Overview

We begin with our approach to trying to “model” development. We begin at the micro-level and begin with the original - Adam Smith. We cover major concepts that are key to how prosperity grows (division of labor, transition from subsistence to exchange, etc) and how markets work. In exploring markets (much in the way you would in ECON 306), we highlight the role of prices and entrepreneurship in bringing about coordination and progress - in doing so, we apply Hayek’s answer to the socialist calculation debate of the previous lesson.

There are no formal “models” here, only major concepts, but they are coming in the next lesson, which takes a more macroeconomic view towards understanding, modeling, and stimulating economic growth.

In thinking about how to “model” an economy in a way that policymakers can exploit (e.g. manipulate key choice variables that can be changed) and assess the results, consider again: what exactly are we able to control? What knowledge must policymakers possess? What incentives ensure it gets implemented “the way we want?”

Readings

Recommended Readings:

• Hayek (1945), “The Use of Knowledge in Society”
• Alchian (1950), “Uncertainty, Evolution, and Economic Theory”