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EconomicModelsandLiberalEducation
January25,20168-9AMWheelerAuditorium,U.C.Berkeley
AWordorTwoonHowEconomistsThink• Stripasituationdowntoitsessentials—thatis,neglectalmosteveryaspect…
• Playwiththisgrossly-oversimplifiedworld…
• Reachconclusions…• Checkthoseconclusions…
• Iterate…
• “Avicenna”:PeterBeagle(1987):TheFolkoftheAir<http://amzn.to/1PvCcdN>.“StateofEuphoria”:DavidLodge(1975):ChangingPlaces<http://amzn.to/1nhoXXp>.IbnSina:AbūʿAlīal-ḤusaynibnʿAbdAllāhibnAl-HasanibnAliibnSīnā<http://tinyurl.com/n58rjc6>.Enkidu:Gilgamesh<http://amzn.to/1PepdkP>.FujiwaraTakako:GenjiMonogatari<http://amzn.to/1nhCkXy>.Hypatia<http://tinyurl.com/z9uyqyw>:IbnKhaldun:AbūZayd‘Abdar-RaḥmānibnMuḥammadibnKhaldūnal-Ḥaḍramī,Muquaddimah<http://amzn.to/1Sd0uhv>.Odysseus:<http://amzn.to/1nhCA94>.
EconomicModels• Movebackandforthbetween:• Verbaldescriptionsofhowpeopleact
• Quantitativeexamples
• Individual-behaviorequations
• Aggregateequations• Graphs:analyticgeometry
• Equilibriumconditionsas“wherethecurvescross”
• “Avicenna”:PeterBeagle(1987):TheFolkoftheAir<http://amzn.to/1PvCcdN>.“StateofEuphoria”:DavidLodge(1975):ChangingPlaces<http://amzn.to/1nhoXXp>.IbnSina:AbūʿAlīal-ḤusaynibnʿAbdAllāhibnAl-HasanibnAliibnSīnā<http://tinyurl.com/n58rjc6>.Enkidu:Gilgamesh<http://amzn.to/1PepdkP>.FujiwaraTakako:GenjiMonogatari<http://amzn.to/1nhCkXy>.Hypatia<http://tinyurl.com/z9uyqyw>:IbnKhaldun:AbūZayd‘Abdar-RaḥmānibnMuḥammadibnKhaldūnal-Ḥaḍramī,Muquaddimah<http://amzn.to/1Sd0uhv>.Odysseus:<http://amzn.to/1nhCA94>.
AndintheProcessHaveSomeFun• Refertoourcommoncollectivehumanculturalheritage.
• NotbecauseIamgoingtotestyouonit.
• Butbecauseourcommoncollectivehumanculturalheritageisanimportantintellectualresource.
• Liberaleducation
• “Avicenna”:PeterBeagle(1987):TheFolkoftheAir<http://amzn.to/1PvCcdN>.“StateofEuphoria”:DavidLodge(1975):ChangingPlaces<http://amzn.to/1nhoXXp>.IbnSina:AbūʿAlīal-ḤusaynibnʿAbdAllāhibnAl-HasanibnAliibnSīnā<http://tinyurl.com/n58rjc6>.Enkidu:Gilgamesh<http://amzn.to/1PepdkP>.FujiwaraTakako:GenjiMonogatari<http://amzn.to/1nhCkXy>.Hypatia<http://tinyurl.com/z9uyqyw>:IbnKhaldun:AbūZayd‘Abdar-RaḥmānibnMuḥammadibnKhaldūnal-Ḥaḍramī,Muquaddimah<http://amzn.to/1Sd0uhv>.Odysseus:<http://amzn.to/1nhCA94>.
AWordorTwoonaLiberalEducation• “Liberaleducation”≠“kindaleft-wingeducation”here
• “Liberaleducation”heremeans“appropriatetosomebodyfree”
• Someonewithcontrolovertheirownandashareofcontroloverourcommondestinies• Notsomeonetaughtaparticularskilltodoonething
• But,rather,someonewhoselifewillbespentinawiderangeofactivities
• Andwhothusneedsawiderangeofknowledge
• Aliberaleducationisaveryvaluablething
• Differenceinthenaturallog(ln)of0.6meansthatthehighernumberis1+0.6+(0.6)^2/2+(0.6)^3/(3!)+(0.6)^4/(4!)+…=1.8221timesthelesser:is82%higher.
ALiberalEducationIsaVeryValuableThing• Ata$40,000/yearaverageearningslevel…
• 82.2%x$40,000/year=$32,884/year
• Gotocollege:invest$15K/yr(tuitionandfees)+$20K/yr(earningsnotmade)for5years=$175,000
• Getanextra$32,884/yearfor40yearsifyou’rethekindofpersonwhocangraduate
• Plus:freedom,depthofexperience…
LiberalEducation:ItisNotthe“Technical”TrainingThatIstheMostValuable
• Inmyextendedfamily,threepeoplewhowere,are,orlookliketheyareheadednotforthetop1%butthetop0.1%…
• constructionandchemicalengineering—ultimatelypollutioncontrol—“smartmoney”onWallStreetmanagingtheflowoffinancingofinvestment,“theindustry”astheycallitinLA…
• LearninghowtodealsociallyasanoutsideratHarvardinthe1920s,historicalsourceanalysisinthe1980s,messingaroundinDartmouthAVinthe1990s
SoLearn!:ExtendYourBrainsinEveryDirectionYourCuriosityMovesYou
• “Avicenna”:PeterBeagle(1987):TheFolkoftheAir<http://amzn.to/1PvCcdN>.
• “StateofEuphoria”:DavidLodge(1975):ChangingPlaces<http://amzn.to/1nhoXXp>.
• IbnSina:AbūʿAlīal-ḤusaynibnʿAbdAllāhibnAl-HasanibnAliibnSīnā<http://tinyurl.com/n58rjc6>.
• Enkidu:Gilgamesh<http://amzn.to/1PepdkP>.• FujiwaraTakako:GenjiMonogatari<http://amzn.to/1nhCkXy>.• Hypatia<http://tinyurl.com/z9uyqyw>:• IbnKhaldun:AbūZayd‘Abdar-RaḥmānibnMuḥammadibnKhaldūnal-Ḥaḍramī,Muquaddimah<http://amzn.to/1Sd0uhv>.
• Odysseus:<http://amzn.to/1nhCA94>.
AWordorTwoonHowEconomistsThink• DidyouseewhatIdidthere?
ProductionPossibilities,Specialization,andtheDivisionofLabor
January25,20168-9AMWheelerAuditorium,U.C.Berkeley
SpecializationandDivisionofLaborI• Differentcapabilitiesandtalents
• Practice-makes-perfect(oratleastbetter)
• Betterifweallmanagetospecialize(tosomedegreeatleast)
SpecializationandDivisionofLaborII• Ofthesepeople,Enkiduisthebestateverything…
• DoesthatmeaneverybodyelseshouldsitbackandletEnkidudoeverything?
• Supposeeverybodyspendshalftheirtimeateachtask…
• Totalproduction:150YL,950TL
SpecializationandDivisionofLaborIII• But…Startwitheverybodyteachingyoga…
• Ifwewanttomakelattes,whoshouldwepulloffthemat?
• IbnKhaldun?• Thenwewindupwith200YL,300TL
SpecializationandDivisionofLaborIV• IfwepullEnkidufirstoffoftheyogamatandputhimontheespressomachine?
• Thenwewindupwith200YL,900TL.
• AnefficienteconomicsystemwouldpreferthatEnkidubefirstontheespressomachine
• Thatishiscomparativeadvantage
TheProductionPossibilityFrontier• IfwepullEnkidufirstoffoftheyogamatandputhimontheespressomachine?
• Thenwewindupwith200YL,900TL.
• AnefficienteconomicsystemwouldpreferthatEnkidubefirstontheespressomachine
• Thatishiscomparativeadvantage
• Andifwewantstillmorecoffee,whodoweputontheespressomachinenext?
TheProductionPossibilityFrontierII• Wenowhavearuleforhowtoallocatetasksinordertomakesocietymostproductive
• Rankpeoplebytheircomparativeefficiency—theircomparativeadvantage
• Putthosewiththegreatestcomparativeadvantagetothetask—theespressomachine,orthemat—first.
AdditionalQuestions• WhatpointonthePPFisitgoodforasocietytochoose?
• Howisitgoodforasocietytodistributethestuffthatitseconomymanagestomake?
• Whenevereconomiststalk“efficiency”talk,theyarereservingthosetwoadditionalquestionsforlater.
ProductionPossibilitiesII
January25,20168-9AMWheelerAuditorium,U.C.Berkeley
Let’sCalculateOurFullPPF• Givencapabilitiesandtalents
• Clearinwhatorderyoushouldtakepeopleoffthematandputthemontheespressomachine
• Andlet’shavemorethanfiveworkers:let’ssaythatthereare20Odysseus-likeworkers,etc.
Let’sCalculateOurFullPPFII• Ifall55workersteachingyoga…5000lessons/day
• Ifall55workerspullinglattes…25000lattes/day
• Andweknowwhatordertoputpeopleontothemat/machine
Let’sCalculateOurFullPPFIII• Puttingall10Enkidu-likeworkersonespressomachinesmovesusfrom(5000YL,0TL)to(4000YL,9000TL)
• Nowlookatthe(0YL,25000TL)point.Whodoyoupulloffthematfirst?
• Yes:Odysseus,andthoselikehim…
Let’sCalculateOurFullPPFIV• Yes:the20Odysseus-likeworkersarethefirstthatyoushouldsettoworkteachingyoga
• EventhoughtheOdysseus-likeworkersaretheworstyogateachersintheeconomy,right?
• It’sjustthatOdysseus’sbadnessatmakinglattesismuchworse,relatively,thantheirbadnessatteachingyoga…
Let’sCalculateOurFullPPFV• AndthenextclassofworkerstoputtoworkteachingyogaareFujiwara-clanworkerslikeTakako…
• AndthenextclasstoputtoworkpullinglattesaretheArabcivilservantslikeIbnKhaldun…
• WiththeAlexandrianmathematicianslikeHypatiainthemiddle…
• Andwearedone!
ModelBuilding• Butthishasbeenapain—carryingallthesenumbersandindividualsaroundinourhead
• Couldtherebeabetterwayofwritingdownallthisinformationaboutrelativeproductivitiesandnumbersinaverysmallspace?
• Thereis:anequation• Muchbetterthan:
• Havingalargetableof55individuals,eachwiththeirrelativeproductivities
• Plusanothertableofderivedcalculationsfromthatfirsttable,no?
• Butremember:ineconomics,equationsaretheresothatwecandescribeveryconciselywhatpeopleareorwouldbedoing…
TL=25000-(YL)2/1000
ThePriceMechanism
January25,20168-9AMWheelerAuditorium,U.C.Berkeley
WeHaveOurPPF• Thesmoothedequationversion—TL=25000-(YL)
2/1000
• The55-workersversion—theOdysseus,IbnKhaldun,Hypatia,FujiwaraTakako,andEnkidu-like.
• Buthowdowegetpeopletoproperlysortthemselvesintotherightjobstocreateanefficienteconomy?
HowAboutIfWePayThem?• Let’ssaythataYLcosts$10tothestudent—pays$10totheteacher…
• ThenifthepriceofaTLis$1…thennobodywillpulllattes…
• ButifthepriceofTLsgoesto$1.12…Enkidushowsup…
• Andat$1.43FujiwaraTakakoshowsup…
• Andat$2,Hypatia;and$3.34,IbnKhaldun…
• Andat$10foraTL,Odysseusandcompany…
SupplyandDemand
January25,20168-9AMWheelerAuditorium,U.C.Berkeley
TheMagicoftheMarketplace• Wedonotneedanycomplicatedbureaucraticcommand-and-controlsystemtogetthe“right”peopleworkingtheespressomachines…
• Allwehavetodoistocryouttherightprice,andpeople—peopleseekingtheirownbetterment—willarrangethemselvessothatthe“right”peopleareattheespressomachinesallbythemselves…
Let’sGraphThis!ThisIsOurSupplyCurve• Let’ssaythataYLcosts$10tothestudent—pays$10totheteacher…
• ThenifthepriceofaTLis$1…thennobodywillpulllattes…
• ButifthepriceofTLsgoesto$1.12…Enkidushowsup…
• Andat$1.43FujiwaraTakakoshowsup…
• Andat$2,Hypatia;and$3.34,IbnKhaldun…
• Andat$10foraTL,Odysseusandcompany…
ButLifeWillBeMuchEasierIfWeSimplifyAgain,andConsiderOnlySmoothSupplyCurves
• RememberourequationforthenicesmoothPPF?
• Justaswedrewourflat-and-jumpsupplycurveforourtable,thereisasmoothsupplycurvefortheequation.
• Hereitis• Ingeneral,fromhereonoutwearegoingtostartouranalyseswithsupplycurves• ButlurkingbehindsupplyistherelativeproductivityanalysisthatledtothePPF
TL=25000-(YL)2/1000
TheMagicoftheMarket• Wedonotneedanycomplicatedbureaucraticcommand-and-controlsystemtogetthe“right”peopleworkingtheespressomachines…
• Allwehavetodoistocryouttherightprice,andpeople—peopleseekingtheirownbetterment—willarrangethemselvessothatthe“right”peopleareattheespressomachinesallbythemselves…
LifeWillBeMuchEasierIfWeConsideredOnlySmoothSupplyCurves
• Butworkingwithasupplycurvewithjumpsandflatswillbeapain…
• RememberourequationforthenicesmoothPPF?
• Justaswedrewourflat-and-jumpsupplycurveforourtable,thereisasmoothsupplycurvefortheequation.
• Hereitis• Ingeneral,fromhereonoutwearegoingtostartouranalyseswithsupplycurves• ButlurkingbehindsupplyistherelativeproductivityanalysisthatledtothePPF
TL=25000-(YL)2/1000
SupplyandDemand• Andinadditiontothesupplycurve,thereisademandcurve…
• Behindthesupplycurve,therelurkedproductionpossibilitiesandotheropportunities:opportunitycost…
• Sobehindthedemandcurve,therelurksananalysisofalternativeopportunitiestobuyandhappiness,willingnesstopay…
MarketEquilibrium• Take,however,theopportunitycostofworkingattheespressomachineandthewillingnesstopayofcustomersasgiven.
• Thuswehaveoursupplyanddemandcurves
• MovetoChicagoandpizza…• Whatwouldhappenifthepriceofpizzawas,say,$4aslice?• Excesssupply:unsoldpiecesofpizza…
• Thefollowingday(orlatethatsameday)someproducerswouldcuttheirprice—andthepricewouldfall…
MarketEquilibriumII• Whatwouldhappenifthepriceofpizzawas,say,$2aslice?• Excessdemand:unhappycustomers…
• Customersinlinewouldtrytooutbidthoseaheadofthem,andthepricewouldrise…
MarketEquilibriumIII• Onlyatapriceof$3/slicewillthemarketbeinequilibrium
• Nobuyersunhappybecausetheycouldnotbuy…
• Nosellersunhappybecausetheycouldnotsell…
• Nobuyerswhowouldbewillingtopaymoreremainingattheendofthedaytobiduptheprice…
• Nosellerswhowouldbewillingtoacceptlessremainingattheendofthedaytocuttheprice…
MarketEquilibriumIV• Atmarketequilibrium,thereisnoreasonforthepricetochange…
• Andatmarketequilibrium,nobodyisunhappy…
• WeareonthePPF—therightpeopleare,inthiscase,cookingthepizza,andtheyarecookingtherightamountofit…
• And,inasense,weareattherightpointonthePPFaswell…
• Note:nobodyhastofixtheequilibriumprice:itspontaneouslyemerges…
