Instructor resource: Market Applications Solutions, December 2022
This topic is all about how market exchange generates prices, which can be used for information purposes. My favourite examples of using price data to tell a story are the two charts below:
The rise of Netflix mirrors the decline of Blockbuster
The share prices of Delta airlines and Zoom diverged on the day that the successful Pfizer vaccine trials were announced
This lecture integrates ecological concerns wirth standard economics, providing an overview of how macroeconomists model the economy and how those methods and models relate to climate issues.
Here’s a clip of John Lennon saying that overpopulation is a myth:
“Macro 6: DSGE“, Anthony J. Evans (for more depth on Macroeconomic models including my other podcast episodes see here)
Recommended videos:
Here is a fascinating video (in French) on the limits to growth and the World 3 model
Here is more on the doughnut model:
Some spinning donuts (see! it is meant to be measured!):
Yes! At last… Watch national Doughnuts changing over time. Published today: 150 countries, 1992-2015. Eye-opening & powerful work by @AndrewLFanning & coauthors. Check out the website – an incredible teaching resource… https://t.co/8D59jZ9TMppic.twitter.com/PwMYZwHc3g
Here’s a concerning thought: “Half of all scientific papers were published in the last 12 years, but much less than half of all scientific progress has happened in that time” (link).
We are seeing unprecedented innovation in payment technologies, with disruptive firms encroaching on activities that many think should be left to central banks. But why not think creatively about the opportunities and threats from decentralised money? What is the proper role of a monetary authority in a system that is fit for the twenty first century? This lecture equips students with the skills to take a radical look at contemporary issues that relate crypto currencies and central bank activities.
Prerequisite: I assume that you have some familiarity with basic concepts from money and banking, and know about and understand Blockchain and Bitcoin. If you don’t, see here:
In response to the 2022 Fed paper, George Selgin wrote a briefing paper that advocated expanding the set of providers that the Fed deals with, to obtain the competition and innovation that comes from the private sector without the Fed having to issue their own digital currencies. Stablecoin issuers do not require the same regulatory oversight as traditional banks, by providing access to the Fed’s system they simply need to ensure that they fully back their coins with central bank reserves (and possibly short term Treasury certificates). This would require:
Bank licenses should be available to non-traditional banks (i.e. institutions that don’t do all of the activities typically associated with a bank, such as maturity transformation)
Can someone really understand crypto currencies and the future of digital money without having a solid grasp of why money even exists? This topic is a great example of why historic knowledge and theoretical clarity are crucial when involved in fast changing industries – it provides a benchmark to verify the bold claims made by industry practitioners. The purpose of this lecture is to gain a deep understanding of what money is and how it has evolved.
Background readings:
Menger, C., 1892, “On the Origins of Money” Economic Journal, 2:239-55
Radford, R.A., 1945, “The Economic Organization of a P.O.W. Camp”, Economica, 12(48):189-201
Steve Hanke runs the Troubled Currencies project which gathers black market data to construct up to date estimates of high inflation environments. You can see more here.
“Pierpaolo Barbieri on Latin American FinTech“, Conversations with Tyler, May 19th 2021 – in particular this shows the importance of knowing financial and economic history for tech founders
“Brian Armstrong”, Conversations with Tyler, February 2021 – a great overview of how the CEO of Coinbase sees the crypto industry
Hashpower – Part 1, Investors Field Guide – a fantastic early introduction to blockchain technology and potential of crypto assets
Money and the rule of law – in conversation with Daniel Smith, Center for the Study of Governance and Markets, King’s College, November 3rd 2021 – an interview about Smith’s co-authored book where he provides a critique of central bank performance
Recommended video:
Here is a standard historical overview of money:
This is a great lecture video, by the late Steve Horwitz, summarising Carl Menger’s work on the origins of money:
If you are totally new to concepts like blockchain, bitcoin and NFTs and want a thorough account of the history and development, in a well produced an informative documentary that takes a highly skeptical and cynical approach, I recommend this:
For a more positive view of NFTs, an identification of the context in which they’ve emerged (post global financial crisis and great stagnation), and subjectivist approach to value, see this Twitter thread.
A good article debunking a lot of Web3 hyperbole is here:
Did SBF’s utilitarian philosophy contribute to his willingness to cross ethical boundaries? (His objective was to make as much “risk neutral” money as possible)
If his intention was to contribute to the norms of capitalism, would he have behaved differently?
Learning Objectives: Understand the origins of money and how this can be used to understand the role of central banks in a fiat money system, as well as to navigate the crypto landscape.
Cutting edge theory: Making assessments of digital and crypto currencies.
Saez, E., and Zucman, G., 2020, “The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macroeconomic Accounts” Journal of Economic Perspectives, 34(4):3-26
Kopczuk, W., and Zwick, E., 2020, “Business Incomes at the Top” Journal of Economics Perspectives, 34(4):27-51,
Many consider inequality to be a key social problem, and yet economics is all about delving beyond intuitions. Do we have good data on what has happened to inequality over time? What type of inequality matters? Is there an important trade-off to consider when confronting inequality? The answers to these questions may be controversial, but they are relevant and important.
Imagine trying to answer the following question:
A study by Gimpelson and Treisman (“Misperceiving inequality“, NBER Working Paper 21174) found that:
In 29 of the 40 countries a majority of respondents who ventured a guess guessed wrong.
In 29 countries, the leading choice attracted fewer than 50 percent of those who guessed.
In almost three quarters of countries, most respondents who thought they could identify the general pattern of inequality got it wrong.
loads of the objections people have to inequality, if there is any truth to them, are probably actually objections to perceptions of inequality, which may be more driven by media coverage than reality. If that’s true, then trying to reduce inequality in fact is a waste of time — you should try to get the media to talk about it less instead
I’ve often seen students link to this graph:
On initial inspection this graph looks highly dubious:
The selection of countries is suspicious (why exclude countries that have more income inequality than the US, and why include Finland but not Singapore?)
The “Index of health and social problems” looks arbitrary and prone to manipulation
However I’ve not been able to find the actual source yet. I assume it comes from ‘The Spirit Level‘, which I believe has been quite firmly debunked.
Oxfam are also reknowned for using dodgy statistics. For example:
Aside: Sometimes I’m asked what I really think about inequality. Really? That the there is no ethical basis for being concerned about inequality per se. In fact, the best argument to take it seriously is because low educated and xenophobic natives, who have hit the jackpot in where to be born, hold civilised (i.e. cosmopolitan) society to ransom by threatening extremism of various sorts and civil disorder unless their concerns are met. Ideally, we prevent all that from happening by ensuring nominal income stability and productivity growth. But there’s no moral basis for “equalising” arbitrary distributions. Our moral concerns should be focused on eradicating poverty and destitution; and ensuring a competitive market economy that rewards wealth creation and limits rent seeking. If forcing Charles Koch to emigrate improves your metrics of success, then I demur.
This is also something that Dracula noticed when he encountered a “normal” modern house:
I’ve been a nobleman for 400 years. I’ve lived in castles and palaces among the richest people of any age. Never….never! Have I stood in greater luxury than surrounds me now. This is a chamber of marvels. There isn’t a king, or queen or emperor that I have ever known or eaten who would step into this room and ever agree to leave it again. I knew the future would bring wonders. I did not know it would make them ordinary.
Here is a debrief about the wealth tax quiz. Recently, Norway increased their wealth tax to 1.1%. According to a report in The Guardian, “More than 30 Norwegian billionaires and multimillionaires left Norway in 2022… This was more than the total number of super-rich people who left the country during the previous 13 years, it added. Even more super-rich individuals are expected to leave this year because of the increase in wealth tax in November, costing the government tens of millions in lost tax receipts… Many have moved to Switzerland, where taxes are much lower”
Here is the reason I’m concerned about the link between inequality as a public policy issue and central bank digital transformation:
We realize it’s difficult to pay your wealth tax when much of your wealth is in the form of illiquid assets. As a result, we’ve deducted the amount from your CBDC balance, which is now negative and subject to the central bank’s borrowing rate.
I largely share Martin Wolf’s (2023, p. 283) criticisms of a universal basic income (UBI) in that by being so intentionally ill targeted it creates too much of a waste of limited public funding – “A UBI at a high enough level to render targeted assistance to those who are vulnerable, needy, and deserving would be unaffordable, while a UBI that is affordable would benefit many people who do not need the money and fail to benefit important services and people who need more than they have now.” I prefer a moderate income tax with generous allowances and incentive compatible welfare payments.
We can think of the state as an “insurer of last resort”, with its access to taxation permitting favourable terms for mitigating risk (p. 274). By being able to compel people it also avoids the “adverse selection” problem that befells individuals in particular need. This helps to explain the main economic justification for a well functioning welfare state (p. 276):
Incomplete private insurance
Incomplete capital markets
Note thought that improving the market in those two areas would reduce the need for widespread social protection.
For an overview of the debate surrounding the role of slavery in the rise of the West see:
“Claudia Goldin on Inequality“, Conversations with Tyler, Oct 6th 2021 – this conversation focuses on gender inequality and the labour market in particular, and although some of the discussion is aimed at graduate students they pose some excellent questions to reflect on.
“Thomas Piketty on the politics of equality“, Conversations with Tyler, April 20th 2022 – Tyler challenges Piketty on some of the political economy arguments relating to progressivism and does a good job putting Piketty’s work into a history of economic thought perspective.
Finally, if you like the plot device from Parasite, with people appearing from underground captivity, confronting a confusing situation as a result of odd costumes, leading to violence and mayhem… then I recommend Emir Kusturica’s Underground (1995):
Learning Objectives: Survey the latest empirical work on inequality and relate this to wider social issues.
I was saddened to learn recently that same amount of time had passed between the first human airplane flight and the first human spaceflight as between the first spaceflight and 2018 (see here).
Here is an example of a business model that sounds very high tech and contemporary… but originates from the 1930s!!
The UK used to have more electric vehicles than anywhere else in the world:
A fleet delivering local, organic produce on a next-day/subscription model, with payment after delivery, zero single-use plastics, and daily recycling pickups. pic.twitter.com/4BsxefcEvH
The lecture provided some pessimistic views on transformative breakthroughs. But every now and then I notice the power of steady, incremental progress. For example:
Textbook Reading: Chapter 1 (Section 1.2, pp. 16-29)
The purpose of this session is to realise that value comes from satisfying people’s needs, and that this leads to a broad and insightful realisation that:
Competition is when anyone else tries to satisfy the same customer needs that you do.
Innovation is trying to find better ways to satisfy your customers needs.
Entrepreneurship is successful when you really understand your customers needs.
Among Us shaped chicken nugget sold for almost $100,000 (link)
One of my favourite examples of a good that has high value is saffron (see here). Since it is worth more than £5,000 per kilo (in 2021), counterfeit saffron is a highly profitable criminal enterprise. It is tempting to think that we value saffron because it requires lots of labour to produce. However this is treating value as some sort of inherent or objective property. But value is subjective, and based on satisfying needs. We don’t (typically) have a need for things that are hard to make. Rather, our need is for appealing food, and saffron satisfies this because it improves the colour and flavour of certain dishes. (Although its use as a cooking ingredient isn’t the only source of value for saffron. A historic use was as yellow dye for tunics, rather than the alternative, which was horse urine!) The extent to which one considers saffron to be a key ingredient for paella will determine how valuable you find it. That will be different for each of us. Factors that relate to the difficulty of creating something can affect the price, and make them more expensive, but they don’t explain why people are willing to pay so much. It isn’t the case that we enjoy the taste of saffron because it is hard to produce. On the contrary, it is because people value that taste that makes it worth the effort to produce.
So remember that we should reason from value to cost, not the other way around. As Will Luther said, “Consider medical doctors. Some say they make a lot of money because they spend so many years in school. Wrong! That explanation gets the story backwards. They are willing to spend so many years in school *because* people are willing to pay so much for their medical services.”
Here’s an example of how Starbucks creates value for me:
And here is evidence that kids enjoy going to Ikea:
A nice account of how Amazon may charge higher prices for the exact same books as their rivals, because they provide additional services, is in McMillan, J., 2002, Reinventing the Bazaar, W.W. Norton & Co. (p.50)
“The internet in fact has not made information free. If shopping were merely a matter of finding the lowest price, the internet’s comparison shopping devices would eventually force all retailers to match their lowest-priced competitors. But a book offered by one retailer may be distinguishable, in a shopper’s perception, from the same book offered by another retailer, even though they are physically identical objects. The shopper is not buying a book, but a package of services of which the book is itself a part – the main part, to be sure, but just a part. In addition, the buyer is getting assurances of various kinds: that the book will be delivered as quickly as promised; that it will be delivered in good condition; that the retailer will allow it to be returned if it is not what was expected; that the retailer’s employees will not fraudulently reuse the buyer’s credit card data. Buyers willingly pay a little more to reduce their uncertainty. Information costs include not only the costs of locating a seller but also the costs of getting assurance. The retailer’s reputation can convey such assurance. A brand name is a device for providing information.” [Emphasis added]
Steve Job’s famous advice was to not listen to your customers. This is in contrast to Tyler Cowen’s “law of interesting content” – which is that interviewers should have the conversation that they want, not what they think their listeners want.
Here’s my bleaker application of value to Apple’s iPhone innovation:
There is a fascinating interview with Rory Sutherland on the links between Austrian economics and marketing, on how value is socially determined and praxeology is the foundation of behavioural science.
For a more traditional, textbook treatment of demand curves, see here:
Can you think of something that delivers a lot of consumer surplus for you? What’s the most consumer surplus you’ve ever received?
Finally, here’s a quick quiz on understanding value.
Learning Objectives: Link a thorough concept of value with implications for competition and innovation. Derive demand curves.
Cutting edge theory: Jobs to be done
Focus on diversity: Economists typically take preferences as given, but we can provide a theory of demand reflecting “the individual’s commitment to an intelligible universe” (p.52), where goods are considered to be a visible reflection of culture. Mary Douglas (1921-2007) was one of the world’s most admired social anthropologists, and her 1979 book, ‘The World of Goods’, provided a rich and compelling illumination of consumption patterns.
The training scene from Rocky IV demonstrates the difference between the USSR (technologically sophisticated but lacking in heart) and the US (backward but free).
