Economics 2: Spring 2014

Economics 2: Spring 2014 J. Bradford DeLong <jbdelong@berkeley.edu>; Maria Constanza Ballesteros <mc.ballesteros@berkeley.edu>; Connie Min <conniemin@berkeley.edu> http://delong.typepad.com/sdj/econ-2-spring-2014/

Economics 2: Spring 2014: Introduction to Microeconomics http://delong.typepad.com/sdj/econ-1-spring-2012/ January 22, 2014, 4-5:30 101 Barker, U.C. Berkeley

What Is Remarkable About the East African Plains Ape? • Basic: • Mammals • Upright posture • A lot of us: 7.2 billion now • Form: • Hands and opposable thumbs • Big brains • Talk • Behavior: • Gossip (about food, threats, mating) • Alter our environment • Gift exchange • Large-scale social division of labor greater than seen in the social insects

What Can’t We Turn into a Reciprocal Gift-Exchange Relationship? • The Iliad: High King Agamemnon takes Akhilleus’s slave-concubine Briseis, Akhilleus sulks in his tent rather than fight in the Trojan War, Trojan Prince Hektor kills Akhilleus’s best friend Patroklos, and then Akhilleus kills Hektor, and then… • And then Hektor’s father King Priam comes out of Troy bringing gifts to Akhilleus to ransom Hektor’s body. They cry. They feast. They hug. They compliment each other. Priam gives Akhilleus the treasure. Akhilleus gives Priam his son’s body and a twelve-day truce… • If even your relationship with your son’s killer gets turned into a reciprocal gift-exchange relationship… • “Natural propensity to truck, barter, and exchange” indeed! • It is on top of this that we build our market economy, our social division of labor, our transformation of our environment to suit our purposes…

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

Adam Smith • In 1776 publishes his genuinely game-changing insight the “system of natural liberty” • Just let people exchange things—in an environment in which there is an alternative deal almost as good just down the street—and things will work out remarkably well…

How Remarkably?: The High Stalinist Experiment

How Much Does Market Organization Matter? • High Stalinist central planning • Marx’s suspicion of markets as surplus-extraction 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-fold amplification of productivity by eschewing the market

How Much Does Market Organization Matter?

In Order to Coordinate... • ...in an economy with N commodities 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 commodities via a bureaucratic 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

Questions to Ask of Any Societal Calculating Mechanism • Is it attainable? • i.e., China during the Great Leap Forward not attainable • Peng Dehuai’s reprimand of Mao; Hai Jui’s reprimand of Shih Tsung • Productive efficiency: will the right people be making the right things? • Allocative efficiency: will anybody say “I don’t want that, I want this instead”? • Will it be fair?

Essentials of Economics I • Principles of individual decision-making: • People must make choices because resources are scarce • What if resources aren’t scarce? We’ll focus our attention on an area of life in which they are scarce! • The opportunity cost of an item is its true cost • “How much” decisions inevitably involve making decisions at the margin • People usually respond to material incentives—exploiting opportunities to make themselves better off • “man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only”

Essentials of Economics II • Principles of social interactions: • There are gains from trade • “In civilized society [man] stands at all times in need of the cooperation and assistance of great multitudes” • “[Man’s] whole life is scarce sufficient to gain the friendship of a few persons” • “A spaniel endeavours by a thousand attractions to engage the attention of its master…. [Man] has not time, however, to do this upon every occasion” • Resources ought to be used as “efficiently” as possible • Markets move toward “equilibrium” • Market equilibrium usually (?) leads to efficiency • When markets don’t achieve efficiency, government intervention can improve society’s welfare

Essentials of Economics III • Principles of macroeconomics: • One person’s spending is another person’s income • Overall spending sometimes gets out of line with the economy’s productive capacity • Government policies can change spending • But we won’t talk about these until after spring break. • For the next two months we will assume that people in aggregate want to spend their incomes today • Those who want to spend less than their income are balanced by those who want to spend more

Governments Create Markets • Money and trust • “Thick-tie” exchanges • “Thin-tie” exchanges • Weights and measures • Property rights • Contract enforcement • Threats to property, contract, and (arms-length) exchange: • Positive and negative affective ties • Roving bandits • Local notables • Government’s own functionaries

What the Market System Gets Us • People can “specialize” in what they are most productive doing • People can become more productive • People can trade via this institution called “market” • Market exchange is win-win • Relative to baseline • Market exchange maximizes wealth • As long as commodities are excludible, rival, known, and internal • Distribution?

SLIDE DECK BREAK

Economics 2: Spring 2014