Def: Not prepared in advance; impromptu, a few unrehearsed comments, ad hoc, on the spur of the moment, an extemporary lecture, with little or no preparation or forethought : an off-the-cuff remark.
Ryan Moore
Ken Brockland
Michael Thomas 
It may sound noble to say, “Damn economics, let us build up a decent world” – but it is, in fact, merely irresponsible.
With our world as it is, with everyone convinced that the material conditions here or there must be improved, our only chance of building a decent world is that we can continue to improve the general level of wealth. The one thing modern democracy will not bear without cracking is the necessity of a substantial lowering of the standards of living in peacetime or even prolonged stationariness of its economic conditions.'
- F. A. Hayek
First any good economics class lays the groundwork with definitions. There will be several definitions offered in this representation of the lecture notes.
Economics defined: The study of the allocation of scarce resources among competing ends (desires).
A set of agents who comprise a system and these have an objective function to maximize utility. These include as part of the function profit, wealth, and other non-pecuniary items.
Scarcity: Human wants exceed the means to satisfy these wants. (wants > means)
Five Questions:
Who gets these resources? What is produced? How will they be produced (are we going to use labor and capital, these both have properties of scarcity)? When will things be produced? (Williams gives examples here of repairing after the hurricane. What time horizon do we anticipate for the rebuilding? Should we rebuild the sites within a month, a year, or longer? We certainly have the capability to do it much faster than the solution which will inevitability occur).
These questions all create conflict, this conflict will have to be resolved in some way.
Conflict resolutions (who is going to get the scarce resources): Conflict implies conflict resolution, (all conflicts are eventually resolved)?
- Auction (some market process), the highest bidder.
- Gift (who would someone give a gift to? This implies favoritism).
- Government fiat (Some tribal leader. A classmate brought up a good point. How are we able to differentiate government fiat from their monopoly on violence. The answer seemed to have something to do with tradition or rational contract theory. Maybe something as simple as custom).
- Violence: This seems to be the most common and efficient form of conflict resolution. These are primal solutions which subvert the more “civilized” ones. The important component of modern society is the monopoly of violence on the part of the state. The threat of removing liberty of the body is the ultimate removal of personal property rights. One theory of the origin of law was to preserve property rights without resorting to violence.
Economic theory is non-normative and therefore we are incapable of deciding which is best. Economics cannot answer the question which is better (anything that can is not a scientific question). Economic theory deals with positive statements (which concern what IS or what WILL BE. If there is disagreement about a positive statement then there can be an appeal to the actual facts. I.e. “the room is 20 by 30. If there is disagreement over this the room can be measured. A normative statement is that the room should (or ought to be) 30 by 50.” Normative Statements are a value judgment.
Economic Models:
The human mind is limited so we need to abstract in order to have Knowledge (incidentally this summarizes most institutions and stereotypes). We make simplifications to reduce the complexity or to make rough approximations to what is actually going on; or about to happen. Usefulness cannot be judged based on realism but only on predictability (does this mean that models based on theory should be rejected when competitive with flawed theory models which predict well? This seems like a justification for the plug and play version of economics rather than the theory, maybe I have this wrong).
Abstraction still applies even when it fails to predict well (the feather and the steel ball). The law of gravity still is valid even when we don’t exist in a perfect vacuum. We expect that in many cases the law of gravity predicts well even when conditions are not ideal. The theory predicts well for the steel ball but not the feather, as long as we recognize this we can apply theory in an imperfect world. We do the same thing in Economics. We do not throw away a model when the real world fails to follow the theory, we can remain interested in the predicted changes in the interesting variable.
The grocery store:
When you go to a grocery store there are always things on the shelves. This means that markets are not perfectly clearing. The implicit statement on the part of the customer is: “I will not tell you when I will come to the store; I will not tell you what I want when I get there; and I will stop coming to your store if you do not have what I am looking for.” Buffer stock or Inventory ALWAYS implies Information costs are non-zero.
The fire extinguisher:
Information is not free. People would not leave fire extinguishers on the wall if they knew when the fire would occur. The depreciation on the item, and the opportunity costs of the money are useful in the meantime, however it is not uncommon to see buildings stock fire extinguishers.
Economic Behavior:
Production: is creation of utility (want satisfying capacity) [I always thought of it as the use of human or physical capital to create either other intermediate or final goods]
-Can be the use of spatial arbitrage (oranges from
-Consumption is the destruction of want satisfying capacity. (open question for next class, are public goods, specifically their quality of being non-rival in nature, consumed in this way. Does this case subvert in a principle way this definition of consumption)? One possible answer was that there are theoretical limits to the consumption of even public goods.
Exchange: The essence of exchange is the transfer of property rights.
Good – Good exchange: Seduction – “If you make me feel good than I make you feel good.” This is also referred to as mutual coincidence of wants. Menger talks about this principle in detail. The idea that you could want what I have more than I want it, and I want what you have more than you want what it. It seems to capture both specialization and the diminishing marginal utility of that product. Trade is a natural result of both these conditions.
Good – Bad exchange: rape – only one person benefits from exchange. This is explicitly an unwilling exchange on the part of one person. There are not ways to compare interpersonal utility measures. This utilitarianism was discredited by the end of the 19th century. Pareto criterion ended this experimental analysis, it states that you cannot implement an action that makes one party worse off. You can however keep one person at the same level of happiness (movement along an indifference curve) and improve the other person, however any exchange which one person enters into which they are worse off afterwards is coercive.
Exchange occurs because of inequalities not equalities. We do not buy milk because we value milk at the price it is sold at, only because we value milk at some value above the value we place on the money necessary to buy it. When two people exchange they do so because both parties benefit.
The water in the desert:
Dr. Williams is driving through the desert with a truck full of water. This is his water. He meets someone on the side of the road in the desert whose car has run out of gas on the way back from
Specialization: said to occur when people produce more of a commodity than they consume OR plan to consume.
Requires unequal endowment
Also requires trade (individually, regionally, nationally)
Lowers the cost of production by taking advantage of natural endowments and reduced marginal costs. I.e. Alaskans are much better at growing king crabs, Floridians are better at making oranges – the cost of trade, including transportation is lower than the cost of either of the two reproducing the environment of the other. In fact they both exist post hoc in a world where they have as many of the other good as they would if they produced them themselves.
Systems:
Set of interconnected elements (car, ear, scissors) Defining these systems is arbitrary (a break-down of any one element does not make the system not a system, it just may change what system it is. I.e. Scissors that loose a rivet are still a metallurgical system. “N” elements and “N(N-1)” relationships. Systems are the underlying element of economic planning.
Classification:
Simple deterministic: few components and relationships – billiards – all the results of your actions can be known, the only fun part of billiards is human error, otherwise all is determined in the system.
Complex deterministic: Universe – can be known but is very complex; computers – clearly is determined, but is seldom completely known all at the same time
Simple probalistic: tossing a penny, binary
Complex probalistic: a country’s economy, the human brain – may not be possible to fully determine the probability, if so will be unlikely to remain true to the original probability.
Complex systems do retain some elements of control: Decision making; communication; Information. I.e. If Dr. Williams threw the chalk at a student, the student could quickly react and catch the chalk. To build a machine that could complete these same actions in response to the same stimulus is beyond our understanding (otherwise star wars, missile system, would already be in place).
Homeostatic systems: Control in a system
I.e. Body temperature or for the following example, man-made thermostat. Use a thermometer. The sum of desired temperature minus the sum of actual temperatures can be subjected to the following inequalities: greater than zero – turn on furnace; less than zero – turn off furnace; equal to zero – do nothing.
The same can be said for the market system. The present of a perfectly competitive market would be like a thermometer. If shortage – prices rise; surplus – prices fall; if we remain at equilibrium – prices do not change.
Parasites and cows. Parasites thrive on cows, two many parasites, the cow population falls, two few parasites the cow population grows. If there are excess numbers of cows, parasites, ceteris paribus, will grow in numbers resulting in fewer cows and by extension parasites. Graphically this is represented by a supply and demand curve with a gradient spiral approximating equilibrium.
As a homeostatic system all systems move from less probalistic to more probalistic. The tendency to move in the direction is entropy which settles to a uniform distribution.
In economics this tendency is seen with opportunities for arbitrage will disappear, markets clear in the long run.
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