Question

1. The following set of questions focuses on the readings Tim Hartford (The Undercover Economist) and Jean Tirole (Economics for the Common Good) and The Commanding Heights episode 1

(a) Jean Tirole discusses various methods outside of markets to approach the issue of scarcity. What are these methods and are all of them inefficient? How does this compare with the ideas discussed in Harford?

(b) What is “the World of Truth” according to Harford? Why does it matter for economics? How does it relate to the concept of efficiency according to Harford?

(c) Explain how “the World of Truth” relates to efficiency in your own words (feel free to reference the pages). Note: 2-3 sentences will be sufficient to explain.

(d) What does Harford claim are the advantages of life without markets? What are the disadvantages? Does the idea of life without markets relate to the concept of market failure?

(e) Based on the readings/episode 1 of “The Commanding Heights,” how has government changed in the past ≈ 100 years? Note: 3-5 sentences should be sufficient to explain (may be helpful to discuss ideas of different economist here).

Answer 1

B)The widely read guide to economics— The Undercover Economist —Tim Harford writes:

In a free market, people don’t buy things that are worth less to them than the asking price. And people don’t sell things that are worth more to them the asking price. … The reason is simple: nobody is forcing them to, which means that most transactions that happen in a free market improve efficiency, because they make both parties better off—or at least not worse off–and don’t harm anyone else.

C) In "The Undercover Economist" Harford is describing both the power of markets, and the potential for their failures, big and small. He is describing what economics call the two fundamental theorems of welfare economics, and in order to do so he has to explore the determination of relative prices, the neoclassical theory of value.

D)

Another piece of evidence comes from the economist Till Marco von
Wachter, of the University of California, Los Angeles. Von Wachter has studied what happens to particular groups of people trying to find jobs in tough labor
markets—for instance, people who lose their jobs in a mass layoff, or who
graduate and start looking for work. He has found that if such people have to
look for work in a recession, rather than when the economy is booming, they
tend to suffer lasting damage to their earnings. Part of the problem is that people,
understandably, accept jobs that aren’t in the fields they really want to enter.
They accumulate skills, experience and contacts in the wrong career. A decade
after the end of the recessions he studied, von Wachter could still see differences
between those who had to look for jobs in a slump and those trying to find
employment in a boom.
Recessions have intangible costs, too. Benjamin Friedman, an economist at
Harvard University, argues that downturns have moral consequences: as people
feel insecure and unhappy, charitable donations fall, nepotism, racism and other
forms of intolerance and closed-mindedness rise, and with them anti-democratic
forces. The Great Depression, followed by Hitler and the Second World War, is
of course the example that attracts all the attention, but Friedman believes that
the same forces are at work more subtly in gentler downturns.
This stuff matters. We should care about it. But it’s not enough to care—we
also need to figure out how the economy works, why it misfires and what to do
about it.

Harford tweaks things a bit by
advocating subsidies (cash) rather than tweaking tax rates or offering
in-kind welfare. He uses the example of elderly pensioners in Britain
where, he asserts, 25,000 seniors die each year from exposure to cold. If
this is true, it is an appalling statistic. What to do? Just give them money.
All the real world complications of bureaucracy, entitlement legislation
and means testing are nowhere to be found in his analysis. He finishes
this chapter by appealing to perfect competition as a moral norm while
decrying deviations from it as “market failure.” In my regulation classes,
students are often dismissive of my contention that some people actually
view the perfectly competitive model as an ethical norm and argue that
government should “correct” for any deviations from it, even though it is
a pure abstraction that has never—and can never—exist in the actual
world. I offer my skeptical students this chapter (and the antitrust divi-
sion in America’s Department of Justice) as proof of my claim

E)At the start of the 20th century, Hayek and Keynes had witnessed the first age of globalization. Every day life was being transformed everywhere. Technologies like the telegraph and the telephone revolutionized communications. Steamships and railways made the world a smaller place. Tens of millions migrated without the need for passports. PELTZMAN: If you look at the whole of the 20th century, there's been a huge cycle. Less government was the orthodoxy at the beginning of the 20th century, more government clearly was the orthodoxy for the middle part of the 20th century, and now the later part, going into the new millennium, we're back to where we were practically at the start of the century. And you have to give folks like Hayek, Friedman, and then later Reagan and Thatcher their due for pushing all of this along.

Part of what happened is a capitalist revolution at the end of the 20th century. The market economy, the capitalist system, became the only model for the vast majority of the world.

This new world economy is being driven by technological change and by political change, but none of it would have happened without a revolution in ideas