1. Chapter 2 A three dimensional approach to economics

2. Economics from Political Economy 150 years ago, economics was part of a subject called ‘political economy’:politics, economics, psychology, and the other social science disciplines Economics was narrowed to focus on markets Nowadays, slowly returning to broader themes

3. Kind of questions that were asked by PE Where does value come from? (for eg. why does a coat cost so much more than a shirt? What are the ways in which society should organize the relationship between people and what should be the relationship between the state and firms? What motivates people and how is this distinct in different economic systems?

4. Fundamental Insight of Political Economy The Economy is about relationships between people and other people (social relationships) that organize human labor in labor processes. Not about relationship between people and things (as sometimes thought) Example: Agriculture

5. Ways of doing agriculture Capitalism is an economic system wherein goods and services are produced by people at the direction of their employers (who own the capital good) with the purpose of making profits

6. How can we think of/analyze any given system Competition :economic relationships in which market exchanges play the most important part Command: those aspects of economic relationships that involve power, coercion, hierarchy, subordination, or authority Change: the ways in which, over time, the operation of an economic system will change the system itself Most of conventional economics focuses on competition only (i.e. market exchange) Chapter 8 and 9 will address that, but chapters 9-12 also consider the reasons for command and change.

7. Competition..Products,Labor, Capital Voluntary exchange by relatively equal parties

8. Command A has power over B if by imposing costs on B, A can cause B to act in a way that is to A’s advantage. Q: Why do we need command?

9. Change Question: Why does the capitalist system Support so much innovation and change? Ans: Rearranging Technology and Production Processes can Yield Large changes in Profits.

10. Central building blocks of conventional analysis (neoclassical economics) Assumption of Homo Economicus: Self interested, rational maximizer of utility Complete Contracts Constant or Decreasing Returns to Scale

11. Homo Economicus Assumption is that human behavior is fundamentally self-interested (includes with respect to family and friends) Human behavior is motivated by the desire for utility or pleasure Human behavior is ‘rational’.i.e. goal oriented and consistent Chapter 2 will evaluate this construct

12. Contracts Agreement, either written or unwritten, commits two or more parties to undertake certain actions. Complete Contract: One that fully specifies everything that each party to the contract is to do Incomplete Contract: One that leaves out certain aspects of an exchange and imposes significant enforcement costs

13. Are contracts complete? Sometimes (think of buying apples at a store) Often are incomplete. (Consider the labor contract). If contracts were complete No lawyers! Often have effects on third parties (what are called externalities): for example pollution of a river

14. When contracts are incomplete or...

15. Supervision/Monitoring

16. Returns to Scale Defn: The proportional increase in output as a result of increasing inputs If you increase inputs by a certain proportion and outputs increase by the same proportion, we have constant returns to scale If the output increases by less, decreasing returns to scale. If the output increases by more, increasing returns to scale

17. Example Constant Returns to Scale Increasing Returns to Scale

18. Why is this important? Defines the nature of competition Constant RTS Increasing RTS If these are two firms, who will win?

19. Values in Political Economy Every system requires some sort of evaluation in terms of values. For example: Aquinas “To sell something for more than you bought it is a sin” Some common values: Efficiency, Egalitarianism, Poverty Minimization, Democracy, Fariness.

20. Normative vs. Positive Economics Positive Economics: What is Normative Econmics: What should be No airtight sealing off of these two. What is is often influenced by ‘what should be’ (e.g. if one is strongly egalitarian, one might see more injustice)

21. Basic Assessment of Social Systems Organize economic activities so as to provide opportunities for all their participants to lead flourishing lives (Amartya Sen) Limits: jobs are mind-numbing or unsafe, children die young of easily preventable diseases, illiteracy, lack of free speech, religion, malnutrition, stigma, other conditions that limit opportunities are generated What are the correct boundaries of the state and the market for this question? (e.g box on hunger)

22. Efficiency Definition: Inputs are used well and not wasted. Not the same thing as profitability An outcome is Pareto optimal (sometimes called Pareto efficient) if there exists no other outcome (using available resources and technologies) that would make at least one person better off without making anyone worse off.

23. Fairness Fairness involves asking about the distribution of the system’s burdens and benefits A fair economic system would be one in which its burdens and benefits were distributed equitably. Ok—but elides the question: what is equitably

24. Questions surrounding Distribution What goods are to be distributed? (examples, income, wealth, power, respect) Between what entities are they to be distributed? (Current human beings, Current and future humans, all beings, a society, nations as a whole?) What is the proper distribution? (Equal a priori, meritocratic, need, property rights, non- coercion?)

25. Parable of the Flute (Sen) A flute is available. Three children make a claim on it. The first says, “I am the poorest and have no toys, I should get the flute: The second says “I am the only one who can play the flute well, I should get it” The third says “I made the flute, I should get it”. Who should get it?

26. Democracy Extent to which the economic system supports or inhibits democratic participation in the major decisions made in the society. Elements: accountability of power, respect for civil liberties, and equal opportunity for political participation

27. Societies may score higher in some categories than another Slavery vs. Independent Production Communism vs. Capitalism Cooperative Movements vs. Capitalist hierarchies No one to one relationship. Requires evaluation and argument. REASONING AND EVALUATION ARE IMPOSSIBLE TO AVOID!