by Kevin Coates | Oct 29, 2009 | Economics
The Origin of Wealth, Eric D Beinhocker, 2006, p116-119 “Imagine you walk into your grocery store and see some tomatoes… You have well-defined preferences for tomatoes compared with everything else you could possibly buy in the world, including bread, milk, and a vacation in Spain. Furthermore, you have well-defined preferences for everything you could possibly buy at any point in the future, and since the future is uncertain, you have assigned probabilities to those potential purchases. For example, I believe that there is a 23 percent chance that in two years, the shelf in my kitchen will come loose and I will need to pay $1.20 to buy some bolts to fix it. The discounted present value of that $1.20 is about $1.00, multiplied by a 23 percent probability, equals an expected value of twenty-three cents for possible future repairs, which I must trade off with my potential purchase of tomatoes today, along with all of my other potential purchases in my life- time. In the Traditional Economics model, all these well-defined preferences are also ordered very logically. So if I prefer tomatoes to carrots, and prefer carrots to green beans, I will always take the tomatoes over the green beans. Likewise, if I prefer tomatoes to carrots, I won’t suddenly go for the carrots simply because I saw some green beans. Traditional Economics also assumes that you know exactly what your budget is for spending on tomatoes. To calculate this budget, you must have fully formed expectations of your future earnings over your entire lifetime and have optimized your current budget on the basis of that knowledge. In...