Economics1:Introductionto
Economics:January20,2016Lecture
J.BradfordDeLong<delong@econ.berkeley.edu>
Economics1:Spring2016:
CourseIntro
January20,20168-0AM
WheelerAuditorium,U.C.Berkeley
WelcometoEcon1:Spring2016:
UCBerkeley
•
•
J.BradfordDeLong
•
delong@econ.berkeley.edu:MW8:00AMWheelerAuditorium
•
Thisdocument:<https://bcourses.berkeley.edu/courses/1411451/assignments/syllabus>
•
OfficeHours:J.BradfordDeLong'sofficehoursforundergraduateswillstartJanuary26,and
willbeTuesday9-11inEvansHall591.
RequiredPurchases:
•
RobertFrank,BenBernanke,KateAntonovics,andOriHeffetz:PrinciplesofEconomics<http://
amzn.to/1Zpuoj5>(NewYork:McGraw-Hill:9781259897580)besuretoorderandbuyISBN
9781259897580fromtheBerkeleybookstore
•
ParthaDasgupta(2007):Economics:AVeryShortIntroduction<http://amzn.to/1ZpuFCQ>
(Oxford:OxfordUniversityPress:9780192853455)
•
MiltonFriedmanandRoseDirectorFriedman(1970):FreetoChoose:APersonalStatement
<http://amzn.to/1NbvEPU>(NewYork:MarinerBooks:9780156334600)
•
TomSlee(2006):NoOneMakesYouShopatWal-Mart:TheSurprisingDeceptionsofIndividual
Choice<http://amzn.to/234zCph>(NewYork:BetweentheLines:9781897071069)
•
i>Clicker+StudentRemote<http://amzn.to/1ZpvkEe?(NewYork:W.H.Freeman:
9781464120152)
3
WelcometoEcon1:Spring2016:
UCBerkeley
• FIRSTSECTIONMEETINGSWILLBEWEDNESDAY1/20ANDTHURSDAY
1/21:TherearenoMondayorTuesdaysectionstheweekofJanuary18
• YOUMUSTATTENDYOURFIRSTSECTIONMEETING:Ifyoufailtoattend,
youwillbesentbacktothewaitlist.
• UsefulResourcestokeepatyourfingertipsforEcon1:Spring2016:
• Econ1QuestionsatPiazza<http://piazza.com>:<https://
piazza.com/class/ijbycscre596wc
• Econ1Chat:<https://bcourses.berkeley.edu/courses/1411451/
external_tools/24485>
• Econ1Announcements:<https://bcourses.berkeley.edu/courses/
1411451/announcements>
• YouareresponsibleforeverythingintheCoursePoliciesdocument.
READIT!<http://www.bradford-delong.com/course-policies.html>
4
ThingstoNoticeAboutThisCourseI
• Thisisonesemester
– Everywhereelsethisisatwosemestercourse:
– Wegofast
• ThisistheUniversityofCaliforniaatBerkeley
– Certainlythefinestpublicuniversityintheworld
– Perhapsthefinestuniversityintheworld
– Otherscouldbeinyourseats
• Theywouldtakeadvantageoftheopportunitieshere
• Don’twasteyouropportunityhere
• Thisisalecturehall:apre-Gutenbergeducational
technologyforapost-Gutenbergage
• Wewilldothebestwecan
ThingstoNoticeAboutThisCourseII
• UndergraduateStudentLearningInitiative:AspartofBerkeley's
UndergraduateStudentLearningInitiative(USLI),theEconomics
DepartmenthasdevelopedlearninggoalsfortheEconomicsmajor
at:http://emlab.berkeley.edu/econ/ugrad/ugrad_goals.shtml.The
specificlearninggoalswhichthiscourseaimstoachieveare:
• CT1:understandeverydayeconomicproblems,
• CT2:useeconomictheorytounderstandandevaluatepolicy
proposals,
• PS1:solveproblemswithclearsolutions,
• CS1:communicateeffectivelyabouteconomicissues,and
• LL3:understandtheeconomicnews.
• Butthatisnotterriblyhelpful,isit?
ThingstoNoticeAboutThisCourseIII:
EconomicLiteracy
• Thereallearninggoalforthiscourseis:economicliteracy.
• Attheendofthecourse,studentsshouldbeabletotakeanyarticle
abouttheeconomy,whetherin,say,theFinancialTimesorthe
EconomistortheSanFranciscoChronicleorBusinessInsideror
vox.com:
• Determinewhatassertionsitismakingabout
• howtheeconomyworks,and
• whatthecurrentstateoftheeconomyis,
• breakdownthoseassertions,
• useeconomiclogicandeconomicmodelsandeconomicdatato
analyzethem,and
• concludewhetherandunderwhatconditionstheargumentsofthe
articlemakesense.
ThingstoNoticeAboutThisCourseIV:
GradingandFirstAssignment
• Grading:
–
–
–
–
–
–
–
30%finalonMay9,20163-6PM
15%midtermonMarch9,2016
40%9problemsetsandashortmidtermpaper.
9%lectureparticipation—i>ClickersshouldstartMonday.
5%sectionparticipation.
1%anintroductorylettertoyourGSI,
AnticipatedmediangradeinthiscourseisahighB…
• Firstsectionassignment:
– ReadParthaDasgupta,Economics:AVeryShortIntroduction
LetterofIntroductionAssignment
• Bythestartofyournextsectionmeeting,pleasewritea
250-wordessay--a“letterofintroduction”--toyourGSI.
Includeyourname,anddiscuss:
– thereasonswhyyouarechoosingtospend3%ofyour
scarcecollegecurriculumtimetakingthiscoursethisyear,
– whatyouhopetolearnfromthiscourse,
– whatyouhopetodointhefutureasaresultofthiscourse,
and
– whateverelseaboutyourselfthatyouwouldliketoshare
withyourGSI.
– Pleaseincludeorembedaphotoofyourself,asthiswill
helpuslearntorecognizeyoubysight.
MicroeconomicsIntro
January20,20168-0AM
WheelerAuditorium,U.C.Berkeley
WhatIsRemarkableAbouttheEastAfrican
PlainsApe?
• Basic:
– Mammals
– Uprightposture
– Alotofus:7.4billionnow
• Form:
– Handsandopposablethumbs
– Bigbrains
– Talk
• Behavior:
–
–
–
–
Gossip(aboutfood,threats,mating)
Alterourenvironment
Giftexchange
Large-scalesocialdivisionoflabor
greaterthanseeninthesocial
insects
AdamSmith
• In1776publisheshisWealthof
Nations
• Itcontainsagenuinelygamechanginginsight:the“system
ofnaturalliberty”
• Justletpeopleexchangethings
freely—inanenvironmentin
whichpropertyissecure,and
inwhichthereisanalternative
dealalmostasgoodjustdown
thestreet—andthingswill
workoutremarkablywell…
OurTaskThisSemester
• Howisitthatmarketsworkso
well?
• Whatcanmakethemfailto
workwell?
• Whatcanwedoaboutitwhen
theydofailus?
• Whatsupportfromother
piecesofsocietydoesamarket
—orperhapsweshouldsaya
mixed—economyreallyneed?
• Arewereallysurethatmarkets
workwell?
HowRemarkably?:TheHighStalinist
Experiment
HowMuchDoesMarketOrganization
Matter?
• HighStalinistcentralplanning
– Marx’ssuspicionofmarketsas
surplus-extractiondevices
– Hence,thecommunistssaid,
wewon’thaveany
– Wewillreproducethe
Rathenau-LudendorffWorld
WarIImperialGermanwar
economy
– Communes,economiesof
scale,GOSPLAN,etc.
• Effect:youthrowawayafivefoldamplificationof
productivitybyeschewingthe
market
HowMuchDoesMarketOrganization
Matter?
GregClark:DirectEstimatesofLong-RunReal
WageTrends
• GregClark’snumbersonwhat
monkspaidtheirconstruction
workers,andwhatbreadand
otherstaplescost…
• AustanGoolsbee:Ittook30
hoursforanAmericanlaborer
in1850tobuyabushelof
corn.Ittakes12minutes
today.
• Plusnewgoodsandnew
typesofgoods:solidthings,
energy-manipulatingthings,
information,and
communication…
RickSteckel’sNumbersonOldWorldHeights
• “InnineteenthcenturySweden,forexample,average
heightwasthreetoeightcentimetersgreaterinruralareas
comparedwithStockholm,dependinguponthetime
periodandruralarea(SandbergandSteckel,1988)….
• “Inlateeighteenth-centuryEngland,forexample,the
averageheightsatage14ofpoorboysadmittedtothe
MarineSocietywere20centimetersbelowthoseofupperclassboyswhoattendedtheeliteacademyatSandhurst
(Floud,Wachter,andGregory,1990).Duringthesameera,
thedifferenceinaverageheightbetweentherichandthe
poorintheUnitedStateswasroughly3centimeters
(MargoandSteckel,1982).”
RobertAllen’sNumbersforWorldCities
• Thisisa
“subsistence
basket”forone
adultmale…
• Unskilledurban
laborers…
• Howwouldonego
aboutthinkingof
howrepresentative
ofthepopulationin
generalsuch
numbersare?
AMalthusianEconomy
• Wearenotterribly
unhappywithour
globalestimatesof
worldpopulation.
• Atwhatrateshould
anutritionallyunstressed,preartificialbirth
controlpopulation
grow?
• Whatiskeepingthe
populationgrowth
ratedown?
AMalthusianEconomyII
• Guessingatpreindustrialrealincome
levels.
• Butwhatdothese
mean?Notjustnew
goodsbutnewtypes
ofgoods.
• Ittook30hoursfor
anAmericanmale
northernworkerin
1850toearnenough
tobuyabushelof
corn
• Ittakes12minutes
now
ThinkingLikeanEconomist
January20,20168-0AM
WheelerAuditorium,U.C.Berkeley
TwoBasicPrinciplesofEconomics
• TheScarcity(orNo-Free-Lunch)Principle:Wehaveneeds,
andwantsthatarepotentiallyboundless.Butthe
resourcesavailabletousarelimited.Choicesare
inevitable.
• TheCost-BenefitPrinciple:Don’tdostupidstuff—doonly
stuffthatmakessense,thatleavesyoubetteroff.
• Calculatecostsandbenefitssensibly!
• Donotanchor,considerabsolutemagnitudes,don’t
forgetimplicitcosts,optionality,doforgetsunk
costs,thinkatthemargin
• Isthiscost-benefitprinciplepositive—howpeople
behave—ornormative—howpeopleoughttobehave?
FourMorePrinciplesofEconomics
• TheIncentivePrinciple:“Itisnotfromthebenevolenceofthe
butcher,thebrewer,orthebakerthatweexpectourdinner,
butfromtheirregardtotheirowninterest…”
• TheSpecializationPrinciple:Practicemakesperfect,oratleast
better.Asocietyofgeneralistswilltendtobeapoorsociety.
• Win-WinExchange:Inasocietyofspecialists,allparties
benefitfrominformedtrade.
• ComparativeAdvantage:Lessproductivethaneveryoneelseat
makingeverything?Youshouldstillspecializeatwhatyoudo
relativelybest—andtrade.Moreproductivethaneveryone
elseatmakingeverything?Youstillbenefitbyspecializingat
yourcomparativeadvantage—andtrading.
Principles:Individuals
• Principlesofindividualdecision-making:
– Peoplemustmakechoicesbecauseresourcesarescarce
• Whatifresourcesaren’tscarce?We’llfocusourattentionon
anareaoflifeinwhichtheyarescarce!
– Theopportunitycostofanitemisitstruecost
– “Howmuch”decisionsinevitablyinvolvemaking
decisionsatthemargin
– Peopleusuallyrespondtomaterialincentives—
exploitingopportunitiestomakethemselvesbetteroff
• “[hu]manhasalmostconstantoccasionforthehelpofhis[or
her]brethren,anditisinvain…toexpectitfromtheir
benevolenceonly”
Principles:Interactions
• Principlesofsocialinteractions:
– Therearegainsfromtrade
• “Incivilizedsociety[man]standsatalltimesinneedofthe
cooperationandassistanceofgreatmultitudes”
• “[Man’s]wholelifeisscarcesufficienttogainthefriendship
ofafewpersons”
• “Aspanielendeavoursbyathousandattractionstoengage
theattentionofitsmaster….[Man]hasnottime,however,to
dothisuponeveryoccasion”
–
–
–
–
Resourcesoughttobeusedas“efficiently”aspossible
Marketsmovetoward“equilibrium”
Marketequilibriumusually(?)leadsto“efficiency”
Wheneveramarketisnotachieving“efficiency”,
governmentinterventioncanimprovesociety’swelfare
Principles:EmergentMacroDifficulties
• Principlesofmacroeconomics:
– Oneperson’sspendingisanotherperson’sincome
– Overallspendingsometimesgetsoutoflinewiththe
economy’sproductivecapacity
– Governmentpoliciescanchangespending
• Butwewon’ttalkabouttheseuntilnearlyspring
break.
– Forthenexttwomonthswewillassumethatpeoplein
aggregatewanttospendtheirincomestoday
– Thosewhowanttospendlessthantheirincomeare
balancedbythosewhowanttospendmore
TheManyThingsthattheMarketSystem
GetsUs
• Peoplecan“specialize”in
whattheyaremost
productivedoing
• Peoplecanbecomemore
productive
• Peoplecantradeviathis
institutioncalled“market”
• Marketexchangeiswin-win
– Butrelativetowhat
baseline?
• Marketexchangemaximizes
wealth
– Aslongascommoditiesare
excludible,rival,known,and
internal
• Distribution?
Remember:GovernmentCreatestheMarketSystem
• Allthis“laissezfairevs.government”ideologyisgreatlyoversold…
• Economistsstartwithanautarchicbaseline,andthenmovetoatrading-whatyou-made-with-your-own-handsbenchmark,andthenstarttalkingabout
government
• Moneyandtrust
– “Thick-tie”exchanges
– “Thin-tie”exchanges
– Weightsandmeasures
• Propertyrights
• Contractenforcement
• Threatstoproperty,contract,and(arms-length)exchange:
–
–
–
–
Positiveandnegativeaffectiveties
Rovingbandits
Localnotables
Government’sownfunctionaries
• Theso-called“nightwatchman”stateisamightyinstrumentalityindeed…
DoINeedtoGoThroughtheAppendixtoCh1?
• TheAlfredMarshallparadigm:words,graphs,
equations.
• TheSamuelsonpost-WorldWarIIMITexperiment.
• Howwellhasthisservedus?
• Youshouldbeabletohandlethismodeofanalysis
—youshouldbeabletomovewellenough
betweenverbalchainsofcausationandanalysis,
equations,andgraphsviaanalyticgeometry.
• Ifnot?Wewillfindoutquickly,anddoubleback