Systems

1. Systems Lesson 7: The Free Market

2. Jokes of the Day Q: A duck, a frog and a skunk wanted to go to the movies and the admission price was $1. Which of the three could not afford to go and why? A:The skunk, because the duck had a bill, the frog had a greenback, but the skunk only had a scent.

3. Jokes of the Day Q: How much money did the pirate pay to get his ears pierced? A:A buck an ear!

4. I Don’t Know!

5. Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives change, behavior changes in predictable ways. Economic Reasoning Principle # 3: People respond to incentives in predictable ways.

6. Laws, customs, moral principles, superstitions, and cultural values influence people’s choices. These basic institutions controlling behavior set out and establish the incentive structure and the basic design of the economic system. Economic Reasoning Principle # 4: Institutions are the “rules of the game” that influence choices.

7. Free Trade!

8. Producing versus Consuming

9. What's wrong with this picture?

10. Concept:  Opportunity cost Most of the homes on this lakefront are expensive and built close to each other, so it's likely that the lakefront lots are highly valued.  This, in turn, suggests that the opportunity cost of living in the shack is high.  We rarely see shacks on expensive lots because the owners usually conclude that they'd do better by selling their property and buying a nicer house on a less desirable lot.

11. The Market Economy(Free Market Economy) • Allows individuals to specialize in their occupations • The means of production are privately owned • Everyone acts to serve his own self interests • Achieved by aiming to satisfy the desires of others • Not a place or a thing • Process of constantly changing prices that guide individuals to adjust to best serve their own interests in this division of labor

12. Creative destruction Innovation in capitalism destroys the old model introduction of a new good, or grade of good introduction of a new method of production new markets employ a new source of supply of the factors of production reorganization of industry, several industries, or a part of industry Government destroys innovation Joseph Schumpeter

13. Review: Lesson from history: Economic growth is the answer to poverty. Why? Productivity ~1750

14. Why Free Trade?

15. Economic Reasoning Principle # 3: People respond to incentives in predictable ways. Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives change, behavior changes in predictable ways.

16. Opinions matter and are of equal value at the ballot box. But on matters of rational deliberation the value of an opinion is determined by the knowledge and evidence on which it is based. Statements of opinion should initiate the quest for economic understanding, not end it. Economic Reasoning Principle #5: Understanding based on knowledge and evidence imparts value to opinions.

17. Cell call kiosk and recharging center. Payphone operator of sorts. Invention is not enough.

18. Innovation: Can be products OR processes Niger: Here it’s not the cell phone that’s new but how it’s distributed and used. Mobile phones proliferate in Niger – farmers could call ahead for grain prices to see where/whether to take their produce. Reduced price variation especially in areas with bad roads or far away from markets. Information made the markets work better. Farmers willing to invest in cell phones to increase their profits. Community cell phones: a business in a box. Buy a cell phone + car battery + antenna (to get service). Rent out use to the village.

19. Cell Phone Use in Africa on the Rise as Mobile Carriers Return A few years ago, it was believed that mobile services were a luxury for the poor, who make up most of the population in Africa. But now millions of people are being added to the lengthy list of cell phone consumers. African farmers once faced long journeys, braving potholed roads and bandits, to check export prices for their goods. Now they just phone the port to ensure they get a fair price, says the Reuters report. More than anything else, analysts say, the availability of mobile services and devices has really increased productivity in Africa. For people working in the informal sector, mobile phones allow them to stay in touch with each other and thereby organize work smoothly.

20. Two to Tango Inventors/innovators can solve a technical problem. Entrepreneurs make inventions marketable. The Innovator The Businessman The Result = + The innovator is James Watt and the entrepreneur is Matthew Boulton who together made and marketed the steam engine.

21. Two to Tango Inventors/innovators can solve a technical problem. Entrepreneurs make inventions marketable. The Innovator The Businessman The Result = + Henry Royce (the engine maker) and Charles Rolls (the capitalist who made it into a company) together produced the Rolls Royce.

22. Two to Tango Inventors/innovators can solve a technical problem. Entrepreneurs make inventions marketable. The Innovator The Businessman The Result + = George Eastman and Henry Alvah Strongwere behind Kodak even though Eastman was actually quite skilled as a businessman himself.

23. Soviet Social Indicators, 1990 Acute shortages of medical supplies Fewer than one-half of draft age men were fit for military duty Illness kept an average of 4,000,000 workers from their jobs each day (as opposed to 287,000 in the US) Infant mortality rates had risen from 22.9 deaths per thousand in 1971 to 33 deaths per thousand in 1989 In rural areas, where one-third of Soviets lived, half the hospitals had no sewer connections, and eighty percent had no hot water In the USSR, government prevented prices from changing in response to changes in supply or demand. In some cases, prices of retail goods remained virtually unchanged for 10 to 15 years at a time. The official price of many goods and services became almost meaningless for purposes of allocating and rationing goods. 1990 population: Soviet Union = 290 million; U.S. = 249 million

24. Soviet Line for Shoes Consequently, non-monetary costs rose and were more important than monetary costs. The opportunity cost of exchange rose; it was harder to trade and therefore fewer exchanges took place and cooperation became less likely and less effective.

25. Top 25 (non-medical) Innovations of the Last 25 years The Internet Cell phone Personal computers Fiber optics E-mail Commercialized GPS Portable computers Memory storage discs Consumer level digital camera Radio frequency ID tags MEMS DNA fingerprinting Air bags ATM Advanced batteries Hybrid car OLEDs Display panels HDTV Space shuttle Nanotechnology Flash memory Voice mail Modern hearing aids Short Range, High Frequency Radio

26. Profit attracts resources Remember the Resource Groupies?

27. Profitable innovations attract resources, but also attract competitors. Increased competition reduces profits and encourages an on-going search for improved products and lower-cost methods of production. Unprofitable innovations create information about what is valuable in a market or economy – and what is not valuable! Note that the innovative process is a classic example of the famous economic dictum:  Profit is the motivator, competition is the regulator.

28. Entrepreneurs who successfully innovate create wealth.  They also pose challenges to others affected by the innovations.  Existing products and services can become obsolete or inefficient in the face of more innovative products or services. Owners of existing products or services are provided incentives to innovate in the presence of other innovative competitors; otherwise, their wealth will be adversely affected as their resources lose value. The on-going market challenge presented by new innovations is known as “creative destruction”.

29. Ease of Doing Business, 2009 Easiest (Wealthiest) Singapore New Zealand United States Hong Kong, China Denmark Most Difficult (Poorest) Burundi Republic of Congo Guinea-Bissau Central African Republic Dem. Rep. of Congo

30. Role of the Entrepreneur • Perceives profit opportunities. • Innovates: Creates new product (provides a supply and hopes it will generate demand). • Assumes the risk concerned with the uncertainty of providing a new product. • Arbitrage

31. Organize land, labor, & capital to produce goods and services Assume the risks of production Different from labor “Residual claimant” Successful Entrepreneurs

32. Unsuccessful Entrepreneurs FAIL

33. How “entrepreneurial” are You? • $1 to $100 • Winner pay cash on the spot • Winner open the envelope to show everyone the contents. ?

34. Economic Reasoning Principle # 4: Institutions are the “rules of the game” that influence choices. Laws, customs, moral principles, superstitions, and cultural values influence people’s choices. These basic institutions controlling behavior set out and establish the incentive structure and the basic design of the economic system.

35. Nations with institutions that encourage entrepreneurship also encourage the innovation that leads to economic growth and rising standards of living. Entrepreneurial innovation leads to improvements in product quality at generally lower costs and market prices.

37. Governmental institutions may encourage or discourage growth-producing innovation: • Stable property rights and well-enforced rule of law attract entrepreneurship. Particularly important in reducing risk for entrepreneurs is the government’s record of enforcement of multi-period contracts. • Business taxes, regulations, and poorly-protected property rights discourage entrepreneurship by reducing return on or increasing the risk of investment – or both.

38. All that matters in economics is the external world. Internal issues are a different class, and cannot be regulated by outward regulations First Amendment Material Welfare

39. Private ownership of the means of production (capitalism) Private ownership with frequent confiscations to redistribute Syndicalism (Mussolini) Public ownership of all means of production (socialism) Interventional Property

40. Rationalism Men don’t always act rationally. They ought to in their own interests. Buyer’s remorse? Mistakes!! Knowledge versus Uncertainty.

41. The good of the Whole NO special interests Provisional sacrifices (apparent) Favorable consequences to come The Aims

42. Freedom Lenin: “bourgeois prejudice” Slavery Free labor Free wages

43. The Results of Freedom Peace There are no good results from violence There are no good results from war Peace is the father of all things Peace brings free trade Free trade brings wealth Wealth brings more welfare

44. The Results of Freedom Equality Men are altogether unequal. All men should receive equal treatment before the law.

45. The Results of Freedom Ethics Social cooperation All would be harmed with social decay Everything that serves to preserve the social order is moral. Everything that is detrimental to society is immoral.

46. Government Social deviants State (compulsion and coercion) Law (the rules) Government (how enforced) Anarchy.....NO WAY! Protection of property, liberty and peace All else is immoral But…What about the need for?

47. But…What about? Democracy Consent of the governed??? Civil war, revolution, insurrection Only representative democracy makes government adaptable to the wishes of the governed without violent disagreements. Democracy is a threat to property if not limited

48. Institutions necessary for well-functioning markets: Property rights Rule of law