1. Economics 2: Spring 2014 J. Bradford DeLong ; Maria Constanza Ballesteros ; Connie Min http://delong.typepad.com/sdj/econ-2-spring-2014/

2. 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

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

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

5. 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?

6. 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.

7. 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-and- control 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%

8. How Remarkably?: The High Stalinist Experiment

9. How Much Does Market Organization Matter? High Stalinist central planning – Marx’s suspicion of markets as surplus- extraction 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.

10. How Much Does Market Organization Matter?

11. What Happened? They threw away a more than five-fold amplification of productivity by eschewing the market

12. 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

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

14. 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

15. In Order to Coordinate......in an economy with N commodities via a bureaucratic command- and-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

16. 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?

17. 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

18. SLIDE DECK BREAK