Just what does an economist do?

Economists

Do research including preparing surveys and crunching the numbers

Economists

Do research including preparing surveys and crunching the numbers

Forecast how the economy might change in the future

Economists

Do research including preparing surveys and crunching the numbers

Forecast how the economy might change in the future

They study topics such as prices, jobs, interest rates, taxes, the stock market, commodities, money, the banking system

Economists

They then write up their reports and present the findings to clients

Economists

They then write up their reports and present the findings to clients

They are really good at PowerPoint and developing charts, graphs and flow charts

Economists

More than half of economists work for federal, state and local governments

Economists

More than half of economists work for federal, state and local governments

Many work for banks, consulting firms, NGOs or are self-employed

NGOs

United Nations, Greenpeace, Amnesty International, AARP

Economists

More than half of economists work for federal, state and local governments

Many work for banks, consulting firms, NGOs or are self-employed

And the rest live in the academic environment or non-profit “think” tanks such as The Heritage Foundation, Hoover Institution and Brookings Institute

Economists

The media pay is $90,000 year

Economists

The media pay is $90,000 yearThere were just 15,400 jobs in 2010 and it’s a

slow-growth profession

Economists

The media pay is $90,000 yearThere were just 15,400 jobs in 2010 and it’s a

slow-growth professionMost positions require a Ph.D. or at least a

master’s degree

Economists

The media pay is $90,000 yearThere were just 15,400 jobs in 2010 and it’s a

slow-growth professionMost positions require a Ph.D. or at least a

master’s degreeLots of young people with a degree in econ

work in other fields

Top economics schools

Top economics schools

HarvardMassachusetts Institute of Technology (MIT)PrincetonUniversity of ChicagoStanfordUniversity of California – BerkeleyNorthwesternYaleUniversity of PennsylvaniaColumbia

Top economics schools

University of Florida was #48

History of economics

Modern economics began in 1776 with our pal Adam Smith (1723-1790) and The Wealth of Nations

History of economics

Modern economics began in 1776 with our pal Adam Smith (1723-1790) and The Wealth of Nations

Smith influenced generations of economists and thinkers including David Ricardo, John Stuart Mill, James Madison, Thomas Jefferson, Alexander Hamilton… and Thomas Sowell

Adam Smith

“Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”[

Adam Smith

In short, the “invisible hand” refers to the self-regulating behavior of the marketplace when people, acting in their own self interest, benefit society

History of economics

Over time, “schools” of economics formed about common framework of assumptions and that continues today

History of economics

Over time, “schools” of economics formed about common framework of assumptions and that continues today

Chicago, London, Austrian, Carnegie… also loosely organized around “saltwater” schools (on both U.S. coasts) and “freshwater” schools (Chicago, Carnegie Mellon)

Mercantilists

Popular from 16th to late 18th centuries, the earliest of the economic schools

Mercantilists

Popular from 16th to late 18th centuries, the earliest of the economic schools

James Steuart was most prominent writerMercantilists argued that the most important

role for government was to ensure a positive balance of trade… export more than you import

Mercantilists

Popular from 16th to late 18th centuries, the earliest of the economic schools

James Steuart was most prominent writerMercantilists argued that the most important

role for government was to ensure a positive balance of trade… export more than you import

They were zero summers!

Mercantilists

Were concerned with the power of their nation relative to others

They didn’t care about SRTHAU to maximize their nation’s standard of living, they wanted more wealth and military power than other nations

Mercantilists

Were concerned with the power of their nation relative to others

They didn’t care about SRTHAU to maximize their nation’s standard of living, they wanted more wealth and military power than other nations

Typical policies included overseas colonies, ban on the export of gold, tariffs, wage limits, imperialism, subsidies for domestic manufacture

Classical economics

‘Wealth of Nations’ ended the mercantilists, although some of their policies such as positive balance of trade and tariffs endure

Classical economics

‘Wealth of Nations’ ended the mercantilists, although some of their policies such as positive balance of trade and tariffs endure

Smith realized that the prosperity of a nation depended on creating more goods and services… and that economic policy should be for everyone’s benefit, just the merchants

Classical economics

‘Wealth of Nations’ ended the mercantilists, although some of their policies such as positive balance of trade and tariffs endure

Smith realized that the prosperity of a nation depended on creating more goods and services… and that economic policy should be for everyone’s benefit, just the merchants

Smith also rejected slavery and imperialism

Classical economics

‘Wealth of Nations’ ended the mercantilists, although some of their policies such as positive balance of trade and tariffs endure

Smith realized that the prosperity of a nation depended on creating more goods and services… and that economic policy should be for everyone’s benefit, just the merchants

Smith also rejected slavery and imperialismHis theories led to the school of Classical

Economics, with a nod to the Physiocrats

Physiocrats

French economists who advocated that productive farm work, not gold, was key to wealth of a nation

Because of the agrarian society, they thought only agriculture land counted

First used the term “laissez-faire”

Classical economics

Smith was radical: preached a sharply reduced role for government and elites

Classical economics

Smith was radical: preached a sharply reduced role for government and elites

Argued that wealth is not a zero-sum game… everyone can win in both foreign trade and the domestic market

Classical economics

Smith was radical: preached a sharply reduced role for government and elites

Argued that wealth is not a zero-sum game… everyone can win in both foreign trade and the domestic market

The free market will regulate itself due to the invisible hand

Classical economics

Smith was radical: preached a sharply reduced role for government and elites

Argued that wealth is not a zero-sum game… everyone can win in both foreign trade and the domestic market

The free market will regulate itself due to the invisible hand

The Classical economists changed economics from a concern with a ruler’s interests to that of the nation

David Ricardo1772-1823

Most influential economist of the early 19th century

Developed “comparative advantage,” which showed how two unequal nations could trade to mutual benefit

Was also the first to use economics dispassionately… principles over immediate policy issues

Say’s Law

Developed by French economist Jean-Baptiste Say (1767-1832)

Say’s Law

Developed by French economist Jean-Baptiste Say (1767-1832)

Say addressed the fears that a growing nation would produce so many good and services that it would exceed the ability of the people to buy them

Say’s Law

Developed by French economist Jean-Baptiste Say (1767-1832)

Say addressed the fears that a growing nation would produce so many good and services that it would exceed the ability of the people to buy them

Say argued that the national output and the income people had were related… “supply creates its own demand” and, therefore, no limit to what it can produce

Modern economics

First exclusive journal was in 1886, “The Quarterly Journal of Economics” at Harvard

Modern economics

First exclusive journal was in 1886, “The Quarterly Journal of Economics” at Harvard

First U.S. professor of economics appointed in 1871 at Harvard, which awards first Ph.D. in 1875

Modern economics

First exclusive journal was in 1886, “The Quarterly Journal of Economics” at Harvard

First U.S. professor of economics appointed in 1871 at Harvard, which awards first Ph.D. in 1875

Economics in 20th century began to turn to mathematics rather than verbal discourses

Marginalist revolution

Marginalist revolution

Refers to acceptance among economists that prices were based on the demands of consumers, rather than just on the cost of the producers

Marginalist revolution

Refers to acceptance among economists that prices were based on the demands of consumers, rather than just on the cost of the producers

Classical econ says labor and other inputs are crucial factors in prices. Marx went even further when he wrote that exploitation of labor was the main factor in economics and society

Marginalist revolution

Marginal utility theory of value: what consumers consider useful was what influenced prices

So while if you’re dying of thirst water is more valuable than diamonds

Once you have enough water, it’s the marginal utility of having another gallon of water compared to a diamond. Because most of us have lots of water, diamonds will sell for more

Equilibrium theory

Developed by Frenchman Leon Walras (1834-1910)

It’s a branch of theoretical economics (because things are rarely in equilibrium) that looks at prices/supply and demand for firms, industries and particular markets

Now generally classified as “microeconomics,” because it tries to understand the whole economy by looking at the parts

Try this definition

“The theory provides a summary description of economic interaction in a society where people are free to pursue their own interests. The theory may be viewed as an attempt to answer the question of whether trade arranged through markets could match demands with supplies for millions of goods and services in an economically efficient way. Notice that the question is could trade achieve an efficient outcome, not does it do so.”

Why should I care??

Because politicians constantly propose solutions to problems “without the slightest attention to how the repercussions of their ‘solution’ will reverberate throughout the economy…”

John Maynard Keynes (say ‘Cains’)

Keynes (1883-1946) was the most prominent economist of the 20th century

His book “The General Theory of Employment, Interest and Money” became the prevailing orthodoxy around the world… with a few important exceptions

Keynes rose to prominence after the Great Depression

Keynesian economics

Keynes argued that inadequate “aggregate demand” could lead to high unemployment

Keynesian economics

Keynes argued that inadequate “aggregate demand” could lead to high unemployment

He argued for governments to spend money during recession and depressions to spur the economy (see President Obama)

Keynesian economics

Keynes argued that inadequate “aggregate demand” could lead to high unemployment

He argued for governments to spend money during recession and depressions to spur the economy (see President Obama)

Thus government could smooth out the boom and bust cycles inherent in free markets

Keynesian economics

Keynes argued that inadequate “aggregate demand” could lead to high unemployment

He argued for governments to spend money during recession and depressions to spur the economy (see President Obama)

Thus government could smooth out the boom and bust cycles inherent in free markets

Was the dominant thinking through the 1970s and resurfaced with the recent global recession

Milton Friedman

Friedman (1912-2006) was an American economist at the University of Chicago who started the “Chicago school” of economics

He opposed Keynesian theory and argued the markets were more rational and responsive than governments were

Won Nobel prize in 1976 when raging inflation worldwide undermined the Keynesians ability to control the economy

Advisor to President Reagan

Milton Friedman

“I am favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible.”

“The greatest advances of civilization, whether in architecture or painting, in science and literature, in industry or agriculture, have never come from centralized government.” 

 

F.A. Hayek

Austrian economist (1899-1992) who won Nobel prize in 1974 while at U of Chicago

Was the one who developed theory of prices communicating information that enables people to coordinate their plans

“Road to Serfdom” is a must-read for every budding economist. A war-cry against central planning

Paul Krugman

Nobel price winner in 2008Hugely influential because he works for the

New York Times and his column is gospel for liberal politicians

A Keynesian on steroids“I believe in a relatively equal society,

supported by institutions that limit extremes of wealth and poverty. I believe in democracy, civil liberties, and the rule of law. That makes me a liberal, and I’m proud of it.”

Assignment 4/23

Chapter 20: “International Trade”