MAC01 S&D

Macroeconomics Lecture 01 on the Supply and Demand Model

Advanced Macroeconomics II: Preliminaries to STUDY prior to the FIRST Class on Mon 10^th Sep 2018

Teacher: Dr. Asad Zaman, VC PIDE.

What To Study Before Coming to Class: All required materials and links are available from Google Website: Keynesian Macroeconomics (https://sites.google.com/site/az4macro). This course will be radically different from routine Macroeconomics courses being taught all over the world. It is our ambition to enable the student to understand real world economics like the impact of China on global trade, the petro-dollar, Causes and effects of the Global Financial Crisis, Why IMF promotes austerity even though it harms weak economies, Current BOP Crises in Turkey and Pakistan, and a whole host of related ongoing economic issues. As opposed to this, conventional courses will teach students models and mathematics which have no bearing on reality, and which often teach the wrong lessons about how to understand and manage the economy. As a simple illustration, all major schools of macroeconomic thought agree that money is neutral, at least in the long run. But this idea is not just wrong, it is dramatically wrong, and has catastrophic consequences. Today, the most advanced Macro models (DSGE) have no role for money, banking, and credit, which is why they were blind to the possibility of the Global Financial Crisis. What is worse is that, even after the crisis, these models have not been reformed, and continue to be used for policy making at Central Banks throughout the world.

Our Advanced Macro course is based on radically different pedagogical principles, briefly discussed below:

PEDAGOGICAL PRINCIPLES:

A: Economic theories are born in historical contexts, and are used to understand and intervene in a particular socio-political environment. Thus economic theories cannot be understood outside this historical context. This is OPPOSED to the conventional view taken by standard texts that economic theories apply across space and time equally to Brazil in 19^th Century, Spain in the 20^th , and Pakistan in the 21^st. The same theory of international trade works for trade between Nigeria and Italy, Pakistan and India, USA and Mexico. We reject this idea, and study Macroeconomics by studying the historical context in which it was born. Furthermore, we believe that Keynesian Macroeconomic cannot be understood without understanding this historical context, because it is not a universally valid scientific theory like the law of gravity.

B: Human knowledge is only and exclusively based on our personal experience. This basic and simple principle was rejected by Descartes, the father of Western Philosophy, when he said “I think therefore I am”. He rejected his personal direct experience of his beating heart and breathing lungs as solid proof of existence, and placed his reliance on tenuous logic – apparently man does not exist until he learns philosophy, and blinks out of existence when he goes to sleep. This mistaken idea that logic and reasoning, without recourse to facts of experience, leads to knowledge, is at the heart of modern Western conventional educational methods. We reject the idea of Descartes. Learning can only take place by expanding the experiential space of the student. So our first goal is to make the student “experience” (indirectly, of course) the Great Depression. We will ask students to read, view, and do exercises of various kinds OUTSIDE of class, creating the experiences which are the foundation of learning. The CLASSROOM will attempt to integrate student experiences outside class into a coherent framework, using organized discussions and exercises. This assimilation and understanding of experience is the heart of any educational process. This is like the “INVERTED” classroom approach.

Some Motivation for The Course Structure: By pretending the macroeconomics is a universal theory based on mathematical models which apply to all places and times, typical texts deny any connection between theory and particular historical events. In fact, modern macroeconomics was born from the pangs of suffering created by the Great Depression. Furthermore, we cannot understand the structure and nature of modern macroeconomics without understanding this historical context.

Ben S. Bernanke, one of the World’s top ranked economists at this time, said in 1995 "to understand the Great Depression is the Holy Grail of macroeconomics". The prolonged and deep unemployment experiences in the USA and UK after the Great Depression was in conflict with economic theories of the time, which suggested that the forces of the free market would automatically correct such problems. Keynes struggled to free his vision from the blindfolds created by conventional economic theories, and succeeded in creating a revolution in economic thought via his famous book: “The General Theory of Employment, Interest, and Money” (GTEIM). As he wrote in the introduction to GTEIM: “The composition of this book has been for the author a long struggle of escape … from habitual modes of thought and expression”. The difficulty was not in the new ideas, but in escaping from the mental shackles created by the old ideas. Keynes was successful in breaking through to a new understanding, but his followers were unable to understand his ideas. For details, see my post on “Understanding Macro: The Great Depression.” For a while, a distorted version of Keynesian economics, developed by Samuelson and Hicks, became mainstream macroeconomics. But in the 1970’s the classical economists led a counterattack which rejected Keynesian economics, and put in place an alternative, which was more or less that same as the theories which Keynes had rejected (see The Keynesian Revolution and the Monetarist Counter-Revolution). As a result, the Global Financial Crisis caught economists by complete surprise. Also, they were unable to craft a suitable response to the crisis; in fact, Bernanke created the Quantitative Easing program in light of the monetarist understanding of the Great Depression. This program helped in some ways, but it also caused a lot of damage, and was unable to prevent the Great Recession which followed the crisis.

The goal of this course will be to produce a deep understanding of this brief summary of major macroeconomic events of the past century. This is NOT produced by conventional courses in macroeconomics, since they do not aim to explain particular events within their historical context. As explained earlier, we will start with a history of the Great Depression.

Assignments to be done by students prior to coming to the first class on Monday, 10^th Sep. 2108.

DAILY TASKS:

Thursday, 6^th September, 2018

Our first goal is to study the Great Depression, which is what led to the birth of the discipline of Macroeconomics.

1. REQUIRED: For this purpose, first watch the 40m Video about “Grapes of Wrath”, John Steinbeck’s famous novel about the misery caused by the Great Depression.

2. OPTIONAL: Download and Read History of the Great Depression (do this in background, at your leisure).

Friday, 7^th September, 2018

1. READ and understand SECTION I of the paper: “Efficiency Wage Hypothesis – the case of Pakistan.” (joint with Syed Kanwar Abbas), Pakistan Development Review, Vol 44 number 4, Winter 2005, 1051-1066

2. VIEW 25m Video Lecture on this paper: Keynes vs. Classics on Unemployment.

3. OPTIONAL: For Motivation: The Ways of the Eagles.

Saturday, 8^th September, 2018

1. 1 Read the three posts: (linked videos in these posts NOT required/recommended)

a. Understanding Macroeconomics I: The Great Depression,

b. Understanding Macro II: Post War Prosperity,

c. Understanding Macro III: The Rule of Corporations.

2. 2 Read summary, and watch video of: Talk/Discussion with PIDE Students.

Sunday, 9^th September, 2018

1. Read the following post: The Education of An Economist.

2. Read post and watch accompanying Video: Completing the Circle: From GD ’29 to GFC ‘07

Monday, 10^th September, 2018 –

Come to class prepared for discussion of SECTION I of the paper: “Efficiency Wage Hypothesis – the case of Pakistan.” (joint with Syed Kanwar Abbas), Pakistan Development Review, Vol 44 number 4, Winter 2005, 1051-1066

BRING with you, for SUBMISSION at the beginning of a class, one page sheet with:

1. ONE POINT that you understood from the paper above, that you consider most important.

2. ONE QUESTION on the Supply and Demand model as discussed in the paper above.

3. ONE question on any of the OTHER materials that you have studied.

In class, we will discuss the (5) points listed in the paper where the predictions of Supply and Demand Model of Labor Markets conflict with the empirical observations, and our experiences, of Labor markets.

Questions for the FINAL exam:

1: List THREE predictions that the Supply and Demand Theory of Labor Markets makes

2: Provide an argument as to why S&D makes the above three predictions -- that is, derive these predictions from the theory of S&D

3. Provide EMPIRICAL evidence that all three predictions are wrong. Cite relevant papers here

In the final, I would ask about only one of the three -- also, I think there are about five predictions that can be proven wrong.