Lecture 4 - Efficiency, Assets, and Time

author: John Geanakoplos, Yale University
recorded by: Yale University
published: March 17, 2012,   recorded: October 2009,   views: 3550
released under terms of: Creative Commons Attribution No Derivatives (CC-BY-ND)
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Over time, economists' justifications for why free markets are a good thing have changed. In the first few classes, we saw how under some conditions, the competitive allocation maximizes the sum of agents' utilities. When it was found that this property didn't hold generally, the idea of Pareto efficiency was developed. This class reviews two proofs that equilibrium is Pareto efficient, looking at the arguments of economists Edgeworth and Arrow-Debreu. The lecture suggests that if a broadening of the economic model invalidated the sum of utilities justification of free markets, a further broadening might invalidate the Pareto efficiency justification of unregulated markets. Finally, Professor Geanakoplos discusses how Irving Fisher introduced two crucial ingredients of finance--time and assets--into the standard economic equilibrium model.

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