Economics1:IntroductiontoEconomics:January20,2016Lecture

J.BradfordDeLong<delong@econ.berkeley.edu>

Economics1:Spring2016:CourseIntro

January20,20168-0AMWheelerAuditorium,U.C.Berkeley

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WelcometoEcon1:Spring2016:UCBerkeley

• J.BradfordDeLong

• delong@econ.berkeley.edu:MW8:00AMWheelerAuditorium

• Thisdocument:<https://bcourses.berkeley.edu/courses/1411451/assignments/syllabus>

• OfficeHours:J.BradfordDeLong'sofficehoursforundergraduateswillstartJanuary26,andwillbeTuesday9-11inEvansHall591.

• RequiredPurchases:

• RobertFrank,BenBernanke,KateAntonovics,andOriHeffetz:PrinciplesofEconomics<http://amzn.to/1Zpuoj5>(NewYork:McGraw-Hill:9781259897580)besuretoorderandbuyISBN9781259897580fromtheBerkeleybookstore

• 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:TheSurprisingDeceptionsofIndividualChoice<http://amzn.to/234zCph>(NewYork:BetweentheLines:9781897071069)

• i>Clicker+StudentRemote<http://amzn.to/1ZpvkEe?(NewYork:W.H.Freeman:9781464120152)

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WelcometoEcon1:Spring2016:UCBerkeley

• FIRSTSECTIONMEETINGSWILLBEWEDNESDAY1/20ANDTHURSDAY1/21: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>

ThingstoNoticeAboutThisCourseI

• Thisisonesemester– Everywhereelsethisisatwosemestercourse:–Wegofast

• ThisistheUniversityofCaliforniaatBerkeley– Certainlythefinestpublicuniversityintheworld– Perhapsthefinestuniversityintheworld– Otherscouldbeinyourseats

• Theywouldtakeadvantageoftheopportunitieshere• Don’twasteyouropportunityhere

• Thisisalecturehall:apre-Gutenbergeducationaltechnologyforapost-Gutenbergage

• Wewilldothebestwecan

ThingstoNoticeAboutThisCourseII

• UndergraduateStudentLearningInitiative:AspartofBerkeley'sUndergraduateStudentLearningInitiative(USLI),theEconomicsDepartmenthasdevelopedlearninggoalsfortheEconomicsmajorat:http://emlab.berkeley.edu/econ/ugrad/ugrad_goals.shtml.Thespecificlearninggoalswhichthiscourseaimstoachieveare:• CT1:understandeverydayeconomicproblems,• CT2:useeconomictheorytounderstandandevaluatepolicyproposals,

• PS1:solveproblemswithclearsolutions,• CS1:communicateeffectivelyabouteconomicissues,and• LL3:understandtheeconomicnews.

• Butthatisnotterriblyhelpful,isit?

ThingstoNoticeAboutThisCourseIII:EconomicLiteracy

• Thereallearninggoalforthiscourseis:economicliteracy.• Attheendofthecourse,studentsshouldbeabletotakeanyarticleabouttheeconomy,whetherin,say,theFinancialTimesortheEconomistortheSanFranciscoChronicleorBusinessInsiderorvox.com:• Determinewhatassertionsitismakingabout

• howtheeconomyworks,and• whatthecurrentstateoftheeconomyis,

• breakdownthoseassertions,• useeconomiclogicandeconomicmodelsandeconomicdatatoanalyzethem,and

• concludewhetherandunderwhatconditionstheargumentsofthearticlemakesense.

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,pleasewritea250-wordessay--a“letterofintroduction”--toyourGSI.Includeyourname,anddiscuss:– thereasonswhyyouarechoosingtospend3%ofyourscarcecollegecurriculumtimetakingthiscoursethisyear,

– whatyouhopetolearnfromthiscourse,– whatyouhopetodointhefutureasaresultofthiscourse,and

– whateverelseaboutyourselfthatyouwouldliketosharewithyourGSI.

– Pleaseincludeorembedaphotoofyourself,asthiswillhelpuslearntorecognizeyoubysight.

MicroeconomicsIntro

January20,20168-0AMWheelerAuditorium,U.C.Berkeley

WhatIsRemarkableAbouttheEastAfricanPlainsApe?

• Basic:– Mammals– Uprightposture– Alotofus:7.4billionnow

• Form:– Handsandopposablethumbs– Bigbrains– Talk

• Behavior:– Gossip(aboutfood,threats,mating)– Alterourenvironment– Giftexchange– Large-scalesocialdivisionoflabor

greaterthanseeninthesocialinsects

AdamSmith

• In1776publisheshisWealthofNations

• Itcontainsagenuinelygame-changinginsight:the“systemofnaturalliberty”

• Justletpeopleexchangethingsfreely—inanenvironmentinwhichpropertyissecure,andinwhichthereisanalternativedealalmostasgoodjustdownthestreet—andthingswillworkoutremarkablywell…

OurTaskThisSemester

• Howisitthatmarketsworksowell?

• Whatcanmakethemfailtoworkwell?

• Whatcanwedoaboutitwhentheydofailus?

• Whatsupportfromotherpiecesofsocietydoesamarket—orperhapsweshouldsayamixed—economyreallyneed?

• Arewereallysurethatmarketsworkwell?

HowRemarkably?:TheHighStalinistExperiment

HowMuchDoesMarketOrganizationMatter?

• HighStalinistcentralplanning– Marx’ssuspicionofmarketsas

surplus-extractiondevices– Hence,thecommunistssaid,

wewon’thaveany– Wewillreproducethe

Rathenau-LudendorffWorldWarIImperialGermanwareconomy

– Communes,economiesofscale,GOSPLAN,etc.

• Effect:youthrowawayafive-foldamplificationofproductivitybyeschewingthemarket

HowMuchDoesMarketOrganizationMatter?

GregClark:DirectEstimatesofLong-RunRealWageTrends

• GregClark’snumbersonwhatmonkspaidtheirconstructionworkers,andwhatbreadandotherstaplescost…

• AustanGoolsbee:Ittook30hoursforanAmericanlaborerin1850tobuyabushelofcorn.Ittakes12minutestoday.

• Plusnewgoodsandnewtypesofgoods:solidthings,energy-manipulatingthings,information,andcommunication…

RickSteckel’sNumbersonOldWorldHeights

• “InnineteenthcenturySweden,forexample,averageheightwasthreetoeightcentimetersgreaterinruralareascomparedwithStockholm,dependinguponthetimeperiodandruralarea(SandbergandSteckel,1988)….

• “Inlateeighteenth-centuryEngland,forexample,theaverageheightsatage14ofpoorboysadmittedtotheMarineSocietywere20centimetersbelowthoseofupper-classboyswhoattendedtheeliteacademyatSandhurst(Floud,Wachter,andGregory,1990).Duringthesameera,thedifferenceinaverageheightbetweentherichandthepoorintheUnitedStateswasroughly3centimeters(MargoandSteckel,1982).”

RobertAllen’sNumbersforWorldCities

• Thisisa“subsistencebasket”foroneadultmale…

• Unskilledurbanlaborers…

• Howwouldonegoaboutthinkingofhowrepresentativeofthepopulationingeneralsuchnumbersare?

AMalthusianEconomy• Wearenotterriblyunhappywithourglobalestimatesofworldpopulation.

• Atwhatrateshouldanutritionally-unstressed,pre-artificialbirthcontrolpopulationgrow?

• Whatiskeepingthepopulationgrowthratedown?

AMalthusianEconomyII• Guessingatpre-industrialrealincomelevels.

• Butwhatdothesemean?Notjustnewgoodsbutnewtypesofgoods.

• Ittook30hoursforanAmericanmalenorthernworkerin1850toearnenoughtobuyabushelofcorn

• Ittakes12minutesnow

ThinkingLikeanEconomist

January20,20168-0AMWheelerAuditorium,U.C.Berkeley

TwoBasicPrinciplesofEconomics

• TheScarcity(orNo-Free-Lunch)Principle:Wehaveneeds,andwantsthatarepotentiallyboundless.Buttheresourcesavailabletousarelimited.Choicesareinevitable.

• TheCost-BenefitPrinciple:Don’tdostupidstuff—doonlystuffthatmakessense,thatleavesyoubetteroff.• Calculatecostsandbenefitssensibly!• Donotanchor,considerabsolutemagnitudes,don’tforgetimplicitcosts,optionality,doforgetsunkcosts,thinkatthemargin

• Isthiscost-benefitprinciplepositive—howpeoplebehave—ornormative—howpeopleoughttobehave?

FourMorePrinciplesofEconomics

• TheIncentivePrinciple:“Itisnotfromthebenevolenceofthebutcher,thebrewer,orthebakerthatweexpectourdinner,butfromtheirregardtotheirowninterest…”

• TheSpecializationPrinciple:Practicemakesperfect,oratleastbetter.Asocietyofgeneralistswilltendtobeapoorsociety.

• Win-WinExchange:Inasocietyofspecialists,allpartiesbenefitfrominformedtrade.

• ComparativeAdvantage:Lessproductivethaneveryoneelseatmakingeverything?Youshouldstillspecializeatwhatyoudorelativelybest—andtrade.Moreproductivethaneveryoneelseatmakingeverything?Youstillbenefitbyspecializingatyourcomparativeadvantage—andtrading.

Principles:Individuals

• Principlesofindividualdecision-making:– Peoplemustmakechoicesbecauseresourcesarescarce

• Whatifresourcesaren’tscarce?We’llfocusourattentiononanareaoflifeinwhichtheyarescarce!

– Theopportunitycostofanitemisitstruecost– “Howmuch”decisionsinevitablyinvolvemakingdecisionsatthemargin

– Peopleusuallyrespondtomaterialincentives—exploitingopportunitiestomakethemselvesbetteroff• “[hu]manhasalmostconstantoccasionforthehelpofhis[orher]brethren,anditisinvain…toexpectitfromtheirbenevolenceonly”

Principles:Interactions

• Principlesofsocialinteractions:– Therearegainsfromtrade

• “Incivilizedsociety[man]standsatalltimesinneedofthecooperationandassistanceofgreatmultitudes”

• “[Man’s]wholelifeisscarcesufficienttogainthefriendshipofafewpersons”

• “Aspanielendeavoursbyathousandattractionstoengagetheattentionofitsmaster….[Man]hasnottime,however,todothisuponeveryoccasion”

– Resourcesoughttobeusedas“efficiently”aspossible– Marketsmovetoward“equilibrium”– Marketequilibriumusually(?)leadsto“efficiency”– Wheneveramarketisnotachieving“efficiency”,governmentinterventioncanimprovesociety’swelfare

Principles:EmergentMacroDifficulties

• Principlesofmacroeconomics:– Oneperson’sspendingisanotherperson’sincome– Overallspendingsometimesgetsoutoflinewiththeeconomy’sproductivecapacity

– Governmentpoliciescanchangespending• Butwewon’ttalkabouttheseuntilnearlyspringbreak.– Forthenexttwomonthswewillassumethatpeopleinaggregatewanttospendtheirincomestoday

– Thosewhowanttospendlessthantheirincomearebalancedbythosewhowanttospendmore

TheManyThingsthattheMarketSystemGetsUs

• Peoplecan“specialize”inwhattheyaremostproductivedoing

• Peoplecanbecomemoreproductive

• Peoplecantradeviathisinstitutioncalled“market”

• Marketexchangeiswin-win– Butrelativetowhat

baseline?• Marketexchangemaximizes

wealth– Aslongascommoditiesare

excludible,rival,known,andinternal

• Distribution?

Remember:GovernmentCreatestheMarketSystem

• Allthis“laissezfairevs.government”ideologyisgreatlyoversold…• Economistsstartwithanautarchicbaseline,andthenmovetoatrading-what-

you-made-with-your-own-handsbenchmark,andthenstarttalkingaboutgovernment

• 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—youshouldbeabletomovewellenoughbetweenverbalchainsofcausationandanalysis,equations,andgraphsviaanalyticgeometry.• Ifnot?Wewillfindoutquickly,anddoubleback