How laypeople understand the economy

This chapter describes the main cognitive challenges presented by economic theory, and discusses the Good-Begets-Good (GBG) heuristic and how it enables non-economists to interpret the economy. It also describes the contribution of metaphors and the dangers of using them to understand economic issues. The chapter then discusses lay knowledge regarding macroeconomics, centring the discussion around the concept of inflation. It shows how it is understood, with a restricted scope; how people perceive the relation between inflation and unemployment; how relations between macroeconomics variables are understood in general, on the basis of the GBG heuristic; and discusses macroeconomic consequences. The GBG heuristic means that the public perceives the economic situation in a simplistic manner, as improving or deteriorating, and this generates waves of optimism or pessimism The ‘Phillips curve’ states that there is an inverse relationship (a ‘trade-off’) between the rate of unemployment and the rate of inflation in an economy.