Intro & Overview - Intro to Political Economy, Lecture1

you start with this image who recognizes it what is it it is indeed a bull it is the ball it is the bull that's on Wall Street the one that's been getting its ass kicked the last couple of days in fact already today things are not going well for the ball so the bull is the sort of symbol of vibrancy and potency of the economy and bulls are people who are optimistic about the projected future path of equity prices I'm not going to show the bear I will show though this does anybody recognize that and don't say horse well but what building is it it's on Constitution Avenue it's the Federal Trade Commission this was my first job out of graduate school Federal Trade Commission is charged with regulating the economy now many federal agencies are charged with regulating the economy but the Federal Trade Commission in particular is in charge of antitrust and consumer protection now when you look at that you notice this guy's pretty hot a lot of muscles he's been working out he's strong but the horse Dwarfs him in strength but it's biting him so pretty clearly what's going on here is the horse is the economy and the man trying to get control of it is the regulator so that kind of metaphor here the freestanding bowl that doing what Bulls do helps the economy or here the man struggling to control this very powerful but possibly dangerous force are the two kinds of tensions that we're going to worry about in this class this is a class in political economy now I'm going to violate the rules and give a brief lecture even though it is on the first day because I had sent out the readings and I hope you had a chance to look at them so there were three main readings for today I pencil by Leonard read Frederic Bastiat so what is seen and unseen and the candle makers petition for eye pencil how long would it take you to make a pencil and of course what you want to know is the context but suppose you couldn't buy anything suppose I told you you couldn't buy anything and otherwise you could just buy a pencil wouldn't take long to buy one would you even consider doing it well do you make your own shoes why don't you make your own shoes well I can say I buy it I can buy them cheaper and better than I can make them and that's the maker by decision that all firms and in fact all consumers face the maker by decision is rather unimaginative Lee should I make it myself or should I buy it and the answer comes down to which one uses the fewer resources which one uses fewer resources well how long would it take me to make a pencil if I couldn't buy anything I'd have to grow the trees I'd have to mine the graphite I'd have to mine the metal for the ferrule the fact is I could not make a pencil for the rest of my life I'm 56 you probably could not make a pencil for the rest of your lives and the pencils are pretty simple market system means that other people work as your employees other people work as your employees they go and get stuff that you need how do they know that you need it they're guessing it would be too expensive and time-consuming for you to hire them all they work for you by making things they think you want to buy what if they're wrong well they go out of business and you take no risk if they make stuff you don't want to buy no one buys it all the risk is on them so there's two things one a bunch of other people all over the world who don't know you are trying to make stuff that they think you want that's pretty great in fact you can get a pencil really cheap the maker buy decision for pencils is pretty simple no one would think of making their own pencil so let's turn to the broken window problem natural disasters terrorist attacks and Wars have one thing in common they involve a lot of destruction but every time there's a natural disaster or a terrorist attack or a war it can be virtually guaranteed that someone is going to come along and say that there's a silver lining in all of this it's good for the economy because it's going to create jobs when there's a natural disaster or a terrorist attack or a war we have to spend money replacing all the stuff that gets destroyed this is an application of what we call the broken window fallacy Frederic Bastiat corrected this fallacy in his early 19th century essay that which is seen and that which is not seen the key point is that destruction does not create prosperity destruction destroys prosperity imagine someone who owns a shop shop has a glass window now a kid comes along and throws a rock through the window so the windows broke shattered glass everywhere the shopkeepers upset why because his windows been broken he has to go and pay the glass maker in order to get the window replaced now some people might come along and say well now look you should all be smiling because this is going to create jobs you spend money on new glass the glass maker earns this money he can then spend it at restaurants and he can spend it on new clothes and he can spend it on things that he likes that's going to create jobs for other people this money is going to circulate and we're all going to be richer as a result of the fact that this kid has thrown a rock through a window and now we've had to replace a window let's think for a moment about what the policy prescription would be if it were in fact true that this is a good idea what we should do instead of trying to prevent people from breaking things instead of trying to prevent people from destroying property we should in fact be enlisting armies of kids with rocks to go around breaking windows to destroy things because after all if this would require a new spending that would make us richer that would make us better off that would be the path to prosperity destroying things breaking things and then spending money to replace them what we're doing when we indulge this kind of thinking is we're focusing our attention on what is seen but we're not taking account of what is not seen what we don't see is what the shopkeeper would have used that money for if he hadn't had to replace his window he might have used it to buy a suit this would have created an opportunity for a Taylor the tailor then could have spent the money on something else he could have used it to buy groceries this would have created opportunities for grocers maybe he would have saved it then the money could be lent to someone who wants to start a new business he could have done something else that would have created job opportunities for other people the world would have still had the window and it would have had the benefit of all of this additional activity that would have gone on had the window not been broken in the first place on net society is worse off to the tune of one window whenever we actually destroy resources that's precisely what we're doing we're destroying stuff we're not creating wealth it's important to remember that it's production that creates prosperity and not destruction so that's a summary of the broken window fallacy from Frederic Bastiat now there are people who disagree with that and they have good reasons that's not a knockdown argument it turns out that that argument as far as it goes is probably incorrect and we'll talk about the reasons however it is certainly possible to caricature people who take what is called the Keynesian perspective as believing in the broken window fallacy and it's easy to find examples of that sounds hypothetical but there's my good friend Paul Krugman and notice that this is a hurricane so and we have some wonderful stimulus heading through the southeast now most of you are probably not from the south I hope you don't have the opportunity to experience a hurricane firsthand hurricanes are really destructive but often after a hurricane as Professor Cardin says somebody will say and you saw this after Hurricane sandy thank goodness it's going to be such a stimulus to be able to rebuild all this stuff and this is something Paul Krugman did actually say if we discovered that space aliens were planning to attack and we needed a massive build-up to counter the space alien threat and inflation and budget deficits took secondary place to that this slump would be over in 18 months so what would the most Keynesian man in the world say I don't always root for aliens to steal mongers daca sekiz but when I do it is because that would create economic growth as I said it's a caricature but there's something to this argument that's pretty fundamental and we're going to come back to it again and again I wanted you to read first the claims about the broken window fallacy to get you to think maybe there's a problem with this before we give the answers but let me say there are I think some pretty persuasive answers so there's Basquiat someone's thrown a rock through the window and the claim is that throwing rocks through windows is the basic Keynesian prescription that is what we need to do is destroy things so that we can spend more money and last the candle makers petition in any of you seen the candle makers petition before it's something that sometimes used in high schools well Basquiat is attempting a satirical letter written from candle makers talking about unfair competition and this unfair competition is subsidized there is foreign products being brought in to France and it's harming the candle makers and they these foreign producers have such an enormous advantage there's no way the French candle makers kenka can compete for at least half of the day what is the foreign producer well as you know it's the Sun there's no way that a candle maker can compete with the Sun so what the candle makers ask is that we board up all the windows and put giant roofs over the cities because that will improve employment prospects for the candle makers now you may remember mr. burns from The Simpsons once actually tried this so the analogy is here's mr. burns and he's he's got this controller he's putting it up and it ends up blocking out all the Sun from Springfield obviously that's absurd should the United States put tariffs on products from China suppose it's literally true that the US has no way of producing products as cheaply as can be made in China isn't that unfair to us producers maybe it's not so absurd after all of course the question is how far would you go with this because you probably could say that light bulbs are unfair to candle makers so here you see the light bulb being led to the scaffold as all the candles look on so the difficulty that this raises and basquiat is very careful to raise it is our economies designed and do we need them to produce jobs or our economies designed and do we need them to produce stuff for consumers what should the economy serve producers or consumers the answer most people would give is consumers but in fact an awful lot of regulation serves producers why would that be and the answer is political the benefits to producers are large and concentrated the cost to consumers are also very large but they're not concentrated so even larger cost to consumers that are 25 cents 50 cents the United States pays twice the world price for sugar the u.s. pays twice the world price for sugar there's relatively few sugar producers in the United States but they're extremely well organized politically as a result most of our soft drinks are not made with sugar they are made with high fructose corn syrup the United States is the only country in the world for which that's true high fructose corn syrup syrup is really bad for you even compared to sugar but all of this is because we're protecting sugar producers to the great harm of American consumers why there's no economic justification it's political that's why I believe that it's difficult and probably useless to have a class just in economics or just in politics the two are inextricably related and you must think so too or you wouldn't be here

Channel: Duke University Department of Political Science

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Keywords: Michael Munger, Duke University, PPE, Economics, Economy, college course, timelapse, Philosophy Politics and Economics, Philosophy, Political Science, Department of Political Science, Leonard Read, Learn Liberty, markets, free market, communism, socialism, Frederic Bastiat, Candlemakers Petition, consumers, voters, producers

Id: Icv9MxTuaTU

Length: 15min 50sec (950 seconds)

Published: Tue Feb 09 2016