20101011+slides - Economics 1: Fall 2010 J. Bradford...

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Unformatted text preview: Economics 1: Fall 2010 J. Bradford DeLong, Michael Urbancic, and a cast of thousands... hAp://delong.typepad.com/econ_1_fall_2010/ Ladies and Gentlemen, to Your i>Clickers... •  About how much does use of markets rather than command amplify societal economic producMvity? –  A. None –  B. Doubles it –  C. Triples it –  D. Quadruples it –  E. Quintuples it •  •  •  •  •  •  •  •  •  Administrivia: The Next Month: The Long March to the Second Midterm M Oct 11: Choice, Scarcity, and Exchange W Oct 13: Markets and Other AllocaMon Procedures. Essay 2: two ­ pages on human social large ­scale cooperaMon M Oct 18: Working with Supply and Demand W Oct 20: ProducMon and Equilibrium in the Short Run and the Long Run. Problem set 4 M Oct 25: General Equilibrium and the "Efficiency" of "Perfect" CompeMMon. W Oct 27: Monopoly. Problem set 5 M Nov 1: Oligopoly W Nov 3: MonopolisMc CompeMMon. Problem set 6 M Nov 8: MIDTERM 2 EXAM Economics 1: Fall 2010: Choice, Scarcity, and Exchange J. Bradford DeLong October 11, 2010, 12 ­1 Wheeler Auditorium, U.C. Berkeley Guessing at Some Numbers •  Growth rates of populaMon –  –  –  –  HG: 0.01%/year AS: 0.05%/year EM: 0.2%/year >1800: 1.0%/year •  Growth rates of technological and organizaMonal knowledge –  –  –  –  HG: ???? AS: 0.01%/year EM: 0.09%/year IS: 2%/year –  –  –  –  AS: 0.05%/year EM: 0.2%/year EIS: 1.4%/year IS: 3.4%/year •  Growth rates of global GDP Convergence to 2009 How Much Does Market OrganizaMon MaAer? •  We have a 20th century “natural experiment” •  High Stalinist central planning –  Marx’s suspicion of markets as surplus ­extracMon devices –  Hence, the communists said, we won’t have any –  We will reproduce the Rathenau ­ Ludendorff World War I Imperial German war economy –  Communes, economies of scale, GOSPLAN, etc. •  Effect: you throw away a five ­ to ten ­fold amplificaMon of producMvity by eschewing the market –  Effect on human welfare can be greater or smaller How Much Does Market OrganizaMon MaAer? Effect on Human Welfare Can Be Greater or Lesser •  Lesser: –  In Cuba life expectancy is high –  In Cuba inequality is low •  Greater: The Economic Problem •  Stuff: –  What... –  How... –  For whom... •  We can’t make everything •  Where there is no scarcity—or where we don’t care that there is scarcity—there is no economic problem •  Where there is, and where we care, there is an economic problem: –  Ursula K. LeGuin: Urras and Anarres –  Jan Wenner vs. Paul Allen What Do We Care About? •  We care about choices between things we value •  “Opportunity cost” –  What is the “opportunity cost” of aAending Cal? •  Cash cost plus foregone wages plus foregone valuable experience plus Med to Berkeley plus not a boring job... –  What is the “opportunity cost” of drinking a cup of coffee? •  You can’t spend the Mme and money taking yoga lessons Scarcity and Choice in a MulM ­ Person Economy •  Dharma and Greg –  Greg is good at making coffee—can make, say, 10 cups a day •  But inept at yoga—one lesson a day max –  Dharma is good at doing (and teaching) yoga—can teach 5 lessons a day •  But can only make two cups of coffee Greg and Dharma in Autarky A Market with cu2 Yoga Lessons! What the Market System Gets Us •  Win ­win •  Wealth MaximizaMon –  Dharma benefits as long as the price of yoga lessons > cu0.40 –  Greg benefits as long as the price of yoga lessons < cu10 –  Any price between cu0.40 and cu10 produces an “wealth ­maximizing producMon outcome –  Any price between cu0.40 and cu10 produces an efficient allocaMve outcome –  Any price outside the range shuts the market—and specializaMon—down •  DistribuMon: –  A price of cu10 gives all the surplus to Dharma –  A price of cu0.40 gives all the surplus to Greg –  A price of cu2 makes them equally well off •  Or does it? Ladies and Gentlemen, to Your i>Clickers... •  The “economic problem”: –  A. Is figuring out how to deal with the fact of scarcity in (at least some of) the things we care about. –  B. Is the result of high opportunity costs. –  C. Was solved for all Mme by the wave of technological innovaMon that was the Industrial RevoluMon. –  D. Is that supply is not guaranteed to match demand. –  E. Is that of figuring out what prices should be charged in markets In Order to Coordinate... •  ...in an economy with N commodiMes via the market, you have to... –  1. Find a whiteboard –  2. Write down N prices –  3. Laissez ­faire –  4. Maybe you don’t have to write down the prices In Order to Coordinate... •  ...in an economy with N commodiMes via a bureaucraMc command ­ and ­control hierarchy, you have to... –  1. Tell everybody what to do –  2. Tell everybody what they are going to consume –  3. Check up to make sure everybody is doing what they are supposed to be doing How Important Are These InformaMonal Differences? •  With two people—Dharma and Greg—these informaMon differences may not seem that important •  But with 140 million workers and with 100,000 different commodiMes? •  What if it is more producMve to do pieces of the division of labor via bureaucraMc command ­and ­control? –  Then the market provides incenMves to create such islands within itself—that is what big businesses are QuesMons to Ask of Any Societal CalculaMng Mechanism •  Is it aAainable? •  Will the right people be making the right things? Will anybody say “I don’t want that, I want this instead”? Will it be fair? •  •  –  i.e., China during the Great Leap Forward not aAainable –  The cu0.40 price allocaMon might be Pareto ­opMmal •  Dharma teaches yoga •  Dharma consumes 2.5 yoga and 1 cup of coffee—and at a price of cu0.4 doesn’t want to teach any more or less for any more or less coffee •  Greg consumes 2.5 yoga and 9 cups of coffee—if he doesn’t like yoga that much, he might not want to take any more yoga lessons even at a price of cu0.4 –  But it doesn’t seem fair, does it? •  That is what we will look at next Mme... Ladies and Gentlemen, to Your i>Clickers... •  What is the single principal reason to have a market economy rather than a bureaucraMc ­command economy? –  A. It is more producMve –  B. It requires that a huge amount less of effort be spent on centrally collecMng and processing informaMon –  C. It requires that a huge amount less of effort be spent checking up on people to make sure that they are doing what they are supposed to be doing –  D. Its tolerance of independent centers of social power makes a collapse into oppressive dictatorship less likely. –  E. It is fairer Test Your Knowledge •  What is the “economic problem”? •  What is “opportunity cost”? •  What informaMon do we need to disseminate in order for a market economy to funcMon? •  What informaMon do we need to acquire and process in order for a centrally ­planned bureaucraMc economy to funcMon? •  What are the quesMons we should ask of any societal social calculaMng mechanism? ...
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