Introduction to Political Economy: Duke Course

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. The example of Lewis and Clark, and the Corps of Discovery: sometimes groups have to choose, AS A GROUP. They all consent to the rules, and are thus bound by the outcome, even if they disagree with it. Market institutions cannot help here. 2. The definition of "politics" is the negotiation of a constituted group, with rules of decision, and also entry and exit. People choosing in groups this way are engaging in "politics." 3. The example of Odysseus, bound to the mast. Can people commit now to be bound by their choices? 4. The "Prisoner's Dilemma": We want everyone else to be bound by rules, but we know we want to cheat. So we voluntarily agree to be bound to be coerced, provided everyone else makes the same agreement.

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. Three stages of social choice: Deciding how to decide how to decide (forming a group identity) Deciding how to decide (choosing a constitution, and rules) Deciding (normal choices, using fixed rules) 2. Access rules (introducing a bill, Writ of Certiorari, moved and seconded, etc) require less than a majority. 3. Decision rules usually (but not always) require a majority 4. Changing the rules requires a supermajority 5. Constituting a group requires unanimous consent, or (what amounts to the same thing) a means of exiting. Forced entry into membership is actually a restriction on exit. 6. Arrow's Theorem 7. An example: Interest Groups--The National Rifle Association 8. Rousseau, and Buchanan-Tullock, and "optimal majority." 9. Borda Count: Examples of ways of choosing

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. Price signals scarcity, and organizes production through profit, and encourages innovation But…wait: If markets are so great, why are there firms? Firms, after all, are the explicit suppression of the market mechanism. “Make or buy”: For many firms, for many items, they choose to make the product. 2. Higher transactions costs in price system, larger firms If cost of using prices falls, firms get smaller (careful, though: network economies). 3. But there is a more interesting story: PIRATES! The way that pirate ships, and groups, were organized is an answer to the problem of transactions costs. A specialized kind of firm Individuals could not operate ships, or capture treasure, but they had no way to enforce contracts. The "Code" is more like "guidelines," because no directly enforceable. 4. Very flat structure, command divided between Quartermaster (mostly) and Captain (in times of battle). Both are elected. 5. First instances of insurance, pensions, and workplace democracy. 6. Key problem: must give quarter if asked. If resistance, fight fiercely. But if no resistance, treat captives well. Must maximize difference between resistance/no resistance, to improve net revenues and reduce risk.

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. Externalities: The uncompensated impact of one person’s actions on the well-being of a bystander 2. Markets alone overproduce negative externalities (such as pollution) and underproduce positive externalities (such as education). 3. The solution may be to "internalize" the externality by taxing bads (pollution) and subsidizing goods (education). 4. Private solutions (the "Coasian Bargaining" solutions) can work if numbers are small and transactions costs are not too high. 6. The reason markets are so useful is that prices provide a means of rationing scarce resources efficiently. The main means of rationing include: Price system (market) Queuing (first-come-first-served) Chance (lottery, drawing) Authority/discretion (experts choose) 7. The standard for "efficient" rationing is "Pareto Optimality": There is no feasible reallocation of resources that makes everyone better off, or makes at least one person better off and makes no one worse off. Technically, if the outcome of decentralized processes is not P.O., then that is a market failure A failure to enforce property rights (a la Hobbes), so the state just doesn’t do its job: Not a PO. 8. Types of "market failures": Information Asymmetries Natural Monopoly Externalities Public Goods Justice of the income/wealth distribution

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. The "Spatial Model" has three aspects: Nature of voter preferences Endogenous platform selection Predictions about outcomes 2. People use “left”, “right”, and “center” to describe political positions, dating to the French National Assemblies and National Convention-- Left: (want change) Jacobins Right: Girondins (defend status quo) 3. "Political power lies at center of distribution of preferences effectively enfranchised by the institutions of the society." Formally, this is called "The Median Voter Theorem." 4. An example: The Affordable Care Act (ACA). 5. In two or more dimensions, there is generally no equilibrium for arbitrarily chosen preferences. 6. Real world legislatures and elections get around this problem get around this by (a) using First Past the Post voting (Duverger's Law) or (b) having a system of coalitions that reduce to two alternative, the "Government" and the "Opposition."

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. Problem with voting: May not produce a coherent result, if people disagree 2. In the case of the Corps of Discovery, turns out there may have been a "cycle," the equivalent of "Rock/Paper/Scissors." 3. Thus, there are two separate problems with political institutions: No obvious solution, or group choice. So outcome can be manipulated with agenda control. In fact, control of the agenda is tantamount to dictatorship. More dangerous, in a way, because trappings of “democracy.” Perhaps worse, the fact that there is no obvious choice raises a fundamental problem of social coherence: a majority is opposed to every alternative. You think it’s a problem of epistemology, but it’s a problem of ontology. 4. The result is that control of agendas may be tantamount to a kind of dictatorship. The rules matter more than you expect! 5. But voters also have power, because they can vote "strategically," misrepresenting their preferences in early rounds of voting. The problem is that this debases the informational grounds for using voting as a "discovery process" in the first place. 6. Condorcet's Paradox: Necessary conditions Three or more choices Three or more agents Disagreement of a certain kind In this case, neither persuasion nor compromise possible 7. Definition of Condorcet's Paradox: “If there are at least three choices and at least three choosers who disagree, then pairwise majority rule decision processes can imply intransitive group choices, even if all the individual preference orders are transitive." 8. This likely caused the dictatorship in France after 1799, and may explain the return to dictatorship in Russia and Egypt in the 21st century.

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. The example of Lewis and Clark, and the Corps of Discovery: sometimes groups have to choose, AS A GROUP. They all consent to the rules, and are thus bound by the outcome, even if they disagree with it. Market institutions cannot help here. 2. The definition of "politics" is the negotiation of a constituted group, with rules of decision, and also entry and exit. People choosing in groups this way are engaging in "politics." 3. The example of Odysseus, bound to the mast. Can people commit now to be bound by their choices? 4. The "Prisoner's Dilemma": We want everyone else to be bound by rules, but we know we want to cheat. So we voluntarily agree to be bound to be coerced, provided everyone else makes the same agreement.

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. Venezuela as an example: a "shortage" of money? 2. Bitcoin: Is a global crypto-currency, has been around since January of 2009. It is not issued by any entity, but rather is peer-to-peer / decentralized. It trades over the internet, or “feature phones.” The protocol is open source. The participants are owners, buyers, and "miners," or people who transmit and check transactions. 3. The maximum number of Bitcoins will be about 21 million. A bitcoin is a unit of measurement, but the “unit” depends on solely on how people value it in transactions. No physical existence. 4. Five essential steps in a Bitcoin transaction: Step 1: owner of Bitcoins signs in, using public key (or Bitcoin Address) a bit like username) and a private key (a bit like password). Step 2: owner of Bitcoins sends X Bitcoins (highly divisible) to another Bitcoin Address. Step 3: This information is then broadcast by the software on the sender’s phone or PC, and received by all the (active) nodes in the network Step 4: All the active nodes add the (pending) transaction to the relevant (current) block. A block is like a ledger entry, divided into 10 minute intervals. All the transactions in one 10 minute interval are in the same block (blocks are disjoint: 10:10 to 10:20, 10:20 to 10:30, and so on…) Step 5: The block is run through a hash function by miners. This is a unique set of characters that contain all the information in the entire block, though knowing the hash won’t let you reproduce the block. Blocks are linked to previous blocks, creating a blockchain. The value of every account is evident on the blockchain.

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. A core argument for markets, then, is that voluntary exchange makes both parties better off. The public policy implication is that the state should take only minimal actions to regulate voluntary exchange, and those actions should foster such exchanges by reducing transactions costs. 2. Greek philosophy and market connections: Xenophon and Aristotle 3. Six conditions for an exchange to be "eunvoluntary" Conventional ownership by both parties Conventional capacity to transfer and assign this ownership to the other party The absence of post-exchange regret, for both parties, in the sense that both receive value at least as great as was anticipated at the time of the agreement to exchange The absence of uncompensated externalities Neither party is coerced, in the sense of being forced to exchange by threat Neither party is coerced in the alternative sense of being harmed by failing to exchange. 4. Bottom line: Just because an exchange is not coerced by human Agency, it does not follow that it is “Voluntary”. And if the exchange is not voluntary, then we have to question the whole set of conclusions about markets being ethical and beneficial. Essentially comes down to many buyers and many sellers. But that’s interesting, because it is exactly the definition of “Perfect competition”. So, assumption of perfect Competition finesses concerns about ethics of Markets. In short, there Is a Reason why economists and philosophers tend to use different examples!

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. Division of labor is the central concept in all of understanding social institutions. States and markets focus division of labor in different ways, and both are necessary. 2. Both markets and states fail when they encourage rent-seeking. 3. Opportunity cost: The cost of doing something is the cost of NOT doing other things. Example: the concert tickets 4. Price: When markets work well (and they don't always) price approximates opportunity cost. That is important because it gives people all over the world accurate signals about how OTHER people value resources. 5. Video: Al Trewis and Moe Cashferme decide whether to grow corn or soy. 6. Sock City: Datang, China makes most of the socks in the world, because of division of labor and the price system. Very efficient, but harmful to the workers who used to make socks, but now lost their jobs. 7. The whole world is constantly "losing" jobs to productivity increases. Great benefit to consumers. 8. An extended example: Recycling. Recycling is expensive. Price system alone would say recycling is a bad idea. But prices here do NOT approximate opportunity cost. May be room for effective state action.

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. This lecture is taught by Richard Salsman, Ph.D.. LECTURE OVERVIEW: 1. Money functions & forms metal, paper, plastic and bits market-based versus fiat-based 2. Banking financial intermediation types; depository, commercial, investment free banking versus central banking 3. Public Finance funding of government spending taxing, borrowing and money-creation deficits, debts and unfunded entitlements fiscal rectitude versus fiscal profligacy

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. The argument for capitalism and entrepreneurship is not greed, but benefits to consumers. Markets rely on a system called "consumer sovereignty." 2. The story of Soichiro Honda, and his struggles with bureaucracy. Innovation requires many people working on different things, and many failures. 3. Definitions: Opportunity Cost, Rents, Profits, and Rent-Seeking 4. The distinction between profit-seeking and rent-seeking is complicated, but it is socially important. Government has to be careful to restrict rent-seeking opportunities, because private markets can't tell the difference! 5. But the incentives of the state are wrong, and the state often fails. Many states actually specialize in rent-extraction. Examples--"mud farmers" and castles along the Rhine River in Germany, are considered. 6. The key problem: Rent seeking causes a loss of consumer surplus from exchanges that do not take place. Unseen, hard to measure. Foregone improvements in growth, prosperity and use of goods. There is also the dissipation of resources in war over right to charge tolls, so that spawns competition over rights to control access to "overfishing" the resource. 7. A summary: Exchange creates value, New products must pass profit test. But accounting profits are both rents and profits. Problem: rent-seeking destroys value in pursuit of transfers, which are at best neutral. Creating rents is "profitable" for authority that can extract transfers in exchange.

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. Profits are defined as the revenue left over from sales after all the inputs (including the salary of the entrepreneur) are paid. 2. What is an entrepreneur? “A person who organizes/operates a business or businesses, taking on financial risk to do so.” 3. This is different from a "political entrepreneur," who uses government funds in business, which greatly reduces risk to the “entrepreneur,” but depends on taking money from taxpayers rather than customers. This is also called "rent-seeking." 4. The key difference is that entrepreneurs hire engineers, to sell stuff to consumers, while rent-seekers hire lobbyists, to get “profit” from the government. 5. The story of the Mancgere is told, from a Saxon psalter in about 1050 C.E. The Mancgere tries to justify profits as a return to risk, and trading as a benefit to consumers. 6. The story of the Verger is told, using a Somerset Maugham short story character. 7. Examples of rent-seeking and true entrepreneurship are recounted from Burton Fulsom's book "The Myth of the Robber Barons." 8. Political choice (the median voter theorem) and economic choice (profits, at the margin) are distinguished. It is likely that it is better to use one sometimes, and the other at other times. Neither is best overall.

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. Human beings are self-interested, but they are also intensely moral beings. Our moral sense evolved in a setting where trade and exchange were limited, however. As a result some of our moral reactions to markets may be atavistic, like the hips of whales. 2. Another way of thinking of this is that we have "lifeboats minds" but live in a "Walmart world." The actual function of price is explained. Munger argues that we can "never run out of anything," because if we start to run out the price goes up, and then three things happen: (a) consumers buy less; (b) producers make more; and (c) entrepreneurs invent substitutes. 3. Still, people object to these important functions of prices. Examples are given from the POW camp article by Radford, and in a remote area of Germany and "price-gouging" after hurricanes. 4. What's important to remember is that there are always two considerations in dealing with market processes: a. Moral outrage/strong negative affect at being taken advantage of in the "lifeboat" b. Expectation of material benefit from consummating exchange of money for needed products

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. Is economics a science? 2. Do institutions evolve (coyotes), or emerge from conscious choice (chihuahuas)? Another example is also given, comparing Jewish dietary and food preparation rules with "modern" food handling rules based on a theory of germ pathology. They are surprisingly similar, showing that there are at least two paths to development of rules. 3. The briefest statement of the best argument for capitalism is NOT greed, it's not self-interest It's the relation between property, voluntary exchange, and price. These have a connected set of consequentialist and natural rights implications. No way to evaluate them separately, because they can't really be disconnected. 4. The political theories of Hobbes, Locke, and Rousseau are discussed, and the implications for the morality and importance of property described. 5. Does your dog own your house? 6. Two court cases are discussed: (a) Hinman v. Pacific Air (1936) and (b) Jacques v. Steenberg Homes (1997). The implications for our understanding, and the social status, of property, is discussed.

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: 1. Division of Labor: In a production process, the assignment of different parts of a manufacturing process or task to different people in order to improve efficiency. In a society, the acceptance of a complex interdependence based on specialization, requiring that people meet each other’s needs 2. Cooperation Horizon: The set of transactions, exchanges, or mutually beneficial actions that are organized in a jurisdiction. The “extent” of the cooperation horizon encompasses both space and time. So we would want to know how far cooperation extends, and for how long. 3. Markets: Markets are the set of institutions for reducing the transactions costs of impersonal exchange. Need not be a physical space. Involves trading infrastructure of transportation, trust, and transaction. The “extent” of a market comprises both the physical distance over which goods are exchanged and the variety of goods exchanged. 4. Theories of origin(s) of the state: Old Testament (1st Samuel, Chapter 8), Plato, Ibn Khaldun, Hobbes, Rousseau, Weber 5. Adam Smith's dynamic theory of "division of labor" and the role of markets in fostering division of labor.

COURSE OVERVIEW: Introduction to Political Economy is a self-contained and nontechnical overview of the intellectual history of political economy, the logic of microeconomics, and the definitions used in macroeconomics. It introduces the notion of a political economy, emphasizing the moral and ethical problems that markets solve, and fail to solve. LECTURE OVERVIEW: I, Pencil (Leonard Read) No one knows enough to do anything. We all depend on other people for almost everything we need. Some of that is provided by the state (defense, police). But most is provided by markets, without our thinking about it. Example is simple: a pencil. No one, no one in the whole world, knows how to make a pencil. 2. What is Seen and What is Unseen (Frederic Bastiat). The broken window fallacy. Does destruction create jobs? What is the real value of something? The answer is opportunity cost, so destruction does not create jobs, or growth. The problem is that we SEE the jobs "created" by the broken window, but we don't see the opportunity cost of those resources. If this were not true, then the President should commission gangs to go around breaking windows and burning cars, because that would create jobs. 3. The Candlemakers’ Petition (Frederic Bastiat) An amusing parable from 19th century France. If we believe that the way to create jobs is to make things more expensive, then just think of how many jobs would be created if we could block the sun! We would need heat, and light, and a lot of people would be employed providing those things. But that is nonsense, because the sun is free and all those things are expensive. The point is not to create jobs, and make things more expensive. The goal should be to take care of consumers, and always make things cheaper and better. Protecting producers is a sucker's bet, but that is very tempting for the state because producers are more politically powerful than consumers, as we will see in this course.