Economics 1: Fall 2010 J. Bradford DeLong, Michael Urbancic, and a cast of thousands... hAp://delong.typepad.com/econ_1_fall_2010/
Gerard Roland Has Found Some Extra Money...
• Please let your students know that the tutors are available to students of Econ 1, 100A, 101A, 100B, 140, and 141. • The tutors will start holding office hours tomorrow. The Smes and locaSons of their office hours will be posted to the following page later today: • hAp://www.econ.berkeley.edu/econ/ugrad/ eac/eac.shtml
Economics of Markets with Search FricSons • “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel” vs. “ The Nobel Prize in Chemistry”
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Administrivia: The Next Month: The Long March to the Second Midterm M Oct 11: Choice, Scarcity, and Exchange W Oct 13: Markets and Other AllocaSon Procedures. Essay 2: two-‐ pages on human social large-‐scale cooperaSon M Oct 18: Working with Supply and Demand W Oct 20: ProducSon and Equilibrium in the Short Run and the Long Run. Problem set 4 M Oct 25: General Equilibrium and the "Efficiency" of "Perfect" CompeSSon. W Oct 27: Monopoly. Problem set 5 M Nov 1: Oligopoly W Nov 3: MonopolisSc CompeSSon. 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
Ladies and Gentlemen, to Your i>Clickers... • About how much does use of markets rather than command amplify societal economic producSvity? – A. None – B. Doubles it – C. Triples it – D. Quadruples it – E. Quintuples it
Guessing at Some Numbers • Growth rates of populaSon – – – –
HG: 0.01%/year AS: 0.05%/year EM: 0.2%/year >1800: 1.0%/year
• Growth rates of technological and organizaSonal knowledge – – – –
HG: ???? AS: 0.01%/year EM: 0.09%/year IS: 2%/year
• Growth rates of global GDP – – – –
AS: 0.05%/year EM: 0.2%/year EIS: 1.4%/year IS: 3.4%/year
How Much Does Market OrganizaSon MaAer? • We have a 20th century “natural experiment” • High Stalinist central planning
– Marx’s suspicion of markets as surplus-‐extracSon 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 amplificaSon of producSvity by eschewing the market
How Much Does Market OrganizaSon MaAer? • Effect: you throw away a five-‐fold amplificaSon of producSvity by eschewing the market... • Effect on human welfare can be greater or smaller (Cuba/Cambodia)... • Linkage between market economy and technological knowledge...
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 Sed to Berkeley plus not a boring job...
– What is the “opportunity cost” of drinking a cup of coffee? • You can’t spend the Sme and money taking yoga lessons
Scarcity and Choice in a MulS-‐ 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 • • •
They have specialized in what they are most producSve doing They have traded via this insStuSon clled “market” It is win-‐win – Dharma benefits as long as the price of yoga lessons > cu0.40 – Greg benefits as long as the price of yoga lessons < cu10
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Wealth MaximizaSon
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DistribuSon:
– Any price between cu0.40 and cu10 produces a wealth-‐maximizing producSon outcome – Any price between cu0.40 and cu10 produces an efficient allocaSve outcome – Any price outside the range shuts the market—and specializaSon—down – 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 Sme by the wave of technological innovaSon that was the Industrial RevoluSon. – 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 commodiSes 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 commodiSes via a bureaucraSc 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
In Order to Coordinate... • ...in an economy with N commodiSes via “custom,” you have to... – 1. Already have solved the economic problem last generaSon – 2. Keep things from changing
How Important Is InformaSon Flow? • •
With two people—Dharma and Greg— these informaSon differences may not seem that important But with 140 million workers and with 100,000 different commodiSes? – Private property pushes decision-‐making out to the periphery where the informaSon already is: you don’t have to collect it – Purchase-‐and-‐sale automaScally gives good incenSves: you don’t have to check up on people – If you can get prices right
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But what if the market system has big fricSons? What if it is more producSve to do pieces of the division of labor via bureaucraSc command-‐and-‐control? – Then the market provides incenSves to create such islands within itself—that is what big businesses are – And we can and do supplement the market with the government • Wyoming KnoA’s Sixth InternaSonal Plauorm
QuesSons to Ask of Any Societal CalculaSng Mechanism •
Is it aAainable?
– i.e., China during the Great Leap Forward not aAainable • Peng Dehuai’s reprimand of Mao; Hai Jui’s reprimand of Shih Tsung
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ProducSve efficiency: will the right people be making the right things? AllocaSve efficiency: will anybody say “I don’t want that, I want this instead”? Will it be fair? – The cu0.40 price allocaSon might be Pareto-‐opSmal
• Dharma teaches yoga • Dharma: 2.5 yoga and 1 cup of coffee— and doesn’t want to teach more or less • 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
– But it doesn’t seem fair, does it?
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That is what we will look at next Sme...
Ladies and Gentlemen, to Your i>Clickers... • What is the single principal reason to have a market economy rather than a bureaucraSc-‐command economy?
– A. It is more producSve – B. It requires that a huge amount less of effort be spent on centrally collecSng and processing informaSon – 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 informaSon do we need to disseminate in order for a market economy to funcSon? • What informaSon do we need to acquire and process in order for a centrally-‐planned bureaucraSc economy to funcSon? • What are the quesSons we should ask of any societal social calculaSng mechanism?