Download Week 14, April 15

Who wants to be an economist?
30
25
20
15
10
5
0
Zero-sum thinking
• Refers to the idea that there is a winner and
loser in all transactions, kind of like a tennis or
boxing match
• So if Bill Gates is rich, he must have taken that
wealth from others
• The economic pie is only so big, so
government has to make sure we all get the
same size slice… “fairness” and “social justice”
Fallacy of composition
• The mistaken assumption that what applies to
a part applies to the whole
• In economics, we’re looking at the economy in
total… not any given individual, company or
industry
• We know that the economy is dynamic… some
companies and industries must pass
(typesetters, milkmen) so others can rise (app
developers, organic bakers)
Fractional Reserve Banking
• A system that enables banks to only have on
hand a fraction of the total reserves needed to
cover all deposits
• Since all depositors won’t demand their
money at once, banks lend out the rest and
earn interest and fees
• Fractional reserve banking creates “new”
money to create wealth
Why does corruption lead to poverty?
• “The law’s delay...”
• Bureaucrat ability to delay often means an
opportunity for bribes
• The lost opportunity for SRTHAU in businesses
not started, investment not made, jobs not
created
• Which means fewer goods and services... and
less prosperity
Just what does an
economist do?
Economists
• Do research including preparing surveys and
crunching the numbers
Economists
• Do research including preparing surveys and
crunching the numbers
• Forecast how the economy might change in
the future
Economists
• Do research including preparing surveys and
crunching the numbers
• Forecast how the economy might change in
the future
• They study topics such as prices, jobs, interest
rates, taxes, the stock market, commodities,
money, the banking system, impacts from
political decisions
Economists
• They then write up their reports and present
the findings to clients
Economists
• They then write up their reports and present
the findings to clients
• They are really good at PowerPoint and
developing charts, graphs and flow charts
Economists
• They then write up their reports and present
the findings to clients
• They are really good at PowerPoint and
developing charts, graphs and flow charts
• They spend a lot of time crunching numbers
and doing statistical modeling
Economists
• More than half of economists work for
federal, state and local governments
Economists
• More than half of economists work for
federal, state and local governments
• Many work for banks, consulting firms, NGOs
or are self-employed
NGOs
• United Nations, Greenpeace, Amnesty
International, AARP, Doctors Without Borders,
Economists
• More than half of economists work for
federal, state and local governments
• Many work for banks, consulting firms, NGOs
or are self-employed
• And the rest live in the academic environment
or non-profit “think” tanks such as The
Heritage Foundation, Hoover Institution and
Brookings Institute
Economists
• The media pay is $90,000 year
Economists
• The media pay is $90,000 year
• There are just 15,400 jobs and it’s a slowgrowth profession
Economists
• The media pay is $90,000 year
• There are just 15,400 jobs and it’s a slowgrowth profession
• Most positions require a Ph.D. or at least a
master’s degree
Economists
• The media pay is $90,000 year
• There are just 15,400 jobs and it’s a slowgrowth profession
• Most positions require a Ph.D. or at least a
master’s degree
• Lots of young people with a B.A. degree in
econ work in other fields
Top economics schools
Top economics schools
•
•
•
•
•
•
•
•
•
•
Harvard
Massachusetts Institute of Technology (MIT)
Princeton
University of Chicago
Stanford
University of California – Berkeley
Northwestern
Yale
University of Pennsylvania
Columbia
Top economics schools
• University of Florida was #48
History of economics
• Modern economics began in 1776 with our pal
Adam Smith (1723-1790) and The Wealth of
Nations
History of economics
• Modern economics began in 1776 with our pal
Adam Smith (1723-1790) and The Wealth of
Nations
• Smith influenced generations of economists
and thinkers including David Ricardo, John
Stuart Mill, James Madison, Thomas Jefferson,
Alexander Hamilton… and Thomas Sowell
Adam Smith
• “Every individual necessarily labours to render
the annual revenue of the society as great as he
can. He generally, indeed, neither intends to
promote the public interest, nor knows how
much he is promoting it. By preferring the
support of domestic to that of foreign industry,
he intends only his own security; and by directing
that industry in such a manner as its produce may
be of the greatest value, he intends only his own
gain; and he is in this, as in many other cases, led
by an invisible hand to promote an end which
was no part of his intention.”[
Adam Smith
• In short, the “invisible hand” refers to the selfregulating behavior of the marketplace when
people, acting in their own self interest,
benefit society
History of economics
• Over time, “schools” of economics formed
about common framework of assumptions
and that continues today
History of economics
• Over time, “schools” of economics formed
about common framework of assumptions
and that continues today
• Chicago, London, Austrian, Carnegie… also
loosely organized around “saltwater” schools
(on both U.S. coasts) and “freshwater” schools
(Chicago, Carnegie Mellon)
Mercantilists
• Popular from 16th to late 18th centuries, the
earliest of the economic schools
Mercantilists
• Popular from 16th to late 18th centuries, the
earliest of the economic schools
• James Steuart was most prominent writer
• Mercantilists argued that the most important
role for government was to ensure a positive
balance of trade… export more than you
import
Mercantilists
• Popular from 16th to late 18th centuries, the
earliest of the economic schools
• James Steuart was most prominent writer
• Mercantilists argued that the most important
role for government was to ensure a positive
balance of trade… export more than you
import
• They were zero summers!
Mercantilists
• Were concerned with the power of their
nation relative to others
• They didn’t care about SRTHAU to maximize
their nation’s standard of living, they wanted
more wealth and military power than other
nations
Mercantilists
• Were concerned with the power of their nation
relative to others
• They didn’t care about SRTHAU to maximize their
nation’s standard of living, they wanted more
wealth and military power than other nations
• Typical policies included overseas colonies, ban
on the export of gold, tariffs, wage limits,
imperialism, subsidies for domestic manufacture
Final Mercantilist thought
• Although gone from modern economic
thinking, concepts about imports/exports
remain such as “favorable balance of trade”
Classical economics
• ‘Wealth of Nations’ ended the mercantilists,
although some of their policies such as
positive balance of trade and tariffs endure
Classical economics
• ‘Wealth of Nations’ ended the mercantilists,
although some of their policies such as
positive balance of trade and tariffs endure
• Smith realized that the prosperity of a nation
depended on creating more goods and
services… and that economic policy should be
for everyone’s benefit, not just the merchants
Classical economics
• ‘Wealth of Nations’ ended the mercantilists,
although some of their policies such as
positive balance of trade and tariffs endure
• Smith realized that the prosperity of a nation
depended on creating more goods and
services… and that economic policy should be
for everyone’s benefit, not just the merchants
• Smith also rejected slavery and imperialism
Classical economics
• ‘Wealth of Nations’ ended the mercantilists,
although some of their policies such as positive
balance of trade and tariffs endure
• Smith realized that the prosperity of a nation
depended on creating more goods and services…
and that economic policy should be for
everyone’s benefit, not just the merchants
• Smith also rejected slavery and imperialism
• His theories led to the school of Classical
Economics, with a nod to the Physiocrats
Physiocrats
• French economists who advocated that
productive farm work, not gold, was key to
wealth of a nation
• Because of the agrarian society, they thought
only agriculture land counted
• First used the term “laissez-faire”… originally
meaning not having the government intervene
in marketplace on behalf of merchants
Classical economics
• Smith was radical: preached a sharply reduced
role for government and elites
Classical economics
• Smith was radical: preached a sharply reduced
role for government and elites
• Argued that wealth is not a zero-sum game…
everyone can win in both foreign trade and
the domestic market
Classical economics
• Smith was radical: preached a sharply reduced
role for government and elites
• Argued that wealth is not a zero-sum game…
everyone can win in both foreign trade and
the domestic market
• The free market will regulate itself due to the
invisible hand
Classical economics
• Smith was radical: preached a sharply reduced
role for government and elites
• Argued that wealth is not a zero-sum game…
everyone can win in both foreign trade and the
domestic market
• The free market will regulate itself due to the
invisible hand
• The Classical economists changed economics
from a concern with a ruler’s interests to that of
the nation
David Ricardo
1772-1823
• Most influential economist of the early 19th
century
• Developed “comparative advantage,” which
showed how two unequal nations could trade
to mutual benefit
• Was also the first to use economics
dispassionately… principles over immediate
policy issues
Say’s Law
• Developed by French economist Jean-Baptiste
Say (1767-1832)
Say’s Law
• Developed by French economist Jean-Baptiste
Say (1767-1832)
• Say addressed the fears that a growing nation
would produce so many good and services
that it would exceed the ability of the people
to buy them
Say’s Law
• Developed by French economist Jean-Baptiste
Say (1767-1832)
• Say addressed the fears that a growing nation
would produce so many good and services that it
would exceed the ability of the people to buy
them
• Say argued that the national output and the
income people had were related… “supply
creates its own demand” and, therefore, no limit
to what it can produce
Modern economics
• First exclusive journal was in 1886, “The
Quarterly Journal of Economics” at Harvard
Modern economics
• First exclusive journal was in 1886, “The
Quarterly Journal of Economics” at Harvard
• First U.S. professor of economics appointed in
1871 at Harvard, which awards first Ph.D. in
1875
Modern economics
• First exclusive journal was in 1886, “The
Quarterly Journal of Economics” at Harvard
• First U.S. professor of economics appointed in
1871 at Harvard, which awards first Ph.D. in
1875
• Economics in 20th century began to turn to
mathematics rather than verbal discourses
Modern economics
• First exclusive journal was in 1886, “The
Quarterly Journal of Economics” at Harvard
• First U.S. professor of economics appointed in
1871 at Harvard, which awards first Ph.D. in
1875
• Economics in 20th century began to turn to
mathematics rather than verbal discourses
• At LAF, we’ve continued the verbal tradition!
Marginalist revolution
Marginalist revolution
• Refers to acceptance among economists that
prices were based on the demands of
consumers, rather than just on the cost of the
producers
Marginalist revolution
• Refers to acceptance among economists that
prices were based on the demands of
consumers, rather than just on the cost of the
producers
• Classical econ says labor and other inputs are
crucial factors in prices. Marx went even
further when he wrote that exploitation of
labor was the main factor in economics and
society
Marginalist revolution
• Marginal utility theory of value: what
consumers consider useful was what
influenced prices
• So while if you’re dying of thirst water is more
valuable than diamonds
• Once you have enough water, it’s the marginal
utility of having another gallon of water
compared to a diamond. Because most of us
have lots of water, diamonds will sell for more
Marginalist revolution, redux
• Anyway, it’s the combo of supply (dependent
on the cost of production) and demand
(dependent on marginal utility) which
determines prices
• Ok?
Marginalist revolution, redux
• Anyway, it’s the combo of supply (dependent
on the cost of production) and demand
(dependent on marginal utility) which
determines prices
• Ok?
Equilibrium theory
• Developed by Frenchman Leon Walras (18341910)
• It’s a branch of theoretical economics
(because things are rarely in equilibrium) that
looks at prices/supply and demand for firms,
industries and particular markets
Equilibrium theory
• Developed by Frenchman Leon Walras (18341910)
• It’s a branch of theoretical economics (because
things are rarely in equilibrium) that looks at
prices/supply and demand for firms, industries
and particular markets
• In a sentence: equilibrium theory notes that
everything in an economy is interconnected so
that one small change can set in motion many
others
Try this definition
“The theory provides a summary description of
economic interaction in a society where people
are free to pursue their own interests. The
theory may be viewed as an attempt to answer
the question of whether trade arranged through
markets could match demands with supplies for
millions of goods and services in an
economically efficient way. Notice that the
question is could trade achieve an efficient
outcome, not does it do so.”
Ok, what’s macro and micro??
• Macroeconomics: basically deals with the
performance, structure, and behavior of a
national economy as a whole.
Macroeconomists seek to understand the
determinants of aggregate trends in an
economy with particular focus on national
income, employment, inflation, investment,
and international trade.
And micro?
• Microeconomics is a branch of economics that
studies how individuals, households, and firms
make decisions to allocate limited resources,
typically in markets where goods or services are
being bought and sold.
• Microeconomics examines how these decisions
and behaviors affect the supply and demand for
goods and services, which determines prices, and
how prices, in turn, determine the supply and
demand of goods and services.
Why should I care??
• Because politicians constantly propose
solutions to problems “without the slightest
attention to how the repercussions of their
‘solution’ will reverberate throughout the
economy…”
John Maynard Keynes (say ‘Cains’)
• Keynes (1883-1946) was the most prominent
economist of the 20th century
• His book “The General Theory of Employment,
Interest and Money” became the prevailing
orthodoxy around the world… with a few
important exceptions
• Keynes rose to prominence after the Great
Depression
Keynesian economics
• Keynes argued that inadequate “aggregate
demand” could lead to high unemployment
Keynesian economics
• Keynes argued that inadequate “aggregate
demand” could lead to high unemployment
• He argued for governments to spend money
during recessions and depressions to spur the
economy (see President Obama)
Keynesian economics
• Keynes argued that inadequate “aggregate
demand” could lead to high unemployment
• He argued for governments to spend money
during recessions and depressions to spur the
economy (see President Obama)
• Thus government could smooth out the boom
and bust cycles inherent in free markets
Keynesian economics
• Keynes argued that inadequate “aggregate
demand” could lead to high unemployment
• He argued for governments to spend money
during recessions and depressions to spur the
economy (see President Obama)
• Thus government could smooth out the boom
and bust cycles inherent in free markets
• Was the dominant thinking through the 1970s
and resurfaced with the recent global recession
Milton Friedman
• Friedman (1912-2006) was an American
economist at the University of Chicago who
started the “Chicago school” of economics
• He opposed Keynesian theory and argued the
markets were more rational and responsive than
governments were
• Won Nobel prize in 1976 when raging inflation
worldwide undermined the Keynesians’ ability to
control the economy
• Advisor to President Reagan
Milton Friedman
• “I am favor of cutting taxes under any
circumstances and for any excuse, for any
reason, whenever it's possible.”
• “The greatest advances of civilization,
whether in architecture or painting, in
science and literature, in industry or
agriculture, have never come from
centralized government.”
F.A. Hayek
• Austrian economist (1899-1992) who won
Nobel prize in 1974 while at U of Chicago
• Was the one who developed theory of prices
communicating information that enables
people to coordinate their plans
• “Road to Serfdom” is a must-read for every
budding economist. A war-cry against central
planning
Paul Krugman
• Nobel-prize winner in 2008
• Hugely influential because he works for the New
York Times and his column is gospel for liberal
politicians
• A Keynesian on steroids
• “I believe in a relatively equal society, supported
by institutions that limit extremes of wealth and
poverty. I believe in democracy, civil liberties, and
the rule of law. That makes me a liberal, and I’m
proud of it.”
Assignment 4/22
• Chapter 20: “International Trade”