6th Form: June 27, HOW ECONOMICS CHANGED THE WAY WE VIEW THE WORLD: Evidence from the Nobel Laureates Daniel M. Bernhofen School of Economics and GEP

6th Form: June 27, The Nobel Prizes Will of Alfred Nobel: “Prizes (to those) who…have conferred the greatest benefit on mankind”. since 1901: physics, chemistry, medicine, literature and peace. since 1969: economics. (the only social science)

6th Form: June 27, What is economics all about ? Academic dimension: Economists are social scientists: We investigate social phenomena in a scientific manner. Today’s conference topic: Globalization. Political dimension: Economists give advice to the policy- making community.

6th Form: June 27, Economics: An empirical science 1.Method of Analysis: An economic way of looking at social life. 2.Accumulative nature: New knowledge builds on previous knowledge. 3.Empirical testing: Checks and balances between theory and social reality.

6th Form: June 27, The economic way of looking at social life Key observation: social reality is complex. 2 options: (i) waive our hands. (ii) Construct theories. A useful metaphor (Karl Popper): “ A theory is a net that is thrown out to catch some aspects of the world”.

6th Form: June 27, What is a scientific theory ? Three components: 1) Assumptions 2) Logic 3) Predictions/Conclusions. Black box view of a scientific theory: Assumptions-> Black Box -> Conclusions. (Logic) (Also: parts of any intellectual argument).

6th Form: June 27, Topic I: Inflation What is inflation? Why is it bad? What causes inflation? Inflation is measured by the consumer price index P: price of a basket of goods. If P ↑ => inflation ↑ => value of £ goes down. Quantity theory of money. Prediction: Inflation occurs if the government prints too much money. Policy implication: Monetary policy should be in the hands of an independent Central Bank.

6th Form: June 27, Quantity theory of money Assumptions: (i) Money is solely used for transactions. (ii) A pound bill is used multiple times; but the average use of a bill is constant. (iii) Money is supplied by the Central Bank. (iv) The value of money adjusts to bring supply and demand into balance.

6th Form: June 27, Logic: Quantity Equation M x v = p x Y [£ available (supply)= £ used (demand)] M: £ bills issued by the Central Bank. v: number of times a £ bill ‘travels’. p: £ value of goods in the economy. Y: quantity of goods exchanged. Prediction: if M ↑ => p ↑ (ceteris paribus)

6th Form: June 27, Nobel Laureate. “…for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy." Milton Friedman

6th Form: June 27, Topic II: Social Organization Three organizational questions: 1) Which goods/services should be produced? 2) How should these goods/services be produced? 3) How should these goods/services be distributed? Two forms of organizations: I) Private markets (decentralized decisions). II) Plans (centralized scheme).

6th Form: June 27, Assessment of the market system For most goods, markets perform better than plans to organize economic activity. Why? Information problem. The Communist economic regimes broke down because of the information problem. Markets work efficiently when prices convey information about preferences, technologies and resources. Markets can break down when there are informational asymmetries. Policy implication: Product information requirements, return options etc.

6th Form: June 27, Friedrick von Hayek 1974 Nobel Laureate. “…for penetrating analysis of the interdependence of economic, social and institutional phenomena."

6th Form: June 27, Nobel Laureates: George Akerlof, Michael Spence, Joseph Stiglitz. “..for their analyses of markets with asymmetric information."

6th Form: June 27, Sir Clive Granger 2003 Nobel Laureate. Former student and professor in the School of Economics at the University of Nottingham. Nobel award for path- breaking work of the statistical analysis of time series.