Economics1:IntroductiontoEconomics

J.BradfordDeLong

Administrivia

April4,20168-9AMWheelerAuditorium,U.C.Berkeley

Meta-Announcement

• Wearemovingannouncementsandadministriviaoutoflecturetimeandontothe“announcements”bCoursespage…

• Thatisall…

FortheRestoftheCourse…

• 2016-03-28Mo-2016-04-06We:Measurement,Growth,andtheCircularFlow(FBAHchs.15-21)

• 2016-04-11Mo-2016-04-20We:TheKeynesianApproach(FBHAchs.22-25)

• 2016-04-25We-2016-05-09Mo:YetMoreIssues,FinalReview,andExam(FBHAch.26)

FortheRestoftheCourse…

• Measurement,Growth,andtheCircularFlow:• 2016-03-28MoLecture:MeasuringtheMacroeconomy(ReadFranketal.chs15-17)

• 2016-03-30WeLecture:EconomicGrowthintheVeryLongRun(ReadFranketal.ch18)

• 2016-04-04MoLecture:Saving,Investment,Finance,Money,Prices,andBanking(ReadFranketal.chs.19-20)

• 2016-04-06WeLecture:BusinessCycles(ReadFranketal.ch21)• 2016-04-06Wu/-07ThAssignment:ProblemSet5(growthandthecircularflow)

FortheRestoftheCourse…• TheKeynesianApproach:

• 2016-04-11MoLecture:IncomeandSpending(ReadFranketal.ch22)(2016-04-11Mo)

• 2016-04-13WeLecture:TheFederalReserveandMonetaryPolicy(ReadFranketal.ch23)(2016-04-13We)• 2016-04-13We/-14ThAssignment:ProblemSet6(theKeynesianmodel)due

• 2016-04-18MoLecture:AggregateDemandandAggregateSupply(ReadFranketal.ch24)

• 2016-04-20WeLecture:MacroeconomicPolicy(ReadFranketal.ch25)• 2016-04-20We/-21ThAssignment:ProblemSet7(macroeconomicpolicy)

FortheRestoftheCourse…

• YetMoreIssues:• 2016-04-25WeLecture:TheInternationalEconomy(ReadFranketal.ch26)

• TheWrap-Up• 2016-04-27FINALREVIEW• 2016-04-27We/-28ThAssignment:ProblemSet8(internationalandotherissues)

• 2016-05-04We/-05ThSectionReviewMeetings• 2016-05-04We/-05ThAssignment:ProblemSet9(finalreview)due

• 2016-05-09Mo:FINALEXAM

FortheRestoftheCourse…• Measurement,Growth,andtheCircularFlow:

• 2016-03-28MoLecture:MeasuringtheMacroeconomy(ReadFranketal.chs15-17)• 2016-03-30WeLecture:EconomicGrowthintheVeryLongRun(ReadFranketal.ch18)• 2016-04-04MoLecture:Saving,Investment,Finance,Money,Prices,andBanking(ReadFranketal.chs.19-20)• 2016-04-06WeLecture:BusinessCycles(ReadFranketal.ch21)

• 2016-04-06Wu/-07ThAssignment:ProblemSet5(growthandthecircularflow)• TheKeynesianApproach:

• 2016-04-11MoLecture:IncomeandSpending(ReadFranketal.ch22)(2016-04-11Mo)• 2016-04-13WeLecture:TheFederalReserveandMonetaryPolicy(ReadFranketal.ch23)(2016-04-13We)

• 2016-04-13We/-14ThAssignment:ProblemSet6(theKeynesianmodel)due• 2016-04-18MoLecture:AggregateDemandandAggregateSupply(ReadFranketal.ch24)• 2016-04-20WeLecture:MacroeconomicPolicy(ReadFranketal.ch25)• (2016-04-20We/-21ThAssignment:ProblemSet7(macroeconomicpolicy)

• YetMoreIssues:• 2016-04-25WeLecture:TheInternationalEconomy(ReadFranketal.ch26)• 2016-04-27FINALREVIEW

• 2016-04-27We/-28ThAssignment:ProblemSet8(internationalandotherissues)• 2016-05-04We/-05ThSectionReviewMeetings

• 2016-05-04We/-05ThAssignment:ProblemSet9(finalreview)due()• 2016-05-09Mo:FINALEXAM

EconomicGrowth:TheTen-MillenniaBird’s-EyeView

March30,20168-9AMWheelerAuditorium,U.C.Berkeley

AGlobalTen-MillenniaBird’s-EyeViewofItAll…

• Linguisticquasi-speciation100,000yearsago—orLess?

• RadiationfromtheHornofAfrica50,000yearsago?

• NeolithicRevolution10000yearsago.

• LiteracyRevolution5000yearsago?

• MalthusianAgrarianism—near-stagnation—asthedefaultstateofpost-Neolithichumanity?

• IndustrialRevolution• ModernEconomicGrowth• AstronomyandtheFermiParadox:TheGreatFilter

LinguisticQuasi-Speciation100,000YearsAgo—orLess?

• Anatomically-modernhumanshavebeenaroundforabout200,000years

• Behaviorallymodernhumanshavebeenaroundforatmosthalfthattime

• Andmaybeonlyaquarter…

• “Behavioralmodernity”—suchthingsas:• burial,fishing,cavepaintings,petroglyphs,figurines,pigmentandjewelry,long-distancetransport,regionally-distinctartifacts,hearths

RadiationfromtheHornofAfrica50,000YearsAgo?

• “Some70,000yearsago,apartofthebearersofmitochondrialhaplogroupL3migratedfromEastAfricaintotheNearEast….Fromapopulationof2,000to5,000inAfrica…possiblyasfewas150to1,000people,crossedtheRedSea…”

• Indiaastheirfirstapparentstop…

• ThenradiationtoEurasia,Australasia—andthentheAmericas,Oceania…

NeolithicRevolution10000YearsAgo• Agriculture,herdingagreatthingforthegenerationsthatdiscoverandintroduceit…

• Andagriculturalregionsfillupuntilpopulationgrowth…stops…• Preventativecheck• Positivecheck

• MalthusianAgrarianism—near-stagnation—asthedefaultstateofpost-Neolithichumanity?

• Possiblytheworstmistakeinthehistoryofthehumanrace?

LiteracyRevolution5000YearsAgo• Agriculture,herdingagreatthingforthegenerationsthatdiscoverandintroduceit…

• Andagriculturalregionsfillupuntilpopulationgrowth…stops…• Preventativecheck• Positivecheck

• MalthusianAgrarianism—near-stagnation—asthedefaultstateofpost-Neolithichumanity?

• Thereafterthepaceoftechnologicalimprovementisslow…

• Butitisatleastpositive—andthereishopeforsomethingbetternowthatknowledgecanbereliablyrecorded

MalthusianStagnationastheDefaultState?

• Lookatfrom8000BCto1500or1800

• Enormousincreasesinpopulation• Butspreadoutoverenormouslengthsoftime

• Staticlivingstandardsforthemostpart

• Exceptions:• Colonization• Biotechnology• Europeanmarriagepattern• Asianlineagefamilypattern• Large-scalefemaleinfanticide

WhyMalthusianStagnationintheAgrarianAge?

• Exceptionalelites• Exceptionalregions• Exceptionaleras• Europeanmarriagepatterns

• Asianlineagefamilies• Large-scalefemaleinfanticide

• Otherwise…Malthusrules

• Andpeople—inventivepeople—aren’tthatfocusedonrapidtechnologicaldevelopment

“Stagnation”:ToYouriClickers• Ifaquantitygrowsat

0.1%/year,howlongdoesittakebeforeithasdoubled?A. AthousandyearsB. AhundredyearsC. TenthousandyearsD. FivehundredyearsE. Noneoftheabove

“Stagnation”:ToYouriClickers• Ifaquantitygrowsat0.1%/year,howlongdoesittakebeforeithasdoubled?A. AthousandyearsB. AhundredyearsC. TenthousandyearsD. FivehundredyearsE. Noneoftheabove

CompoundGrowth• Startingat1andgrowingat0.1%/year…• After1000yearsthereturnonthatoriginal1=another1…

• Butthatadditionhasbeenaccumulating,onaverage0.5…

• Anditgrowstoo:soreturnontheincrement=another0.5…• Andsoon:

• 1+1+0.5+0.167+0.042+0.008=2.71828182846=e

• Ifyougrowat0.1%/yearfor1000yearsyouhavenottwicebut2.71828timesasmuch

ToYouriClickers…• Itellyou:2^10=1024• Ifittakes694yearsforaquantitygrowingat0.1%/year

todouble,howlongdoesittaketogrowathousandfold,roughly?A. 6912yearsB. 10000yearsC. 1694yearsD. 1024yearsE. NoneoftheAbove

ToYouriClickers…• Itellyou:2^10=1024• Ifittakes694yearsforquantitygrowingat0.1%/year

todouble,howlongdoesittaketogrowathousandfold,roughly?A. 6912years

ApplicationtotheMalthusianEra,8000BC-1500

• Growthof0.1%/year=doublingtimeof690years

• Growthof0.1%/year=thousandfoldtimeof6900years

• Wehave1.5ofthose0.1%/yr-thousandfoldtimessincetheNeolithicRevolution

• Changesthatareabsolutelyglacialoverayearoragenerationdoaddup

IndustrialRevolution• ThenattheendoftheeighteenthcenturycomestheIndustrialRevolution

• FirstintheBritishMidlands…

• Thenspreading:Belgium,NewEngland,NorthernFrance,Ruhr,Silesia…

• Justanotherseriesofinventions,butluckyenoughthatcoal-steam-rails-cottonhadahighelasticityofdemand?

• Oragame-changer?

ThenWeEscape.HowLikelyWasEscape?

• MalthusianAgrarianasthedefaultstateofpost-Neolithichumanity?

• “Twoheadsarebetterthanone”theories

• “Eyeoftheneedle”theories

• AstronomyandtheFermiParadox:TheGreatFilter

ModernEconomicGrowth• Theninthelatenineteenthcentury:theSecondIndustrialRevolution

• ThetransitiontoModernEconomicGrowth

• Populationexplosionfollowedbydemographictransition

• 2%/yearproductivitygrowthintheindustrialcore…

• Catch-upornotcatch-upelsewhere…

• Theoriginsoflargescaleinternationaleconomicinequality

• Theroleofmigrationandtrade

SourcesofGrowth• Technologicaladvance

• Newgoodsandnewtypesofgoods• Makingoldgoodsmorecheaplyandefficiently

• Ideasastheultimatenon-rival(andbarelyexcludible)commodities

• Howtomanageintellectualproperty?• Investment

• Inphysicalcapital• Inhumancapital

• Governance• Resources

• Resourcediscoveries• Resourceexhaustion

• Externalities

WhatWouldtheWorldLookLikeTodaywithoutCommercialRevolution/IndustrialRevolution/ModernEconomicGrowth?

• 1500-presentlike0-1500…• Growingtechnologicalcompetence• ZengHe• InfanteDomEnriqueandBartolomeuDias

• ButMalthusiandynamics• 720millionpeople• GDPpercapitaof$750/yr• Technologies…

• 0-1500TPabout0.03%/yr• Technologiesof1590orso—“Elizabethan”;lateMing;earlyMughal

WhyEscape?WhyModernEconomicGrowth?

• Fiveimportantprerequisites:• Resources• Science• Technology• Amarketeconomy• Profitstobemadefromproductiveinnovation

• Nurturingitscontinuation—andnotingitsfragility—perhapsthemostimportantgoal,andthemostimportantlesson

• AndherewegetintoastronomyandtheFermiparadox

AstronomyandtheFermiParadox:TheGreatFilter

• Whathappensnext?• Finally,since1970some

signsofglobalcatch-up• RobertGordon’s

predictionsofgreatlyslowedgrowth

• Whereareourflyingcars?• Extrapolatinggrowth• TheFermiParadox

ToYouri>Clickers…

• CompareyourlivingstandardifyouwereaslaveofThomasJefferson’sin1800versusaslaveofMarcusTulliusCicero’sin50BC.Youwere:A. MuchbetteroffasaslaveofCiceroB. MuchbetteroffasaslaveofJeffersonC. Aboutequallywelloff,butverypoorand

workedhardbyyouroverseers

ToYouri>Clickers…

• OurbestguessofthetotalimprovementinAmericanagriculturallaborproductivitysince1800is:A. ThatitisthesamenowasthenB. Thatafarmertodayis250timesasproductiveC. Thatafarmertodayisabout50timesas

productiveD. Thatafarmertodayisabout10timesas

productiveE. Noneoftheabove

ToYouri>Clickers…

• OurbestguessofthetotalimprovementinAmericanagriculturallaborproductivitysince1800is:A. ThatitisthesamenowasthenB. Thatafarmertodayis250timesasproductive

Finance

April4,20168-9AMWheelerAuditorium,U.C.Berkeley

What If Your Income Outruns Your Desired Expenditure Today?

• “Storage”

• Store goods—but will they last?

• Store durable goods—but are they salable?

• Store durable, salable goods—but can you protect them, and will they hold their value?

• Spend money turning your garage into an apartment and rent it out on AirB&B

• Educate yourself so you can get a higher-paying job.

• Give it to the financial markets

Equity and Debt• Equity

• You get a share in the business

• You gotta keep very close track of the accounting yourself

• You gotta play a role in choosing managers—somehow

• Debt

• They pay you back—with fixed interest

• Only if they don’t pay you back—with interest—do you need to take action

• And then you have powerful legal tools

Types of Bonds• Discount bonds

• You buy it for $B

• It pays you $1 when it matures in T years

• Interest rate: (1/B)(1/T)

-1

• Consol bond

• You buy it for $B

• It pays you a coupon of $c each year

• Permanent interest rate c/B