A three dimensional approach to economics

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 economypolitics, 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 As
  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 systems burdens and benefits
• A fair economic system would be one in which its
  burdens and benefits were distributed equitably.
• Okbut 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!