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 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?
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