Equality Matching Oops

On the website, Bandcamp (http://bandcamp.com/) musicians have the ability to sell their music online to fans. Often, many bands allow users to name their own price to purchase the music. And I have to admit, I did not utilize "equality matching"when I downloaded a recent ep. In the back of my mind, I realize that I could spare a few dollars, especially because I'm aware this music wasn't free, this band is made of college students like me who paid for the instruments and used valuable time to put together the music I put into my iPod. Still, as someone who has to plan for study abroad costs, and because it wasn't convenient to take the 30 seconds to use my card, I opted to pay $0. What is interesting is if I was presented with a physical EP priced for $5 I would have been more than happy to pay it to these guys. But the transaction was impersonal and if I don't have to use extra time/money on something, I won't. Basically, this is an example of me failing to think economically until after the fact. (Maybe I can make it up to the band and my conscience by buying a ticket and a t-shirt at their next show)

Trade Creates Wealth

Trade creates wealth: strange b/c nothing new created at all
*Recall last example, Kirby Puckett =>"black box" => complete set
Trade = non-technical form of production
-some goods only produced when good exchanged across the globe (China's precious metal)


What exchange does: make cake or laptop with the goods swapped, now can sell for $

How Trade Can Make Us Richer In True Sense

* Mike and Rich have identical properties

	Mike	Rich
Weeding	80 min	120 min
Mowing	40 min	120 min
Total Yard Work Time	120 min	240 min

*Rich offers to weed 3/4 of Mike's yard if Mike mows Rich's yard

	Mike	Rich
New Labor Deal	+40 min to Mow Rich’s yard +40 min to mow own +20 min to weed rest of own yard	+90 min to weed Mike’s yard +120 min to weed own yard
New Total Yard Work   Time	100 min	210 min

*BOTH have less time doing yard work

Efficiency: getting more from stock of resources

Production Possibilities Frontier: Amount one can produce given resources, technology and knowledge

Properties of PPFs

1) All Points on/in = achievable

2) Absolute Advantage: Raw sense, one person/company better at producing a product than another

 ex: Rizzo better at making coon hats, but Mrs. Rizzo better at jibbiets

3) All points NE are NOT achievable

4) Points on the PPF are "productively efficient"

  --> key: produce stuff that people want at lowest cost; consider making the right amnt for demand

5) Slop; negative/downward; captures tradeoff

  -produce more of one, then must produce less of the other

6) Change in slope = "Law of Diminishing Return" 

 -aka law of increasing opportunity cost

 - lower quality when want to expand

7) Economic growth

   1- Resources (created or discovered)

   2- Technology

   3- Trade

Comparative Advantage

Rochester Grads vs. Cornell grads; who better at making wine and/or cameras?

Trade Trade Trade!

Rely on rules when unsure how to act; socially optimal outcome

"blow off rule of law" -->extra kids in class
-able to predict with certainty
-some rules not economic
 --> class enrollment piece of legislation that

Bus example: not clear whether he should stop

imagine world where have to get to airport
-call brother, ask stranger, taxi; which most confid way to get there?

ex: send legal document, used FedEx
-why Rizzo not worried about his important stuff?
==>imagine how many things that could go wrong! (throw out, open..) Why content?
CONFIDENCE!
-Compare other ways of doing business (Imagine giving package to total stranger on street)
-Compare time to get there, the cost, reputatio

Feedback Loops: exist to ensure performance
-Consequence for failure

FedEx hires honest people, fires people who lose packages, rude

Why Bother Keeping Reputation Intact?

Customers damage competition

-> Rizzo more confident in Fed Ex

Feedback works well when people feel guilty about doing a bad job

*Areas most satisfied/that work => more feedback loops

Trade and Exchange (Must understand what property is and ethics of a just exchange)

1) What should get produced?

2) How Do We Decide to Produce?

3) Allocation System; how get from producers to consumers?

Inputs => "Black Box" => Stuff

Factors of Production

1) Land

2) Labor

3) Capital

-->basic resources available to society

Land: Nat. resources, preexisting phys. objects (minerals, trees)

-Something doesn't become a resource UNTIL we give it value

Labor: # of bodies, phys/mental ability born with

Capital: something that must be produced in order to produce something else

2 types here

  -physical: used for something else (crow bar used to change tire)

  -human: all augmentation people 

2 Ways to Exchange in Production Process

Self Sufficient  <------    ------->  Specialization & Exchange

1) Specialization 2) Exchange 3) Discovery

What does it meant to have economic activity?

PSST = Patterns of sustainable specialization & trade

-Getting other people to voluntarily do things for you

Work By Yourself --> reduce economic activity, less GDP

Dynamic Discovery; techonology growth, new patterns of PSST

Possible for Undiscovery

-Dark Ages "undiscovered" urban living

-Econ. slumps traced to undiscovery

Rapid change of technology -> possible reason behind Great Depression

Prices awesome, adjust BUT in real world sometime people don't care?

Just remember, TRADE IS GOOD!

 Why Do People Produce? -> Acquire wealth

 What is Wealth? -> sometimes material stuff

ex: What Buddha's wealth was: wanted nothing! Yay, wealthy! 

Nat. incr. production of thing but incr. production of wealth growth happens when inputs and stuff move apart

Voluntary Exchange:NOT exchange of equal value; People trade/cooperate to gain what each values

ex: exchange of baseball cards, money value not sole reason

Let's Teach the Silver Rule

Golden Rule = Knowledge problem

Mao’s China

·      During the great leap forward, more people starved than previously thought

·      10-20 million deaths? More about 45 millions people died unnecessarily from starvation

Our culture doesn’t elevate…?

·      Self interested actions in a market setting are frowned upon, but things like spending more time for yourself or working out everyone agrees are good things

·      Rizzo teaches us economic which is a good service

·      A person who goes jogging is virtuous but who sells the jogger the shoes is evil

Reciprocal Altruism

ex Tony needs a kidney, Tina anonymously donates her kidney

·      10 years later: Tina struggles with her mortgage, Tony randomly gave her $20,000

·      If you shrink the distance and time and place, two altruistic actions turn into Tony buying Tina’s kidney which is “morally horrific”

·      Which societies are the greediest? Wall Street made up of corporation, when they buy and sell they do it greedily

·      We don’t view extreme couponing as greedy though, or Lebron James who sells his labor for a huge price

o   Its not just selfishness that motivates people

o   We’re motivated by love of family, motivated by wanting to do a good job, we don’t want to be bored, we’re anxious about how other people perceive us, etc…

Self interest is to pursue the projects that interest you

·      Mother Teresa was very self interested bc she wanted to pass along a message of peace, so was Jack the Ripper

The Golden Rule doesn’t work in a big society or with the knowledge problem

 ex: The bus shouldn’t stop for Rizzo

·      What decisions do the bus driver have to make to make an objectively good choice?

o   Figure out what Rizzo’s modus operandi is? Is he going to save someone or is he going to bomb a bank? How would the bus driver know?

o   The people sitting on the bus matter, you will be delaying all those people, Our behavior today changes our long run incentives (waiting first 5 minutes of lecture ends up wasting 2.5 lectures total)

§  Lateness in Ecuador caused 4% of GDP per year!

o   Must follow the rule of law

o   The ethics of a market system must be more than intimate system

o   Silver rule= Do not do to others what you would consider unfair or unjust if they did it to you

Imagine you have a struggling business, you have marginally productive workers like interns. Should the CEO let you go or should he let you stay?

ú  Its okay to be charitable with your own money, but impermissible to be charitable with someone elses money

Running a good business requires that you use “soft” values

The Most Unusual Day
 I think this is an interestingly example of how incentives can lead to unexpected outcomes and "unintended consequences". Even the author, who admitted he wasn't a huge supporter of the policy, was eager to work the system to his benefit to gain the "Baby Bonus". Hospitals were unprepared for the rush of expecting mothers and had to use extra resources, space and employees to keep up. I wonder if mothers-to be had some sort of influence physically on delaying the birth (they say that people can delay dying until after the holidays) I agree with the author's idea to implement the policy the day it is announced to the public if the government wishes to save money (and the hospital staff).

Academic Episode
  I really enjoyed reading this article. Initially, I thought the idea of challenging one's superior was a great idea. In high school, I recall friends would compete with other students for the highest chair in band or orchestra. Competitions could be made at any time, and it motivated students to practice aggressively. Still, it quickly became clear why the majority of universities do not use Seguira's methods. Once again, unexpected results are worse than the original issue.

Example of Law

I live on my sorority's floor and there are a few understood rules that keep 24 girls in the same dorm same.
For example,
-If you leave your food out in the lounge, it's fair game. Don't want to share, don't leave it out.
-Each suite on the floor rotates on the duties of cleaning the lounge
-It's acceptable to turn up the music at night, but not during the day
-If you leave your stuff out, it will end up in the lost & found box with the other random clothes

None of these rules are actually written down anywhere. And obviously, some of the rules are more enforced and respected than others. But having a general understanding where "everyone is treated equally" and because the "laws are general, not specific", this semester has run pretty smoothly.

It's Ok That Markets Aren't Perfect

Product Value, Worth -->Profit opportunity; wage close to productivity
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