“Perfect markets and the ‘World of Truth'”

In his widely read guide to economics—The Undercover Economist—Tim Harford writes:

In a free market, people don’t buy things that are worth less to them than the asking price. And people don’t sell things that are worth more to them the asking price. … The reason is simple: nobody is forcing them to, which means that most transactions that happen in a free market improve efficiency, because they make both parties better off—or at least not worse off–and don’t harm anyone else.

The chapter of his book called “Perfect Markets and the ‘World of Truth'” is the starting point and the end point of the next block of lectures in our course Economics for Everyone. Harford is describing both the power of markets, and the potential for their failures, big and small. He is describing what economics call the two fundamental theorems of welfare economics, and in order to do so he has to explore the determination of relative prices, the neoclassical theory of value.

In perfectly competitive markets we can describe the determination of prices in terms of demand and supply curves. And so we have to develop a facility in using these tools to understand how markets work, how they are sometimes manipulated for better or for worse, and how they may fail in a way that can rationalize a role for public policy.

Download the presentation for the next couple of lectures, and keep reading!

Why should we care about inequality? Tim Harford nails it in this Financial Times column

Tim Harford nails it in an article called “How the wealthy keep themselves on top.

I set out two reasons why we might care about inequality: an unfair process or a harmful outcome. But what really should concern us is that the two reasons are not actually distinct after all. The harmful outcome and the unfair process feed each other. The more unequal a society becomes, the greater the incentive for the rich to pull up the ladder behind them.

The noted Financial Times columnist, and author of The Undercover Economist, does a great service to readers by pulling a major theme from the series of articles on inequality and the top 1% published in the summer 2013 issue of the Journal of Economic Perspectives.

First, he states that while the “idea that the fat cats simply stole everyone else’s cream is emotionally powerful; it is not entirely convincing.” Then he goes on to note that:

In a well-functioning market, people only earn high incomes if they create enough economic value to justify those incomes. But even if we could be convinced that this was true, we do not have to let the matter drop.

This is partly because the sums involved are immense.

We should care about inequality because of the outcomes. But also because outcomes influence process.

At the very top of the scale, plutocrats can shape the conversation by buying up newspapers and television channels or funding political campaigns. The merely prosperous scramble desperately to get their children into the right neighbourhood, nursery, school, university and internship – we know how big the gap has grown between winners and also-rans.

This is what sticks in the throat about the rise in inequality: the knowledge that the more unequal our societies become, the more we all become prisoners of that inequality. The well-off feel that they must strain to prevent their children from slipping down the income ladder. The poor see the best schools, colleges, even art clubs and ballet classes, disappearing behind a wall of fees or unaffordable housing.

This is exactly what I hoped would be the main message of my article “Income Inequality, Equality of Opportunity, and Intergenerational Mobility” in the Journal of Economic Perspectives symposium, and it is very satisfying to witness a talented journalist articulate these and related ideas with such clarity and precision!