Financial Theory with John Geanakoplos - 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.