Valuable economics knowledge available, ironically, for free

by Stuart_Armstrong 5 min read18th Jul 201337 comments


I took an economics course recently. And by "took a course" I mean followed a series of online lectures. I can strongly recommend doing so, especially if you already think you have an intuitive grasp of economics.

I was in that situation. I knew about incentives, and revealed preferences. I understood that supply and demand curves crossed. I grasped some of the monetarist arguments about the lack of long run tradeoffs between inflation and employment. I could talk about Keynesian stimulus and sticky prices/wages. I understood bank runs. Externalities were obvious, public goods a bit less so. I even knew quite a lot about banks and the money supply.

I had it pretty good, I thought. And yet when I followed basic economics lecture, I learnt a lot. The models and concepts suddenly fit together. I understood concepts that I only thought I had understood before. Economists do know their stuff, their models and concepts are informative - more so than I ever expected.

So, bearing in mind that economics is a social science whose conclusions are not nearly as rigorous as its models, I can recommend to anyone on Less Wrong who's interested to follow a lecture series or take a course.

The lecture series I followed was this one, by Professor Kenneth E. Train (the first lecture can be skipped). The most useful potential insight of all was in a brief throw-away comment in lecture 22: many economist think that the unemployment rate is determined entirely by macro-economic policy (and probably by the business cycle). So all the articles you might read about new industries "creating" jobs, or about some people becoming unemployable because of the "loss" of certain types of jobs: according to some some economists, all these articles are wrong. These trends affect who is employed versus unemployed, and conditions and wages, but not the unemployment rate across the business cycle. An interesting idea, worth thinking about.

Here are some brief notes on each lecture (useful for revision):

  • Lecture 01 is a general introduction, touching upon scarcity and opportunity costs, and setting up class stuff. Can be skipped.
  • Lecture 02 introduces demand and supply curves, emphasising their hypothetical nature, and showing how the crossing of supply and demand act as an attractor. Illustrates by showing the idiocy of the war on drugs.
  • Lecture 03 looks at elasticity of demand/supply and the consequences of price controls and taxes, figuring out who actually pays for them.
  • Lecture 04 explains how demand/supply curves are constructed from individual marginal willingness to pay/marginal cost. From this, we can calculate the total consumer and supplier surplus, and the deadweight loss due to taxation.
  • Lecture 05 is about production costs for a firm, including fixed costs, total costs, average costs and marginal costs. The important points are that marginal costs eventually rise, and that the marginal and average costs cross at the minimum of the average cost curve. The social optimum is defined, when marginal willingness to pay and marginal costs are equal.
  • Lecture 06 presents the definitions and advantages of perfect competition (a surprisingly relaxed situation for the firms involved). In this situation, each firm faces a flat demand curve and has no market power. Because of this, price is equal to marginal cost (reaching social optimum). Due to free entry and exit, this is also the same as the average cost - which is automatically the minimal average cost.
  • Lecture 07 looks some extra features and issues concerning perfect competition, such as the fact that the producer surplus/profit is zero, once all workers and investors are paid, and the fact that consumers are paying the minimal possible cost. Waste and inefficiencies get eliminated, but firms will collude if they can. The shape of the average cost curve can tell us if the market is naturally competitive, naturally monopolistic or neither.
  • Lecture 08 concerns monopolies. Facing a non-flat demand curve, firms use marginal revenue rather than marginal cost: their prices and quantity produced are connected and vary inversely. Monopolists will produce so that marginal revenue equals marginal cost, producing less than is socially optimal, and pricing higher than is optimal (which would be marginal cost), capturing more of the surplus and making positive profits.
  • Lecture 09 introduces the (badly named) concept of monopolistic competition, with heterogeneous products. This gives firms some market power. Firms will produce till marginal revenue is equal to marginal cost, producing too few products (as in monopoly), but due to free entry and exit, they will not make a profit (as in competition). Collusion and the prisoner's dilemma are presented (nothing that Less Wrongers won't have seen before, apart from the fact that transparent prices make collusion easier).
  • Lecture 10 is all about the regulation of natural monopolies, how hard it is (mainly because regulators and firms don't have the same information and incentives), and why regulation must be fluid and often re-inspected. This lecture and the next are illustrated with historical examples which imply that regulators often reach the right conclusion - eventually.
  • Lecture 11 looks at anti-trust regulation in the United States. Of relatively narrow, American relevance, but the discussion and analysis are interesting.
  • Lecture 12 introduces externalities. Negative externalities (when social costs exceed private costs; e.g. pollution) cause too much of the product to be produced. Positive externalities (when social benefits exceed private profits; e.g. vaccinations) cause to little of the product to be produced. Describes potential solutions, each with advantages and disadvantages, and emphasises the point is not to get rid of things like pollution entirely, but to move closer to social optimum.
  • Lecture 13 is about public goods (e.g. National Defence), and seems to focus on the non-rivalrous aspect rather than the non-excludable. Public goods are under-produced by the market. The various attempts to remedy this have flaws, mainly because there is no effective way to force people to disclose their true valuation of the public good.
  • Lecture 14 considers inter-relations between markets, using the example of the labour market and the market for the good produced by that labour. Ideally, there would be a joint equilibrium in both markets, to which prices would converge (depending on whether the markets obey the properties of various fixed-point theorems). To illustrate mutual dependency, changes to demand are played out through the joint system.
  • Lecture 15 looks at time, uncertainty, utility, diminishing marginal utility, and why higher risk requires higher returns. It finishes with Moral Hazards, the only part of the lecture that might be unfamiliar to Less Wrongers.

That's the end of micro-economics, the rest are about macro-economics:

  • Lecture 16 is the introductory overview of macroeconomics, introducing the basic concepts (aggregate output, employment, general price level, inflation...) and how they are measured. Fiscal policy (economic impact of government taxes/spending) and monetary policy (interest rate setting) are mentioned.
  • Lecture 17 analyses aggregate output, pointing out that in a closed economy, every expenditure is an income for somebody, giving an equilibrium aggregate output. This is a function of the rate of consumption and investment. It is pointed out that this equilibrium need not correspond to full employment, and multipliers are introduced: extra consumption becomes extra income, a part of which is then spent as more consumption, and so on. With a high marginal propensity to consume, changes in consumption have large effects (hence giving an argument for transferring income from richer people with low propensity to consume to poorer ones with a high propensity).
  • Lecture 18 looks at the role of government, pointing that tax reductions and government spending (fiscal policy) both have a (potentially large) multiplied stimulative effect on the economy (though there is a long term cost). Spending is more effective than tax reductions, so simultaneous equal tax and spending increases are stimulative (though subsequent lectures all reduce the impact of fiscal policy).
  • Lecture 19 studies the money supply and interest rates. The interest rate is the price of money; it's the desire for liquidity that determines the value of money (this is an attracting equilibrium process). The Federal Reserve and other central banks have ways of manipulating the interest rates (monetary policy).
  • Lecture 20 compares fiscal and monetary policy, showing that they affect both interest rates and aggregate output. The impact of both polices across the two markets is reduced by the interaction between them: decreased interest rates increases aggregate output which increase interest rates. This reduces the multiplicative impact of fiscal policy, especially over the long term. Monetary policy is more effective, except when in a liquidity trap: a situation where consumers and firms are so pessimistic they won't spend or invest, even if they could borrow money for free (at 0%).
  • Lecture 21 models inflation. "Aggregate demand" curves models how increasing prices reduces aggregate output (increasing prices increase demands for money, and hence interest rates). "Aggregate supply" models how increasing aggregate output increases employment, which puts an increasing pressure on prices. The crossing of these two curves is an attracting equilibrium. This reduces the impact of both fiscal and monetary policy, strongly when the economy is close to full employment (and weakly otherwise). The shape of the aggregate supply curve explains the difference between Keynesian and classical economics.
  • Lecture 22 (out of order on the playlist) is a hagiography of the benefits of free trade. It covers comparative advantage, and the fact that free trade doesn't destroy jobs (unemployment being determined by macroeconomic policy), but just moves around where those jobs occur. Jobs can only be outsourced to a country if they are also outsourced from it. Nothing really new, but well phrased.
  • Lecture 23 is the last lecture with new content. It completes the analysis of the macroeconomy, by adding the macroeconomic impact of trade: exchange rates. These are determined by the desire of people in one country to buy products, or invest, in another country. When the dollar depreciates, the US exports more, and their aggregate output climbs (and vice versa). Fiscal expansion increases interest rates, which causes the dollar to appreciate (thus weakening its expansionary impact), while monetary expansion causes it to depreciate (thus strengthening its expansionary impact). Monetary policy may cause trade wars and international tensions if used this way, however.

And in conclusion:

  • Lecture 24 is the general revision lecture. If you can follow it, you've learnt most of the course. It emphasises that monetary policy is generally much more effective than fiscal policy, except in liquidity traps, when monetary policy becomes ineffective.