Reading List

Section I: The Economic Way of Thinking

1. Introduction

• *Hayek, F.A. “Introduction to Bastiat’s Selected Essays on Political Economy, Library of Economics and Liberty. Available online. 

• *Bastiat, Frederic. 1845. “Abundance and Scarcity,” Economic Sophisms, Chapter 1. Available online. 

• *Bastiat, Frederic. 1845. “Obstacle and Cause,” Economic Sophisms, Chapter 2. Available online.

• * Read, Leonard E. 1958. “I, Pencil,” The Freeman, December 1958. Available online. 

• *Hazlitt. Chapter One: The Lesson. 

OTHER MEDIA

• *VIDEO Clip: Anarchy is Not Chaos – 20 seconds atop the Arc de Triomphe. Available online.

1. Economic Evolution: Today’s Economy in Historical Perspective – The Record

• * Lucas, Robert. 2003. “The Industrial Revolution: Past and Future,” The Region, Annual Report of the Federal Reserve Bank of Minnesota. Available online.

• *Robert W. Fogel, 2005. "Reconsidering Expectations of Economic Growth After World War II from the Perspective of 2004," IMF Staff Papers, Palgrave Macmillan Journals, vol. 52(si). Available online.  

• * Toynbee, Arnold. 1884. Lectures on the Industrial Revolution in England: Popular Addresses, Notes and other Fragments. London: Rivingtons, pp. 85-93. Available online. Scroll down to Section VIII: The Chief Features of the Industrial Revolution. 

• *George, Rose. 2008. “In the Sewers,” in the Big Necessity, pp. 22-23. Scanned on Blackboard.

1. Economic Evolution: Today’s Economy in Historical Perspective – The Ideas

• * Heilbroner, Robert. 1999. “The Economic Revolution,” The Worldly Philosophers, Chapter II, pp. 18-41. Scanned and on Blackboard.

• * Marx, Karl and Friedrich Engels. 1848. The Manifesto of the Communist Party. Read the Preface, Section I (Bourgeois and Proletarians) and the last 5 paragraphs of the book. Available online.

• * Lerner, Abba. 1963. “Review of Capitalism and Freedom by Milton Friedman.” American Economic Review, Vol. 63, No. 3, pp. 458-60. Available online.

• *McCloskey, Deirdre, 2011. “Saints, Sweet Talk and the Madwoman in the Economics Department: An Interview with Deirdre McCloskey,” Online

OTHER MEDIA

• *Image: The only thing you need if you travel through time. 

• *Why Most Economics Cannot Explain the Modern World. Watch the video summarizing Deirdre McCloskey’s book, Bourgeois Dignity.

• *EconTalk Podcast: Arnold Kling on From Poverty to Prosperity, Library of Economics of Liberty. December 14, 2009. Available online. 

• *Full Length Video: The Industrial Revolution. This is a video in three parts – each part is less than an hour and each can be viewed in streaming format on the course Blackboard site.
• Part One: The Great Discontinuity
• Part Two: Freedom Under the Law
• Part Three: A Magnificent Century

• *Youtube Clip: Everything is Amazing Right Now and Nobody is Happy. Available online.

• *Youtube Clip: Can You Spot the Billionaire? Available online.

• *Youtube Clip: 200 Years That Changed the World (Hans Rosling). Available online. 

Here is a nice transition piece that takes us to the next section, but also could very well fit in the section on the Economics of Government or even a Requiem and retrospective on the entire course. I don’t know where best to put it. For some economists, this is one of the best essays ever written, and it was written over 170 years ago.

• *Macaulay, Thomas Babington. 1830. “Southey’s Colloquies on Society,” Available online.

1. Economics as a Science: Modeling, Theories and Policies

• *Roberts, Russell. 2010. “What is Economics Good For?” Café Hayek, January 2011.

• *Buchanan, James. 1964. “What Should an Economist Do?” Southern Economic Journal 30, January 1964: pp. 213-222. Available online. 

• * Peirce, Charles Sanders. 1931. “Morality and Sham Reasoning,” The Collected Papers Vol. I: Principles of Philosophy. Available online.

• * Manzi, Jim. 2010. “What Social Science Does—and Doesn’t—Know.” City Journal, Vol. 20, No. 3, Summer 2010. Available online.

1. Basic Economic Principles

• *Hazlitt, Chapter 2: The Broken Window. 

• *Hazlitt, Chapter 3: The Blessings of Destruction. 

• * Bastiat, Frederic. 1845. “Effort and Result,” in Economic Sophisms, First Series, Chapter 3. Available online.  

• * Bastiat, Frederic. 1845. “What is Seen and What is Not Seen,” in Selected Essays on Political Economy. Available online.  

• * Buchanan, James. 1969. "Preface," Cost and Choice: An Inquiry in Economic Theory. Available online. 

OTHER MEDIA

• *Munger, Michael. 2006. “Ticket Scalping and Opportunity Cost,” EconTalk podcast. Podcast April 10, 2006. Available online.

• *War, Terror and Disaster is Good for the Economy, Really? Watch a short video here in case you do not wish to read all of Bastiat.

1. Ethical Foundations of Commercial Society

• *Bastiat, Frederic. 1845. “Two Systems of Ethics,” in Economic Sophisms, Second Series, Chapter 2. Available online.  

• *Bastiat, Frederic. 1850. “Conclusion to Part I,” in Economic Sophisms. Available online.

• * Appiah, Kwame Anthony. 2006. “The Case for Contamination,” New York Times Magazine, January 1, 2006. Available online.

• *Sandel, Michael J. 1998. “What Money Can’t Buy: The Moral Limits to Markets,” Tanner Lectures on Human Values. Brasenose College, Oxford May 11 and 12, 1998. Available online.

• *Wight, Jonathan. 2007. “The Treatment of Smith’s Invisible Hand.” Journal of Economic Education. Summer 2007. Vol. 38, Iss. 3; pp. 341-358. Available online.

1. Scarcity, Choice, Specialization and Exchange 

• *Hazlitt, Chapter 7: The Curse of Machinery

• *Hazlitt, Chapter 8: Spread the Work Schemes

• *Hazlitt, Chapter 11: Who’s “Protected” by Tariffs?

• *Krugman, Paul. “Ricardo’s Difficult Idea.” Online.

• *Krugman, Paul. “In Praise of Cheap Labor.” Online. 

• *Krugman, Paul. “A Raspberry for Free Trade.” Online. 

• *Bastiat, READ ALL OF ECONOMIC SOPHISMS … but perhaps these chapters …
• Trade is not war – Domination by Labor
• The Right Hand and the Left.
• The Negative Railroad.
• Something Else. Crusoe v the Nation.
• The Candlemakers’ Petition 

• * Smith, Adam. 1776 (6^th edition: 1791). “Book I, Chapter II: Of the Principle which gives Occasion to the Division of Labour,” in An Enquiry into the Nature and Causes of the Wealth of Nations. London: A Strahan. Available online.

• * Smith, Adam. 1776 (6^th edition: 1791). “Book IV, Chapter II: Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home,” in An Enquiry into the Nature and Causes of the Wealth of Nations. London: A Strahan. Available online.

• *Bastiat, Frederic. 1845. Economic Sophisms, First Series Chapter 4 through 23, but particularly Chapter 6, 7 (Candlemakers’ Petition) and 17. Series 2, Chapter 16. Available online.

• *Ricardo, David. 1817. "On Foreign Trade," in On the Principles of Political Economy and Taxation, Available online. Ricardo’s famous insights into comparative advantage.

OTHER MEDIA

• *Blog Entry: Rizzo, Michael, “Moving Trucks and Medical Care,” The Unbroken Window, June 16, 2009.

• *Images: The 100 Mile Suit.

• *Interesting Website: The Toaster Project.

• *Rizzo, Michael. 2008. “Should You Buy Local?” American Institute for Economic Research. Free version available online. 
• Blog Entry: Rizzo, Michael, “On My Way Into Work,” The Unbroken Window, August 17, 2009.

• *TedTalk: Alex Tabarrok – How Ideas Trump Crises – and Walls Come Crumbling Down

1. Property Rights, Institutions, and Economic Freedom (We May Skip this Section Formally, But I Will Send Some Summary Notes to the Class if We Do)

• * Friedman, Milton. 2002. “The Relation Between Economic Freedom and Political Freedom,” Capitalism and Freedom, Chapter 1, pp. 7-21. PDF posted to blackboard site.

• * de Soto, Hernando. 2003. The Mystery of Capital:  Why Capitalism Triumphs in the West and Fails Everywhere Else (New York:  Basic Books, 2003), pp. 41-62. PDF posted to blackboard site.

• * Alchian, Armen A. “Property Rights,” The Concise Encyclopedia of Economics. Available online.

• *Hazlitt, Chapter 9: Disbanding Troops and Bureaucrats

• *Bastiat, Frederic. 1848. The Law, Available Online. 

• *Palmer, Tom. 2004. “The Role of Institutions and Law in Economic Development,” conference presentation at A Liberal Agenda for the New Century: A Global Perspective,” cosponsord by the Cato Institute, the Institute of Economic Analysis and the Russian Union of Industrialists and Entrepreneurs, April 8-9, Moscow, Russian Federation.  Available online.

OTHER MEDIA

• *Documentary Video: Commanding Heights, Episode One: The Battle of Ideas

Section II: Analytical Tools of the Economist 

1. Supply and Demand

• *Sowell, Basic Economics, Chapter 2, “The Role of Prices.”

• *Rothbard, Murray. “Determination of Price: Equilibrium Price,” in Man, Economy and State, Volume 1, pp. 91-108. Scanned and uploaded to Blackboard.

• * Radford, R.A. 1945. “The Economic Organization of a P.O.W. Camp.” Economica, XII, No. 48, New Series, pp. 189-201. Available online.

• * Rizzo, Michael. “Riffing on Gas Price Complaints,” The Unbroken Window, August 8, 2005.

• * Bastiat, Frederic. 1845. “High Prices and Low Prices,” in Economic Sophisms, Second Series, Chapter 5. Available online.  

1. Equilibrium and the Price System

• * Hazlitt, Chapter 15: How the Price System Works

• *Hazlitt, Chapter 17: Government Price Fixing

• * Smith, Adam. 1776 (6^th edition: 1791). “Book IV, Chapter II: Of Restraints upon the Importation from foreign Countries of such Goods as can be produced at Home,” in An Enquiry into the Nature and Causes of the Wealth of Nations. London: A Strahan. Available online – particularly paragraphs 8 and 9. (Invisible Hand)

OTHER MEDIA

• *Adler, Max. 2009. “Bethpage Gray,” Golfworld  May 25, 2009. Available online. 

• *Reynolds, Glen. 2010. Progressives Can’t Get Past the Knowledge Problem. Washington Examiner, April 4, 2010. Available online. 

• *The Onion Movie: “Obesity Price Controls.”

1. Supply and Demand Applications

• *Sowell, Basic Economics, Chapter 3, “Price Controls.”

• *Bastiat, Frederic. 1845. “The Tax Collector,” in Economic Sophisms, Second Series, Chapter 10. Available online.  

• *Hazlitt, Chapter 5: Taxes Discourage Production

• *Hazlitt, Chapter 6: Credit Diverts Production

• *Hazlitt, Chapter 18: What Rent Control Does

• *Hazlitt, Chapter 19: Minimum Wage Laws

OTHER MEDIA

• *Video: This is Your War on Drugs. Youtube.

• * Video: The Hidden Compliance Cost of the Internal Revenue Code. Youtube.

• * Schiff, Peter. 2010. “Congress Sacks Samoan Economy,” Advisor Perspectives, January 23, 2010. Available online. 

• * Boston Globe: Jacoby, Jeff. 2009. “A Deadly Organ Donor System.” Boston Globe, July 5, 2009. Available online.

1. Evaluation of Market Mechanism

• *Hazlitt, Chapter 21: Enough to Buy Back the Product

• * Senior, Nassau. 1836. “Value of the Forces of Supply and Demand,” in An Outline of the Science of Political Economy. New York: Augustus N. Kelly, pp. 13-17.  Scroll down here to the section on value. (Perfect Competition).

OTHER MEDIA

• *Documentary Video: Commanding Heights, Episode Two: The Agony of Reform

Section III: Profits, Losses and Entrepreneurialism

1. Simple Theory of the Firm

• *Sowell, Basic Economics, Chapter 5, “The Rise and Fall of Business.”

• *Hazlitt, Chapter 22: The Function of Profits

• * Schumpeter, Joseph. 1942 (3^rd edition: 1950). Capitalism, Socialism, and Democracy. New York: Harper Torchbooks, Harper and Row Publishers, pp. Chapter VII – Creative Destruction. In PDF form on Blackboard Course Reserves. 

• *Graham, Paul. 2004. “How to Make Wealth,” in Hackers and Painters, O'Reilly Media, Inc. Available online.

OTHER MEDIA

• *Friedman, Milton. 1970. “The Social Responsibility of Business is to Increase its Profits,” New York Times Magazine. Online.
  
• *Rethinking the Social Responsibility of Business, Contra Friedman. Reason.
  
• *Taco Bell and the Golden Age of the Drive Thru. A pretty incredible story. Bloomberg, May 5, 2011.
  

1. The Entrepreneur  

• *Sowell, Basic Economics, Chapter 6, “The Role of Profits – And Losses.”

• * Kling, Arnold and Nick Schulz. 2010. “The Heart That Pumps Innovation,” From Poverty to Prosperity, Chapter 5, pp. 181-198. PDF posted to blackboard site. 

• *Hazlitt, Chapter 14: Save the X Industry

• *Bastiat, Frederic. 1845. “The Physiology of Plunder,” in Economic Sophisms, Second Series, Chapter 1. Available online.  

• * Mill, John Stuart. 1849. “Competition and Custom,” in Principles of Political Economy. London: Longmans Green, pp. 242-47. Book II, Chapter IV: Available online. 

OTHER MEDIA

• * Trial, Error and the God Complex. See Tim Harford’s terrific Ted Talk.
  
• * Video: The Amazing Ford Model T. Youtube.

• * Video: What’s at Stake for Entrepreneurs? Look what these two people do just so you can enjoy some good wine and coffee. There goes that evil capitalism thingy again.
  

Section IV: The Economics of Government (We Are Unlikely to Get This Far)

1. Regulation, Freedom of Association

• *Sowell, Chapter 7, “Big Business and Government.”
  
• *Sowell, Chapter 8, “An Overview” (of Industry and Commerce)
  
• * Zupan, Mark. 2011. “The Virtues of Free Markets,” Cato Journal, Vol. 31, No. 2 (Spring/Summer 2011). Draft uploaded to blackboard. (Note, Professor Zupan is the Dean of the Simon School of Business at the University of Rochester).
  

OTHER MEDIA

*Documentary Video: Commanding Heights, Episode Three: The New Rules of the Game.

1. Government Incentives and Private Incentives: A Public Choice Primer

• *Shughart, William. “Public Choice,” Concise Encyclopedia of Economics.

• * Stigler, George. 1984. “A Sketch of the History of Truth in Teaching,” in The Intellectual and the Marketplace, Enlarged edition, Chapter 6. Cambridge, MA, and London, England: Harvard University Press, pp. 43-50. Available online.

• * Munger, Michael. 2006. “Two Steves and One Soichiro: Why Politicians Can’t Judge Innovation,” feature at the Library of Economics and Liberty. Available online. 

1. The Distribution of Income 

• * George, Henry. 1879. “Preface,” Progress and Poverty. New York: Modern Library, pp. xii-xvii. Available online.

• Harriss, C. Lowell. “How to Make Slums and Create Barbarians,” Economic Education Bulletin. May 1981. American Institute for Economic Research: Great Barrington, MA. Available online.

Section V: A Requiem for the Economic Way of Thinking?

• *Hazlitt, Chapter 25: The Lesson Restated

• *Hazlitt, Chapter 26: The Lesson After 30 Years

• *Stigler, George, 1963. “The Intellectual and the Marketplace,” in The Intellectual and the Marketplace, Cambridge, MA: Harvard University Press. Available online.

• *Sowell, Chapter 23, “Myths About Markets”
  
• *Sowell, Chapter 24, “Non-Economic Values”
  
• *Sowell, Chapter 25, “Parting Thoughts”
  
• * McRaney, David. 2011. “The Illusion of Asymmetric insight,” from You Are Not So Smart. Available online.
  

OTHER MEDIA

• * Rizzo, Michael. 2011. “The Problem With Economics,” Speech Delivered to the AHI Annual Carl Menges Colloquium, April 14, 2011. Available online. 

about trade

*Typically the transactions are characterized as between a buyer (who might value a pair of sunglasses at $90) and a seller (who might be able to produce it for $30), but that need not be the case. It is simply any exchange between any two actors who value things differently.


*I still get confusion because people argue that many people have no money, so allocating goods by money prices is unfair and unjust. But once you understand that money simply represents goods and services that you have produced, and that are found to be valuable by your fellow citizens, you are partway to addressing this dilemma. Everyone has the ability to produce – and the natural state of nature is non-production – it is poverty. Wealth and happiness is not an entitlement, they can only be possible when you take efforts to produce things of value (broadly defined too). The collectivists among us run away from this reality by talking about “causes of poverty” as if nothingness has a cause. Wealth and somethingness is the thing to be explained, and it is up to the astute reader to understand what things make it difficult for people to move from a state of nothingness and into a state of somethingness.

Chapter 16 Frideman

There are three ways in which the market outcome could be changed. （Marshall improvement? NO!）
i. The bureaucrat-god could have the same quantity of the good produced in the same way, while changing its allocation--who gets it. 
ii. He could produce the same quantity and allocate it to the same people, while changing how it is produced. 
iii. He could change the quantity.

Chapter 4 Frideman

a change in the price of one good affects not only the cost of that good in terms of others but also the consumer's total command over goods and services--a drop in price is equivalent to an increase in income. A full discussion of this would involve the income-compensated (Hicksian) demand curve discussed in the previous chapter.

The methodologies of economics

i. Deductivism by John Stuart Mill. 
So many causal factors influence economic phenomena, and experimentation is generally not possible, there is no way to employ the methods of induction directly.


*independently established laws. The basic generalizations are instead statements of tendencies.
*neoclassical theory focuses much more on individual preferences and decision making than did classical economics.
ii. Positivist or Popperian Views
Good science be well-confirmed by empirical data.
iii. Predictionism by Milton Friedman
The goals of a positive science are predictive, not at all explanatory.
All that matters is how well a theory predicts the phenomena in which economists are interested. (falsity of assumptions or of predictions is unimportant unless it detracts from a theory's performance in predicting the phenomena in which one is interested )
iv. Eclecticism (various)
to fucos on the methodology economists practice, making use of whatever tools philosophers of science have had to offer that appear to be well-made and apt for the job

How Economists Think

*Differentiate wants and needs


Two major assumptions:

i.  comparability, the assumption that the different things we value are comparable.
ii. non-satiation, the assumption that in any plausible society, present or future, we cannot all have everything we want and must give up some things we desire in order to have others.


*value (of things) means how much we value them and that how much we value them is properly estimated not by our words but by our actions


This definition is called the principle of revealed preference--meaning that your preferences are revealed by your actions.


 the claim that people do not really have any choice confuses the lack of alternatives with the lack of attractive or desirable ones. Having chosen the best alternative, you may say that you had little choice; in a sense you are correct. There may be only one best alternative.


* Choice or Necessity? You just don't want it(given the cost, eg. $1000 shirts)

David Frideman, Price Theory Ch 1

We assume that every people has reasonably simple objectives and choose the correct means to achieve them.

Rationality is an assumption about individual, not about group (think about the prisoner's dilemma)

*rational ignorance: it is rational to be ignorant when the information costs more than it is worth.
Rational behavior (in the sense of "making the right decision") requires information. If that information is itself costly, rational behavior consists of acquiring information (paying information costs) only as long as the return from additional information is at least as great as the cost of getting it.

Rationality is not the same as the assumption that people reason logically. Logical reasoning is not the only, or even the most common, way of getting a correct answer. Since there're rationality with no mind to reason with. (computers that can learn)

Class Forty Two

Profit= total revenue - total cost
Why do we get wages and pay rents?
We ALSO know that the profitability of investing in any asset must be zero over time, so that the value of our formula is zero.What is a wage and why can we get the wage?
Wage is a contractual agreement between worker and employer that specifies precisely what worker will be doing and what employer will be getting and giving.


Contract lays out what a worker should do and how much he can get; employer knows how much he gets and how much cost he bears to hire the worker.

So the whole essence of wage is to eliminate uncertainty.


Rent also functions to reduce the uncertainty.
Lenders know how much he can get as compensation and borrowers know how much he must produce.

What is interest?
It is the price of using money today rather than future.
Price comes from demand and supply.
People want purchasing power that they don't possess now, so interest is the price of obtaining unearned resources, the price to persuade lenders to give their current purchasing power to the borrowers.


So wages are return of working, rent are return of leasing machinery, interest is return of loaning out purchasing power.

What is the distinction between accounting profit and economic profit?
Application:
Suppose Rachel can earn $30000 per year as a secretary. She owns a building that rents for $6000 per year. She also has a savings account $23000, and the interest rate is 10%.

Now Rachel wants to quit her current job and open a pizza shop. She will use her own building, cash out all 23000 bucks and borrow 20000 dollars from the bank. She estimated that she can have revenue of 85000 dollars.

Question: Is it a good choice for Rachel?

Explicit cost: 23000+20000+20000*10% So account profit is 40000
Implicit cost: foregone wages 30000, normal rate of return 23000*10%, foregone rent 6000
So econ profit is revenue-implicit-explicit= $1700, which means that Rachel will be $1700 richer to be an entrepreneur than if she choose second best option.


When there is a profit, new competitors will come in to get profit they will (1)lower price (2)increase quality, but the consequence is that total revenue will be lower and less efficient producers will be rationed out of the market, leaving the most competent ones to compete.

The prosperity of pizza market will increase demand for raw material and thus the total cost will increase.
So in a perfect market, price will be the marginal cost of good.
Econ profit is the return of entrepreneur ability


Question: why does econ profit exist?
(1)people's wants are unlimited (2)licensure and patent

Losses are key to market because it's the signal whether you are good at what you do.
What's the problem of insulating losses?
(1) Losses destroy resources
(2) U lose feedback, having no idea whether you are good at what you do or not.
(3) people will be more audacious.

The incentives between profit and non-profit organizations are different.
Capitalism is full of uncertainty and it's too dynamic for some people.

EWOT Thirteen

Like most sport fans, I watched some NFL football this weekend. During one of the commercial breaks, a promo for a show called GangLand began playing.

California is notorious for having some gang issues. In oder to deal with this problem, the California police department decided to create, along with public support, California's Top 10 Most Wanted Gang members. Sounds like a  good idea right? Not exactly- we're about to see some untended consequences. Well California's gangbangers now had an incentive to even create more harm than before...in order to make it on the list, thus validating their street credit. After the list was released, violent crimes increased as more gang members tried to make their way onto the list. Now was this the police departments' intent? I doubt it. But this example does highlight the dangers of unintended consequences.

The Heart That Pumps Innovation

A) Kling claims the reason for America's economic success stems from the innovation of our entrepreneurs. He contrasts our private-ownership system with Europe's public-ownership system. I wish Kling would give statistics to back up his claims that Europe's economy is stagnating when compared to the U.S., or that "it is easier for large businesses to fail in America." I found the claim that only paranoid businesses survive very interesting; entrepreneurs must adapt to constantly changing market conditions in order to keep up with the competition. Many entrepreneurs usually experience failure before success. I also found the Entrepreneur's Ten Commandments were really interesting - its basically saying that in order to help the company, you must defy it first. However, entrepreneurship forces companies (i.e. shareholders) to bear most of the cost rather than the intrapreneur. My favorite line is: "Someone who fits the description of an un-entrepreneur would be perfectly suited in another role - as a bureaucrat."

B)
1. How many businesses does the typical entrepreneur start before creating a successful business?
2. Is the appeal of starting your own business greater today than it was 10 or 20 years ago?
3. Can you think of any businesses that actually promote entrepreneurship?

C) Entrepreneurialism advances the market, while benefiting the consumer, because of competition between rising and incumbent firms. However, in order to create a successful business model, entrepreneurs must be able to adapt to the ever changing preferences of consumers.

Class Thirty Seven

Profits, Losses, and Entrepreneurs
Society doesn't celebrate the accumulation of wealth, only its distribution.

Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward.

Industries and commerce are not static things, but dynamic processes, in which particular products, individual companies and whole industries rise and fall, as a result of relentless competition under changing conditions.

The company which first introduces a product that consumers like may make large profits, but those very profits attract more investments into existing companies and encourage new companies to form, and thus drive down the price.

Losses force business to change with changing conditions and shift to what they are comparatively good at.

Knowledge is one of the scarcest of all resources in any economy and the insight distilled from knowledge is even more scarce.
 Entrepreneurs - When starting a business, the most important thing to do is understand your real costs.
Factors of Production: (1) land, (2) labor, and (3) capital. You can about explicit and implicit costs
1) Explicit:rent ; Implicit: rent (cost of forgone opportunities)
2) Explicit:wages ; Implicit: forgone wages
3) Explicit: rent (projectors, laptops) ; Implicit: forgone rent

What decides whether you should buy or rent something: The equation of profitability
Profitability = Rental Rate + Appreciation Rate - Interest Rate
Benefits of buying an asset: its the forgone rental payments you would have to make.
So annual:
[(rental payments) / (price of good)] + [(Change in asset price)/(price)](It's the expectation of how much you wanna sell the next year) - 10% = 2.5%
37.5% + (-25%) - 10% = 2.5%

Suppose the lease payment: 12000 dollars per year
Buy a car: $32000 sell it next year: 24000 bucks
Interest rate: 10% (associated with The cost of administrate loans, risk, time preference, inflation )

Rental rate= 12000/32000 = 37.5%
Appreciation rate= -8000/32000= -25%
Interest rate: 10%
Profitability= 37.5% + (-25%) - 10% = 2.5%

If the outcome is larger than 0, you should buy the stuff.

What does 2.5% mean?
It shows how much richer you are every year if you own the thing rather than rent the thing.
2.5% means: how much richer I am each year from owning the car as compared to if I rented the car. If the number is positive you should buy; if the number is negative you should rent. If you buy, you are $250 richer than if you had rented the car.

Class Thirty Six

Two odds about tax:

i.                     Raising tax prevent otherwise mutually beneficial transactions from happening.

ii.                   I aim to make the producers to bear the burden, but the truth is the demanders also shared the burden.

The other costs of taxation that do not appear on the supply and demand curve. When we say tax is bad, we mean the deduction of valuable transaction that you place the wedge.

i.                     Bureaucrats are reluctant to any change/

ii.                   The time and effort spent doing and preparing the tax is too big, about 400 billion dollars per year. That's a great waste. It’s not productive activity.

iii.                  Tax can be misused.

The problem of tax is the deadweight loss part, and I’ll show you how to avoid that.

Sales tax: the legal liability of tax is upon the consumers.
The effect of sales tax and excise tax is identical.

When you post a tax on the buyers, it’s the buyers that are affected. The amount of demand will shift down just exactly the same amount of the tax.

You can charge tax whichever side you want, but all taxes are burden by both suppliers and producers. The economic incidence of tax is completely independent of legal incidence of tax.

Social security is actually paid by workers: the burden is determined by the relative elasticity of both suppliers and demanders of labor. The fact is more workers are inelastic, and firms’ demand for labor is really elastic under current international trade background. The more elastic of one part, the more destructive to that part.

What’s good tax policy? Your goal part is elastic and the other one inelastic (not really much deadweight loss)

*Slum sum: no marginal incentive change, but not good for the poor

Would you support that we should put all the tax only on things that the firms take the whole burden?
Answer: NO. Firms consist of shareholders and workers. We shift between the identities of consumers and producers, so the argument doesn't make any sense.

Subsidy can benefit both producers and buyers, and the more inelastic the curve is, the more benefit it can get.

But the subsidy doesn't mean the market will be better off.
Reason: Think about how people respond to incentive and opportunity cost of resources.
When there is a subsidy, the cost of the good is artificially lower, so producers shift resources, which have alternative uses, to make this product. But the low cost is merely an artificial phenomenon, so resources(whether land, workers, capital or time) that could have been used more efficiently are now used to make the product with the subsidy. That's a waste.

Besides, a subsidy may lead producers to overproduce (price now lose the role of signal) and deadweight loss will occur.

So subsidy, like tax, is still an intervention of market, which makes the price no longer the truth teller of market transactions.
Subsidy is mere another way of economic fallacy. What's seen is the prosperity of one field, what's not seen is its damage to fields that could have made the resources more efficiently.