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
– 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
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?
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?