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

Economics 2: Spring 2014: Recap:The Importance of the Market January 29, 2014, 4-5: Barker, U.C. Berkeley

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.

How Remarkably?: The High Stalinist Experiment

How Much Does Market Organization Matter?

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

And in Long-Run Perspective… Things start to happen worldwide between … Straightforward extrapolation of 8000 BC to 1500 gets us to our 7138 million people in 5200—with probably 100 million people in California with workers earning $2/day and 70% of us in the San Joaquin Valley on our small rice plots… What happens then? More and more of the world starts to shift from old (ancient, feudal, “Asiatic”, petty-bourgeois) to the “bourgeois” mode of production. Science, yes. Two heads better than one, yes, but also market…

Why Do Markets Work So Well? Ways of Organizing: – Bureaucratic command-and-control – Thick-tie reciprocity – Market What gives markets their edge?

Concept of a “Reservation Price” For sellers, the price below which you think you got a really bad deal if you sell—you really, after thinking about it, would rather not have sold at all… For buyers, the price above which you think you got a really bad deal—you really, after thinking about it, would rather not have bought at all…

Ten People Who Do Nothing But Drink Espresso and Give (or Take) Individual Yoga Lessons… Yoga Teachers – Black Widow (25) – Tyrion Lannister (15) – Captain America (10) – Hannah Horvath (5) – Arnold Schwarzenegger (0) Yoga Students – WyldStyle (20) – Beyoncé (16) – Macklemore (12) – Adam Sackler (8) – Jerry Brown (4)

Bureaucratic Command and Control Pick a random number from 0-5: 2 Pick two teachers: Tyrion Lannister and Arnold Schwarzenegger Pick two students: Macklemore and Adam Sackler What’s the outcome? – Macklemore happy (+12), Adam happy (+8) – Tyrion annoyed (-15), Arnold meh (0)

To Your iClickers… Why is Macklemore happy with this (bureaucratic) outcome? – A. Because WyldStyle didn’t get to take a yoga lesson – B. Because he is being taught by Tyrion, who is a better yoga teacher (15) than he is a student (12) – C. Because he is getting something he values as much as 12 cups of espresso—plus he doesn’t have to give anything up for it, because it’s a command-and- control rather than a market-price world. – D. Because Jerry Brown, who doesn’t like yoga, doesn’t have to take a yoga lesson. – E. Because Black Widow, who really does not like teaching yoga, does not have to teach a lesson.

A Competitive Market Tatonnement: – At a price of 21: 4 teachers (everyone except Black Widow), 0 students: excess supply of 4… – At a price of 1: 1 teacher (Arnold), 5 students: excess demand of 4… – At a price of 16: 4 teachers (everyone except Black Widow), 1 student (WyldStyle): excess supply of 3… – At a price of 6: 2 teachers (Hannah and Arnold), 4 students (everyone except Jerry Brown): excess demand of 2… – At a price of 11: 3 teachers (Hannah (- 5), Arnold (0), and Captain America(- 10)), 3 students (WyldStyle (20), Beyoncé (16), and Macklemore (12)): excess demand and excess supply of 0! Net hedonic calculus: +33

Who Teaches and Who Takes… Yoga Teachers – Black Widow (25) – Tyrion Lannister (15) – Captain America (10) – Hannah Horvath (5) – Arnold Schwarzenegger (0) Yoga Students – WyldStyle (20) – Beyoncé (16) – Macklemore (12) – Adam Sackler (8) – Jerry Brown (4)

Ladies and Gentlemen, to Your i>Clickers Which of the following is not true of the competitive market equilibrium? – A. Everyone teaching has a reservation price lower than the market equilibrium price. – B. Everyone shares fairly in the surplus from the fact that some people dislike teaching yoga less than other people like taking yoga lessons. – C. Everyone taking lessons has a reservation price higher than the MEP. – D. A higher price would have someone teaching someone with a lower reservation price than they have. – E. A lower price would leave a deal to be made—a potential student would be left with a higher reservation price than a potential teacher.

The Competitive Market in Equilibrium Acts as Though It Starts by Making the Highest-Surplus Deal It Can, and Then the Next Highest, and So On…

Ladies and Gentlemen, to Your i>Clickers Who is happiest as a result of opening-up a competitive market for yoga lessons? – A. Black Widow and Tyrion Lannister – B. Captain America and Macklemore – C. WyldStyle and Arnold – D. Adam Sackler and Jerry Brown

Ladies and Gentlemen, to Your i>Clickers Who is happiest as a result of opening-up a competitive market for yoga lessons? – A. Black Widow and Tyrion Lannister – B. Captain America and Macklemore – C. WyldStyle and Arnold – D. Adam Sackler and Jerry Brown Why are they happiest? (This is a real question)

Ladies and Gentlemen, to Your i>Clickers Who is happiest as a result of opening-up a competitive market for yoga lessons? – A. Black Widow and Tyrion Lannister – B. Captain America and Macklemore – C. WyldStyle and Arnold – D. Adam Sackler and Jerry Brown Why are they happiest? – Because: 20-11, and They are in the right place at the right time with the right skills

Ladies and Gentlemen, to Your i>Clickers Who is happiest as a result of opening-up a competitive market for yoga lessons? – A. Black Widow and Tyrion Lannister – B. Captain America and Macklemore – C. WyldStyle and Arnold – D. Adam Sackler and Jerry Brown Why are they happiest? – Because: 20-11, and They are in the right place at the right time with the right skills – Do they deserve their happiness? (That’s a rhetorical question)

Ladies and Gentlemen, to Your s… I have been driving this point about what markets do in maximizing money-metric surplus home with a pile driver. It’s the most important thing for you to remember from this course: what markets in commodities that are rival, excludible, known, and internal are good at. But: Sometime this evening—not now, but before midnight… – me at – Econ 2—Spring 2014 in the subject line – Write two sentences about what left you unconvinced, or what questions you have, or what leaves you skeptical about this demonstration…