Class Summary #5 for Class on 9/12/11

Professor Rizzo spent the majority of class reviewing last week's required reading, I, Pencil.

Prof. Rizzo explained how there we're four major points he wanted us to glean from the essay regarding the making of a pencil. The four major points, which are explained below, also correspond to any process for making something in the world:

1. Impersonality- There we're a lot of things that had to occur for the pencil in I, Pencil to be made, but I personally do not know who completed all of the steps that led to the pencil's creation. Therefore, the production of a pencil (and every other creation) is extremely impersonal because I do not know everyone/everything that played a part in making the writing utensil. 
• As Prof. Rizzo explains, there is 6.85 billion people in the world, and in result, almost everything in this world is impersonal. Because of the gargantuan amount of people alive, there is nothing we can do about this impersonality.
2. Self-Interest- More than likely, all of the people that completed the many steps necessary to make a pencil did so for their own reasons. The people almost definitely did the work they did necessary to get something they wanted, whether that be money to use on their family, to buy a house, etc.
3. Cognitive Issue- Is there any one person who knows exactly how to make a pencil on his/her own? Most likely no one knows how to do every single step necessary to make a pencil.
• Assuming one does not know how to do everything to make a pencil, is it at all pragmatic for a person to do it all by him/herself and then sell each pencil for the normal price of a pencil (let's just say a pencil costs $1.50). The answer to this is probably now because it would cost millions and millions of dollars to take care of every aspect of the production of a pencil between transportation costs, digging up necessary elements for the pencil, cutting down trees, etc. One could not make a serious profit if he/she did everything all on his/her own. This explains how people make money off a pencil- by specific people doing different steps and then selling their services to the next person in line who is prepared to take the next step in pencil making. 
4. Who gave the orders?- People from all over the world cooperate with one another to make one single pencil. People might hate each other if they worked together in person for various reasons, but nonetheless, all different people from different backgrounds cooperate with one another for a common cause. And in the end, a pencil is created from countless people putting in work, even though there is not one single overseer watching over the process. Instead of one single overseer, there are many different businesses/workers that contribute to the making of a pencil in their own individual way.

These four steps beg the question about what all of this illustrates? According to Prof. Rizzo, this all illustrates that:

1. Invisible Hand- it means that a load of people come together and cooperate to make a creation, despite the fact there are not bosses or leaders giving specific orders. Each workers' considerable small impact in the creation of a pencil leads to the compilation of all of the workers making something very important that fulfills a societal need.
2. Tacit Knowledge- litte bits of knowledge that cannot be known by anyone else except for the people who have first hand experience doing something. In short, tacit knowledge is party allowing people with specific knowledge to work without interruption from other people who may not know as well.
• Prof. Rizzo provided an example of this to me during his office hours. He told me that if the baseball field was hit by a lot of rain the night before, he might say we should practice indoors. But as a baseball player, I might say otherwise, that perhaps the field drains very well and we could indeed practice outside. Since I have experience playing baseball, I would know that. Prof. Rizzo would not, since he is a professor and not a baseball player. This idea can be translated into a market because as Prof. Rizzo explains, those with experience have an incentive to act on the knowledge they have from personal experience, knowledge that other people who are not as experienced in a certain field may not have.

Prof. Rizzo concluded class by discussing Modern Market Economies, which means:

1. producers make decisions on production depending on whether or not consumers need a certain product.

And finally, the web that keeps the process together (the four steps above) are:

• The Price System
• perfect signal of scarcity because prices, almost always, tell a person how scarce an item is
• Terms of Exchange- provide us incentive to do the right thing