The Class of Extraordinary Examples

More Basic Economic Principles
ex: 1914, U.S. banned drugs --> ends up increasing the potency, incr. hypdermic needles -->AIDs epidemic
ex: Social Security, when installed only had to cover a few people. Later, it as people lived longer, incentives changed, seniors get a check each month, why bother saving?

Law of Unintended Consequences
-Failure when simple rules try to regulate a complex system (even physical systems)
-People have problems with: limited information, time matters (ex, reelection). little feedback, poorly aligned incentives
-Not restricted to gov't
  -> fire suppression, make forest fires more likely and damages more serious
-When regulation pushes against incentives, incentives will push back
  -->Never know how people will respond
ex: Protect People w/ Disabilities
-decrease in amnt of disabled workers
-->employer may be concerned whether able to discipline or fire later b/c worried taken to court from discrimination
-effort to protect fails


*Trade is not zero sum
-One side doesn't "win" at the expense of the other
-"pie fallacy" -> thinking of fixed amnt of wealth in the world
-gains from trade actually aren't thrilling

successful transaction = no one hurt, both sides benefit

Almost axiom: market selfish; price on everything ? fragmented society
-we are selfish and greedy
-no one plans, runs system -->still, people see the market as a way to dominate

Commercial Prudence Based- civilizing; post Commercial Revolution, true explosion of trade

Consequence of Pie Fallacy
1)Retards economic growth
2)believes losers, believe poor oppressed
3)penalize work, risk taking, innovation
4)often invokes notion of power

Wealth vs. Income, Stocks and Flow
Are we Poorer Because Bill Gates Is So Rich?
-Gates didn't take, he PRODUCED that stuff
-Compare to Cong. get loads of $ have WAY more $$ than Gates
-Don't like Windows? Don't use it. Don't like policy? Vote against it if you can..

ex: The Beatles on Ed Sullivan
-imagine all the viewers had $1 worth of pleasure from watching performance
-today, worth $4.4 billion. JUST that one show
-Beatles each captured only a fraction of the wealth they created for the US

Decisions are made about more or less; not all or nothing.
ex: Cassy "so-so" is unselfish. Rizzo is selfish -->compare against avg person? What about in Denmark where mothers leave children to wait outside? Selfish has little meaning
-->Must implicitly understand what the margin is
-Also, articulate constraints (Ex: Santa comes once a year, Bruce waits a year or two to release album)

-Teachers make a fraction of professional athletes' pay=> don't we value education more than sports?
-"Use vs. Exchange"

• margin similar to water-diamond paradox
• relative scarcity of teachers to athletes
• imagine removing 200 teachers vs. removing 200 NBA players
• Given amnt of teachers, value next teacher less than next NBA player
• BUT rebuild the world, obviously pay teachers more than sports

Again, compe Total Use with Marginal Exchange

-agree salary has no relation ot moral worth

-money is not the measure of the man

Equal Pay Debate

2 women, work 9 hours in factory at similar job; one in pills, one in make up

-->drug worker paid more

-values matter at the margin, added costs for making decisions

• Context dependent
• values that matter to us are peculiar
• Value arises from human interpretation

Sunk Costs = resources that are not recoverable when one changes/makes a decision

ex: Rizzo in 5 yr relationship, already super invested, can't give it up now?! 

ex: Get your "money's worth" if already bought tickets, whether you attend the event or not does not have an impact on what you spent

No Sunk Cost in the Long Run

Axiom 1: Scarcity

Axiom 2: Humans act with purpose

->behave in a way that makes our lives easier

->people respond to incetives

          -recall dropping $, behavior changes when benefits and costs change

Law of Unintended Consequences

-Decisions have effects that you couldn't predict in advance

ex: Ralph Nadar helped promote mandatory seat belt laws in 1970s

-> changed cost/impact of driving

-when wore seat belt, much more likely to survive, less injuries 

-->lowers cost of getting into an accident

    -people drive more, drive less carefully ==> MORE accidents, more dangerous

-If we REALLY cared about driving safety, would have a spear pointing towards us on steering wheel or drive with our children on the hood

Tradeoffs

Instead of studying for my econ midterm, I could have ...

1. Slept. 
2. Worked Out at the Gym
3. Napped
4. Wrote my Interdepartmental Major essay
5. Relaxed
6. Washed Dishes and Do Laundry

But instead, I valued my grade in this class far more than any perceived benefits of my other options.

WW II Didn't Save the Depression, Breaking Windows Won't Help Your Wallet

**3 Problems with the "It's Stimulus" **

1) I didn't choose the roof to begin with
2) We lose the values of resources used to repair the roof
   -i.e. ignore the $, resources matter
3) But...what if roofer unemployed? Ooh good argument, but just wait

1) Consider: Rizzo worse off b/c wants driveway more than a roof; doesn't preference matter?
ex: Food. Doesn't matter as long as you get enough calories; imagine storm wipes out dfo and only liverwurst left, that's fine right? NO!

• preferences do matter, society is poorer by amount of pleasure you would have gotten from the driveway or other food

2) When replace roof, society poorer by exactly the amount of that roof
 --> stuff used for roof could have been used to make a porch
WWII did NOT get us out of the Great Depression
 => Destruction does not equal prosperity
-Instead of a new driveway...get another roof

"Silver lining" = bullshit
ex: stranded in airport, how nice you can contemplate thoughts and write poems!
-NO! Awful! Don't need to force people into that

ex: Gov't stimulus program to create jobs...but it's easy to create a job
-Rizzo offers you $100 to get him coffee, you do it.
-Don't See: Funds have to come from somewhere --> tax revenue
-"borrow" = tax incr. tomorrow
    -People in future have less income
-stimulus: trade old jobs for new jobs

RECAP: raise taxes today, tomorrow, or policy = job losses somewhere else
BUT we can't say what was lost or what would have happened. It just doesn't exist.

Scenario: People hide $ under the bed or give to insurance. STORM AGAIN! insurance pays for roof!
-this is great! economy sucks, people are employed, doesn't that create stimulus?

==> remember, ignore $, resources matter

-when build roof, need wood, (it could have been in that porch) 

• the price of wood and everything needed to make that roof goes up

-well, what about people working?

• Increase the cost of the roofer makes price of all roofers more expensive. suddenly we can't afford that porch!

-It puts someone in construction

• One less person who could have gone into computers or sales or conservation

Banks hoarding allll the $, just sitting on it

-bank risk vs employ

-$ on balance sheet, if $ taken out, what do the banks do?

• Recapitalize, try to get mo' money
• call in loans, stop giving loans

NOT COSTLESS!!!!!!

**Jobs are not a benefit, they are a cost**

-Yes, jobs pay for out food, but why do we work?

--> to get goods and services; if jobs were a benefit, Rizzo would pay us to teach

-massive unemployment in U.S. HUGE and after WWII everyone had a job making guns, bomb, ships

Problem: you can't eat a bomb. Consumption levels low (think 1929 low) until 1946

-consider rationing tickets, shipping food overseas (not accounting for massive deaths & destruction of cities)

-If wanted new streets, new buildings, consider pt. #1 of broken window

-imagine, if built planes and bombs without killing people. 

-take every factory worker, don't tell them what they doing 

  -TN uranium processing, women cleaned toxic stuff to kill people..and didn't know it .

-why use time & resources to give pay check..why not just give paycheck?

==>stimulus, why not just give $ (incentive not to work or waste resources)

-GDP goes up every time a bomb is made, doesn't go down when the bomb blows up

-not negative GDP when people are hungry & women have cancer from uranium

4) Cost is subjective

( read buchanan's cost and choice)

-value cost of paying attention in class vs. sleeping

- costs that matter in econ. never seen

5) Marginal Analysis

-way we make decisions: do x or y

-> reference with frame to x, more of x less of y

Water - Diamond Paradox (1871)

-Water vital, very high in value, in use but so CHEAP! very low exchange value

-Diamond..is a nice rock. Can't eat, build, just..pretty. BUT high exchange value!!!

-firms that make best decisions think of margins

ex: 200 seat plane, cost to fly is $100,000, avg cost per seat is $500

--> should airline sell ticket for less? why charge $100?

   => flight booked, 180 passengars, many people on standbym let people on plane for less

-firm knows, once committed to fly plane, already planning on spending $100,000

-consider, what is the cost to put me on the plane

-given people, given plane cost, next person on the plane will just add $ (look at margin, make it better)

Should the State Subsidize the Arts?

"What is Seen And What Is Not Seen"

           We are fortunate to have beautiful collections of paintings, museums full of sculptures and inspiring theatrical performances. Shouldn't we do everything in our power to protect their development? Typically, legislature will enact subsidies on organizations as a measure to preserve them, but Bastiat argues that subsidies do not, in fact, work the way people intend. If society helps one industry, it hurts another. The theaters that are successful are the ones who have earned a high reputation and profits on their own. Bastiat wrote that we should believe in people's choice and allow the arts to develop freely and in harmony with other industries. Often, people are quick to judge that if we do not support the subsidization of a practice, we are out to abolish it. Bastiat quotes Lamartine as a supporter of subsidies because they will protect jobs. However, theaters have a need for skills (artists, designers, writers, directors, painters etc) therefore there will always be jobs available. The other side of the coin, the money where subsidies come from is "what is not seen".
"The taxpayer who will have been taxed one franc will no longer have this franc at his disposal".
I have always been a major supporter of the arts, and I believe children especially benefit from exposure to music, dance, and a variety of creative forms. There are several programs that have demonstrated the success of art with kids, especially ones who lack a stable home.
**Check this out: http://www.cbsnews.com/video/watch/?id=6483651n **
Bastiat has convinced me that not all subsidies are worth it, the natural forces of the market and consumer needs will favor and protect the arts. However, these children have little influence on the present market, but will make a big impact in the future. I think some things are worth investing in, it's a cost I am willing to pay for.

Obviously, I "Value" My 9am Econ Class.

Basic Economic Principles

How People Make Decisions                            How People Interact                      How aggregates work

1)People face tradeoffs (TANSTAAFL)

      -what is a cost?

2)Opportunity Costs

   -application: Broken Window

3) "Marginal Analysis"

    -application: subjectivism

4) Sunk Costs

5) People Respond to Incentives

**We live in a world characterized by scarcity**

--more of us than stuff

--Resources scarce. trade one thing for another

1) When execute tradeoffs, says something about our values

Ex: More $$ to defense means less $$ to enviro protection

Other trade offs: economic efficiency & econ. equity 

 1) Make pie as big as possible

 2) Make pie distributed; equitable 

      -->try to find "win-win" solutions

ex: $60,000 check, get only $28,000 out of it; Rizzo leaves advisor job, world loses that $

• investment banker makes 1 mill. and has $300,000 taken out of taxes; instead, quit job, teach for $50,000 and pay $15,000 in taxes-->no tax revenue, lose that production, only get "lousy class"

For "truly free" must produce & consume with out using any resources or sacrificing anything.

=>No such thing as free. 

*It is possible to have to much of a good thing*

Totally possible to spend too much time studying.

Drug Lag: takes years to test drug, new drugs better than old, ppl who need but don't have harmed

Drug Loss: U.S. spends $50 bill on drug research, only 20 new drugs each year

• Testing costly, fewer profit opportunity
• can't solve AIDs & malaria BUT able to give 90 year olds boners (not my example)
• bad drug?!
• Ruin reputation, lose job, $
• good drug..
• no reward, no thanks
• what a messed up incentive! reward mistakes, not progress

What is a Cost?

-Anything that consumes resources

-Tradeoffs means endure a cost

2) Opportunity Costs

When make choices, realize what you give up.

**Net value of next best opportunity**

ex: lemons or limes? it's not the $ amnt, but rather the pleasure amnt

 Lebron: College or NBA star? He did miss out on econ 108

ex; You won Bruce tickets! (not the same without the big man though)

-Cannot resell tickets, have to to

BUT also could see Barry Manilow for $40, but you'd pay $50 to see him.

      What is the opportunity cost?

• $10!
• Net value of what you give up
• 50 - 40 = 10; WTP = willingness to pay
• Consider, must like Bruce at least $10 worth; say indifferent, still have to pay to see Barry

Broken Window

Say roof blown off Rizzo's house--> Pays $ to repair; $ to worker spent on lunch; $ to chef spent on...

BUT

what would happen if roof didn't blow off? Will never know. Could have paved driveway

• No new jobs created
• $ to construction, $ less elsewhere
• unable to pay to redo driveway
• job from one sector stimulated other less
• Didn't spend $ already means you value something else
• Imagine before/after
• before: Have $1,000, and a roof
• after: Have $0, and..a roof
• Actually poorer!

Laissez Faire Lets Prices Adjust

Adam Smith
-1776 = Wealth of Nations
-Gov'ts do not need to control & regulate trade (thinking internationally)
- "free & peaceful association" --> good things

Laissez Faire: allow people to do what they want
1) Gov't important b/c provide polices & courts
2) National defense --> protection
3) Public Works -->roads, things gov can do that private corp. won't

How Will People be fed if King does not force it? Why not anarchy & chaos?
--> People will pursue self interest & provide goods
1) Rights to property
   ---> ownership protected; allows people to invest
2) Vital division of labor exist
  --> Rqd for economics; engage with other people
3) Exchange must be peaceful & mutually agreed upon
  --> voluntary; don't rob or kill
4) No special privledge

Physiocrats => Moral Philo => Hume => Smith

** Source of Wealth => ability to produce & exchange **

Think, poor b/c of trouble producing stuff (not resources, not population)
-People have moral obligation to seek more than own self interest
-Mutual exchange w/ limited gov't oversight
-Best possible use of competition; not argument to leave things as they are
  --> doesn't always work; not utopia, but works b/c it allows people to adjust their activities in reaction to society
1)Parties in markey buy/sell @ ? price    2) Anybody can participate
3)? 4)law should not control entry

Laissez Faire does not oppose: taxes, safety net programs
-system of stable rules that allow ppl to respond creatively with certainty

Spontaneous Order = commercial society (capitalism) self emerged, not gov't decided

Ferguson: (SMP) history/evol of important institution
Where does etiquette, morals, customs come from?

*We want to ease the burden of doing things*

We have something betwn instinct & reason that compels us to make our lives easier

Smith: the future wealth of Eng. threatened by:

1) "predjudics of the public; Smith = initially biased

2) Guards self; conspire to screw people over (think 2 business men drinking/talking)

Eng. in early 1800s grain price quadrupled -> Jews brought bread in from outside

--> land lord developed system of protection

Corn Laws

 - imposed sliding duties on the importation of grain, min price for Eng.

 -taxed French & German

 - wheat prices rose to twice weekly wages

Anti Corn Law League 

 - 27 yrs before the corn laws were repealed

-->Eng allowed free trade of all goods -->forced other countries to lower their trade barriers

Marx: capitalist engine = mass production

-takes care of people who are not est.

-inequality not necessarily the worst

1) inequality that matters most = health, practice relig, polit, power -->access to necessities 

-Note: can't be necessity today if it wasn't in 1790s.. 

*More capital a country has, the smaller the importance capital is??

-More cap -> more people invest

US = 25% of income property, steady pay

achievement = opportunities to extend & develop

materialism = nonsense