September 19, 2016

What happens if there is not enough money in the economy?

Flows of Money  

∙ Economies don’t need money  

∙ However, money is useful

o Barter is hard  

o Search costs and transaction costs  find people who want what  you have but also have what you want

 Cost of making a transaction  really hard  

o Double coincidence of wants  

∙ Economic Organization of a POW Camp  

o Allied prisoners got the same rations

o Sikh prisoners didn’t want beef, French prisoners were desperate  for coffee  

o Cigarettes emerged as currency

∙ Uses of money  

o Medium of exchange  standard object, exchange goods and  services

What did they do in pow camps?

o Unit of account  standard unit, quoting prices

o Store of value  store wealth

∙ Money reduces transaction costs when it is:

o Divisible  

o Uniform  

o Storable  

o Compact  

∙ Gold and Silver worked well  they weren’t very useful for anything  else  

∙ First paper money  11th century in China  

o Bank notes carried a guarantee that it could be traded at any  time for coinage  

o Could be public or private  

∙ Invention of Finance  

o Money makes deals easier to strike  Don't forget about the age old question of What is the function of large intestine?

o Early states stored their treasure in temples  

What are the main uses of money?

 People began storing valuables in the temple, including  coins  

o Julius Caesar introduced the idea of allowing creditors to seize  land if payments weren’t made

∙ Not all lending relies on legal contract enforcement

∙ Fractional reserve banking system  Don't forget about the age old question of What is light microscopy used for?

o Banks take deposits in return for interest  

o Lend out the cash for more interest  

o Keep little cash in the vaults  reserves of cash are only a  fraction of their deposits

 Mostly electronic these days  

o Effects:  

 Banks make money on the “spread”

 Banks create money  

 Bank runs risk the economy  

∙ Bank run  

o Something causes depositors to worry about their deposits  o They storm the banks demanding to see their money  o Banks start to call in loans if they can  

 A healthy bank shuts down  

o Other people get scared  If you want to learn more check out What are the mature bone cells?

o Banking system shuts down  without credit, the real economy  follows  

 Credit drives up  can’t get loans anymore  

 Most of our wealth is tied up in the creation of money by  the financial system  If you want to learn more check out What happened in nat turner’s rebellion?

∙ Governments can stop bank runs  

o Alleviation  central banks can print money and lend it to banks  that are facing bank runs  

 Buying assets in return for a deposit  

 Stops banks from failing and keeps credit flowing  

o Prevention  Insurance and regulation  

 Insurance stops runs in their tracks  

 Regulation prevents “moral hazard”  

∙ International bank runs  

o Foreign investors more likely to panic  

 Less information  

 Don’t trust institutions  

 Deposit insurance systems are national  

 Exchange rate risk  

o Take their money, pulling deposits from banks and selling  securities  

o Sends prices crashing  contagion across countries  

∙ Crisis free, abundant credit countries  

o Half are small island or city states  We also discuss several other topics like What is the meaning of the individual level?

o Other half are democracies  

o All are former British colonies

∙ Non-democracies seem to be systematically less stable  ∙ Banking crises are not caused by unforeseen shocks  ∙ Bank bargains  

o Banks require governments  

o Governments can use banks  

 Finance state, government and their supporters

o Banks need to be sure that the government won’t turn against  them  

 Legal system assures the above, but policies can still  

change  

o Governments and financiers make bargains  

 Bargains govern entry into finance, how credit is priced and who holds the bag when (or if) things go wrong  

o These bargains vary across countries and time  

∙ Takeaways  

o Finance is necessary for a modern economy  

o Finance is inherently risky  

o Finance is extremely difficult without the government  

 Provides property rights and can mitigate risk  

o Getting the balance right is extremely hard  

 Democracies generally do it but not all  

September 21, 2016 Don't forget about the age old question of What is the meaning of biotic?

Recitation  

∙ Midterm  Topics 1 through 6

∙ What works in one country does not work in others  

∙ Big three in economics  

o John Maynard Keynes  

o Adam Smith  

o Karl Marx  

∙ Developmental Economists  

o William Eastery  

 Tyranny of Experts  

 2014  over the last century, global poverty has largely  been viewed as a technical problem that merely requires  

the right “expert” solutions

 If you do X, Y and Z, you can fix global poverty  

∙ Then why hasn’t it been solved yet  

 Experts recommend solutions that fix immediate problems  ∙ Don’t address the systemic political factors that  

caused them  

 Produce an accidental collusion with “benevolent  

autocrats”  

∙ Leaving dictators with more power to violate rights of

the poor

 Remedy extreme poverty  failed because they have  

neglected that individuals, businesses, governments and  

donors respond to incentives

 Failure of economic development is not the failure of  

economics

∙ Failure to apply economic principles  

 Recommendation is to improve the institutions of  governments and international actors  

∙ Create incentives that promote growth

o Daron Acemoglu and James Robinson  

 Why Nations Fail  2012  

∙ “You need to go back 200 years, not 20 years to  understand”

∙ Key differentiator between countries is (good)  

institutions  

 Good institutions  

∙ Laws and practices that motivate people to work  hard, become economically productive  

 Narrow focus on inclusive institutions  

∙ Ignore certain things  

o Area’s being landlocked  harder to trade  

o Environmental damage  

o Tropical diseases  

o Tropical agricultural productivity

o Jeffery Sachs  

 Earth Institute  

 Topography  decides whether you can make it or not   “I have assumed that America... would reliably find its way  to social betterment.”

 We need a new economic paradigm  

 Changed gears and devoted himself to looking at economic problems in the US  

 End of Poverty  clear conceptual map of the world  economy  

∙ Explains why, over the past 200 years, wealth has  diverged across the planet  

o Why the poorest nations have so far been  

unable to improve

o Thomas Friedman  

 Books

∙ Hot, and Crowded  

∙ The World is Flat  

 Talks about the US  something really wrong is going on  here  

 How to renew the US  

 Global Warming and rapidly growing populations and the  astonishing expansion of the world’s middle class through  globalization  

∙ Have produced a planet that is hot, flat and crowded

 Earth is dangerously unstable  green revolution we need  is like no revolution the world has seen  

o Paul Collier  

 The Bottom Billion  

∙ Shows what is happening to the poorest people in  

the world  

∙ Offers ideas for opening up opportunities for all  

 Why the differences?  central question  

 Norway is 496 times richer than Burundi  

∙ Average per capita income: Norway $84,290 and  

Burundi $170

 Power, prosperity and poverty vary greatly around the  world

 Hot-Cold climate theory  politically incorrect today  

∙ People in hot places work less than those in cold  

climates  

o Jared Diamond  

 Guns, Germs and Steel  

 Attributed the success of a state’s economic development  (or lack thereof, to characteristics of its physical  

environment  

 Geography is an important determinant  

 Geography theory  

∙ Farming and governments  

∙ The curse of natural resources  

∙ Cold versus Hot Climate  impacts rate of diseases  

and agricultural productivity  

∙ Natural environment

o Max Weber

 Reasons why some countries and regions of the world  experienced near miraculous periods of explosive growth  while the rest of the world stagnated  

∙ Multi-disciplinary approach is necessary  

∙ Cliometric theory  

o Emphasis on developing a coherent and  

consistent theoretical model that will provide  

the basis for interpreting historical economic  

and social phenomena

∙ What makes countries rich or poor?

o No simple answer, depends on so many things  

o Inheritance, education, ambition, talent, health, personal  connection, etc.  

o Also depends on how you define health  

∙ The IMF

o Creation after WWII  

 Manage the world’s exchange rate system

 Global financial system of currencies  

o Since 1976, we are in a volatile exchange rate system   IMF had to reinvent itself  

o Lender of last resort when you run out of real money   IMF grabs the reigns of economic power of a country when  they are called in  

 Badge of shame  means that the government has failed