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Economists provide insights to policymakers. How economists can make the world a better place?
What do economists do?
Economists do many things – but two things stand out.
1. Economists contribute specialist knowledge to the world
2. Economists can help policymakers make the world a better place
This naturally means that Economics is often an important part of public debate and opinion.
One example is climate change. Scientists can work out how to prevent climate change by sticking to a ‘carbon budget’. By cutting the amount of greenhouse gas we emit each year, we help create a more future-proof and sustainable economy.
Economists can help outline these budgets. They can also help us stick to them. Part of an economist’s job is to focus on efficiency: finding the most efficient/least costly way of achieving a required goal (for example, a carbon budget).
Economists rely on models to act out a version of the world. This helps them understand the world better and utilise strategies to overcome obstacles.
Two theories are particularly suited to this purpose.
1. Game theory
This is a way of modelling behaviour. It looks at the strategies of actors/agents who act in their own self-interest, but whom are interdependent and affected by each other’s decisions.
An example of this is the prioner’s dilemma. It’s a thought experiment that studies how two prisoners might behave without knowing what the other is doing. One option is to betray the other one by confessing to the detective. The other option is to stay loyal and keep quiet.
Game theory tries to work out what the best decision is for the individual. It also tries to calculate the best decision for all parties involved.
2. Information theory
This centres on the way that individuals make use of private information.
Let’s look at another experiment, so we can get an idea of how this works.
Take, for example, a tenant farmer and a landlord. The owner of the land has private information. Only he/she knows this. This information might be about the fertility of the land that the farmer is interested in renting. When the time arrives to sign and agree to the contract, the landlord may look to form it in a way that benefits him/her. The landlord might know that the land is very fertile; so the landlord might propose a profit-sharing model rather than a fixed monthly rent. This would contract work at the behest of the landlord, but it also might make the farmer worse off.
Analysis of what one might do with private information allows economists to make better decisions and recommendations. Private information may affect individual behaviour, and economists need to account for that.
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