly generates less.
At this point, I hope you are now convinced that microeconomics, at least for its basic part that has been established mainly in its initial stage, is constructed mainly from a policy-maker's perspective.
Of course, this is not our major concern in this post. The major concern is the use of microeconomics. But settling the question about the perspective can easily lead to the question about the use. The use is exactly for giving advices to policy-makers. From the discussion above, you may already appreciate how useful it would be for microeconomics to give policy advices. Yet there are also many other microeconomics concepts and theories that haven't been covered above but they are useful for policy advising.
At this point, I hope you won't be too disappointing. I am quite sure that students in my microeconomics class are mainly not interested in policy advising. They most likely want to know how economics can inform business decisions or can be used to analyze daily life issues. For the latter, as mentioned above, I have written some pieces but perhaps it lacks a systematic discussion. For the former, another post may be needed to handle the issue.
What I want to say in this post is: if you think economics should be useful for policy advising, like what students in certain high-flying programme known as "Philosophy, Politics and Economics" do, then you will get a positive answer from this post. If not, and you think the microeconomics that you have learned is not useful, then you have to understand that its initial purpose is more for policy advising. This enables you to understand microeconomics better. Yet, time has changed and now people want to use microeconomics for many other issues. But its basic part is more about policy.
Perhaps you may ask: can I just skip the basic part and jump directly to other applied parts of microeconomics? My answer is: if you are so impatient, you should not choose economics as your major. You should go to the business school and there you can also learn some economics, with fewer foundations and more applied parts. For economics, we value solid foundations, not simply applications.
Anyway, the use of microeconomics is not limited to policy advising. But to go through these other "uses", I think I need to write another post.
