Loading document…
Opening in Pages for Mac...
Your browser isn’t fully supported.
For the best Pages for iCloud experience, use a supported browser.
Learn More
Cancel
Continue
Reading Notes: Dasgupta
on Economics
J. Bradford DeLong
University of California at Berkeley
, Economics and Blum Center,
and WCEG
brad.delong@gmail.com
http://delong.typepad.com/
+1 925 708 0467
Last Edited January 6, 2020: 1723 words
Pages: <
https://www.icloud.com/pages/0CLYIvKyZgxnRUMDgkL7RyWZQ
>
Key: <
https://www.icloud.com/keynote/0hD8Le6gFIjTAwOWnBGv8PF5A
>
Living on the Internet at: <>
Understanding Dasgupta’s Take
In your lives so far you have certainly taken at least one course in
economics—probably three or four. That probably means that you have
been taught, as Betsey Stevenson and Justin Wolfers put it in their
textbook, to use:
four core principles
…
The marginal principle: Ask
‘
one more?
’
instead of
‘
how many?
’
The cost-benefi t principle: Compare the relevant costs and
benefi ts
.
The opportunity cost principle
….
The interdependence principle
…
Betsey and Justin promise us that “
these four core principles form a simple
but powerful framework for making even the most mundane decisions
…”
and claim that their book will show “the unity and power of the economic
1
2020-01-06
approach’, and by “
learning to apply these core ideas to any new
economic question they face
… [students] wi
ll naturally come to
‘
think
like an economist
’…”
But why would one want to think like an economist? What is thinking like
an economist—rather than like a sociologist (looking for the webs of
human connections and common belief), a political scientist (looking at
power and at authority both given and taken), or a historian (looking at
origins and development)? One wants to think like an economist because
it is an especially useful way of thinking about the
economy
. What, then, is
the
economy
? And why is “thinking like an economist”—marginal,
interdependence, benefi t-cost, and opportunity cost calculations—a good
way of understanding it?
Partha Dasgupta provides the best short answer to those two linked
questions, and in the process of doing so provides the best introduction to
economics, that I have seen. His book
is a game theorist's short
introduction to economics. It focus on: individual goals, individual
opportunities and constraints, individual incentives, strategies, exchange,
trust, and equilibrium outcomes. It is, of course, greatly concerned with
wealth and poverty—that is, after all, the point of the discipline of
economics: it is an inquiry into nature and causes of the wealth of nations.
You won't fi nd
in Dasgupta’s book
lots of practice fi guring out how price
and quantity change in response to demand shocks or calculating
multipliers. What you will fi nd is the logic and rationale for why fi guring
out how price and quantity change in response to demand shocks or
calculating multipliers is a worthwhile thing to do
.
It is worth getting into your frontal brain lobes what an economy is and
what thinking like an economist is because of what we are going to do this
semester. We are going to study the growth of the human economy. And
we are going to do so by thinking like economists.
2
2020-01-06
So I want you, before class begins, to read Partha Dasgupta’s book:
Economics: A Very Short Introdu
c
tion
And I don’t want you to just skim it. If you do, you will then forget it
—
and you will have wasted an hour and a half.
The problem is that our
brains are very good at forgetting irrelevant information. And our brains
take information that we do not fi nd ourselves using and reusing to be
irrelevant—to be thrown out so that we can focus on information relevant
to the continued life and reproductive success of the East African Plains
Ape. The things that we remember are things that we think about over and
over again in our inner monologue
. So as you read this book I want you to
do what I do.
I am rarely just reading: I am generally also analyzing,
compressing, synthesizing, and summarizing.
I am taking notes—but very
brief, synthesizing and summarizing notes. And I am generally asking
myself questions—and then answering them.
For example:
My
Reading Notes to the Beginning
of
Dasgupta,
to Get You Started...
Preface
•
An account of how economists reason
•
Examples of how that reasoning can be applied to (some of) the most
urgent problems Humanity faces today
•
The lives of Becky—the daughter of a Chicago lawyer—and Desta—the
daughter of an Ethiopian farmer couple
3
2020-01-06
Prologue
•
Becky and Desta
•
Becky's household income $150K/year as the daughter of a
Chicago lawyer (and stay-at-home mom)
•
Desta the daughter of an Ethiopian corn-growing farmer couple
with a household income of $5K/year
•
Desta's household's income subject to much greater risks
•
Economists look at things from the bottom up: resources, institutions,
choices, histories, destinies
•
Economists use models and quantitative models
Macroeconomic History
•
Annual GDP per capita as a measuring rod:
•
GDP per capita in the world today: $7K/year
•
GDP per capita in the year 1: $500/year
•
GDP per capita in 1800: $1500/year in western Europe; $500/year
in Africa; $750/year global average
•
Calculating growth rates: the
rule of 72
•
The world today:
•
1B people with an average per capita income of $20K/year at the
top
•
3.5B people in the middle
•
2.5B people with an average per capita income of $2.1K/year at
the bottom
•
Agriculture 25
%
of GDP in poor countries, 5
%
of GDP in rich
countries
•
Causes
of wealth and poverty
:
•
Proximate causes of the difference: (physical) capital, (human
capital) education, gender equality, public health, technologies?
markets? division of labor?
4
2020-01-06
•
Deeper causes: institutions (corruption), institutions (markets),
institutions (incentives), the application of ideas (technological
and organizational), natural resources vs. population growth
•
Virtuous and vicious circles
Questions
to Ask Yourself—and Answer!
So we
are going to ask you questions
—here below, and also
at the fi rst
lecture and at your fi rst section.
Try to read with
intent
, and with an active
mind:
Preface
•
How different do you think the lives of Becky and Desta are?
•
How would you go about explaining why the lives of Becky and Desta
are different?
•
How would an economist go about explaining why the lives of Becky
and Desta are different?
•
What are the costs and benefi ts of thinking like an economist?
•
What kind of person would start an analysis by asking: "What are the
costs and benefi ts of thinking like an economist?"
Prologue
•
Why does Becky's household live outside of Chicago and earn money by
having the father work all day outside of the house doing transactions
processing rather than, say, living 100 miles further west and growing
corn in DeKalb County?
•
How different would Becky's life be if her father (and mother) were
corn-growing farmers in DeKalb County?
5
2020-01-06
•
Why did they choose to become suburban Chicago yuppies?
•
Why does Desta's household live in rural Ethiopia and grow their own
corn rather than, say, living in Addis Ababa and earn money by having
the father work all day outside of the house doing transactions
processing?
•
How different would Desta's life be if her father were an Addis Ababa
lawyer?
•
Why did they choose to become rural Ethiopian subsistence farmers?
Macroeconomic history
•
In the long sweep of human history, is Becky very lucky, lucky, unlucky,
or very unlucky?
•
In the long sweep of human history, is Desta very lucky, lucky, unlucky,
or very unlucky?
•
How much richer is the world today than it was in the long centuries
from 5000 BC to 1800?
•
How much richer are the world's rich today than the world's poor today?
•
What would count as an explanation of this divergence across space and
time—that is, what kinds of things would count as "causes" and make
you happy that you understood what was going on?
•
How many useful "hierarchies of causation" can you imagine here?
Trust:
•
About what fraction of our wealth is the result of—or, perhaps, is
enabled by—our collective ability to engage in a very large distribution
of labor (rather than requiring that each extended household be close to
self-suffi cient)?
6
2020-01-06
•
What are the possible ways of creating the "trust" needed for a small-
scale—within the village or within the herding band, say—distribution
of labor?
•
What are the possible ways of creating the "trust" needed for a large-
scale division of labor?
•
What, in the world we see around us, turn out to be the most important
ways of creating the "trust" needed to maintain a large-scale division of
labor?
Communities:
•
Suppose that we have the norm (or the strategy) that a failure to share in
any case leads to the end of the sharing relationship forever. How much
of a large-scale social distribution of labor can be supported by tied
engagements of this type?
•
What are the advantages to having an economic network built out of
"weak ties"?
•
What are the diffi culties in creating and maintaining an economic
network built out of "weak ties"?
Markets:
•
How is having access to an ideal market the same as or different from
having an economic network of ties (strong or weak) extending over the
entire world?
•
In what sense is what Dasgupta calls an "ideal market" ideal?
•
Why did Friedrich von Hayek deserve his Nobel Prize?
•
How can a central planner nevertheless add value for society, even
though Friedrich von Hayek did deserve his Nobel Prize?
7
2020-01-06
•
Why should we worry about each of the four kinds of market failure that
Dasgupta sees: distributional, free-riding, market power, and
macroeconomic?
Science and Technology as Institutions:
•
Given that knowledge is non-rival—if I teach it to you, I don't have any
less of it than I did before—what justifi cation could there possibly be for
charging people for access to knowledge and its uses?
•
If people weren't allowed to charge others for access to knowledge and
its uses, would there be any reason to think that society would be putting
a properly-large share of our resources into creating and disseminating
knowledge?
•
Why can contests and the rule of priority be good ways to spur the
creation and dissemination of knowledge?
•
How well do contests and the rule of priority fi t with a private-property
market economy?
Households and Firms:
•
Where have all the women gone?
•
Why do we think that Africa's population is likely to grow much faster
than India's population over the next fi fty years?
•
How does Desta's household react to the fact that GEICO does not sell
insurance policies in their neighborhood?
•
How does Becky's family react to the fact that they can borrow from
Umpqua Bank and invest in the Vanguard Funds—rather than having to
deal with the local moneylender?
•
Why does Becky's world have large-scale fi rms?
•
Why does Becky's world have joint-stock limited-liability companies?
•
Why does Becky's world have tradable fi nancial assets?
8
2020-01-06
Sustainable Development:
•
Why are we destroying our fi sheries? Why are we rapidly using up our
atmosphere's capacity to absorb carbon dioxide without substantial
increases in temperature? Why is such a large chunk of our population
potentially short of fresh water?
•
Why have we been able to successfully capture and use 40
%
of the
photosynthesis on earth without already severely disrupting our planet?
•
How have we managed to become so much more numerous and rich
since 1800 without rapidly-rising prices of pretty much all natural
resources?
Social Welfare and Democratic Government:
•
What are T.H. Marshall's "three revolutions"?
•
Why is each of them important?
•
How does a government based on T.H. Marshall's "three revolutions"
tend to promote a prosperous market economy?
•
Does a prosperous market economy tend to promote T.H. Marshall's
"Three Revolutions"—and if it does, does it promote them all?
Epilogue:
•
What distinction does Dasgupta draw between problems and challenges?
•
Which—problems or challenges—is better suited for analysis with the
tools of economics?
•
What, after fi nishing this book, do you now think the most important
tools of economics are?
9
2020-01-06
For Reference
Prologue to
Economics: A Very Short
Introduction
Partha Dasgupta:
Becky
’
s world
:
Becky, who is 10 years old, lives with her parents and an
older brother Sam in a suburban town in America's Midwest. Becky's father
works in a fi rm specializing in property law. Depending on the fi rm's profi ts,
his annual income varies somewhat, but is rarely below 145,000 US dollars
($145,000). Becky's parents met at college. For a few years her mother
worked in publishing, but when Sam was born she decided to concentrate
on raising a family. Now that both Becky and Sam attend school, she does
voluntary work in local education. The family live in a two-storey house. It
has four bedrooms, two bathrooms upstairs and a toilet downstairs, a large
drawing-cum-dining room, a modern kitchen, and a family room in the
basement. There is a plot of land at the rear—the backyard—which the
family use for leisure activities.
Although their property is partially mortgaged, Becky's parents own stocks
and bonds and have a saving account in the local branch of a national bank.
Becky's father and his fi rm jointly contribute to his retirement pension. He
also makes monthly payments into a scheme with the bank that will cover
college education for Becky and Sam. The family's assets and their lives are
insured. Becky's parents often remark that, because federal taxes are high,
they have to be careful with money; and they are. Nevertheless, they own
two cars; the children attend camp each summer; and the family take a
vacation together once camp is over. Becky's parents also remark that her
generation will be much more prosperous than theirs. Becky wants to save
the environment and insists on biking to school. Her ambition is to become
a doctor.
Desta's world
:
Desta, who is about 10 years old, lives with her parents and
fi ve siblings in a village in subtropical, southwest Ethiopia. The family live
10
2020-01-06
