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Lecture

ECON 2K03 Lecture Notes - Peace Movement, Applied Mathematics, Staples Thesis


Department
Economics
Course Code
ECON 2K03
Professor
Jack Leach

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What is Economic History?
• the study of long-term changes & transformations over decades or even centuries People study
economic history because they want to know about the past. Ex: How did the native population live
before the arrival of the Europeans?
• many questions open up including institutional change, technical change, the formation of values
Others study economics because they are intrigued by how past has affected present day. Ex: Why is
Canada among the richest and most economically advanced countries in the world today?
Economic History versus Economics
• economic agents as managers maximizing subject to constraints Deal with the constraints and
manage by being inside the box
• entrepreneurs looking for ways to change constraints Think outside the box
Economic History & Path-dependency
• economic history embraces complexity
• economic historians tend to argue that how an economy functions in the current state is a product of
how it got to that state in the first place
Path dependence explains how the set of decisions one faces for any given circumstance is limited by
the decisions one has made in the past, even though past circumstances may no longer be relevant.[1]
In economics path dependence can refer to either outcomes at a single moment in time or to long run
equilibria of a process. In common usage, the phrase implies either:
(A) that "history matters"a broad concept,[2] or
(B) that predictable amplifications of small differences are a disproportionate cause of later
circumstances. And, in the "strong" form, that this historical hang-over is inefficient.[3]
The first usage, (A): "history matters" is trivially true in the explanatory context; everything has causes.
Path-dependency
• you cannot understand “x” by simply observing its characteristics
• you need to understand how we got from “non x” to “x”
• capabilities & tipping points
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Economic theory loses its history
• the real world is messy and not easily subject to mathematical analysis
• solution starting in the 1870s was to build “model” economies based on assumptions and predict how
they work
• universal system rather than a particular system
• the theory was ahistorical and built around abstract individuals
• the features and institutions of a specific economy were lost
• emergence of Real-World Economics
“Mainstream economics truly is the economics of nowhere.”(p. 37)Complexity Economics
• critical of equilibrium concepts implicit in traditional economic theory
• traces this back to Walras’ work in the 1870s
• to make models work they assumed self-interest, perfect information, notransaction costs• see the
economy as always in transition and moving
• the path is as important as the forces towards equilibrium
traditional theory assumes an economy exists but how they are created
• assumes wealth exists but how it is created“
It is important to note that the key behavioral assumptions of Traditional Economics were not
developed because anyone thought they were a good description of real human behavior; they were
adopted to make the math work in the equilibrium framework.” E.Beinhocker, The Origin of Wealth,
page 118.Responses to Neoclassical Theory
• anthropologist offered evidence that societies do not create unlimited wants
in some earlier societies the problem was unlimited resources and scarcity of wants
• rejected idea that humans are driven by greed and insatiable needs
Behavioral economists
The Selfish Pig Experiment
John offers to give Bob and Mary, two strangers, $5,000.
Bob decides how the money should be divided, and Mary can either accept this division or give the
money back to John.
What should Bob and Mary do? Political Economy and Institutional
Analysis
• reject the idea of an ahistorical universal economic model
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