Econ 1: Spring 2012: UC Berkeley: Powerpoint Slides for March 12, 2012: Monopoly:
Sophonts taking Econ 1--
Only 6 of the 700 of you showed up for my three hours of Wednesday office hours this week...
So I will be in Wheeler from 11-11:45 on Friday to talk about quotas, taxes, subsidies, price ceilings, price floors, perfect competition, and monopolistic competition
We will stop at 11:45 to leave Bob Reich's class lots of time to flood in...
Econ 1: Spring 2012: U.C. Berkeley: Powerpoint Slides for March 7, 2012 Monopolistic Competition Lecture:
Economics 1: Spring 2012: Problem Set 5:
J. Bradford DeLong: U.C. Berkeley: Due at first section after March 12, 2012 lecture
Headnote: Remember that the utility—that is, the happiness—of the consumer is higher when the function:
U = (x1)θ(x2)(1-θ)
is higher. For this function the marginal rate of substitution is—that is, the utility stays the same as you move from (x1, x2) to (x1+Δx1, x2-Δx1) for small changes Δx1 and Δx2 if:
Δx1 = ((1-θ)/θ)(x1/x2)Δx2
Suppose we have students going to Railroad Monopoly University who spend their money on only two things all semester: vacations in Cabo San Lucas (V) and renting BMWs for the weekend (R). And suppose that their utility function is the Cobb-Douglas function with θ=1/3, and suppose that a student named Jonah takes vacations in Cabo on three weekends and rents a BMW for the other 15 weekends of the semester. What, for that consumption pattern, is Jonah’s marginal rate of substitution between Cabo vacations and renting BMWs?That is, if he takes an additional vacation, by how many BMW rentals could he cut back his BMW-renting and still be as happy, still be on the same indifference curve?
Suppose that Channing is also a student at Railroad Monopoly University, with the same utility function as Jonah. But suppose that Channing takes vacations in Cabo on six weekends and rents a BMW for six weekends of the semester. What, for that consumption pattern, is Channing’s marginal rate of substitution between Cabo vacations and renting BMWs—that is, if he takes an additional vacation, by how many BMW rentals per average semester could he cut back his BMW-renting and still be as happy, still be on the same indifference curve?
Suppose that renting a BMW costs $50 a weekend and taking a vacation in Cabo costs $500, and that Jonah has $2250 to spend and Channing $3300. Is either Channing or Jonah making a mistake in choosing their consumption pattern? If only one is, which one is making a mistake? Why are they making a mistake?
Explain to either Channing or Jonah—whichever one you think is making a mistake, or both—how they could make themselves happier (or at least more dissipated) if they changed their consumption pattern. In what direction do you think they should change their consumption pattern(s)? How far do you think they should change their consumption pattern(s)? (Or, if you think neither is making a mistake, explain why you think both are doing what they ought to do.)
Brie, with only $1100 per semester to spend, has different tastes and preferences. Her utility function has θ=5/6. If Cabo vacations cost $500 and BMW rentals cost $50, is she happiest buying 0, 1, or 2 vacations and spending the rest of her money on BMW rentals? Explain why her optimal ratio of vacations to rentals is different than the optimal ratio for Channing and Jonah.
Suppose that there is a BMW shortage. BMWs now rent for not $50 a weekend but $500 a weekend. And suppose that Jonah, Channing, and Brie have $2500, $3500, and $1000 to spend, respectively. How should each of the three spend his or her money? Explain your reasoning.
Suppose Phil and Chris notice that neither Channing nor Jonah actually likes riding around in BMWs. What they like, instead, is impressing each other by renting more BMWs than their co-star—and they feel unhappy when their co-star rents more BMWs than they do. That is, the utility function for Jonah is actually: Uj = (Vj)θ(Rj/Rc)(1-θ), where “j” as a subscript means that this applies to Jonah, and “c” as a subscript means this applies to Channing. And Uc = (Vcc)θ(Rc/Rj)(1-θ). Phil and Chris calculate how many vacations and BMW rentals, if BMW rentals cost $50 and Cabo vacations cost $500, Channing and Jonah should spend their money on to collectively make them the happiest. What do they conclude? Explain your reasoning. (Hint: suppose Phil and Chris decide to calculate the geometric mean of Channing’s and Jonah’s utility, and then to try to make that product as large as possible...)
Suppose that Phil and Chris are right, that you are in charge of Railroad Monopoly PDC, and that you try to make both Channing and Jonah happier by imposing a tax on BMW rentals. How high a tax do you think you should impose? Explain your reasoning.
From: Brad DeLong
To: Econ 1 Students
Subject: Review "Office Hours" in Wheeler on Fridays...
The 200 people who came to the pre-midterm Friday "office hour" in Wheeler 11-12 believed that it was useful...
So given that attendance at my W2-5 office hours up in Evans Hall has been low--a total of only 27 people in the 5 weeks the term has been running--I am going to repeat Wheeler Friday "Office Hours"...
They will run from 11-11:50, so that we can be out of Wheeler before Robert Reich's class starts to funnel in...
March 2 I have to be in New York for my niece's Bat Mitzvah, March 23 I have to be in Washington for a Brookings Institute Conference, April 13 I have to be in New York for a Russell Sage Conference, and April 27 I have to be in Los Angeles...
That leaves us with March 9, March 16, April 6, April 20, and May 4...
The exam will take place on Wednesday, February 22 from 11:10 AM - 12:00 PM. We will need to start handing out exams a few minutes before the official start, so please arrive promptly and get seated quickly so we can be ready to start right at 11:10.
No blue books are necessary; you will write directly on the exam. No calculators, cell phones, or electronic devices are allowed in the exam. Time will be announced periodically during the exam. If you are worried about keeping track of time, please wear a wristwatch that day.
To give you ample space during the exam, we have divided the students, based on GSI, into different rooms for the exam. Students (except DSP) should report to classrooms on Feb. 22 at 11:10 AM as follows:
Wheeler Aud: Ashley Clark, Haozhe Wang, Eric Huff, Natarajan Chakrapani, Jason Barbose, Sean LaGuardia
106 Stanley: Sarah Thomason
1 Pimentel: Katherine Murtha, David Puzey, Frankie Le, Fahd Majeed
105 North Gate: Gaurav Shetti
GSI names and emails are in "GSI-section info" under the Resources tab on bspace. Please go to your assigned room. It is not good if exams go to the wrong GSIs.
It looks as though my office hours will be interrupted at 3 by a (hopefully) brief faculty meeting...
Office hours today: 2-3, 4-6.
Number of open seats > # people on the waitlist. People can get in, as long as they switch into a section that has open seats (using Telebears): 22 people on the waitlist and 26 available seats
Any more manual processing of the waitlist should be done by the middle of this week
Any questions about enrollment can be directed to Lanwei Yang... She has year last set of office hours Monday 1-5 PM, 534 Evans
RUCHIKA GUPTA (Jan 26, 2012 9:24 PM PST) When drawing the supply curve in our homework why do we make steps (a horizontal line and a vertical line) to connect the points as opposed to connecting them by straight lines like in a PPF?
J. Bradford DELONG (Jan 27, 2012 5:58 AM PST) It is because of the way we set up the problem: the supply curve is flat because each producer has a constant opportunity cost of teaching yoga lessons. If they got bored as they taught more lessons--and so needed more money to teach the fifth lesson than the first to make it worth their while--we would have a supply curve without steps.
J. Bradford DELONG (Jan 27, 2012 12:42 PM PST) Re: "how do you calculate opportunity cost if a worker can produce n of one good and 0 of the other. The opportunity cost of the other would be n/0 which is undefined" Would you be happier at saying that the limit of the opportunity cost is infinity as productivity at making the good approaches zero?
THERESA FRUZSINA ANDRASFAY (Jan 27, 2012 7:11 PM PST) I'm noticing this problem set is not only long but the problems each are pretty time intensive. I'm just wondering if the exams are going to be a similar difficulty level.
J. Bradford DELONG (Jan 27, 2012 7:13 PM PST) As I said, the first problem set was double length in an attempt to clear the waitlist. It seems to have worked: at the moment we have 26 available seats and a waitlist of 27...
JOSEPH JAE MIN AHN (Jan 27, 2012 11:31 PM PST) Can anyone tell me where I can find out how to find expected values?
TAI CAO TRAN (Jan 28, 2012 12:17 AM PST) Based on our section, (taken from a worksheet) Expected Value = [probability that the person will be making x item] x [amount of item the person can make]. For example: Greg can make 10 lattes and Dharma can make 2 lattes. The probability that either Greg or Dharma will be making latte is 50% (say they flip a coin to determine who will make latte). So Greg making lattes EV would be 5 (1/2 * 10) vs Dharma making lattes EV would be 2 (1/2 * 1). FYI, I'm still trying to incorporate that to #3 of the problem set.
J. Bradford DELONG (Jan 28, 2012 8:56 AM PST) Remember: expected values are easy because they add: E(a + b) = E(a) + E(b). Expected values are easy because they are just probabilities times outcomes: E(a) = P(a=A) x A, where P() means "probability" and E() means "expected value"
Due at the start of section following the Monday, February 6 lecture:
Suppose that there are four people in the economy who demand yoga lessons: Kautilya (a government economist) with an income of $1000/week, Thasuka Witko (a herder and politician) with an income of $500/week, Buffy Summers (a student at U.C. Sunnydale) with an income of $300/week, and Sappho (a poet) with an income of $600/week. Kautilya spends 1/5 of his income on yoga lessons, Thasunka Witko spends 1/10 of his income on yoga lessons, Sappho spends 1/4 of her income on yoga lessons, and Buffy Summers spends half of her income on yoga lessons. Draw the demand curve for yoga lessons in this economy. What is demand for yoga lessons if the price of yoga lessons is $10/hour? $20/hour? $30/hour? $40/hour? $50/hour?
Consider the same situation as in question (1) but with one difference. Changes in Buffy Summers's life circumstances--the opening of the Mouth of Hell on the U.C. Sunnydale campus--lead her to have no demand for yoga lessons at all as she has to spend all of her income buying sharp wooden stakes. Learning about Buffy's predicament leads Kautilya to boost his yoga expenditures to 1/4 of his income, leads Thasuka Witko to drop yoga entirely and join Buffy in her family business, while Sappho continues to spend 1/4 of her income on yoga lessons. Draw the demand curve for yoga lessons in this economy. What is demand for yoga lessons if the price of yoga lessons is $10/hour? $20/hour? $30/hour? $40/hour? $50/hour?
This new situation sees the rapid growth of a wooden stake-making industry to deal with the influx of vampires onto the U.C. Sunnydale campus. Buffy can make 20 stakes a shift and has an alternative occupation she enjoys as much as stake-making that pays her $60 a shift. Kautilya can make 10 stakes a shift and has an alternative occupation he enjoys as much as stake-making that pays him $200 a shift. Sappho has an alternative occupation she enjoys as much as stake-making that pays her $120 a shift and can make 30 stakes a shift. Thasuka Witko has an alternative occupation he enjoys as much as stake-making that pays him $100 a shift and can make 8 stakes a shift. Draw the supply curve for stakes on the U.C. Sunnydale campus. How many stakes are supplied if the price of each stake is $1? $2? $4? $8? $15? $30? $50?
In this new situation, Buffy realizes that she can order wooden stakes over the internet in unlimited quantities for a price including next-day FedEx shipping of $10/stake. Draw the new supply curve for stakes.
In the same situation as problem (4), suppose that there is a demand for 10 stakes a shift. Who makes stakes? What is the market price of stakes? How about if there is a demand for 50 stakes a shift? 100 stakes a shift? 200 stakes a shift?
Suppose that, on and near the U.C. Sunnydale campus, the weekly supply curve for lattes is given by the equation Q = max(1000 P - 2000, 0) : nobody makes any lattes unless the price is above $2/latte, and for each $1 the price is above $2 an extra 1000 lattes are made. Suppose that customers have $10,000/week to spend on lattes. Draw the supply curve and the demand curve. What is the equilibrium price of lattes? What is the equilibrium quantity of lattes?
Suppose, in the same situation as (6), that the arrival of new, charismatic yoga teachers reduces the amount of money customers have to spend on lattes to $6,000/week. Draw the supply curve. Draw the old and the new demand curves. What is the new equilibrium price of lattes? What is the new equilibrium quantity of lattes?
Suppose that, in the same situation as (6), scary newspaper stories about the health dangers of yoga lead customers to cut back on their purchases of yoga lessons and increases the amount of money they have to spend on lattes to $14,000 a week. Draw the supply curve. Draw the old and the new demand curves. What is the new equilibrium price of lattes? What is the new equilibrium quantity of lattes?
Suppose that, on and near the U.C. Sunnydale Campus, the supply curve for yoga lessons is Q = 100 P. Suppose that customers have $10,000/week to spend on yoga lessons. Draw the supply and demand curves. What is the equilibrium price of yoga lessons? What is the equilibrium quantity? Suppose that the amount of money customers have to spend on yoga lessons rises to $14,000/week? Suppose it falls to $6,000/week?
In the same situation as (9), suppose that the professors at Crony Capitalism Corrupt Rail Baron University 50 miles to the south become lazier, decide they want to teach less, and offer full course credit toward their degree to students who are willing to offer yoga lessons at U.C. Sunnydale. Suppose that enough students to teach 500 places in yoga classes a week drive up to U.C. Sunnydale to add to those offering yoga classes. Draw the new supply curve. Draw the demand curve if people have $10,000/week to spend on yoga lessons. What is the equilibrium price of yoga lessons? What is the equilibrium quantity? Suppose that the amount of money customers have to spend on yoga lessons rises to $14,000/week? Suppose it falls to $6,000/week?
J. Bradford DELONG (Jan 13, 2012 8:46 AM PST) Welcome to Econ 1, Spring 2012...
J. Bradford DELONG (Jan 13, 2012 2:04 PM PST) Yes, there are sections on Tuesday, January 17. Moreover, if you do not attend your sections the first week, even if they happen before the first lecture, THE ECONOMICS DEPARTMENT AUTOMATICALLY DROPS YOU FROM THE COURSE. YOU MUST THEN RE-ENROLL. AND YOUR RE-ENROLLMENT PRIORITY PUTS YOU BEHIND ALL CURRENT MEMBERS OF THE WAITLIST. So, yes, go to section on January 17...
J. Bradford DELONG (Jan 13, 2012 4:23 PM PST) The first assignment will be going out by email in less than 24 hours. It will be to read the "Preface", "Prologue", and "Macroeconomic History" sections of Dasgupta's "Economics: A Very Short Introduction" before your first section...
J. Bradford DELONG (Jan 13, 2012 5:42 PM PST) There are at least 30 available seats in the lecture--and at least 5 sections with open seats in them. Why are you on the waitlist rather than in the class?
J. Bradford DELONG (Jan 14, 2012 9:34 AM PST) The first assignment is to read the "Preface", "Prologue", and "Macroeconomic History" sections of Dasgupta's book, "Economics: A Very Short Introduction", before your first section...
J. Bradford DELONG (Jan 14, 2012 12:41 PM PST) I'm looking for four students who would like to join me for lunch (my treat) at A Musical Offering after lecture on January 23. First come, first served...
YIJIA MAO (Jan 16, 2012 4:33 PM PST) Professor, I bought the textbook "Principles of Microeconomics" at cal bookstore, but you are not one of the author. The authors are Janet Gerson, Paula Malone and Chris Proulx. Is it the correct textbook? By the way, do we have to buy this textbook? Or can we just buy the other three books? From course website, I cannot find what chapters we need to read in "Principles of Microeconomics".
J. Bradford DELONG (Jan 16, 2012 4:53 PM PST) Yes. Gerson, Malone, and Proulx just taught from this version last semester at Michigan...
J. Bradford DELONG (Jan 23, 2012 10:48 AM PST) First Essay “Intro to GSI” due at start of next section... One more week to do problem set 1... iClicker points will start for real next Monday... Econ 1 §106 REASSIGNED TO 156 DWINELLE...
J. Bradford DELONG (Jan 25, 2012 5:36 AM PST) what's the textbook situation, anyway? Any sign that the next tranche of the order has arrived at the bookstore?
J. Bradford DELONG (Jan 25, 2012 3:49 PM PST) 34 students on the wait list, 26 places in the class. If 8 more drop, the wait list is going to clear...
J. Bradford DELONG (Jan 26, 2012 9:14 AM PST) We are now down to a waitlist of 32 with 28 seats available. This waitlist is going to clear...
J. Bradford DELONG (Jan 26, 2012 9:14 AM PST) And I guess I did not have to make the first problem set a double-length one after all...
RUCHIKA GUPTA (Jan 26, 2012 10:44 AM PST) how do you calculate opportunity cost if a worker can produce n of one good and 0 of the other. The opportunity cost of the other would be n/0 which is undefined
J. Bradford DELONG (Jan 26, 2012 11:00 AM PST) Don't say "undefined"! Say "larger than any real number"! There is a symbol for a quantity larger than any real number: "∞".
DEBORAH MARI FRIAS (Jan 26, 2012 8:25 AM PST) Professor Delong, for some reason when I click on the lecture audio, it doesn't work. And I asked the staff if your lecture will be podcasted and they said no.
J. Bradford DELONG (Jan 26, 2012 11:02 AM PST) Are you sure? It looks like there is a podcast of the lectures here: http://itunes.apple.com/itunes-u/economics-1-001-spring-2012/id496401496
At the moment, 28 seats available and 32 people on the waitlist. This sucker is going to clear...
I guess I did not have to make the first problem set a double-length problem set after all...
Students demand: less lecturing about the socialist calculation debate, more demonstrations of how to draw Production-Possibility Frontiers...
A Note on Office Hours
OK. It is now clear the way office hours are going to work. They are going to start in either Evans 597 or Evans 601 at 2 PM on Wednesdays (depending on where I am at that moment), and then I will gradually drift upward to Evans 601--with occasional runs into Evans 611 to grab cookies and coffee.
"Lord, enlighten thou our enemies," prayed nineteenth-century British economist and moral philosopher John Stuart Mill in his "Essay on Coleridge" http://olldownload.libertyfund.org/Texts/MillJS0172/Works/Vol10/PDFs/Mill_1277.pdf. "Sharpen their wits, give acuteness to their perceptions, and consecutiveness and clearness to their reasoning powers: we are in danger from their folly, not from their wisdom; their weakness is what fills us with apprehension, not their strength."
For every left-of-center American economist in the second half of the twentieth century, Milton Friedman (1912-2006) was the incarnate answer to John Stuart Mill's prayer. His wits were smart, his perceptions acute, his arguments strong, his reasoning powers clear, coherent, and terrifyingly quick. You tangled with him at your peril. And you left not necessarily convinced, but well aware of the weak points in your own argument.
General William Westmoreland, testifying before President Nixon's Commission on an All-Volunteer [Military] Force, denounced the idea, saying that he did not want to command an army of mercenaries. Milton Friedman interrupted him:
General, would you rather command an army of slaves?
Westmoreland got angry:
I don't like to hear our patriotic draftees referred to as slaves.
And Friedman got rolling:
I don't like to hear our patriotic volunteers referred to as mercenaries. If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general.
And he did not stop:
We are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher http://www.davidrhenderson.com/articles/0199_thankyou.html.
As George Shultz likes to say:
Everybody loves to argue with Milton, particularly when he isn't there.
Thinking as hard as he could until he got to the root of the issues was his most powerful skill. "Even at 94," Chicago economist and Freakonomics http://www.amazon.com/exec/obidos/ASIN/006073132x/ author Steve Levitt wrote on his website yesterday, "he would teach me something about economics whenever we talked" http://www.freakonomics.com/blog/2006/11/16/sad-news-milton-friedman-has-died/. In this morning's New York Times http://www.nytimes.com/2006/11/17/business/17milton.html, Chicago economist Austen Goolsbee quotes from Milton Friedman's Nobel autobiography:
Friedman said that when he arrived [at the University of Chicago] in the 1930s, he encountered a "vibrant intellectual atmosphere of a kind that I had never dreamed existed."
"I have never recovered."
His world-view began with a bedrock faith in people, in their ability to make judgments for themselves, and thus an imperative to maximize individual freedom. On top of that was layered a deep faith and conviction that free markets were almost always the best and most magical way of coordinating every conceivable task. On top of that was layered a powerful conviction that a look at the empirical facts--a marking-to-market of your beliefs to reality--would generate the right conclusions. And on top of that was layered a fear and suspicion of government as an easily-captured tool for the enrichment of cynical and selfish interests that sought to grab whatever they could. Suffusing all was a faith in the power of argument and the utility of reason. He was an optimist: people could be taught the truths of economics, and if they were properly taught then institutions could be built to protect all against the corruption and overreach of the government.
And he did fear the government. He hated government's and society's sticking their nose into people's private business. And he interpreted "people's private business" extremely widely. He hated the War on Drugs, which he saw as a cruel and destructive breeder of crime and violence. He scorned government licensing of professions--especially doctors, who heard over and over again about how their incomes were boosted by restrictions on the number of doctors that made Americans sicker. He feared deficit spending: cynical politicians could pretend that the costs of government were less than they were by pushing the raising of taxes to pay for spending off into the future. He sought to innoculate citizens against such political games of three-card-monte: "Remember," he would say, "to spend is to tax."
This did not mean that government had no role to play. Enforcement of property rights, adjudication of contract disputes--the standard powerful rule-of-law underpinnings of the market--plus a host of other government interventions when empirical circumstances made them appropriate: Mayor Ken Livingstone's congestion tax on cars in central London is Milton Friedman's. Friedman's negative income tax is one of the parents of what is now America's largest anti-poverty program: the Earned Income Tax Credit. And, most important, government had a very powerful and necessary role to play in keeping the monetary system working smoothly through proper control of the money stock. If there was always sufficient liquidity in the economy--enough but not too much--then you could trust the market system to do its job. If not, you got the Great Depression, or hyperinflation.
In his belief that the government was required to undertake relatively narrow but crucially important strategic interventions in order to stabilize the macroeconomy--keep production, employment, and prices on an even keel--Milton Friedman was in the same chapter if not on the same page as John Maynard Keynes, the economic giant of the previous generation whose doctrines and influence Friedman worked tirelessly to supplant and minimize. The Great Depression had convinced Keynes that central bankers alone could not rescue and stabilize the market economy. In Keynes's view, stronger and more drastic strategic interventions were needed to boost or curb demand directly.
Friedman and his coauthor Anna J. Schwartz argued in their Monetary History of the United States that this was a misreading of the lessons of the Great Depression, which in Friedman's view was caused by monetary mismanagement--or perhaps could have been rapidly alleviated by skillful monetary management--alone.
Over the course of forty years, Friedman's position carried the day. Federal Reserve Chair Ben Bernanke right now holds Milton Friedman's view, not John Maynard Keynes's, of what kind of strategic interventions in the economy are necessary to provide for maximum production, employment, and purchasing power, and stable prices.
Milton Friedman's thought is, I believe, best seen as the fusion of two strongly American currents: libertarianism and pragmatism. Friedman was a pragmatic libertarian. He believed that--as an empirical matter--giving individuals freedom and letting them coordinate their actions by buying and selling on markets would produce the best results. It was not that he thought this was natural law--that markets always worked best. It was, rather, that he believed that places where markets failed were atypical; that where markets did fail there were almost always enormous profit opportunities from entrepreneurial redesign of institutions; that the market system would create now opportunities for trade that would route around market failures; and that government failure was pervasive--that any expansion of government beyond the classical liberal state would be highly likely to cause more trouble than it could solve.
For right-of-center American libertarian economists, Milton Friedman was a powerful leader. For left-of-center American liberal economists, Milton Friedman was an enlightened adversary. We are all the stronger for his work. We will miss him.
‘The extent of the market’ is limited not just by transport but by trust: [T]here is also a feeling that some of the [recent] best-sellers have trivialised economics, titillating the reader with sex and drugs while neglecting the more important insights of the discipline. Nobody could accuse Partha Dasgupta of deepening this rut. In this Very Short Introduction, he has taken as his theme the original mystery of economics: the nature and causes of the wealth of nations. And he motivates the study not with unadorned GDP statistics but by comparing the lives of two young girls: Becky, who lives in an affluent American suburb, and Desta, the daughter of Ethiopian farmers. Why do two children, born so much alike, live such different lives?
The question is compelling, and presents an opportunity to explore many branches of economics, in a concrete and relevant way. Unfortunately… [w]hile there are many references to ‘Desta’s world’ and ‘Becky’s world’, these are too often brief appendages to abstract discussions of agents A, B and C and factors X, Y and Z. At times one could be reading a textbook, except there are no problem sets, fewer graphs, and the pictures are in black and white.
This is a great pity, because there is a deep, coherent and insightful argument at the core of the book.
One might begin with the proposition: wealth depends on the division of labour, and the division of labour is limited by the extent of the market. But the extent of the market is not limited only by transport and taxes. It is limited also by trust: by the rules and expectations that allow cooperation for mutual gain between people who do not know each other. And these rules and expectations, particularly the expectations, are hard to build but easy to destroy. In the worst case, not just the extent of the market but its very existence is threatened.
The logic for this argument is provided by game theory. Economic life, and indeed social life more generally, depends on trust… that most people will keep their word most of the time. But even this modest level of trust cannot be gained just by wishing for it. People must believe that the long-run benefits from successful cooperation outweigh the short-term gains from cheating. And they must believe that other people think the same….
If prospects for the future become less bright, or if confidence in the other party is reduced, even for trivial or fallacious reasons, the balance may tip from cooperation to conflict very quickly. This has become a cliché in Yugoslavia, Rwanda and Iraq: political uncertainty resurrects dormant divisions and peaceful neighbours become killers.
Less dramatically, such calculations may just restrict the number of people any individual can trust…. The ‘community’ is a natural boundary: any group which people are born into (and with no easy, voluntary exit) and must deal with repeatedly for their whole lives makes the penalties for cheating higher and more certain. The family is the ultimate example….
Yet… families… are small… limit the division of labour…. Markets… overcome these problems by allowing much larger numbers of people to cooperate. But these large numbers cannot rely on personal ties, so establishing the necessary trust is much more difficult….
While consideration of trust, and its implications for communities, markets, households and firms, is the key content of the book, other subjects are considered. It begins with a brief consideration of the history of economic growth, contains an interlude on the contrasting incentives and institutions in science and technology, and concludes with chapters on sustainability and democratic decision-making….
The Very Short Introduction series is advertised as being for ‘anyone wanting a stimulating and accessible way into a new subject’. Stimulating, yes. Accessible? I am not so sure. Popular economics is supposedly aimed at the whole literate population, or at least the university-educated, newspaper-reading part of it. Partha Dasgupta seems to equate them with his fellow Cambridge professors and their brightest students. And it is a shame, because the intellectual content of the book, combined with the Becky/Desta device, had the potential for a truly great and accessible introduction to economics.
This is a game theorist's short introduction to economics. It focus on on: individual goals, individual opportunities and constraints, individual incentives, strategies, exchange, trust, and equilibrium outcomes. It is, of course, greatly concerned with wealth and poverty--that is, after all, the point of the discipline of economics: it is an inquiry into nature and causes of the wealth of nations. You won't find lots of practice figuring out how price and quantity change in response to demand shocks or calculating multipliers. What you will find is the logic and rationale for why figuring out how price and quantity change in response to demand shocks or calculating multipliers is a worthwhile thing to do.
Definitely five stars.
This is probably not the best intro to economics book (i.e. it is a little too concise in places), but I liked it nevertheless. Overall, the author did do a great job explaining ideas…. The main drawback is that there's little to no iteration i.e. I usually learn by being exposed to a concept or term several times but in this short book there's no room for that - you're told about a concept once…
If you want a textbook, get something else...
The strengths of this book are: it avoids the trap of doing a developed-world only description, it really allows you to appreciate how economists think, it ties economic concepts to concepts from other disciplines. It can get technical sometimes for the least mathematical readership, but still a must read.
Chapter 5 alone justifies buying the book (Science and technology as institutions).
Or, is there any relationship that humans do not think ought to be turned into a reciprocal gift-exchange relationship? "Natural propensity to truck, barter, and exchange" indeed!
Iris, fleet as the wind, sped forth…. "Take heart," she said….
The lord of Olympus bids you go and ransom noble Hektor, and take with you such gifts as shall give satisfaction to Akhilleus…. Akhilleus will not kill you nor let another do so, for he will take heed to his ways and sin not, and he will entreat a suppliant with all honourable courtesy.…
[H]e lifted the lids of his chests, and took out twelve goodly vestments. He took also twelve cloaks of single fold, twelve rugs, twelve fair mantles, and an equal number of shirts. He weighed out ten talents of gold, and brought moreover two burnished tripods, four cauldrons, and a very beautiful cup which the Thracians had given him… to ransom the body of his son….
Priam and Idaeus as they showed out upon the plain did not escape the ken of all-seeing Jove, who looked down upon the old man and pitied him; then he spoke to his son Mercury and said, "Mercury, for it is you who are the most disposed to escort men on their way, and to hear those whom you will hear, go, and so conduct Priam to the ships of the Akhaeans that no other of the Danaans shall see him nor take note of him until he reach the son of Peleus." Thus he spoke and Mercury, guide and guardian, slayer of Argus, did as he was told….
Then answered Priam, "If you are indeed the squire of Akhilleus son of Peleus, tell me now the Whole truth. Is my son still at the ships, or has Akhilleus hewn him limb from limb, and given him to his hounds?"
"Sir," replied the slayer of Argus, guide and guardian, "neither hounds nor vultures have yet devoured him; he is still just lying at the tents by the ship of Achilles, and though it is now twelve days that he has lain there, his flesh is not wasted nor have the worms eaten him although they feed on warriors….
Ere long they came to the lofty dwelling of the son of Peleus for which the Myrmidons had cut pine and which they had built for their king; when they had built it they thatched it with coarse tussock-grass which they had mown out on the plain, and all round it they made a large courtyard, which was fenced with stakes set close together…. Mercury opened the gate for the old man, and brought in the treasure that he was taking with him for the son of Peleus…. Mercury went back to high Olympus. Priam… went straight into the house where Akhilleus, loved of the gods, was sitting. There he found him with his men seated at a distance from him: only two, the hero Automedon, and Alkimus of the race of Mars, were busy in attendance about his person, for he had but just done eating and drinking….
Priam besought Akhilleus saying:
Think of your father, O Akhilleus like unto the gods, who is such even as I am, on the sad threshold of old age. It may be that those who dwell near him harass him, and there is none to keep war and ruin from him. Yet when he hears of you being still alive, he is glad, and his days are full of hope that he shall see his dear son come home to him from Troy; but I, wretched man that I am, had the bravest in all Troy for my sons, and there is not one of them left. I had fifty sons when the Akhaeans came here; nineteen of them were from a single womb, and the others were borne to me by the women of my household. The greater part of them has fierce Mars laid low, and Hektor, him who was alone left, him who was the guardian of the city and ourselves, him have you lately slain; therefore I am now come to the ships of the Akhaeans to ransom his body from you with a great ransom. Fear, O Akhilleus, the wrath of heaven; think on your own father and have compassion upon me, who am the more pitiable, for I have steeled myself as no man yet has ever steeled himself before me, and have raised to my lips the hand of him who slew my son."
Thus spoke Priam, and the heart of Akhilleus yearned as he bethought him of his father. He took the old man's hand and moved him gently away. The two wept bitterly- Priam, as he lay at Achilles' feet, weeping for Hektor, and Achilles now for his father and now for Patroklus, till the house was filled with their lamentation. But when Akhilleus was now sated with grief and had unburthened the bitterness of his sorrow, he left his seat and raised the old man by the hand, in pity for his white hair and beard; then he said:
Unhappy man, you have indeed been greatly daring; how could you venture to come alone to the ships of the Achaeans, and enter the presence of him who has slain so many of your brave sons? You must have iron courage: sit now upon this seat, and for all our grief we will hide our sorrows in our hearts, for weeping will not avail us. The immortals know no care, yet the lot they spin for man is full of sorrow; on the floor of Jove's palace there stand two urns, the one filled with evil gifts, and the other with good ones. He for whom Jove the lord of thunder mixes the gifts he sends, will meet now with good and now with evil fortune; but he to whom Jove sends none but evil gifts will be pointed at by the finger of scorn, the hand of famine will pursue him to the ends of the world, and he will go up and down the face of the earth, respected neither by gods nor men. Even so did it befall Peleus; the gods endowed him with all good things from his birth upwards, for he reigned over the Myrmidons excelling all men in prosperity and wealth, and mortal though he was they gave him a goddess for his bride. But even on him too did heaven send misfortune, for there is no race of royal children born to him in his house, save one son who is doomed to die all untimely; nor may I take care of him now that he is growing old, for I must stay here at Troy to be the bane of you and your children. And you too, O Priam, I have heard that you were aforetime happy. They say that in wealth and plenitude of offspring you surpassed all that is in Lesbos, the realm of Makar to the northward, Phrygia that is more inland, and those that dwell upon the great Hellespont; but from the day when the dwellers in heaven sent this evil upon you, war and slaughter have been about your city continually. Bear up against it, and let there be some intervals in your sorrow. Mourn as you may for your brave son, you will take nothing by it. You cannot raise him from the dead, ere you do so yet another sorrow shall befall you.
And Priam answered:
O king, bid me not be seated, while Hector is still lying uncared for in your tents, but accept the great ransom which I have brought you, and give him to me at once that I may look upon him. May you prosper with the ransom and reach your own land in safety, seeing that you have suffered me to live and to look upon the light of the sun."
Akhilleus looked at him sternly and said:
Vex me, sir, no longer; I am of myself minded to give up the body of Hector. My mother, daughter of the old man of the sea, came to me from Jove to bid me deliver it to you. Moreover I know well, O Priam, and you cannot hide it, that some god has brought you to the ships of the Achaeans, for else, no man however strong and in his prime would dare to come to our host; he could neither pass our guard unseen, nor draw the bolt of my gates thus easily; therefore, provoke me no further, lest I sin against the word of Jove, and suffer you not, suppliant though you are, within my tents….
They lifted the ransom for Hector's body from the waggon. but they left two mantles and a goodly shirt, that Akhilleus might wrap the body in them when he gave it to be taken home…. Akhilleus himself lifted it on to a bier, and he and his men then laid it on the wagon. He cried aloud as he did so and called on the name of his dear comrade:
Be not angry with me, Patroklus," he said, "if you hear even in the house of Hades that I have given Hektor to his father for a ransom. It has been no unworthy one, and I will share it equitably with you.
Akhilleus then went back into the tent and took his place on the richly inlaid seat from which he had risen, by the wall that was at right angles to the one against which Priam was sitting. "Sir," he said:
your son is now laid upon his bier and is ransomed according to desire; you shall look upon him when you him away at daybreak; for the present let us prepare our supper. Even lovely Niobe had to think about eating, though her twelve children- six daughters and six lusty sons- had been all slain in her house. Apollo killed the sons with arrows from his silver bow, to punish Niobe, and Diana slew the daughters, because Niobe had vaunted herself against Leto; she said Leto had borne two children only, whereas she had herself borne many- whereon the two killed the many. Nine days did they lie weltering, and there was none to bury them, for the son of Saturn turned the people into stone; but on the tenth day the gods in heaven themselves buried them, and Niobe then took food, being worn out with weeping. They say that somewhere among the rocks on the mountain pastures of Sipylus, where the nymphs live that haunt the river Akhelous, there, they say, she lives in stone and still nurses the sorrows sent upon her by the hand of heaven. Therefore, noble sir, let us two now take food; you can weep for your dear son hereafter as you are bearing him back to Ilius- and many a tear will he cost you.
With this Akhilleus sprang from his seat and killed a sheep of silvery whiteness, which his followers skinned and made ready all in due order. They cut the meat carefully up into smaller pieces, spitted them, and drew them off again when they were well roasted. Automedon brought bread in fair baskets and served it round the table, while Achilles dealt out the meat, and they laid their hands on the good things that were before them. As soon as they had had enough to eat and drink, Priam, descendant of Dardanus, marvelled at the strength and beauty of Akhilleus for he was as a god to see, and Akhilleus marvelled at Priam as he listened to him and looked upon his noble presence. When they had gazed their fill Priam spoke first. "And now, O king," he said:
take me to my couch that we may lie down and enjoy the blessed boon of sleep. Never once have my eyes been closed from the day your hands took the life of my son; I have grovelled without ceasing in the mire of my stable-yard, making moan and brooding over my countless sorrows. Now, moreover, I have eaten bread and drunk wine; hitherto I have tasted nothing.
As he spoke Achilles told his men and the women-servants to set beds in the room that was in the gatehouse, and make them with good red rugs, and spread coverlets on the top of them…. Then Achilles said laughingly to Priam:
Dear sir, you shall lie outside, lest some counsellor of those who in due course keep coming to advise with me should see you here in the darkness of the flying night, and tell it to Agamemnon. This might cause delay in the delivery of the body. And now tell me and tell me true, for how many days would you celebrate the funeral rites of noble Hector? Tell me, that I may hold aloof from war and restrain the host.
And Priam answered:
Since, then, you suffer me to bury my noble son with all due rites, do thus, Achilles, and I shall be grateful. You know how we are pent up within our city; it is far for us to fetch wood from the mountain, and the people live in fear. Nine days, therefore, will we mourn Hector in my house; on the tenth day we will bury him and there shall be a public feast in his honour; on the eleventh we will build a mound over his ashes, and on the twelfth, if there be need, we will fight.
And Achilles answered, "All, King Priam, shall be as you have said. I will stay our fighting for as long a time as you have named."
As he spoke he laid his hand on the old man's right wrist, in token that he should have no fear; thus then did Priam and his attendant sleep there in the forecourt, full of thought, while Achilles lay in an inner room of the house, with fair Briseis by his side…
Trust and Panic/Who's in Charge?
Man and the risks of nature/Our violent past/How have we tamed our violent instincts?
How did the social emotions evolve?/Money and human relationships/Honor among thieves: hoarding and stealing/Honor among bankers: what caused the financial crisis?
Professionalism and fulfillment in work and war/The city, from ancient Athens to modern Manhattan/Water: commodity or social institution?
Prices for everything?/Families and firms /Knowledge and symbolism
Exclusion: unemployment, poverty, and illness/States and empires/
Globalization and Political Action
There are, I think two important things you should note when you start reading Friedman and Director Friedman's "Free to Choose". The first is that it was a book that was written 30 years ago. The second is that the Friedmans believed that they were fighting against the tide of history. They thought--in 1980--that liberty and prosperity were in retreat worldwide, and had been in retreat for at least fifty years.
This strikes us--this strikes me at least--as profoundly odd. When you ask me what "freedom" means, I tend to go back to Franklin Delano Roosevelt's four freedoms:
When I think of major impingements on freedom, I don't think of the things that the Friedmans point to in 1980 as evidence that freedom is in retreat. I see 1980 as coming at the end of the fastest and most complete 50-yeear expansion of freedom, democracy, and prosperity the world had ever seen.
Try to figure out why the Friedmans do see these things they see as evidence that freedom is "in retreat" or under threat.
The power of the market
The tyranny of controls
The anatomy of crisis
Cradle to grave
What's wrong with our schools?
Who protects the consumer?
Who protects the worker?
The cure for inflation
The tide is turning
J. Bradford DeLong—that's me—is a professor of economics at the University of California at Berkeley, a research associate of the National Bureau of Economic Research, a weblogger for the Washington Center for Equitable Growth, and was in the Clinton administration a deputy assistant secretary of the U.S. Treasury.
My best work extends from business cycle dynamics through economic growth, behavioral finance, political economy, economic history, international finance to the history of economic thought and other topics.
Among my best works are: "Is Increased Price Flexibility Stabilizing?" "Productivity Growth, Convergence, and Welfare," "Noise Trader Risk in Financial Markets," "Equipment Investment and Economic Growth," "Princes and Merchants: European City Growth Before the Industrial Revolution," "Why Does the Stock Market Fluctuate?" "Keynesianism, Pennsylvania-Avenue Style," "America's Peacetime Inflation: The 1970s," "American Fiscal Policy in the Shadow of the Great Depression," "Review of Robert Skidelsky (2000), John Maynard Keynes, volume 3, Fighting for Britain," "Between Meltdown and Moral Hazard: Clinton Administration International Monetary and Financial Policy," "Productivity Growth in the 2000s," "Asset Returns and Economic Growth."
I have signed up with the Leigh Speakers' Bureau for non-academic and non-public service talks...
"I now know it is a rising, not a setting, sun" --Benjamin Franklin, 1787