Download Chapter 1 - Foothill College

Class 1
I. Self Intro

This is Econ 1A, Principles of Macroeconomics (at EVC it’s Econ 10A,
Principles of Macro Theory). I am your instructor, David Moglen.
Just to tell you something about my background I went to High School in the Auburn
area which is an hour east of Sacramento.
 I attended Sierra Comm. Coll. in Rocklin. After 2 yrs I transferred to UCSC
 I completed a double-major in Economics and Modern Literature with honors.
 While at UCSC I interned with MSDW and was a TA for Macro.
 MA from UCSB (Econ, Business Emphasis)
GSI 2 sections Macro
GSI 2-3 sec Am Law 100 per term over two terms
Group tutor for Macro sections 4 times a week, public/ private econ tutor
Soon after graduation, I worked as an Instructional Designer for a web-based education
firm in Mountain View, teaching English Composition in San Jose and at Mission
teaching Macro. I’ve taught Macro at Foothill and Evergreen Valley College (EVC) since
2004. I have also taught for Ohlone College and De Anza College.
1. Syllabus/ Schedule: discuss each element
2. Reading to be completed prior to class in which that chapter will be covered
You are responsible for all chapter content. It also will help to read the Applications that
are in the chapter, the Appendix that will follow some chapters, and the end-of-chapter
Summary.
3. Phone number, email address, website – lectures and other class docs will be there
This should make note-taking a lot easier since you can just try to note the main
points, definitions, lists, etc. and not feel like you need to write down every word of the
lecture notes.
II. Market Theory
http://www.davidkorten.org/
contains:
http://www.pcdf.org/post-corp/contents.htm#Prologue
The theory of the market economy traces back to the Scottish economist Adam Smith
(1723-1790) and the publication of Inquiry into the Nature and Causes of the Wealth of
Nations in 1776. Considered by many to be the most influential economics book ever
written, it articulates the powerful and wonderfully democratic ideal of a self-organizing
economy that creates an equitable and socially optimal allocation of a society's
productive resources through the interaction of small buyers and sellers making decisions
based on their individual needs and interests.
Market theory, as articulated by Smith and those who subsequently elaborated on his
ideas, developed into an elegant and coherent intellectual construction grounded in
carefully articulated assumptions regarding the conditions under which such selforganizing processes would indeed lead to socially optimal outcomes. For example:
Buyers and sellers must be too small to influence the market price.
Complete information must be available to all participants and there are no trade
secrets.
Sellers must bear the full cost of the products they sell and pass them on in the sale
price.
Investment capital must remain within national borders and trade between countries
must be balanced.
Savings must be invested in the creation of productive capital.
There is, however, a critical problem, as international financier George Soros has
observed: "Economic theory is an axiomatic system: as long as the basic assumptions
hold, the conclusions follow. But when we examine the assumptions closely, we find that
they do not apply to the real world." Herein lies the catch: the conditions of what we
currently call a capitalist economy directly contradict the assumptions of market theory in
every instance.
ax·i·om·at·ic
ax·i·om
Pronunciation: "ak-sE-&-'ma-tik
Pronunciation: 'ak-sE-&m
Function: adjective
Function: noun
Etymology: Middle Greek
axiOmatikos, from Greek,
1 : a maxim widely accepted on its intrinsic merit
honorable, from axiOmat-, axiOma
2 : a statement accepted as true as the basis for
1 : taken for granted : SELF-
argument or inference : POSTULATE 1
EVIDENT
3 : an established rule or principle or a self-evident
2 : based on or involving an axiom
truth
or system of axioms <axiomatic set
theory>
In summary, the market system will result in socially optimal outcomes if certain
assumptions are true.
Soros’ point is we can’t expect efficient outcomes let alone equitable outcomes
since some or all of the basic assumptions are not being achieved.
Some sectors might adhere to the assumptions completely.
There is some extent to which the economy in many sectors will fail to achieve the basic
assumptions. When the economy is not productively efficient, unable to make the most
output (total goods produced) for the given amount of inputs (such as quantity of
available labor) that it can, that’s a result of failing to achieve the basic assumptions.
1. A distinction is made between positive (factual, statistical) economics
and normative (opinion-involving) economics
2. The testing of hypotheses takes place by using publicly available data on
society i.e. employment levels (macro) and industry, sales, etc. (micro) so
there is no “laboratory” where controlled experiments can take place.
III.
The scope of Macroeconomics
A. National Income Accounting – GDP, similar measures of total output
B. National un/employment level
C. Inflation, or the rate of change in overall national prices on all goods
counted in a Consumer Price Index survey (of goods purchased by US
households, and their prices tracked over time). Along with the rate of change
in prices, these “year-over-year” rate of change are also very important to
understanding GDP and employment figures. (Static vs. Dynamic)
D. Business Cycle
E. Growth: “year-over-year” rate of change in GDP (delta + change in; Y is
GDP)
Microeconomics
A. The study of the behavior of individual decision makers in specific
markets for products (goods), services or resources. An individual decision
maker might be, for example: consumers of a particular good or service, the
owners of a resource (such as the supply of labor with engineering skills), or
firms (companies) in a market.
IV.
Important Economic Theories
A. Adam Smith 1723 – 1790 believed that the basic motivation of human beings was
self-interest. Market Theory, as articulated in The Wealth of Nations, holds that the
natural human impulse to pursue self-interest could result in a socially optimal
outcome if certain assumptions are met such as atomistic market participants,
accurate prices and complete information.
B. Jeremy Bentham (1748-1832) theorized that people would behave in such a way
as to maximize their happiness at all times. Benthamites, or hedonists are however,
in the minority in this belief. Most modern economists believe that people act to
nearly maximize pleasure and satisfaction, but not to the absolute degree Bentham
conceived of, one which requires humans to become walking calculators of pleasure
and pain in order to always maximize happiness.
C. Bentham also popularized the term Utility, which economists still use to mean
happiness, satisfaction, well-being. Any tangible good or service we purchase
provides a utility that is worth at least slightly more than the dollar value. The
consensus view of modern economists is that a person will seek to almost maximize
utility, and a corporation will seek to almost maximize profits.
D. John Maynard Keynes (1883-1946) Published The General Theory of
Employment, Interest and Money in 1936. Also authored two significant pieces in
condemnation of laissez-faire economic policy (1925,1926). Among the
revolutionary concepts initiated by Keynes was the possibility of using government
fiscal and monetary policy to help eliminate recessions and control economic booms.
He theorized that “the economic problem” (relative scarcity) may not be the
permanent problem of the human race.
V.
Applying Economics to Policy Decisions
A. While the economist will gather data, theorize and test, the formation of
economic policy is enacted by a politician, delegate, or executive (macro
CEO:President)
B. The method of economic analysis is this agreed-upon process; yet the endresults and recommendations of differing economists can be caused by a variety
of dissimilarities in the choices of independent variables, time periods considered,
and complexity of the model. How the model is conceptualized will influence the
final analysis. This leads to disagreements about alternative solutions to specific
economic problems.
C. Along with the general analytic process, certain properties of human behavior
are typically agreed upon with little to no questions, these being the central pillars
of market theory:
1. Individuals seek to nearly maximize utility (material well-being)
2. Incentives to individuals (profits, intellectual property protection as in
patents) lead to economic growth through encouraging work, risk taking,
and innovation.
D. It is important to remember that macroeconomic analysis significantly
influences government policy, and government policies influence the economy.
Policy is not confined to mean laws passed by the U.S. Congress. Policy also
refers to state and local laws, the Constitution, rules designed and enforced by
Regulatory Agencies (there are a number of powerful Regulators at Federal and
State levels), and the spending decisions of the government.
1. For example, if the Congress doubles the budget of the Securities
Exchange Commission (SEC) by slashing the funds for the General Accounting
Office (GAO), there will be economic impacts from both decisions.
a. A stronger SEC should have more resources to go after
fraudulent stockbrokers and investment bankers, which could be beneficial to the
financial system by restoring investors’ confidence, and even enriching investors
since financial professionals will be more worried about getting caught if they
were planning on defrauding clients (not to mention more direct payment to
victims for past crimes).
b. A weaker GAO will put billions of taxpayer dollars (and
government bonds – loans) at risk since this regulatory body is responsible for
overseeing Government spending. A weaker GAO will have more difficulty
tracking ongoing and new public spending, as well as have less resources to
investigate old expenditures that appear wasteful.
This example illustrates the concept of “Opportunity Cost.” Say the amount transferred
from the GAO’s budget to the SEC’s budget is one million dollars. Then the opportunity
cost of the decision to buy more Regulatory Enforcement of the Financial System is the
value to society of the lost Accounting Oversight capacity of the weakened agency.
E. The Positive-Normative Distinction
A. Positive Economics involve statements of fact. There can be no element or
implication of opinion involved. Implicitly or directly comparing statistics or
stating mathematical truisms will usually indicate a Positive statement.
B. Normative Economics involve opinion. They either directly state or imply a
belief of how humans should behave. Words like should, ought, better, good,
bad, all imply value judgments that identify normative thinking. These values
cannot be separated from cultural, religious, political, and philosophical beliefs.
Positive statements that cause disagreement can at least be illuminated by factual
data. This may resolve such disagreements.
Normative statements that cause disagreement are unlikely to be resolved as they
involve competing value judgments that would have to be reformed in order to change
that person’s opinion.
The “Art of Economics” involves the applied knowledge from positive economics to
analyze methods of achieving normative economic goals.