ex: produce $25/hr but wage only $15/hr
Consider Marxism: Abolition of private property
- If no priv. property, no relation btwn pay and production
- Free distribution
- Exploited if realize that you have right to $ to productivity
- Marxism is paradoxical
-Markets are a good way to organize economic activity
ex: Dismantling Utopia->effects of no price system;
Shoe disfunction: Type, size, color size
-Price gives important info, sensors to consumer needs
Econ Principle: Markets often don't work well
1) Lack of existence
2) Institutions
ex: willing to pay a lot to get rid of Rizzo; Rizzo willing to accept a little
-options, competition
Class of Problem (Don't take models seriously)
-Certain situations, one party in transaction has more info than other, will skew market
ex: Insurance Markets
Insurance does research, avg % of bad disease;
-Lack of ability to interact causes problems
- $100/month covers illness; prepared for prob. Consider: good genes vs. bad genes
- WE know our stress levels, what we eat, how much we exercise
- $100 is more than I'd need to pay over the course of my life
- RESULT: Pool of people who get insurance becomes unhealthy, then more unhealthy
- Price of premiums rise-->Willing buyer, but market doesn't offer the price
- Gov't can fix or someone can step in and profit
*If markets were always successful, there would be no need for entrepreneurs, no profit opportunities
What is the Goal of Economic Policy? Bigger Pie
Efficiency
What People Want <--------- ---------> At Lowest "Possible" Cost
Efficiency is not "end all be all"
Market Processes Destructive
-1% of stuff that works is really great. lose trial-error, lose good stuff that follows
Institutions: formal & informal mechanism we use to live together
-social construct
-allows us to live peacefully together
ex: 1) Soviet Union fell, we go & tell them to have markets! -> Now, they're poorer today
-beautiful store fronts empty
-problems with property rights --> can't make decisions, share the space
2) Institutions: good gov't, legal system, courts, no corruption
ex: put stuff down on seat, anyone ever move your stuff and sit there?
-ridiculous to pass legislation to uphold htis
Good Societies
-legislation reflects what is believed to be law
-Speed limit "real law", but we drive speed everyone else is driving (unless you're from CT...)
Rule of Law when try to make legal legislation (formal/informal)
1) everyone treated equally
2) laws cannot be arbitrary
3) must be general, not specific
-predictable before enter situation
- custom not a surprise and can plan lives around it
- key to success of a market
3) Institutional Structure
Compare N & S Korea, similar people, resources, etc BUT different instit. -->N. very poor and hungry
4) Some poor countries, customs that prohibit customs for markets to work well
When get institution right, extremely fast improvements to living standards
-But there are upfront costs to install institutions
Inflation: general increase of all prices in an economy
-compare two periods of time
-caused by: too much money around
--> econ. prosperity should not matter on $
Ethics of Markets
Hume: self interested, scarcity -->must cooperate, rules of justice
- Free societies work best when people are honest
- value self interest over interest of others
Ex: Pursue own interest inferior...to...what
-Rizzo teaches b/c he wants $; inferior to activity that promotes int.
-->society based on Golden Rule: produce to satisfy others first, self second
"We are a materialistic society"
-->Who is the moral authority?
People want good, high paying jobs yet recall the Golden Rule
-Thoughtful action: do unto others as you would want them to do unto you
-hard to actually apply
