Assume a Can Opener

 Since I'm actually giving a lecture about this tomorrow I'll just share some of my slides.

•Introductory economics textbook writers are fond of cartoon worlds --   only two people with goods to exchange, or only two goods for sale.

•They imagine how these worlds would work and then argue that these imaginings can be extrapolated to explain how the real world works.

•To the more realistic world of many people, many products, and many buyers and sellers they apply numerous other assumptions, without for the time being examining whether any of them are ever likely to be true.

A caricature? Maybe, but many people, including many influential people, think is a description of reality. It strongly influences journalism, our political discourse, our jurisprudence, and our public policy.

 

"FEW IDEAS have more profoundly poisoned the minds of more people than the notion of a “free market” existing somewhere in the universe, into which government “intrudes.” 

                                                                    -- Robert Reich, The Myth of the Free Market 

 

The Story . . . 

 

Imagine a world of two people, Bob and Alice. Alice has something that Bob wants more than she does, let’s call it X, and Bob has something that Alice wants, call it Y, that is worth less to Bob than it is to Alice. So if they exchange X and Y, they’ll both end up feeling better off.

 

That’s called a transaction. It follows that whenever a transaction happens, the world is a better place because now both parties are happier. Obviously, if some busybody comes along and stops Alice and Bob from doing all the trading they want to do, they won’t be as happy as they could be.

 

The Conclusion . . . 

 

The endeavor from here on is to inflate this into a claim about the real world of many people, many corporations, and innumerable products.

A first order conclusion is that the way to the best possible world is to let everybody do whatever trading they want, of anything, with anybody.

The posited “free market” economy, if left to its own devices, will turn out maximum prosperity, efficiency and happiness for all.

Government just needs to leave it alone – an idea called laissez faire – French for “let do” – a phrase popularized in the 19th Century.

 

This, however, depends on certain assumptions . . .

•“Rational Actors”: People allocate their spending* to maximize their “utility,” a mysterious psychological property such that $1=1 utile.

•Willing sellers and willing buyers.

•Perfect information: Buyers and sellers know everything important about the product.

•Corollary: Consumer sovereignty – consumers generate demand.

•Many sellers and many buyers.

•Willing sellers and willing buyers.

•Declining marginal utility.

•No “externalities” – 100% of the costs and benefits of transactions are captured by the parties.

•All goods are “excludable” and “rivalrous,” i.e. non-public

 

Next, we'll take on these assumptions and see what's really true.