Macro review
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Review of the simplest Keynesian model used to study the business cycle and the role of fiscal policy. For money & banking students.
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Macro review
- 1. Review of macro-economics juliohuato@gmail.com
- 2. Introductory macroeconomics Focuses on: The structure or composition of a modern economy the behavior of the economy in the short run (business cycles) and long run (growth), and the principles of fiscal and (to a lesser extent) monetary policy.
- 3. Structure of the economy Study of the national accounts: how output (Y), price level (P), and employment or -- more commonly – unemployment(u) are measured. Yis measured using GDP: the value of the final goods newly produced in a year in the economy and traded in organized markets. P is measured by an index (CPI, PPI, PCEPI, GDP deflator, where GDP deflator = Nominal GDP/Real GDP, where -- in turn -- real GDP is GDP calculated at constant prices, i.e. the prices of a base year). π= (P1-P0)/P0 is the inflation rate. u is measured as members of the labor force (L) unemployed as a fraction of L. L is defined as those legally and physically able to work, employed or unemployed but actively engaged in job searching.
- 4. To study business cycles We use a simple macroeconomic model based on Keynes’ work. In all economies, the output produced in a period of time (CG and MP) has to go to individual consumption (“consumption” proper, of CG) or to productive consumption (of MP). In a monetary economy, the output produced in a period of time is sold in markets and, before the sectors can use or consume CG or MP, they have to buy the goods in markets. It is helpful to assume that, to consume CG, individuals are organized as “households.” To produce CG + MP, individuals (the same individuals, in fact) are organized as “businesses” or “firms.” Also, people are organized as a “government” to produce and consume certain goods (CG and MP). Finally, since this is a national economy inserted in a global economy, there is another sector called the “rest of the world” (ROW).
- 5. To study business cycles For simplicity, markets will be classified in three types: Goods markets (markets where people trade the flow of CG and the MP produced in that period), Factor markets (markets where businesses hire or rent LP, MP produced in previous periods, and natural resources for use in the period), and Financial markets (markets where people trade the ownership of businesses and natural resources, bonds, at each point in time) In a monetary economy, the output produced will be valued in the markets and, when sold, that value will be realized and appear to the producers (and sellers) as income. Thus, total income = the value of output. At first, the total income is the total revenues of businesses, but the businesses belong to households (the owners of LP, previously produced MP, and natural resources); hence, the total income will be split into income from labor (wages, salaries, benefits) and income from property (rents, interests, profits). In turn, the profits of legally incorporated businessesmay be split into dividends (distributed to individual stockholders) and retained profits (kept by the corporation to enhance its operations)
- 6. To study business cycles In a monetary economy, the output purchased for individual or productive consumption, again, as valued in the markets, will appear to the buyers (all the sectors) as expenditure. C: consumption expenditure, the spending by households in the purchase of CG I: investment spending, the spending of businesses in the purchase of MP G: government spending, both for consumption or investment X: exports or the spending by the ROW in the purchase of goods (CG and MP) produced by domestic businesses M: imports or the spending by domestic households, business, and government in the purchase of foreign goods (CG and MP)
- 8. Simple macro model The pieces of the model are: A consumption function and Macroeconomic equilibrium The result is a model of total output or income determination as driven by fiscal policy (government spending and taxes)
- 11. Solution of the model
- 12. Solution of the model
- 13. Solution of the model
- 14. Fiscal policy Fiscal policy: taxation/spending. The economy can be more directly affected via: delta_Y* = [1/(1-mpc)] delta_G delta_Y* = - [mpc/(1-mpc)] delta_T
- 15. Monetary policy Saving = Y - T - C Investment depends on Y, Wealth, i, and expected return on investment projects. How is i determined? A big chunk of the course is devoted to this very topic. Monetary policy can affect it. We will discuss this later in the course.
Notes de l'éditeur
- Trade is a form of social cooperation. For example, barter. I take a notebook. I give 4 pens in exchange. In principle, we could produce the same welfare by having the person with the pens and notebooks donate them to a public fund and then having the public fund give the pens to the person who needs them and the notebook to the other person. I produce chicken salad and you produce bread. We then exchange some of the salad for some of the bread. It is not very different from us having a potluck dinner. You bring chicken salad, I bring bread, and then we share. So it is cooperation. But trade is a form of cooperation in which each of us seeks to advance her/his individual interest. In the video clip about the basic processes in the life of a society, I mentioned that we needed then to abstract from conflicts of interest. Now we can see how trade can lead to conflicts of interest. If we help each other only when the proportion of mutual help – what each of us gives compared to what each of us takes – is consistent with the price in the market, in other words, when it is consistent with the rate of exchange between salad and bread as determined by the haggling and negotiating between buyers and sellers in the salad and bread markets, then if I take more bread in exchange for a pound of salad, or you take more salad in exchange for a loaf of bread than dictated by the prices in the market, you or I will be violating the rules of trade, and one of us may feel abused, taken advantage of.But before I dwell in the negative aspects of trade, let me say that trade – a form of human cooperation that, in its primitive form of barter, can be traced back perhaps 100 thousand years, which is about 1/10 of the time that human beings proper, so-called homo sapiens – has shown to be a very powerful form of cooperation, in that it has managed to harness and spark human productivity and creativity to an extraordinary extent. I will say more about this later on.Back to the nature of trade: Since we care mainly about our own individual interest and not about the social outcome, what happens to others, then we may decide that we want to actually try and take advantage of each other. In a sense, trade counter-poses or opposes us to each other, pit us against each other. What is good for you is what is bad for me, and vice versa. We get into a zero sum game. If you get more is because I get less, and vice versa. One of us may emerge as a winner and the other as a loser, as a sucker. Even though it is overall win-win, because otherwise we wouldn’t want to trade, the very fact that we mainly care about our individual interest, makes us adversaries. As we will see there are gains from cooperation or, in this case, gains from trade. Our individual welfare can increase. But how that additional welfare that results from cooperation or, specifically, trade is distributed between the individuals involved can be really tricky. In trade, we face each other as means to each other’s ends and – therefore, because each of us is a human being with different needs and interests -- as adversaries, one trying to take advantage of the other. We are cooperating, yet we’re in conflict with each other. Trade is, in this sense, a perverse form of social cooperation. It is perverse, because it undermines the basis of social cooperation. It makes people use, distrust, fear, and loathe people. And, in the long run, that doesn’t help us stick together as a society. Society becomes a place where people are pitted against one another, fight with one another. And that is the opposite of social cooperation. That is the recipe for the disintegration of a society. It is not an accident that societies where trade is the dominant form of cooperation, where markets are the dominant social structure, with little regulation by public agencies, experience high degrees of criminality, violence, legal litigation, law enforcement, private and public security, incarceration, etc. A large amount of the resources of society are spent in locks and safeboxes, in the court system, sustaining lawyers and jury duties (i.e. people who are not producing wealth but just consuming it), as well as law enforcement, and prisons. And, since people become hostile to people, there is also an entire industry that produces means of destruction – arms, military hardware, etc. On the other hand, societies where other forms of social cooperation predominate, or where markets are constrained legally, highly regulated, the indices of violence and criminality are significant lower. Moreover, even in a society like ours, during emergencies such as the terrorist attacks in 2001 or blackouts or earthquakes or hurricanes tend to show this cooperative side of people, and you may see that – depending on the context – the levels of criminality and violence decrease significantly. People feel that they share a purpose and come together. When they feel that there is no common purpose, that each person is on her/his own, then conflicts result. These problems compound when there’s social polarization, when private ownership is unequally divided, when a few have all and most have little.Let me examine the presuppositions of trade a little bit more. When I trade something, when I exchange something with another individual, there is a shared presupposition, namely that each of us owns privately the good that one is exchanging. You own the pens and I own the notebook. That is why we can willingly, voluntarily, share them. If we don’t acknowledge each other’s rights of ownership over our respective goods, then that means that you can take my good or I can take yours without giving anything in exchange. Stealing would be okay. Trade requires that we do not steal from each other, that we respect each other’s rights of ownership over these goods. Then we can exchange them. Now, let’s see. If your good is yours, that basically means that one way or another society assigns to you those rights (either by default or by actively doing so) and that society uses some of its resources to enforce those rights. Thus, if anybody wanted to steal the good from you, then society would feel that violation as an injury to all and would take action to protect your good and punish the violator. Rights of ownership have to be social structures deliberately or consciously organized. Property rights do not emerge spontaneously. Property rights have to be codified legally and ethically (and defended ideologically) for them to stick. Society has to do this purposefully. People have to come together as a society and codify these rights, and then enforce them, make them effective. So note that private ownership, which presupposes trade, is a social structure that has to be created on purpose. A state has to exist. A state is not a mob. A state is not a market. A state is not an spontaneous organism. A state is a social organization. Furthermore, for people to cooperate and form and sustain a state, the state and its functions have to enjoy a certain degree of legitimacy. People have to be believe that the state is necessary and that it is doing, largely, the right thing. If the trust of people in the state begins to erode, then enforcing rights and sustaining the political system becomes more and more costly. Society has to spend larger and larger amounts of resources to keep the legal and political order from falling apart. And since productivity is limited, then that dooms a state, that dooms a legal and political system. You cannot keep a legal and political system for long against the wishes of the majority of the people, especially when people stop being afraid. Look at what happened very recently in North Africa, and what is going on today still in that region, and in the Middle East. The ruling elites have to resort increasingly to force, and that means that they have to divert resources from productive uses to enforcing and upholding the state. If people are truly adamant against the legal and political system, that cannot last long. At some point, the legal and political system will collapse. The rulers may succeed in postponing the collapse by repression, by scaring people, bribing or killing the leaders of a social insurrection, disrupting their organization. But if the people at the grassroots are done with the legal and political system, then that is going to collapse one way or another. History has shown this repeatedly.In the remainder of the course, we will be focusing almost exclusively in how markets function. However, we should never lose sight that behind markets, there are always other social structures that are not spontaneous organisms that result from people cooperating casually, without concern for others. On the contrary, these organizations require that we be concerned with others, that we see people not as instruments to our ends, but as concrete individuals with concrete needs and powers, that we treat people as people, and not only as tools for our own ends.
- Trade is a form of social cooperation. For example, barter. I take a notebook. I give 4 pens in exchange. In principle, we could produce the same welfare by having the person with the pens and notebooks donate them to a public fund and then having the public fund give the pens to the person who needs them and the notebook to the other person. I produce chicken salad and you produce bread. We then exchange some of the salad for some of the bread. It is not very different from us having a potluck dinner. You bring chicken salad, I bring bread, and then we share. So it is cooperation. But trade is a form of cooperation in which each of us seeks to advance her/his individual interest. In the video clip about the basic processes in the life of a society, I mentioned that we needed then to abstract from conflicts of interest. Now we can see how trade can lead to conflicts of interest. If we help each other only when the proportion of mutual help – what each of us gives compared to what each of us takes – is consistent with the price in the market, in other words, when it is consistent with the rate of exchange between salad and bread as determined by the haggling and negotiating between buyers and sellers in the salad and bread markets, then if I take more bread in exchange for a pound of salad, or you take more salad in exchange for a loaf of bread than dictated by the prices in the market, you or I will be violating the rules of trade, and one of us may feel abused, taken advantage of.But before I dwell in the negative aspects of trade, let me say that trade – a form of human cooperation that, in its primitive form of barter, can be traced back perhaps 100 thousand years, which is about 1/10 of the time that human beings proper, so-called homo sapiens – has shown to be a very powerful form of cooperation, in that it has managed to harness and spark human productivity and creativity to an extraordinary extent. I will say more about this later on.Back to the nature of trade: Since we care mainly about our own individual interest and not about the social outcome, what happens to others, then we may decide that we want to actually try and take advantage of each other. In a sense, trade counter-poses or opposes us to each other, pit us against each other. What is good for you is what is bad for me, and vice versa. We get into a zero sum game. If you get more is because I get less, and vice versa. One of us may emerge as a winner and the other as a loser, as a sucker. Even though it is overall win-win, because otherwise we wouldn’t want to trade, the very fact that we mainly care about our individual interest, makes us adversaries. As we will see there are gains from cooperation or, in this case, gains from trade. Our individual welfare can increase. But how that additional welfare that results from cooperation or, specifically, trade is distributed between the individuals involved can be really tricky. In trade, we face each other as means to each other’s ends and – therefore, because each of us is a human being with different needs and interests -- as adversaries, one trying to take advantage of the other. We are cooperating, yet we’re in conflict with each other. Trade is, in this sense, a perverse form of social cooperation. It is perverse, because it undermines the basis of social cooperation. It makes people use, distrust, fear, and loathe people. And, in the long run, that doesn’t help us stick together as a society. Society becomes a place where people are pitted against one another, fight with one another. And that is the opposite of social cooperation. That is the recipe for the disintegration of a society. It is not an accident that societies where trade is the dominant form of cooperation, where markets are the dominant social structure, with little regulation by public agencies, experience high degrees of criminality, violence, legal litigation, law enforcement, private and public security, incarceration, etc. A large amount of the resources of society are spent in locks and safeboxes, in the court system, sustaining lawyers and jury duties (i.e. people who are not producing wealth but just consuming it), as well as law enforcement, and prisons. And, since people become hostile to people, there is also an entire industry that produces means of destruction – arms, military hardware, etc. On the other hand, societies where other forms of social cooperation predominate, or where markets are constrained legally, highly regulated, the indices of violence and criminality are significant lower. Moreover, even in a society like ours, during emergencies such as the terrorist attacks in 2001 or blackouts or earthquakes or hurricanes tend to show this cooperative side of people, and you may see that – depending on the context – the levels of criminality and violence decrease significantly. People feel that they share a purpose and come together. When they feel that there is no common purpose, that each person is on her/his own, then conflicts result. These problems compound when there’s social polarization, when private ownership is unequally divided, when a few have all and most have little.Let me examine the presuppositions of trade a little bit more. When I trade something, when I exchange something with another individual, there is a shared presupposition, namely that each of us owns privately the good that one is exchanging. You own the pens and I own the notebook. That is why we can willingly, voluntarily, share them. If we don’t acknowledge each other’s rights of ownership over our respective goods, then that means that you can take my good or I can take yours without giving anything in exchange. Stealing would be okay. Trade requires that we do not steal from each other, that we respect each other’s rights of ownership over these goods. Then we can exchange them. Now, let’s see. If your good is yours, that basically means that one way or another society assigns to you those rights (either by default or by actively doing so) and that society uses some of its resources to enforce those rights. Thus, if anybody wanted to steal the good from you, then society would feel that violation as an injury to all and would take action to protect your good and punish the violator. Rights of ownership have to be social structures deliberately or consciously organized. Property rights do not emerge spontaneously. Property rights have to be codified legally and ethically (and defended ideologically) for them to stick. Society has to do this purposefully. People have to come together as a society and codify these rights, and then enforce them, make them effective. So note that private ownership, which presupposes trade, is a social structure that has to be created on purpose. A state has to exist. A state is not a mob. A state is not a market. A state is not an spontaneous organism. A state is a social organization. Furthermore, for people to cooperate and form and sustain a state, the state and its functions have to enjoy a certain degree of legitimacy. People have to be believe that the state is necessary and that it is doing, largely, the right thing. If the trust of people in the state begins to erode, then enforcing rights and sustaining the political system becomes more and more costly. Society has to spend larger and larger amounts of resources to keep the legal and political order from falling apart. And since productivity is limited, then that dooms a state, that dooms a legal and political system. You cannot keep a legal and political system for long against the wishes of the majority of the people, especially when people stop being afraid. Look at what happened very recently in North Africa, and what is going on today still in that region, and in the Middle East. The ruling elites have to resort increasingly to force, and that means that they have to divert resources from productive uses to enforcing and upholding the state. If people are truly adamant against the legal and political system, that cannot last long. At some point, the legal and political system will collapse. The rulers may succeed in postponing the collapse by repression, by scaring people, bribing or killing the leaders of a social insurrection, disrupting their organization. But if the people at the grassroots are done with the legal and political system, then that is going to collapse one way or another. History has shown this repeatedly.In the remainder of the course, we will be focusing almost exclusively in how markets function. However, we should never lose sight that behind markets, there are always other social structures that are not spontaneous organisms that result from people cooperating casually, without concern for others. On the contrary, these organizations require that we be concerned with others, that we see people not as instruments to our ends, but as concrete individuals with concrete needs and powers, that we treat people as people, and not only as tools for our own ends.
- Trade is a form of social cooperation. For example, barter. I take a notebook. I give 4 pens in exchange. In principle, we could produce the same welfare by having the person with the pens and notebooks donate them to a public fund and then having the public fund give the pens to the person who needs them and the notebook to the other person. I produce chicken salad and you produce bread. We then exchange some of the salad for some of the bread. It is not very different from us having a potluck dinner. You bring chicken salad, I bring bread, and then we share. So it is cooperation. But trade is a form of cooperation in which each of us seeks to advance her/his individual interest. In the video clip about the basic processes in the life of a society, I mentioned that we needed then to abstract from conflicts of interest. Now we can see how trade can lead to conflicts of interest. If we help each other only when the proportion of mutual help – what each of us gives compared to what each of us takes – is consistent with the price in the market, in other words, when it is consistent with the rate of exchange between salad and bread as determined by the haggling and negotiating between buyers and sellers in the salad and bread markets, then if I take more bread in exchange for a pound of salad, or you take more salad in exchange for a loaf of bread than dictated by the prices in the market, you or I will be violating the rules of trade, and one of us may feel abused, taken advantage of.But before I dwell in the negative aspects of trade, let me say that trade – a form of human cooperation that, in its primitive form of barter, can be traced back perhaps 100 thousand years, which is about 1/10 of the time that human beings proper, so-called homo sapiens – has shown to be a very powerful form of cooperation, in that it has managed to harness and spark human productivity and creativity to an extraordinary extent. I will say more about this later on.Back to the nature of trade: Since we care mainly about our own individual interest and not about the social outcome, what happens to others, then we may decide that we want to actually try and take advantage of each other. In a sense, trade counter-poses or opposes us to each other, pit us against each other. What is good for you is what is bad for me, and vice versa. We get into a zero sum game. If you get more is because I get less, and vice versa. One of us may emerge as a winner and the other as a loser, as a sucker. Even though it is overall win-win, because otherwise we wouldn’t want to trade, the very fact that we mainly care about our individual interest, makes us adversaries. As we will see there are gains from cooperation or, in this case, gains from trade. Our individual welfare can increase. But how that additional welfare that results from cooperation or, specifically, trade is distributed between the individuals involved can be really tricky. In trade, we face each other as means to each other’s ends and – therefore, because each of us is a human being with different needs and interests -- as adversaries, one trying to take advantage of the other. We are cooperating, yet we’re in conflict with each other. Trade is, in this sense, a perverse form of social cooperation. It is perverse, because it undermines the basis of social cooperation. It makes people use, distrust, fear, and loathe people. And, in the long run, that doesn’t help us stick together as a society. Society becomes a place where people are pitted against one another, fight with one another. And that is the opposite of social cooperation. That is the recipe for the disintegration of a society. It is not an accident that societies where trade is the dominant form of cooperation, where markets are the dominant social structure, with little regulation by public agencies, experience high degrees of criminality, violence, legal litigation, law enforcement, private and public security, incarceration, etc. A large amount of the resources of society are spent in locks and safeboxes, in the court system, sustaining lawyers and jury duties (i.e. people who are not producing wealth but just consuming it), as well as law enforcement, and prisons. And, since people become hostile to people, there is also an entire industry that produces means of destruction – arms, military hardware, etc. On the other hand, societies where other forms of social cooperation predominate, or where markets are constrained legally, highly regulated, the indices of violence and criminality are significant lower. Moreover, even in a society like ours, during emergencies such as the terrorist attacks in 2001 or blackouts or earthquakes or hurricanes tend to show this cooperative side of people, and you may see that – depending on the context – the levels of criminality and violence decrease significantly. People feel that they share a purpose and come together. When they feel that there is no common purpose, that each person is on her/his own, then conflicts result. These problems compound when there’s social polarization, when private ownership is unequally divided, when a few have all and most have little.Let me examine the presuppositions of trade a little bit more. When I trade something, when I exchange something with another individual, there is a shared presupposition, namely that each of us owns privately the good that one is exchanging. You own the pens and I own the notebook. That is why we can willingly, voluntarily, share them. If we don’t acknowledge each other’s rights of ownership over our respective goods, then that means that you can take my good or I can take yours without giving anything in exchange. Stealing would be okay. Trade requires that we do not steal from each other, that we respect each other’s rights of ownership over these goods. Then we can exchange them. Now, let’s see. If your good is yours, that basically means that one way or another society assigns to you those rights (either by default or by actively doing so) and that society uses some of its resources to enforce those rights. Thus, if anybody wanted to steal the good from you, then society would feel that violation as an injury to all and would take action to protect your good and punish the violator. Rights of ownership have to be social structures deliberately or consciously organized. Property rights do not emerge spontaneously. Property rights have to be codified legally and ethically (and defended ideologically) for them to stick. Society has to do this purposefully. People have to come together as a society and codify these rights, and then enforce them, make them effective. So note that private ownership, which presupposes trade, is a social structure that has to be created on purpose. A state has to exist. A state is not a mob. A state is not a market. A state is not an spontaneous organism. A state is a social organization. Furthermore, for people to cooperate and form and sustain a state, the state and its functions have to enjoy a certain degree of legitimacy. People have to be believe that the state is necessary and that it is doing, largely, the right thing. If the trust of people in the state begins to erode, then enforcing rights and sustaining the political system becomes more and more costly. Society has to spend larger and larger amounts of resources to keep the legal and political order from falling apart. And since productivity is limited, then that dooms a state, that dooms a legal and political system. You cannot keep a legal and political system for long against the wishes of the majority of the people, especially when people stop being afraid. Look at what happened very recently in North Africa, and what is going on today still in that region, and in the Middle East. The ruling elites have to resort increasingly to force, and that means that they have to divert resources from productive uses to enforcing and upholding the state. If people are truly adamant against the legal and political system, that cannot last long. At some point, the legal and political system will collapse. The rulers may succeed in postponing the collapse by repression, by scaring people, bribing or killing the leaders of a social insurrection, disrupting their organization. But if the people at the grassroots are done with the legal and political system, then that is going to collapse one way or another. History has shown this repeatedly.In the remainder of the course, we will be focusing almost exclusively in how markets function. However, we should never lose sight that behind markets, there are always other social structures that are not spontaneous organisms that result from people cooperating casually, without concern for others. On the contrary, these organizations require that we be concerned with others, that we see people not as instruments to our ends, but as concrete individuals with concrete needs and powers, that we treat people as people, and not only as tools for our own ends.
- Trade is a form of social cooperation. For example, barter. I take a notebook. I give 4 pens in exchange. In principle, we could produce the same welfare by having the person with the pens and notebooks donate them to a public fund and then having the public fund give the pens to the person who needs them and the notebook to the other person. I produce chicken salad and you produce bread. We then exchange some of the salad for some of the bread. It is not very different from us having a potluck dinner. You bring chicken salad, I bring bread, and then we share. So it is cooperation. But trade is a form of cooperation in which each of us seeks to advance her/his individual interest. In the video clip about the basic processes in the life of a society, I mentioned that we needed then to abstract from conflicts of interest. Now we can see how trade can lead to conflicts of interest. If we help each other only when the proportion of mutual help – what each of us gives compared to what each of us takes – is consistent with the price in the market, in other words, when it is consistent with the rate of exchange between salad and bread as determined by the haggling and negotiating between buyers and sellers in the salad and bread markets, then if I take more bread in exchange for a pound of salad, or you take more salad in exchange for a loaf of bread than dictated by the prices in the market, you or I will be violating the rules of trade, and one of us may feel abused, taken advantage of.But before I dwell in the negative aspects of trade, let me say that trade – a form of human cooperation that, in its primitive form of barter, can be traced back perhaps 100 thousand years, which is about 1/10 of the time that human beings proper, so-called homo sapiens – has shown to be a very powerful form of cooperation, in that it has managed to harness and spark human productivity and creativity to an extraordinary extent. I will say more about this later on.Back to the nature of trade: Since we care mainly about our own individual interest and not about the social outcome, what happens to others, then we may decide that we want to actually try and take advantage of each other. In a sense, trade counter-poses or opposes us to each other, pit us against each other. What is good for you is what is bad for me, and vice versa. We get into a zero sum game. If you get more is because I get less, and vice versa. One of us may emerge as a winner and the other as a loser, as a sucker. Even though it is overall win-win, because otherwise we wouldn’t want to trade, the very fact that we mainly care about our individual interest, makes us adversaries. As we will see there are gains from cooperation or, in this case, gains from trade. Our individual welfare can increase. But how that additional welfare that results from cooperation or, specifically, trade is distributed between the individuals involved can be really tricky. In trade, we face each other as means to each other’s ends and – therefore, because each of us is a human being with different needs and interests -- as adversaries, one trying to take advantage of the other. We are cooperating, yet we’re in conflict with each other. Trade is, in this sense, a perverse form of social cooperation. It is perverse, because it undermines the basis of social cooperation. It makes people use, distrust, fear, and loathe people. And, in the long run, that doesn’t help us stick together as a society. Society becomes a place where people are pitted against one another, fight with one another. And that is the opposite of social cooperation. That is the recipe for the disintegration of a society. It is not an accident that societies where trade is the dominant form of cooperation, where markets are the dominant social structure, with little regulation by public agencies, experience high degrees of criminality, violence, legal litigation, law enforcement, private and public security, incarceration, etc. A large amount of the resources of society are spent in locks and safeboxes, in the court system, sustaining lawyers and jury duties (i.e. people who are not producing wealth but just consuming it), as well as law enforcement, and prisons. And, since people become hostile to people, there is also an entire industry that produces means of destruction – arms, military hardware, etc. On the other hand, societies where other forms of social cooperation predominate, or where markets are constrained legally, highly regulated, the indices of violence and criminality are significant lower. Moreover, even in a society like ours, during emergencies such as the terrorist attacks in 2001 or blackouts or earthquakes or hurricanes tend to show this cooperative side of people, and you may see that – depending on the context – the levels of criminality and violence decrease significantly. People feel that they share a purpose and come together. When they feel that there is no common purpose, that each person is on her/his own, then conflicts result. These problems compound when there’s social polarization, when private ownership is unequally divided, when a few have all and most have little.Let me examine the presuppositions of trade a little bit more. When I trade something, when I exchange something with another individual, there is a shared presupposition, namely that each of us owns privately the good that one is exchanging. You own the pens and I own the notebook. That is why we can willingly, voluntarily, share them. If we don’t acknowledge each other’s rights of ownership over our respective goods, then that means that you can take my good or I can take yours without giving anything in exchange. Stealing would be okay. Trade requires that we do not steal from each other, that we respect each other’s rights of ownership over these goods. Then we can exchange them. Now, let’s see. If your good is yours, that basically means that one way or another society assigns to you those rights (either by default or by actively doing so) and that society uses some of its resources to enforce those rights. Thus, if anybody wanted to steal the good from you, then society would feel that violation as an injury to all and would take action to protect your good and punish the violator. Rights of ownership have to be social structures deliberately or consciously organized. Property rights do not emerge spontaneously. Property rights have to be codified legally and ethically (and defended ideologically) for them to stick. Society has to do this purposefully. People have to come together as a society and codify these rights, and then enforce them, make them effective. So note that private ownership, which presupposes trade, is a social structure that has to be created on purpose. A state has to exist. A state is not a mob. A state is not a market. A state is not an spontaneous organism. A state is a social organization. Furthermore, for people to cooperate and form and sustain a state, the state and its functions have to enjoy a certain degree of legitimacy. People have to be believe that the state is necessary and that it is doing, largely, the right thing. If the trust of people in the state begins to erode, then enforcing rights and sustaining the political system becomes more and more costly. Society has to spend larger and larger amounts of resources to keep the legal and political order from falling apart. And since productivity is limited, then that dooms a state, that dooms a legal and political system. You cannot keep a legal and political system for long against the wishes of the majority of the people, especially when people stop being afraid. Look at what happened very recently in North Africa, and what is going on today still in that region, and in the Middle East. The ruling elites have to resort increasingly to force, and that means that they have to divert resources from productive uses to enforcing and upholding the state. If people are truly adamant against the legal and political system, that cannot last long. At some point, the legal and political system will collapse. The rulers may succeed in postponing the collapse by repression, by scaring people, bribing or killing the leaders of a social insurrection, disrupting their organization. But if the people at the grassroots are done with the legal and political system, then that is going to collapse one way or another. History has shown this repeatedly.In the remainder of the course, we will be focusing almost exclusively in how markets function. However, we should never lose sight that behind markets, there are always other social structures that are not spontaneous organisms that result from people cooperating casually, without concern for others. On the contrary, these organizations require that we be concerned with others, that we see people not as instruments to our ends, but as concrete individuals with concrete needs and powers, that we treat people as people, and not only as tools for our own ends.
- Trade is a form of social cooperation. For example, barter. I take a notebook. I give 4 pens in exchange. In principle, we could produce the same welfare by having the person with the pens and notebooks donate them to a public fund and then having the public fund give the pens to the person who needs them and the notebook to the other person. I produce chicken salad and you produce bread. We then exchange some of the salad for some of the bread. It is not very different from us having a potluck dinner. You bring chicken salad, I bring bread, and then we share. So it is cooperation. But trade is a form of cooperation in which each of us seeks to advance her/his individual interest. In the video clip about the basic processes in the life of a society, I mentioned that we needed then to abstract from conflicts of interest. Now we can see how trade can lead to conflicts of interest. If we help each other only when the proportion of mutual help – what each of us gives compared to what each of us takes – is consistent with the price in the market, in other words, when it is consistent with the rate of exchange between salad and bread as determined by the haggling and negotiating between buyers and sellers in the salad and bread markets, then if I take more bread in exchange for a pound of salad, or you take more salad in exchange for a loaf of bread than dictated by the prices in the market, you or I will be violating the rules of trade, and one of us may feel abused, taken advantage of.But before I dwell in the negative aspects of trade, let me say that trade – a form of human cooperation that, in its primitive form of barter, can be traced back perhaps 100 thousand years, which is about 1/10 of the time that human beings proper, so-called homo sapiens – has shown to be a very powerful form of cooperation, in that it has managed to harness and spark human productivity and creativity to an extraordinary extent. I will say more about this later on.Back to the nature of trade: Since we care mainly about our own individual interest and not about the social outcome, what happens to others, then we may decide that we want to actually try and take advantage of each other. In a sense, trade counter-poses or opposes us to each other, pit us against each other. What is good for you is what is bad for me, and vice versa. We get into a zero sum game. If you get more is because I get less, and vice versa. One of us may emerge as a winner and the other as a loser, as a sucker. Even though it is overall win-win, because otherwise we wouldn’t want to trade, the very fact that we mainly care about our individual interest, makes us adversaries. As we will see there are gains from cooperation or, in this case, gains from trade. Our individual welfare can increase. But how that additional welfare that results from cooperation or, specifically, trade is distributed between the individuals involved can be really tricky. In trade, we face each other as means to each other’s ends and – therefore, because each of us is a human being with different needs and interests -- as adversaries, one trying to take advantage of the other. We are cooperating, yet we’re in conflict with each other. Trade is, in this sense, a perverse form of social cooperation. It is perverse, because it undermines the basis of social cooperation. It makes people use, distrust, fear, and loathe people. And, in the long run, that doesn’t help us stick together as a society. Society becomes a place where people are pitted against one another, fight with one another. And that is the opposite of social cooperation. That is the recipe for the disintegration of a society. It is not an accident that societies where trade is the dominant form of cooperation, where markets are the dominant social structure, with little regulation by public agencies, experience high degrees of criminality, violence, legal litigation, law enforcement, private and public security, incarceration, etc. A large amount of the resources of society are spent in locks and safeboxes, in the court system, sustaining lawyers and jury duties (i.e. people who are not producing wealth but just consuming it), as well as law enforcement, and prisons. And, since people become hostile to people, there is also an entire industry that produces means of destruction – arms, military hardware, etc. On the other hand, societies where other forms of social cooperation predominate, or where markets are constrained legally, highly regulated, the indices of violence and criminality are significant lower. Moreover, even in a society like ours, during emergencies such as the terrorist attacks in 2001 or blackouts or earthquakes or hurricanes tend to show this cooperative side of people, and you may see that – depending on the context – the levels of criminality and violence decrease significantly. People feel that they share a purpose and come together. When they feel that there is no common purpose, that each person is on her/his own, then conflicts result. These problems compound when there’s social polarization, when private ownership is unequally divided, when a few have all and most have little.Let me examine the presuppositions of trade a little bit more. When I trade something, when I exchange something with another individual, there is a shared presupposition, namely that each of us owns privately the good that one is exchanging. You own the pens and I own the notebook. That is why we can willingly, voluntarily, share them. If we don’t acknowledge each other’s rights of ownership over our respective goods, then that means that you can take my good or I can take yours without giving anything in exchange. Stealing would be okay. Trade requires that we do not steal from each other, that we respect each other’s rights of ownership over these goods. Then we can exchange them. Now, let’s see. If your good is yours, that basically means that one way or another society assigns to you those rights (either by default or by actively doing so) and that society uses some of its resources to enforce those rights. Thus, if anybody wanted to steal the good from you, then society would feel that violation as an injury to all and would take action to protect your good and punish the violator. Rights of ownership have to be social structures deliberately or consciously organized. Property rights do not emerge spontaneously. Property rights have to be codified legally and ethically (and defended ideologically) for them to stick. Society has to do this purposefully. People have to come together as a society and codify these rights, and then enforce them, make them effective. So note that private ownership, which presupposes trade, is a social structure that has to be created on purpose. A state has to exist. A state is not a mob. A state is not a market. A state is not an spontaneous organism. A state is a social organization. Furthermore, for people to cooperate and form and sustain a state, the state and its functions have to enjoy a certain degree of legitimacy. People have to be believe that the state is necessary and that it is doing, largely, the right thing. If the trust of people in the state begins to erode, then enforcing rights and sustaining the political system becomes more and more costly. Society has to spend larger and larger amounts of resources to keep the legal and political order from falling apart. And since productivity is limited, then that dooms a state, that dooms a legal and political system. You cannot keep a legal and political system for long against the wishes of the majority of the people, especially when people stop being afraid. Look at what happened very recently in North Africa, and what is going on today still in that region, and in the Middle East. The ruling elites have to resort increasingly to force, and that means that they have to divert resources from productive uses to enforcing and upholding the state. If people are truly adamant against the legal and political system, that cannot last long. At some point, the legal and political system will collapse. The rulers may succeed in postponing the collapse by repression, by scaring people, bribing or killing the leaders of a social insurrection, disrupting their organization. But if the people at the grassroots are done with the legal and political system, then that is going to collapse one way or another. History has shown this repeatedly.In the remainder of the course, we will be focusing almost exclusively in how markets function. However, we should never lose sight that behind markets, there are always other social structures that are not spontaneous organisms that result from people cooperating casually, without concern for others. On the contrary, these organizations require that we be concerned with others, that we see people not as instruments to our ends, but as concrete individuals with concrete needs and powers, that we treat people as people, and not only as tools for our own ends.
- Since trade presupposes ownership and ownership has a legal aspect: ownership is a contract between the owner of a piece of wealth and the rest of society – and those contracts (whether they are explicit pieces of paper or pdf files with stamps and signatures or verbal agreements or implicit or tacit) are what we call “financial assets” or “financial claims” or “securities” or “bonds” or “financial instruments”, then – effectively – what people trade when they trade anything is financial assets!In separate courses in our curriculum, macroeconomics and money and banking, we discuss in some detail the origin and functions of money. Let me at this point just say that a particular financial asset that has emerged historically is money. Money is usually defined as anything that people more or less generally or universally accept as a (1) means of purchase and (2) as a means of payment (settlement of debt obligations). Historically, in its origins, when people traded commodities, they bartered them. In other words, they exchanged a certain amount of a good for a certain amount of another good. This could be a hindrance, because it required what economists call the “double coincidence of wants” – you have to want what I have and I have to want what you have in order for us to make a deal and exchange our goods. But what if I don’t want what you have or you don’t want what I have? Then there’s no deal. DOUBLE COINCIDENCE OF WANTS FORMULAMoney emerged as a way around this problem. Markets would not exist a day without a host of social organizations that sustain them. In fact, markets link a myriad of organizations, rather than mere individuals. In our society for example, markets link households and families and business firms of all kinds and state institutions (governments, public agencies), nonprofits like many colleges, hospitals, etc. Some people characterize our society as a society of markets. Our economy as a market economy. In a sense it is, because markets a very important economic role in our society. But markets are not everything. Markets are embedded in a society in which there is a lot of direct cooperation and social organizations that are based on direct cooperation, on helping each other without keeping close track on the rate of giving and taking. Markets connect all those social organizations. And so, when we refer to the success or failure of our society, not everything – good or bad -- is due to markets.