4. Efficiency, Assets, and Time

Financial Theory (ECON 251)

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.

00:00 - Chapter 1. Is the Free Market Good? A Mathematical Perspective
11:20 - Chapter 2. The Pareto Efficiency and Equilibrium
38:42 - Chapter 3. Fundamental Theorem of Economics
46:27 - Chapter 4. Shortcomings of the Fundamental Theorem
52:39 - Chapter 5. History of Mathematical Economics
01:00:21 - Chapter 6. Elements of Financial Models

Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses

This course was recorded in Fall 2009.