Who wants to be an economist?

Se-ries1

0

5

10

15

20

25

30

Series 1Series 2Series 3

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 slow-

growth profession

Economists

• The media pay is $90,000 year• There are just 15,400 jobs and it’s a slow-

growth 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 slow-

growth 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 self-regulating 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 Ricardo1772-1823

• 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 (1834-1910)

• 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 (1834-1910)• 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”