Class Summary #18 for 10/14/11

Prof. Rizzo began class with talking about the wage system in our economy. He talked about how generally, workers should be paid as much value as they produce. For example, Prof. Rizzo's salary, let's say, is $150,000. If he is being paid that much, it should reflect how much value he is producing for the company.

If he is paid less, he is being exploited and thus, offers a chance for another business to pick up his services to make profit off his contributions.

Then, Prof. Rizzo went on to discuss the problems in the market.

1. Markets often don't work well due to:
1. Lack of existence
2. Institutions

Lack of Existence: this means something that prevents a transaction from happening. A perfect example of this is when you are on the sidewalk and people in front of you are walking slow but you are in a rush. Despite this, you neglect to confront the people in front of you. This could be compared to a transaction, because for whatever reason, there is basically an unwritten code that prevents you from being able to get in front.

We also learned how entrepreneurs loves market opportunities- without problems in our society, there would be no reason to have entrepreneurs exist to fix our problems.

Goals of Economic Policy:

1. Policies and outcome are "efficient"
1. Developing what people want
2. Doing so at lowest "possible" cost

When we say institutions, we mean all the formal and un-formal mechanisms we stumble upon that allow us to live peacefully with one another. 

Then, Prof. gave us some examples of institutional failures:

1. Markets epic fail in Russia because no property rights
2. Markets can't work without the rule of law. Societies that understand the law and are treated fairly tend to be better societies. Ways to have this type of society are:
1. Laws can't be arbitrary- in other words, people can't be unsure what the rule is (i.e. unsure when you will get a ticket).
2. Everyone must be treated equally
3. Good laws must be general, not specific
3. Some poor country's norm is to prohibit customs that are necessary for markets to work well.
4. Inflation- definition: the general increase in all prices in the economy (all prices of goods and services we buy)
1. Cause of inflation= when there is too much money around---> like in Mercantilist times

These notes ended our formal lessons about the basic principles of economics. Prof. Rizzo concluded class with the following notes;

• Free societies work best when people are honest
• People find acting in self-interest is inferior to one who presents other's self-interests over their own. In a market, to be successful, it is vital to look out for one's own self-interest, while also considering other people's interest as well, but as a secondary concern.