Lessons Learned from Paul Krugman’s Masterclass Session on Economics and Society

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Paul Krugman won the 2008 Nobel Memorial Prize in Economic Sciences for his groundbreaking work on international trade and economic geography. He is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes. Paul is a Professor of Economics and Distinguished Scholar at the Graduate Center’s Stone Center at City University of New York (CUNY).

Paul is one of the founders of the “new trade theory,” a major rethinking of the theory of international trade, for which he also received the John Bates Clark Medal in 1991 from the American Economic Association, a prize given every two years to “that economist under forty who is adjudged to have made a significant contribution to economic knowledge.

It’s never been more important to educate yourself.

In his session, paul teaches economics and society. He shares insights on the financial crises, health care, taxes, international trade, urbanization, and globalization.

Here are my favorite take ways from viewing Paul Krugman’s Masterclass Session on Economics and Society

  • What is Economics?

At its heart, economics is about people—specifically, it’s about how people make their way in the world. It’s about how they earn a living and how they spend their income.

Economic theory is mostly just a collection of stories.

Adam Smith “invisible hand” of the market.

[Each individual] generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…He intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.—Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, Book 4, Chapter 2

Two Fundamental Principles of Economics

There are two fundamental insights at the heart of economics

  • The first is that people respond to incentives. Obvious opportunities to be better off are rarely left unexploited.
  • The second is that every economic transaction has two sides: each side gets something and each side gives up something.

The wealth of a country consists not in gold and silver, but in its ability to produce stuff.

Countries were rich or poor not based on their levels of precious metals or other stores of wealth, but based on their capacity to produce the everyday things their citizens needed and wanted. – Adam Smith

Say’s Law

Say’s Law states that supply creates its own demand. By “supply” economists mean the creation of goods and services. By “demand” economists mean the desire to purchase goods and services. Say’s Law suggests that on average the quantity of goods created will be equal to the quantity people want to buy.

Understanding Maro-Economics

  • The understanding today is that price stability means keeping the inflation rate around 2% per year.
  • Full employment means getting unemployment as low as it can go without driving up inflation
  • An economy that produces too little will suffer from high unemployment, since the low rate of employment opportunities will be inversely proportional to the high number of able-bodied workers.
  • An economy that produces too much will see widespread increases in the prices of nearly all goods and services as the demand for them outpaces production capabilities. This general increase in prices is known as inflation.

Zero Lower Bound.

Interest rates cannot go below zero no matter how much money the Fed prints. Economists call this the Zero Lower Bound. When the 2008 crisis came along, the Fed attempted to counteract the economic collapse by printing money and driving down interest rates. When interest rates hit zero, however, printing money had no additional effect. In a severe depression like the one in 2008, printing money is not enough to save the economy

When interest rates hit zero, however, printing money had no additional effect. In a severe depression like the one in 2008, printing money is not enough to save the economy

2008 Financial Crisis

In 2008, the United States entered the worst recession in 75 years and the rest of the world soon During thee 2008 financial crisis, unemployment soared from 4.5% to around 10%. An unemployment rate of 10% meant that roughly 15 million Americans who wanted to find a job could not. Now referred to as the Great Recession, this was the worst economic crisis since the Great Depression. Millions of manufacturing jobs were lost during the Great Recession.

We managed to recreate the conditions that made the Great Depression possible by creating this unregulated shadow banking system

Bank Run

Bank runs are often associated with asset bubbles. The fundamental value of an asset is the return an investor believes he or she would receive if he or she bought an asset and never sold it. For real estate, the fundamental value is based on the rent the property will earn over its lifetime.

Bank Run Scene from the movie, It’s a Wonderful Life (1946), which depicts a classic bank run during the Great Depression.

Bank Run Scene – It’s a Wonderful Life (1946),

  • Know your History

The Panic of 1893 was remarkably similar to the Great Recession of 2008. The current era of globalization shares much in common with the wave of globalization that occurred in the late 1800s.

History does not repeat itself but it rhymes.

Recommended Tools

Further Reading

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Paul Krugman Teaches Economics and Society

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