PRINCIPLES OF MACROECONOMICS



INTERMEDIATE MICROECONOMICS

Term: Summer 2007 – Cross Term

Course Number: ECO 3101

Meeting Times Monday & Wednesday – 2:30 – 4:00 P.M.

and Location:

Required Text: Frank, Robert H. 2006. Microeconomics and Behavior, 6th Ed. Boston:

McGraw-Hill – Irwin.

Course Prerequisites Introduction to Economics, two course sequence.

and Description:

Since the time of John Maynard Keynes, the discipline that had been known as ‘Political Economy’ [David Ricardo’s book is a perfect example: Principles of Political Economy and Taxation, 1817, as is John Neville Keynes’ Scope and Method of Political Economy, 1891] by the English School, was transformed with text books differentiating between Micro- and Macro- economics. The British economist, Alfred Marshall, treated economics as a whole in his classic work, Principles of Economics, [8th Ed., 1920.] Rather, contemporary economics owes more to the so-called Continental School, which devolved from the Leon Walrás/Vilfredo Pareto ‘Lausanne School,’ than it does to the English School.

This raises several differentiating characteristics (which are derived from the largely implicit ‘limiting assumptions’ of the two approaches. First, the Continental School approaches economics from the vantage point of ‘general equilibrium.’ Notice that the text reserves extensive discussion of this topic to Chapter 16, ”General Equilibrium and Market Efficiency,” 587-609. This does not detract from the importance of the assumptions, nor their ultimate implications of this approach to ‘price determination’ and the issues associated with the concepts of ‘optimization’ and ‘efficiency.’ In juxtaposition to these views is the Marshallian or English School, which are based on ‘partial equilibrium’ assumptions (the way that individual markets function in isolation from other markets). Second, the basic models developed by the Continental School focus on a ‘static state’ of perfect competition. In contrast, the English School developed around divergences from the ‘optimum,’ associated with the more realistic assumptions of ‘pure competition.’ Notice that assumptions that are inherent in this ‘model’ of market relationships (or structures) found in Chapter 11, “Perfect Competition,’ (364; 368-69): (i) standardized product(s); (ii) price-taking behaviors of firms; (iii) perfect mobility of all factors of production [land, labor, capital, and entrepreneurship]; and, finally and perhaps most alarming, (iv) availability of perfect information to all market participants.

Out of this environment, emerged the ‘Pigouvian welfare theory’ (A.C. Pigou. 1920. The Economics of Welfare) appealing to those who were willing and able to consider the ‘neoclassical utility theory’ as a simple extension of Marshall’s analysis. [Remember: that ‘utility theory’ is premised on the assumption of the measurability of consumer want satisfaction associated with the consumption of a unit of some product per unit time (a Hershey Semi-Sweet Chocolate Bar gives an individual ‘precisely 72 ‘utils’ of want satisfaction, at the moment). Further, this non-sense pretends that this measurable want satisfaction is characterized by a diminishing marginal process and reflects the attribute of an additive nature … a second Hershey Semi-Sweet Chocolate Bar will only add 64 ‘utils’ to the level of want satisfaction to our hypothetical consumer’s level of want satisfaction. This represents the notion of: ‘Diminishing Marginal Utility.’ After purchasing and consuming the two candy bars, at the moment, the consumer will have derived a total of 78 ‘utils’ + 64 ‘utils’ or 142 ‘utils’ of want satisfaction. In order to purchase the candy, the consumer had to exchange $ 1.30 for the chocolate. This implies that the ‘utility’ of money (really command over OTHER goods and services, which reflects an ‘opportunity’ cost or the ‘alternative’ cost), at the moment

It must be noted that the influence of ‘logical positivism’ exerted some influence over the development of economics during the 1920s and the 1930s. ‘Logical positivism’ espouses the necessity of ‘verification,’ while rejecting ‘metaphysics and normativism, and requires first person, direct observation:

… all knowledge is based on logical inferences from simple ‘protocol sentences’

grounded in observable facts.

Rima, in a ‘history and philosophy of economics’ type of textbook has written about ‘logical positivism’ and “the stature of economics as a science” (I.H. Rima. 1967 & 1972. Development of Economic Analysis):

For the logical positivists the stature of economics as a science required that it

limit itself to two types of generalizations: tautologies, i.e., generalizations which

are derived by logical deduction from one or more premises which are intuitively

obvious and, therefore, a priori acceptable, and empirical generalizations which

can be verified. Clearly, the methodology of logical positivism was inhospitable

to the whole concept of utility and the kind of welfare analysis which developed

from it. Whereas Pigou’s welfare analysis was, at least implicitly, grounded on

value judgments. (32-33, emphasis added)

This raises a thorny issue: Whose value judgments will prevail? This may seem to be an innocuous statement, until it is realized that it is Pigou’s theory of ‘welfare economics’ and ‘utility theory’ that underpins the progressive income tax system imposed on citizens by the ‘political class’ – the logic is: ‘rich people’ (however the ‘political class’ chooses to define it) have more money than others, so they MUST value the last dollar less than a less affluent individual (remember, ‘diminishing marginal utility’?). This being the case, taking (using the power of government to confiscate ‘private property’ EARNED by an individual) that ‘extra’ money (money that “They don’t need,” a la John Edwards) from them and transferring it to less affluent individuals, MUST improve society’s TOTAL LEVEL of utility … Remember, the assumption of the additive nature espoused by utility theory? Such an approach may well work for an individual with his unique set of tastes and preferences, considering her limited income, two goods/services with their respective prices and their respective utility functions. This approach tends to result in questionable results when it is used for interpersonal comparisons (highly unlikely that anyone CAN KNOW their ‘unique set of tastes and preferences’) and/or inter-temporal comparisons.

According to the critics of Pigou, such as Lionel Robbins (1932. Essay on the Nature and Significance of Economic Science), the nature of the Pigouvian approach devolves, ultimately, to consideration of ‘value judgments’(thereby violating the ‘verifiability’ and ‘observable’ criteria of logical positivism) and had no place in economics. Seeking to make ‘welfare economics more palatable, advocates relied on the notion of a ‘Pareto Optimum’ … Vilfredo Pareto’s work: 1909. Manuel d’Économie Politique:

Pareto conceived of welfare as being maximized when the resources of the

community are used in such a manner that their reallocation would not enable

any individual to improve his position except at the expense of someone

else. (Rima, 333; emphasis added)

It would appear to be obvious that taking (confiscation by force) of the ‘property’ of one

Individual and giving it to another would be a violation of Pareto’s so-called

‘Optimum.’

Rima continues his analysis:

It’s very definition, therefore, gave promise of avoiding the interpersonal

comparisons of utility and the value judgments which the logical positivists

insisted it is necessary for economists to avoid. Thus, the ‘new’ welfare

economies, as distinct from Pigovian welfare economics concerns itself only

with the requirements for achieving optimal conditions with respect to both

consumption and production. This objective is partly a matter of achieving

a level of employment which is in some sense ‘ideal,’ partly a matter of

achieving an ideal allocation of resources among various products, and partly

a matter of achieving an ideal distribution of products among consumers.

Once again, the issue of “Who is to decide upon what is ‘ideal’? I guess “It all depends upon what the meaning of is, is”! If it is a member of the ‘political class’, then, what are the assurances that he/she is not pursuing self-interest, engaging in ‘rent-seeking’?

An alternative way of viewing microeconomic theory is through the lenses of Ronald Coase’s ‘transaction cost analysis,’ James M. Buchanan’s ‘public choice theory,’ and the existence of a ‘probabilistic external environment’ in comparison to the traditional ‘deterministic models’ based on ‘logical positivism.’ One of the new directions of analysis may be found in Zoltan Acs and Daniel Gerlowski’s textbook: Managerial Economics and Organization (1996):

It is quite important to recognize the implied functionality of firms;

they organize economic activity. For this reason, a more general term has evolved in business for firms: organizations. (2, emphasis

in original)

…. Each of these activities is organized or arranged in a particular way that depends on a number of forces both inside and outside the firm.

Traditional economic analysis focuses to a great degree on profit maximization as the primary force driving firms in their actions. We [Acs and Gerlowski] will adopt the much broader concept of efficiency. A particular way of organizing economic activity is said to be efficient if it is impossible, given available resources, to implement an alternative arrangement under which all parties involved are at least as well off. [2, emphasis is original]

It might be noted that the foundations of this approach were established long ago, but ignored by most economists in a most irresponsible manner. To check on this, read about Ronald Coase at: research/ei. Pay particular attention to his article: “The Nature of the Firm,” (Economica, 1937) and his view that ‘activities may be accomplished ‘within’ the firm or be ‘out-sourced’, based on the decision-criterion: the minimization of ‘transaction costs.’ Coase was heavily influenced by his colleague at the University of Chicago, Frank Knight and his dissertation turned into a book: Risk, Uncertainty and Profit. In a later article, “The Problem of Social Costs” (1960, Journal of Law and Economics), Coase more fully developed his ideas on ‘transaction costs,’ calling into question the ‘conventional wisdom’ of economic policy …. government regulations serve to ‘correct’ market-failures and promote economic efficiency. This silliness may be traced back to A. C. Pigou’s notorious book: The Economics of Welfare (1920). Robert Formaini has commented on Coase’s observation:

… methodologically demonstrates that regulatory interventions can

under certain conditions lead to less economically efficient outcomes

than markets alone would create. [“Ronald Coase – The Nature of Firms and Their Costs,” Economic Insights, 8 (3).]

A second significant contemporary economist that you should review is James M. Buchanan, who also acknowledged the costly role of ‘government failure’ in its pretenses of correcting the alleged failures of free-markets, a la A. C. Pigou. Buchanan notes that he has been heavily influenced by Frank Knight and Frederick Hayek. The silliness of the pretense that government can correct ‘market failure’ devolves from the conviction that ‘bureaucrats’ are superhuman entities, with access to ‘perfect information’, the capacity of setting aside their own ‘self-interest’ and acting ONLY to serve the interests of the public!, e.g., they are “… a disinterested agency that could correct for market failures.” Unfortunately, the pretense of sainthood is overshadowed by the existence of ‘rent-seeking’ and ‘wealth-trading’ inherent in the legislative processes. For more on Buchanan, see: Robert Formaini. “James M. Buchanan – The Creation of Public Choice Theory,” Economic Insights, 8 (2); @ dallasfed. org/research/ei.

A basic understanding of major precepts of both micro- and macro-economics is assumed – the essential nature of economics as practical exercises in making difficult decisions necessitated by explicit recognition that ALL resources (land, labor, capital and entrepreneurial talent) are scarce. Rational decisions under conditions of resource scarcity require that the factors of production (or, resources or inputs) be directed to their ‘highest and best uses.’ This has been summed-up by James D. Gwartney and Richard L. Stroup as “There Ain’t No Such Things As A Free Lunch,” or TANSTAAFL. Such a definition indicates that deviations from such a pattern of resource allocation involves waste or inefficiencies – that less is made available than would be the case.

No mode of social organization (capitalism or socialism, not even communism or simple subsistence economies) is exempt from this so-called iron ‘law of scarcity.’ Though some decision-makers forget this, or choose to ignore it, or, arrogantly, in their superior wisdom, presume that they are able to suspend the laws of human nature. Such behaviors are a suspension of the ‘Baconian’ Scientific Method’ and has been chronicled by Michael Crichton, M.D. in his disturbing speech (available on his website – speeches/index.htmh): 2003. “Aliens Cause Global Warming,” California Institute of Technology, January 17.

The ‘theories’ and ‘laws’ of economics are subject to empirical verification through the assiduous application of the ‘Baconian’ scientific method. This means a theory or law that fails to ‘predict’ outcomes with a high level of precision at a high degree of accuracy must be rejected – neither science nor economics is a democracy. When you hear “most scientists or economists agree,” you know that, as Sherlock Holmes would, “Something is afoot.” There are no partial truths, the theory/law is either correct or it is incorrect!

Instructor: Louis A. Woods

Office Hours: Monday and Wednesday @ – 1:00 to 2:30; and by appointment.

Phone: [904] 620-2641

E-mail: lwoods@unf.edu

Outside Readings: In addition to the assigned reading material in the text, each student is

expected to read a total of ten (10) articles (not editorials or book reviews) from scholarly journals over the term. Time, Businessweek, Fortune, The Wall Street Journal, etc. are all popular periodicals and DO NOT qualify as scholarly journals. Several examples of scholarly journals are: Journal of Business, Harvard Business Journal, Journal of Marketing, Journal of Accountancy, Land Economics. Each of the articles should be reviewed, summarized or outlined as a written report on 5" x 8" note-cards. Reviews must be headed with the appropriate bibliographic heading on the top line:

Author. Year. “Title,” Journal, Vol. ?? , No. ? (Month), pages; --

for example:

Hermann Hauser. 2000. “Entrepreneurship in Europe,” Business

Strategy Review, 11, 1 (Spring). 1-9.

These reports are to be turned in on a weekly basis, beginning the week of

May 23rd.

Textbook: Frank, Robert H. 2006.Microeconomics and Behavior, 6th Edition.

May 14 - Introduction

June 6 Chapter 1 “Thinking Like and Economist,” 3-23;

Chapter 2 “Supply and Demand,” 27-55;

The Theory of Consumer Behavior

Chapter 3 “Rational Consumer Choice,” 61-103;

Chapter 4 “Individual and Market Demand,” 105-153; and

May 28 University Holiday – MEMORIAL DAY

Chapter 5 “Applications of Rational Choice and Demand

Theories,” 155-181;

Chapter 6 “The Economics of Information and Choice Under

Uncertainty,” 187-229.

June 6 FIRST QUIZ

June 11 - The Theory of Consumer Behavior – continued:

July 9 Chapter 7 “Explaining Tastes: The Importance of Altruism

and Other Nonegoistic Behavior,” 231-255;

Chapters 8 “Cognitive Limitations and Consumer Behavior,”

259-281.

The Theory of the Firm and Market Structure

Chapter 9 “Production,” 287-321;

Chapter 10 “Costs,” 323-351;

July 4 University Holiday – INDEPENDENCE DAY

Chapter 11 “Perfect Competition,” 363-401; and

Chapter 12 “Monopoly,” 407-448

July 9 SECOND QUIZ

July 11 - The Theory of the Firm and Market Structure – continued:

Aug. 6 Chapter 13 “Imperfect Competition: A Game Theoretic

Approach,” 453-499.;

Factor Markets

Chapter 14 “Labor,” 505-553;

Chapter 15 “Capital,” 555-582;

Schumpeter and the Entrepreneur, See:

Chapter 16 “General Equilibrium and Welfare,” 585-609;

Chapter 17 “Externalities, Property Rights, and the Coase

Theorem,” 613-639; and

Chapter 18 “Government,” 647-675; and

Alan Greenspan. 1962. “Antitrust,” @ Ayn Rand. 1967.

Capitalism: The Unknown Ideal, 63-71.

Aug. 6 THIRD QUIZ.

Additional Each student is expected to be well informed on current social and

Requirements: economic issues – both domestic and international -- by reading a reliable

newspaper or internet source, including the editorial pages (such as the

Wall Street Journal or Investor’s Business Daily; and/or by viewing a

reliable television news source (if that’s even possible) on a daily basis.

Initial In a recent Investor’s Business Daily editorial, Paul Craig Roberts

Comments: presented ‘seven big economic ideas’ and three related issues. Finally, in

an editorial written by Walter E. Williams, entitled “Economics 101’, he identified the ‘key characteristic of economics’. In order to set the tone for this course, I can think of no better place to begin than in Williams’ editorial, “Economics 101”:

More than anything else, economics is a way of thinking. At the

heart of economics are several simple and easily observable

characteristics of humans and the world in which we live. The first

is that people prefer more of those things that give them satisfaction

and fewer of those things that give them dissatisfaction. Second,

when the cost of something goes down, people tend to take or do

more of it, and when the cost of something increases, people tend to

take or do less of it. Finally, having more of one thing requires less

of something else. Or, as my colleague Professor Milton Friedman

puts it, “There’s no free lunch.” [“Economics 101,” available at:

columnists/walterwilliams/ww000607, emphasis added]

It would be wise to read Williams’ entire editorial to discover how he applies these basic principles to ‘public policy issues’. For more about Milton Friedman go to and ‘click’ on ‘Publications and Resources’ (top banner); then to ‘E’ (extreme upper right); and then on ‘Economic Insights’. Now, page down to “Milton Friedman – Economist as Public Intellectual,” Economic Insights, Vol. 7, No. 2; or you may simply go to: research/ei/ei0202.

Paul Craig Roberts in his editorial has identified the seven big economic

ideas of the 20th Century (having had the most socio-political influence).

He lists:

(i) communism (socialism);

(ii) Keynesianism and spending or demand-side economics;

(iii) Hayek’s identification of “the market system as an

information network”;

(iv) monetarism à la Friedman’s notion “demand is a

monetary phenomenon”;

(v) supply-side economics;

(vi) Coase and transaction cost analysis (“laws and property

rights” affect economic outcomes, i.e., so-

called ‘market failures’; and

(vii) Buchanan and ‘public choice’ economics (“policy-

makers use public policy to advance their own

self-interests”).

Note that there are explanatory materials devoted to Frederick Hayek, James

M. Buchanan and Ronald Coase available on the Dallas Federal Reserve website:

“Hayek – Social Theorist of the Century,” @ research/ei/ei9901;

“James M Buchanan – The Creation of Public Choice Theory,” @

research/ei/ei0302; and

“Ronald Coase – The Nature of Firms and Their Costs,” @

researh/ei/ei03.03.

Additionally, an historical evaluation and comparison of John Maynard Keynes and Frederick Hayek and their influence of politics and economics during the 20th and early 21st centuries may be found on the PBS website relating to one of their programs, “The Commanding Heights,” (a nine hour special devoted to ‘the battle of economic ideas’ during the 20th Century) especially:

‘Episode One: The Battle of Ideas’ @ wgbh/commandingheights/ lo/story/index.

The series and a companion book by the same title (1998. The Commanding Heights: The Battle for the World Economy) was written by Daniel Yergin and Joseph Stanislaw. Dan Yergin is one of the world’s leading experts on petroleum and the economics of its exploitation.

Roberts begins his editorial by stating: “The two most influential – communism and Keynesian economics – proved themselves to be false, but the shadows they cast kept the five valid ideas in the shade.” (Emphasis added) He proceeds by examining the ‘seven big ideas’, and concludes by observing:

Government growth is the 20th century reflected two big ideas that proved to be wrong. If the five valid economic ideas prove to be as influential, the future will bring a contraction of government and an expansion of individual freedom.

Grading: Three, equally weighted quizzes will comprise 86% of the final grade. The remaining 14% of the final grade will be determined by the outside readings and

summaries. The following aggregate grading scale will be used:

350 to 323 (100% to 93%) ............... A

322 to 298 (92% to 86%) ................. B

297 to 270 (85% to 77%) ................. C

269 to 242 (76% to 70%) ................. D

Less than 242 (69%) ..................... F

Library Scholarly journals may be located in the periodical section of the library

Assignments: (The Third Level).

Written The individual article summaries will comprise one of the written

Communication communication requirements in this course. Please note that the cards=

Requirements: format, particularly the Bibliographic material, should conform to those found in the Chicago Manual of Style.

Oral Class participation constitutes the demonstration of oral

Communication communication skills. At all times, class discussion and class

Requirements: participation is strongly encouraged.

Computer Use of the Internet for data searches, articles from scholarly journals

Applications: and data manipulation are encouraged. The need for students to access the

instructor=s home page to download syllabi, class materials, and project

instructions serves as an additional set of computer applications.

International Frank devotes very little space to international issues. Lectures, outside Coverage: readings and handouts are used to augment the international component of

this course.

Environmental Externalities/market failures, as well as government policies, are used

Issues Covered: to examine environmental issues (See: Chapter 16 “Externalities, Property

Rights and then Coase Theorem,” and Chapter 17 “Government.”. In addition, the regulatory response and burden on private markets are discussed. The role of private property in a free-market economy and its implications for economic efficiency vis-a-vis the public provision of goods and services are examined in the so-called >tragedy of the commons=.

Ethical Issues Ethical issues related to illegal or immoral activity within the economy will Covered: be discussed where and as appropriate. This is particularly appropriate,

given recent scandals—Enron, Global Crossing, etc. and elected

governmental officials. Since the course addresses aggregates, aggregate

behavior of producers, consumers, regulators will be considered.

Academic Integrity: Each student is expected to do his/her own work on assigned activities and on all quizzes. An understanding of what constitutes plagiarism and abuse

of copyright >fair use= laws is expected of each student.

Students With Students with a disability, as defined under the Americans with

Disabilities: Disabilities Act (ADA), who may require special classroom

accommodations, should inform the instructor of any special needs during

the first week of class. Students should also contact the Office of Disabled

Services Programs (620-2769) immediately.

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