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How some economists think 24 January 2008 How some economists think by Danny Quah Economics Department, LSE 24 January 2008 This presentation is NOT about oral sex* * apologies to The Undercover Economist How some economists think D. Quah 2 Where economists begin You react to pain and to pleasure You can’t live beyond your means… y … forever OR 1. People respond to incentives, purposefully 2. Budget constraints matter 3. People take interactions and the future into account y y How some economists think D. Quah D. Quah 3 1 How some economists think 24 January 2008 ... towards: y Behaviour isn’t random but instead explicable and predictable ◦ The “economics of everything” Financial markets, labour markets, information markets, … markets for all kinds of goods and services y Game theory y Economic growth and income distribution y How some economists think D. Quah 4 Our interest is in outcomes A famous writer and his fundamental question of economics: “Why do some places prosper and thrive… y How some economists think D. Quah 5 Our interest is in outcomes A famous writer and his fundamental question of economics: “Why do some places prosper and thrive… … while others just suck? suck?” y How some economists think D. Quah D. Quah 6 2 How some economists think 24 January 2008 Tradeoffs 1. 2. 3. 4. 5. “Do good in the world by doing well for yourself” Adam Smith and markets: Social gain aligned with individual incentive Virtual and illusory Substantive but not what many might think Substantive and hard Substantive and hard… to quantify How some economists think D. Quah 7 5. Substantive and hard to quantify (1) y Moral hazard: Greenspan put ◦ Ex post vs. ex ante: Government bailout to keep financial market turmoil from harming broader economy ◦ Allowing innovation vs. curbing excessive risktaking How some economists think D. Quah 8 5. Substantive and hard to quantify (2) y Global warming 1. Greenhouse gases cause global warming 2. Global warming has massive deleterious effects on human welfare 3. Greenhouse gas production strongly correlated with economic growth 4. All else equal, economic growth is good How some economists think D. Quah D. Quah 9 3 How some economists think 24 January 2008 2. Virtual and illusory y The Phillips curve UK unemployment and inflation, 1856-1997 40 30 Wage inflation 20 10 0 -10 -20 -30 0 2 4 6 8 10 12 14 16 18 Unemployment rate How some economists think D. Quah 10 2. Virtual and illusory y The Phillips curve Unemployment and inflation co-movements, when controlled 20 Wage inflation 15 10 5 0 -5 -10 0 2 4 6 8 10 12 14 16 18 20 Unemployment rate How some economists think D. Quah 11 3. Substantive but not what many might think y Inequality and growth ◦ Kuznets curve How some economists think D. Quah D. Quah 12 4 How some economists think 24 January 2008 Inequality and growth How some economists think D. Quah 13 From even the Wall Street Journal How some economists think D. Quah 14 Annual earnings of US men, aged 35-44, in $2005 1973 45785 49705 Median Mean 2005 40964 54525 Source: Paul Krugman, 2007 Meade Lecture, LSE How some economists think D. Quah D. Quah 15 5 How some economists think 24 January 2008 US College-High School wage ratio 1.9 1.8 1.7 1.6 15 1.5 1.4 1.3 1.2 1.1 1 Source: Paul Krugman, 2007 Meade Lecture, LSE How some economists think D. Quah 16 World Poverty 1981 1990 1999 24 33 43 52 GDP per capita PPP$ 5408 6292 7231 8198 World’s poor 106 1470 1247 1109 969 Chi ’ poor 106 China’s 634 374 223 128 Remainder 106 836 873 886 841 World GDP 1012 PPP$ D. Quah 2004 PPP$ means constant International Dollars corrected for inflation and Purchasing Power Parity Poor means living on less than PPP$1/day How some economists think D. Quah 17 How some economists think D. Quah 18 6 How some economists think 24 January 2008 How some economists think D. Quah 19 How some economists think D. Quah 20 4. Substantive and hard y Intellectual property rights ◦ ◦ ◦ ◦ Efficiency versus incentive Nonrival goods Identityy and group g p consumption p Unlike property rights for all other goods and services How some economists think D. Quah D. Quah 21 7 How some economists think 24 January 2008 IPRs on Facebook How some economists think D. Quah 22 Intellectual property rights y Music, digital entertainment ◦ MP3s, DVDs y Computer software, operating systems y Pharmaceuticals ◦ MS Windows, Linux ◦ AIDS antiretrovirals How some economists think D. Quah 23 Digital goods and services y Global medication ◦ HIV/AIDS infection: Africa 24.5m, total worldwide 34.3m ◦ Population in Africa 12% of world ◦ Cost of anti-retroviral medications y Dynamic incentives versus monopoly markup: Creation versus dissemination How some economists think D. Quah D. Quah 24 8 How some economists think 24 January 2008 Creativity and dissemination Price Demand Marginal revenue Marginal cost q1 q0 How some economists think Quantity D. Quah 25 International IPRs y y y y India 04/1972-05/2003 pharma process patents only World’s largest producer by volume, one of the world’s largest for bulk drugs. Major exporter Quinolone molecules for bacterial infection Welfare loss US$715mn a year (120% of total sales) versus domestic producer profits gain US$50mn a year, multinationals US$57mn How some economists think D. Quah 26 Conclusions and emergent issues Tradeoffs y Modeling y ◦ Behavioral ◦ Constraints ◦ Heroism Numbers y Political economy y How some economists think D. Quah D. Quah 27 9 How some economists think 24 January 2008 How some economists think by Danny Quah Economics Department, LSE 24 January 2008 D. Quah 10