Economics 101
Notes from MasterClass Paul Krugman Teaches Economics and Society
I completed this short course on economics by Paul Krugman on MasterClass last week and the following is a stiched version of my two page notes. I should tell you that the course is lucid and as Paul says himself in one of the beginning videos, this course is not to dump facts and theories of economics on students instead to kindle that interest and give some glimpses. Nothing over the top. Hence, content wise there are few quirks here and there, but mostly it was a 4–5 hour interesting watch. A fresh perspective to look at the world with economic mindset. Thinking about people at macro scale and understanding the social reality and strings pulling it’s fabric. Course at: https://www.masterclass.com/classes/paul-krugman-teaches-economics-and-society
Watch the trailer here: https://www.youtube.com/watch?v=JRhvnlQHKc0
The Two Fundamental Principles
Principle #1: People take advantage of incentives
When governments and agencies give incentives as simple as a 0.1 increase in interest, people react. We cannot predict if you will react or not, but given a large number of people, we can confidently guesstimate a close enough percentage of people that will respond. This is what economics is about.
Principle #2: Every sale is a purchase
The economy is a zero-sum game for the most part. Every purchase you make is someone’s sale. Your salary is someone’s cost. Your savings is someone’s debt. Automation, Innovation, and Growth due to increased productivity are things that make it a positive sum game qualitatively by increasing total economic value but on a macro scale, the records are still straight.
Two knobs
Monetary Policy — Central Bank
The monetary policy is the currency circulation, interest rates and anything else to do with the central bank. This is the primary knob to which economies react the fastest and is used to maintain the inflation rates and keep things under control not too fast that debt becomes a burden and not too slow that holding money becomes a better wager than investing (ie recession).
Fiscal Policy — Government
This is the second and less used knob. Only in a crisis, does the central bank seek help from the government asking to cut down the spending (higher inflation) or increase spending (recession) to fuel the economy. Government is the biggest client of the central bank after all!
Generations …
This is for information purpose only. Different generations have different names based on events of that generation. Baby Bust is the generation where there was a drop in birth rates across the globe largely in the US after the baby boomer generation. The x-axis shows the year in Gregorian Calendar (the one that you are using most probably!) Y-axis is the age. The dotted line parallel to the y-axis is the current year 2019.
Paul mentioning he is from baby boomer age sparked me to go out and make the full chart myself. :P
Hence, it might not be relevant to the economics-101 here but i wanted to show anyway!
Inequality
Problem
When the rate of return on wealth is higher than the rate of growth of the economy than the rich can become richer by simply sitting on their wealth and the wealth disparity is going to get worse. The gap will increase. This is a pretty bad thing leading to all sorts of social and political consequences.
Solution
Two broad measures to reduce income and wealth inequality are predistribution and redistribution.
Indirect spendings and providing “services for all” like healthcare, roads, schools etc and promoting unionizations, compliances etc by the government come under predistribution.
Taxes collected according to various brackets is the prime example of redistribution. Here, the wealth is taken and redistributed.
Fallacy of Composition
Instead of explaining I will cite the example given by Paul as:
Premise: You are in a concert and you can’t see the superstar.
Solution: You raise your head and stand on your toes.
Composition: If this works for you, it should work for all.
Aha! you see the fallacy of composition, right?
From a closer look, the curve is self-explanatory. It shows how in the period of 20 years how the world has had disproportional benefits. The tusk of elephant curve is the rising elites and their substantial increase in wealth. The large flat part is the rise of the middle class across the globe. The elephant tails with the poorest of the poor with little to no increase in income over the past decades and also the meager benefits to relatively poor in richer/developed countries. This chart is based on real data from the World Bank.
The chart can explain the reality and make it less surprising. It can tell why Trump won despite a majority’s bemusement, why China has become a superpower quite exponentially, among others.
Concluding remarks
Today’s time witnesses multiple sources of information and advice givers. It is very important for a reader or simply a citizen to be aware and observant. Few tips that Paul gives in this regard are:
- Look for arguments over mere assertions in any information piece
- Everyone makes mistakes. If someone deliberately covers and disagrees to their share then they might not be the most honest source for future as well.
- Context is important.
