Intro to Micro II

Economics 2: Spring 2014 J. Bradford DeLong ; Maria Constanza Ballesteros ; Connie Min

http://delong.typepad.com/sdj/econ-2-spring-2014/

Economics 2: Spring 2014: Introduction to Microeconomics II http://delong.typepad.com/sdj/econ-1-spring-2012/ January 27, 2014, 4-5:30 101 Barker, U.C. Berkeley

Do You Have an i>Clicker? • A. Yes • B. No. • C. What’s an i>Clicker?

Did You Email Me Your Preferred Email Address? • A. Yes • B. No. • C. What’s an email address?

From Last Time… • We got about halfway through “Introduction to Micro…” • Now let us pick up: how much of a difference does it make that we arrange the coordination of our economic life through markets?

To Your i>Clickers… • We had a gigantic “natural experiment” in the twentieth century. It was: – A. Whether technology could be successfully transferred by Europeans colonizing the rest of the globe. – B. Whether breaking up large firms would restore competition. – C. Whether population growth could be controlled by government command. – D. Whether an economy that got rid of markets could thereby be more prosperous and more egalitarian than one that did not. – E. Whether eliminating communist regimes would accelerate prosperity.

To Your i>Clickers… • What share of productivity do you throw away by forbidding the market system to operate? – A. None—big firms show us that command-andcontrol plus bureaucracy are more productive – B. None—the victory of the Soviet Union over Nazi Germany in World War II and of Mao’s CCP over Chiang Kai-Shek’s Guomindang in the Chinese Civil War show that central planning is best – C. Less than 20% – D. About 50% – E. More than 80%

How Remarkably?: The High Stalinist Experiment

How Much Does Market Organization Matter? • High Stalinist central planning – Marx’s suspicion of markets as surplusextraction devices – Hence, the communists said, we won’t have any – We will reproduce the Rathenau-Ludendorff World War I Imperial German war economy – Communes, economies of scale, GOSPLAN, etc.

How Much Does Market Organization Matter?

What Happened?

•They threw away a more than five-fold amplification of productivity by eschewing the market

How Are We to Understand This? • You want a large-scale division of labor: – Because: specialization

• There are problems with having a large-scale division of labor – Problems of coordination – Problems of information – Problems of incentivization – Problems of justification

For the Moment… • Focus on two sets of problems: – Information – Incentivization

In Order to Coordinate... • ...in an economy with N commodities via the market, you have to... – 1. Find a whiteboard – 2. Write down N prices – 3. Laissez-faire – 4. Maybe you don’t have to write down the prices

In Order to Coordinate... • ...in an economy with N commodities via a bureaucratic commandand-control hierarchy, you have to... – 1. Tell everybody what to do – 2. Tell everybody what they are going to consume – 3. Check up to make sure everybody is doing what they are supposed to be doing

Questions to Ask of Any Societal Calculating Mechanism • Is it attainable? – i.e., China during the Great Leap Forward not attainable • Peng Dehuai’s reprimand of Mao; Hai Jui’s reprimand of Shih Tsung

• Productive efficiency: will the right people be making the right things? • Allocative efficiency: will anybody say “I don’t want that, I want this instead”? • Will it be fair?

Recap: To Your i>Clickers… • The fundamental “economic problem” is: – A. Is figuring out how to deal with the fact of scarcity in (at least some of) the things we care about. – B. Is the result of high opportunity costs. – C. Was solved for all time by the wave of technological innovation that was the Industrial Revolution. – D. Is that supply is not guaranteed to match demand. – E. Is that of figuring out what prices should be charged in markets

SLIDE DECK BREAK