When Rizzo told you that bus driver shouldn’t stop, he’s not telling you we should help people. While in fact, if the drive stops, he may be able to improve social welfare.
*The question is, we have a giant information problem:
The social goal is to improve the welfare of many people without hurting anybody. That’s the goal deciding whether you should stop or not. We need to consider social cost.
College (into class) vs. Customers (onto bus) Expectation Problem
I. Which situations in our life tend to give us the most confidence about whether we gonna have success engaging in particular transactions.
Eg. The sign of a hotel about not allowing pet in the room. Why “we love pets?” not “pets are really costly”? Why they’re playing emotional games rather than logical convincing?
*Relying on strangers, then you can free of your friends.
Eg. If you go to a dining hall, you pick up an apple; do you really care that the farmer loves you?
You’d want more farmers competing, “my apple is cleaner” “my apple taste better”
Eg. A few years ago, I want to buy a house, and then I went into a store the pass the guy behind the table whom I’ve never seen before the important documents. What gave me the confidence, given many things that MAY be going wrong?
*Feedback Loops the most important thing you gonna learn about what market economists can do when they are working well (give the confidence to you). It’s they provide feedback.
Eg. For the real estate company, there’re feedback loops that ensures good performance. The reason is there’re consequences perhaps very serious to the company if they fail. It’s not just they lose money. People lose jobs, the whole company may disappear. There’re two reasons why that might happen:
*Rule of law doesn’t help me here. It can’t be trust. You can only trust it when you’ve developed some good reason to trust it.
i. Competition is part of the reason why feedback loops are important. (If this company doesn’t perform well, you turn to other company.)
ii. Competition is not enough. When the people in the company fail, they actually feel bad about it. You need people in society that have some sort of moral sense of good and bad, right and wrong, hard work and reward. The company tries to hire honest people. People who regularly do things wrong wouldn’t be there.
*Then people in the real estate company are not doing so because they love you.
*When you see a problem, don’t start thinking about politics, just ask questions about: ”why feedback loops” are not there? For big government, if you want to do things well, reward what’s right, that’s what you need to think about.
II. Trade + Specialization
Any study of economics in the real world involves the study of exchange of property.
*We exchange not the goods itself but property rights.
What’s the whole point of economic activity?
*The world has scarcity and we want stuff. So the real economic challenge is we ask ourselves:
i. What stuff should we get produced?
ii. How do we decide to do it? Factories…machines…(Production questions)
iii. What’s the stuff is produced, how do you get it to people? (Allocation problem)
“Input”------“Black Box”------“Stuff”
*Factors of production (inputs also known as):
i. Land (air, water, trees, anything there that people can touch it)
ii. Labor (The natural stock of human beings. Whatever your skill, your gene is when you come to the world, called god given, that’s labor )
iii. Capital (something that must first be produced for the purpose to produce thing else)
1) Physical (machines…)
2) Human (any increment to your ability that happens in your life, not just education.)
*To produce capital, you have to sacrifice land, labor, it’s a new trade-off.
*The real challenge of economics is to make use the god given to make the stuff we want.
III. What exactly do we mean by “economic activity”?
Prior to industrial revolution, outside of a few small societies, there was virtually no economic activity happening on earth. There was productive activity. In history we produce what we want, but that’s productive activity. What makes economic activity? It’s: The second you decide NOT to do sth. for yourselves.
i. Specialization (when you work for yourself, you don’t specialize)
ii. Exchange
iii. Discovery (technology), figuring out new patterns of sustainable specialization and trade. There is a time lag associated with discoveries.
*The more that we become self-sufficient, the less economic activity out there.
The challenge of economic activity, it to develop P.S.S.T. (patterns, sustainable, specialization trade)
The challenge of free economics it to figure out when I should take the risk not to do something for myself. It’s true that self-sufficient make you poor, but at that moment, I know I can get pizza from other sources.
*One of the things that characterized major recessions is when these patterns of specialization and trade break down. People become really self-sufficient during that period.
*In the long-run, the challenge for any economy is to solve a lot of MATCHING problem.
Eg. Somebody show you an i-pad, you found you need it.
i. The production capacity, the technology within society to be able to do that.
ii. Match the skill sets of the people in economy with what people want, with the available technology.
*Trade is good. (Everyone realize the goodness of trade):
People have confusion about trade because two things weird about trade:
i. When you exchange, nothing new is created.
ii. When I do exchange with people, isn’t that exploit?
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