7Financial Theory

7Financial Theory - Financial Theory

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Financial Theory: Lecture 7 Transcript September 24, 2009 << back Professor John Geanakoplos: I think I'm going to start. So, so far where have we gotten to? We started summarizing what general equilibrium was. We saw that Irving Fisher of Yale reinvented general equilibrium in order to study finance, and we saw just by reinterpreting the variables of general equilibrium we could start to say a lot of things about finance, and in particular we had the idea of free markets, an argument in favor of free markets. We had the idea of arbitrage and no arbitrage so you could deduce a lot of prices without solving for the whole equilibrium just by knowing what other prices are. And we also learned that the price of many things is going to have to do with the utility and marginal utilities of people, and that's going to have a lot to do with what their impatience is, and whether they're rich people or poor people, redistributions of wealth, who's got the money and how impatient the people who have the money are. So those are the basic lessons that we're going to now carry into the course. And so for several lectures now I'm going to leave the abstract theory of general equilibrium and start teaching you some of the basic vocabulary of finance that you have to know and that everybody in finance knows like what is a mortgage, what's an annuity and stuff like that. So before I go there, though, I want to remind you of what Shakespeare had done 300 years before Irving Fisher. So Irving Fisher, remember, he cleared up the confusion of what interest was. He said interest is crystallized impatience. It's not some horribly unjust thing. It's not, as Marx thought, exploitation, but Shakespeare had discovered all this 300 years before. Now, when I was your age or a little bit younger than you in high school we all had to read the Merchant of Venice . I have two Indian coauthors who are vaguely my age, maybe a little older, but anyway they sort of grew up in India and they had to learn the Merchant of Venice , and actually they learned it a lot better than I did. They both have memorized the Merchant of Venice . They can recite almost the entire thing by heart. But anyway, when I was in high school it was completely typical to study the Merchant of Venice . I wonder how many of you have actually read it. Who's read the Merchant of Venice ? Whoa this is Yale, I'm shocked. So a quarter of you have read it. Well, I recommend to the other three-quarters that you do read it. Now, when it's taught nowadays, especially at Yale, it's taught as a love story and a commentary on anti-Semitism. Now, of course, it's both. It is a love story and commentary on anti-Semitism. Shylock the lender is Jewish. And remember what we heard about the great religions? They were all forbidding lending at interest except for Judaism which let you loan money at interest to non-Jews. So Shakespeare [correction: Shylock], who's the money lender, is Jewish and lending it to Christians and that plays a big role in the play and what happens to him, and what people say about Judaism is a big element of the story.
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7Financial Theory - Financial Theory

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