In the last class (summary) we have discussed trade and that, under certain conditions, trade leads to Pareto improvements (which means that at least one person is better off and no one is worse off). I now want to discuss what economists call a market, market prices or, better, market values, and a market allocation. The difference between the idea of a market and bilateral trade is that bilateral trade is, well, bilateral (i.e. always between two people), whereas a market is, at least in some form, a central meeting place in which all participants interact at the same time in this one place by making offers and counteroffers to possibly many other participants. We have two options of how to deal with such a market. One is to try to capture the dynamic protocol of interaction that underlies the market place. This is difficult and probably depends on the exact market we are interested in. So we will not do this here. I also do not know of any very convincing general model of this kind, but there are some for special cases. The other option is to state what we think will be the likely outcome of any such market interaction. Note that what we write down next is an assumption or definition and not derived from any more basic set of assumptions.
It would seem the US budget/debt ceiling crisis is on its way to getting resolved, yet an article on it that I read last week did strike me as weird.
A major puzzle for me has always been how irrational, incompetent and often plain and simply stupid many economic commentators make out large swaths of the population to be. As a self-declared liberal I find this strange at best and deeply troubling at worst. Obviously, the whole concept of fully rational economic actors is bogus, but to start from the premise that most of the population of a country is simply yet obviously dumb brings up huge problems when you believe that, in most cases and on average, individuals know fairly well what is in their interest and what is not and are therefore generally in a fairly good position to act accordingly. There are plenty of market failures, but for the most part they involve skewed incentives, not sheer stupidity. This latest episode involves a note to clients written by Greg Valiere, a researcher at the Potomac Research Group, in which he apparently states that:
“[I]t’s just a matter of time before President Obama throws a game-changer — warning senior citizens that their Social Security checks won’t be mailed because of John Boehner.”
That sentence makes no sense at all unless you assume most senior American citizens have absolutely no clue whatsoever why and from whom they get money each month. Does it really take the president to tell seniors that them receiving social security checks (as federal a program as they get) depends on the federal government actually being able to pay for stuff? Markets don’t seem all too worried about the debt ceiling either – are they also just stupid (and by that I mean far beyond the obvious failings of the strict forms of the EMH)? Or is this guy simply getting paid by quantity rather than by quality of memos he puts out?