Economic Reasoning

Economic reasoning refers to an economic decision rule where individuals and society rationally compare the marginal benefits and marginal costs of every decision. These choices are based upon logical thinking after proper analysis of the tradeoffs and evidence for every alternative and its potential result.

Such a framework is functional on the ideology that every action or decision has a specific cost. It enables the decision-makers to effectively handle the problems and dilemma of choosing between different alternatives by making them concentrate on the critical aspects while overlooking the noise factors. This way, people can make informed decisions while supporting their choices with logical reasons. 

Economic reasoning is a decision-making rationale that emphasizes evaluating the marginal benefits of a decision with the marginal cost involved in making that particular choice. Thus, the phenomenon that everything involves a cost helps individuals and society make rational decisions. It is simply assessing every decision on a balancing scale where one side is the benefits that will be derived from it, and the other is the cost of such benefits.

As per the economic decision rule, there can be two possible scenarios as stated below:

1. MB>MC: The marginal benefit of a particular choice is higher than the marginal cost it involves. In this condition, the decision makers can move ahead with their decision.
2. MB<MC: The marginal cost of the decision will be more than its marginal benefit. In this case, such a decision should not be taken.

The ideology of economic reasoning can function upon the following propositions:

1. Individual Choices and Social Outcomes: The resources that an individual has and the social impact of a decision shape their choices.
2. Opportunity Cost: The cost of letting go of one option to choose the other is another factor.
3. Influence of Incentives: The incentives offered by the alternatives decide the individual's behavior.
4. Impact of Institutions: The laws, customs, and cultural values impact individual choices by framing the rules and incentives within the economic system.
5. Value of Informed Opinions: Rational decisions are often supported by valuable opinions.

Some of the fundamentals that govern the economic reasoning are as follows:

1. People Experience Tradeoffs: Since individuals often have insufficient resources to fulfill all their needs, they need to prioritize their choices. 
2. People Economize: During the decision-making process, individuals often choose the alternatives that offer the optimal benefits compared to their costs.
3. Every Choice Has a Cost: While choosing a particular option, individuals leave the other alternatives unselected; therefore, every decision has an opportunity cost of losing the benefits of the other options.
4. All Rational Decisions Are Marginal: The extreme ends of the decisions, I.e., having all or nothing, are too rare; however, the rational decisions are those that compare the expected benefits with the potential cost at every level.
5. Incentives-Based Response: People often consider the reward or punishment associated with a decision; with any change in these incentives, the behavior of individuals also changes predictably. 
6. Most Powerful Incentives are Prices: While the prices fluctuate with the dynamic demand and supply of resources, goods, and services, they hold the power to influence the opportunity costs and decisions of people. 
7. Trade Can Make Everyone Better Off: In an economy, trade and exchange can create wealth for everyone. While individuals benefit from receiving a higher value at a lower cost, the producers specialize in producing higher quality products, and society improves with specialized producers.
8. Markets Organize Economic Activity: The markets facilitate individuals to make decisions freely based on their expectations of the costs and benefits.
9. Market Outcomes May Improve Through Government Interventions: The various measures of the government to check externalities, free rider issues, and market inefficiencies can enhance market decisions.
10. Production Ability For Goods or Services Shape Individual and National Standards of Living: The change in production capacity, including higher labor productivity, use of advanced technology, and better education, can all result in a better standard of living.

Given below are some of the examples that explain how economic reasoning impacts the decision-making by individuals and society:

Example #1 

Suppose the policymakers in a developing economy suggested various welfare programs for the development of the below-poverty line class of the society. Thus, the government approved two of these initiatives, including a low-income education program and social security benefits for food, medical expenses, and housing needs of the people with low or no income. However, the economic reasoning for these programs is the development of the weaker section of society for the growth of the overall economy and standard of living.

Example #2

In a study, it was found that the impact of judges' exposure to economic reasoning can be seen in their decisions when investigating the antitrust and securities law cases from 1932 to 2016. The research found that the judges who attended law schools with solid law and economics programs were more likely to incorporate economic reasoning in their opinions. Hence, such inclination is related to a higher rate of pro-business rulings, regardless of political ideology. Moreover, the various computational linguistics used during the study identify the presence of economic terms in judicial opinions, which reveals a higher influence of economic analysis since the 1940s. Altogether, the paper concludes that a judge's training in economics can significantly affect court decisions, particularly in regulatory and business contexts.

Source - https://www.promarket.org/2020/12/03/judges-who-use-economic-reasoning-in-court-decisions-rule-in-favor-of-business-more-often/

A sound economic reasoning can lose its essence due to the following shortcomings:

• Biases: The decision-making is often prone to biases, I.e., people's decisions may diverge from logical reasoning because of their preconceived notions. However, education can help people overcome this challenge.
• Fallacy of Composition: Sometimes, the decision makers assume that a decision that has a positive impact on a small group will benefit the entire society or economy.
• False Dichotomy: In this pitfall, the people believe in only two extreme alternatives while ignoring all the middle alternatives.
• Loaded Terminology: When the decision makers are trapped in words or phrases like corporate greed, their decisions lose their motive of impartiality.
• Fallacy of Causation: This shortcoming emphasizes that two events take place simultaneously, where the occurrence of one event is the reason behind the occurrence of the other.
• Post-Hoc Fallacy: Similar to the causation fallacy, the post hoc fallacy assumes that the happening of the second event relies upon the occurrence of the first one.