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
II
http://delong.typepad.com/sdj/econ-1-spring-2012/
January 27, 2014, 4-5:30
101 Barker, U.C. Berkeley
Do You Have an i>Clicker?
• A. Yes
• B. No.
• C. What’s an i>Clicker?
Did You Email Me Your Preferred
Email Address?
• A. Yes
• B. No.
• C. What’s an email address?
From Last Time…
• We got about halfway through “Introduction
to Micro…”
• Now let us pick up: how much of a difference
does it make that we arrange the coordination
of our economic life through markets?
To Your i>Clickers…
• We had a gigantic “natural experiment” in the
twentieth century. It was:
– A. Whether technology could be successfully transferred
by Europeans colonizing the rest of the globe.
– B. Whether breaking up large firms would restore
competition.
– C. Whether population growth could be controlled by
government command.
– D. Whether an economy that got rid of markets could
thereby be more prosperous and more egalitarian than
one that did not.
– E. Whether eliminating communist regimes would
accelerate prosperity.
To Your i>Clickers…
• What share of productivity do you throw away by
forbidding the market system to operate?
– A. None—big firms show us that command-andcontrol plus bureaucracy are more productive
– B. None—the victory of the Soviet Union over Nazi
Germany in World War II and of Mao’s CCP over
Chiang Kai-Shek’s Guomindang in the Chinese Civil
War show that central planning is best
– C. Less than 20%
– D. About 50%
– E. More than 80%
How Remarkably?: The High
Stalinist Experiment
How Much Does Market Organization
Matter?
• High Stalinist central
planning
– Marx’s suspicion of
markets as surplusextraction 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.
How Much Does Market Organization
Matter?
What Happened?
•They threw away a
more than five-fold
amplification of
productivity by
eschewing the market
How Are We to Understand This?
• You want a large-scale division of labor:
– Because: specialization
• There are problems with having a large-scale
division of labor
– Problems of coordination
– Problems of information
– Problems of incentivization
– Problems of justification
For the Moment…
• Focus on two sets of problems:
– Information
– Incentivization
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 commandand-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?
Recap: To Your i>Clickers…
• The fundamental “economic problem” is:
– 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 time by the wave of technological
innovation that was the Industrial Revolution.
– D. Is that supply is not guaranteed to match demand.
– E. Is that of figuring out what prices should be charged
in markets
SLIDE DECK BREAK