EWOT Goggles #5

My EWOT goggle entry for this week is about something that happened last week in recitation during the Ultimatum Game.


During the ultimatum game, there was one student who constantly rejected offers that were as high as 4-6, which in my opinion is a tremendous offer. As my TA Alex taught us following the game, one should pretty much accept every single offer presented to him/her because it is better to get something than to get nothing.


But this one student (I will call him Joe) rejected several offers that Alex advocated against doing. Joe's argument for doing this was because he felt like he was being taken advantage of, and didn't want to give other people a better deal.


But as we have learned in economics throughout the semester, it is important as an economist to focus on one's self-interest over one's feelings.


Adam Smith, the great economic philosopher, advocated the belief that looking out for one's self-interest is the key to accumulating wealth/success. Prof. Rizzo explained in class that Smith believed that the way to get rich and increase production is by making rational decisions that benefit one's self-interests.


And if you think about it, this makes a lot of sense. But Joe did not do this in class. He let his emotions get in the way of his decision making. I suppose some people would argue that Joe's was smart by the rejections he made, but according to Smith's theories, he was completely wrong.


This is because Joe had an opportunity to better himself (get extra-credit), but he let his emotions get in the way of his decision making. Thus, he wasn't acting in his best interest. It didn't matter how many points the presenter offered- the bottom line is that by rejecting the 6-4 deal, Joe was accepting 0 extra-credit points instead of 4, which hurts him because now he ends up with nothing.


It is interesting to point out that if Joe actually values his feelings more than becoming wealthier in terms of extra-credit, he may have actually made the right decision. But as Alex pointed out in our recitation, it is very important in the business world to not let emotions take over decisions. 


The bottom line is that in today's world, it is imperative to act in your best interest, and that pretty much always means trying to get SOMETHING as opposed to NOTHING.

Class Summary #15 for 10/5/11

Prof. Rizzo began class today explaining the Broken Window Fallacy.

Three problems with the "it's stimulating" notion:

1. I didn't choose the roof to begin with, and therefore, I lose the opportunity of preference. Consumers didn't choose the roof, and thus, society is poorer by the pleasure I would've gotten by getting something else. In short, there is a steep opportunity cost here. I lost out on the opportunity to get something I really wanted because I had to pay for a new roof.
2. We also lose the value of the resource that was used to repair the roof. We are losing resources that could've been used by other people, resources in our world that weren't necessary to be used had there not been a natural disaster.
3. Then, the final question is: what if the roofer was unemployed? Answer(s): What isn't seen is the other person who isn't getting a job now because you had to spend the $1,000 on a new roof. If you didn't spend the money on the roof, maybe you would've spent it on a new driveway. Thus, it is job displacement- no job is gained, just a different one is made. 

• Ignore the $. What is relevant is that I need wood for the roof, and now I am forced to use wood for my house that could've been used other ways. Thus, someone who has a better need for wood can no longer get it. By employing roofer, I also just raised the price of wood and other roofers- b/c the more exchange (money for wood) I make, the higher the cost of wood goes. If I stick a roofer on my roof, I just raised wages for wood and such. Resources get used up and prices go up, so really, not a great thing for the economy.

Here is a good diagram to consider:

Before Storm, I have:

$1,000 and a roof

After Storm, I have:

$0 and a roof

Thus, as you can see, I am actually poorer from having to buy a new roof because there is no net change in what I received, and I now have no money in my pocket.

Increasing taxes can also be looked at in the same light: The government takes more $ from people and there are then less expenditure by people which in turn causes there to be less jobs created because people have less money to hire. Causes job losses somewhere else.

A VERY IMPORTANT NOTE: THIS BROKEN WINDOW FALLACY ONLY APPLIES WHEN THERE IS AN EXCESS OF UNEMPLOYED RESOURCES/WORKERS OR IF A SOCIETY IS IN THE MIDST OF RECESSION (BECAUSE THE WHOLE IDEA IS TRYING TO CREATE MORE JOBS).

Later on in class, Prof. Rizzo discussed how jobs are not a benefit, but rather a cost. The benefit of a job is to get income and use on necessities/luxuries. People are paid to work a job, therefore it is a cost. It is also a cost to the person working because he/she gives up the time to do other things in his/her life to work. If the worker would prefer to work than do anything else in the world, then it is not as much of a cost, but it is still a little bit of a cost because the worker is giving up the time to eat, drink, and do other necessities.

Another example Prof. Rizzo discussed was the belief of some people that war is good because it creates jobs. Prof. Rizzo argues, however, that it would be better if the government just paid people money and not fight a war to not incur the cost of deaths. War does help spur immediate economic progress by giving people jobs, but why not just not fight a war and give money to people. Same result.

Important to note that if the government gave money away for free, it would reduce the incentive for people to work. But this might be acceptable in times of crisis, Prof. Rizzo argues.

Finally, Prof. Rizzo concluded class with going over some of the key economic principles we are learning in class:

4. Cost is subjective---> values are subjective (opinionated).

• Example: The cost I spend my paying attention in class differs for different people. For me, the cost is that I am giving up time to space out and not focus. For others, it might be giving up the chance to sleep.

5. Marginal Analysis---> Should I do more of x or less of y? (Should I pay attention for more than 2 miniutes, for example).

• Water-Diamond Paradox: 
1.  Something high in usage has a low exchange value (water)
2. Something low in usage has a high exchange value (a diamond)
• This has to do with value and scarcity. Diamonds more scarce, so valued at a higher amount. But important to note that if all diamonds/water became extinct, people would pay more for the first cup of water than the first diamond.

MARGINAL COST/BENEFIT: THE CHANGE IN YOUR COST/BENEFIT FROM TAKING A CERTAIN ACTION

Class Summary #14 for 10/3/11

Today in class, we learned about the bulk of what economics is about.

First, Prof. Rizzo posted a diagram on the board that depicted economics.

Basic Economic Principles:

1. How people make decisions
2. How people interact
3. How "aggregates" work (i.e. the economy)

Then, Prof. Rizzo put a list of five things that we are going to learn about this semester. They are:

1. People face tradeoff (tanstaafl=there ain't no such thing as a free lunch (a person/society can't get something for nothing) )
1. What is a cost?
2. Opportunity costs
1. Application: Breaking Windows
3. "Marginal" Analysis
1. Application: Subjectivism
4. Sunk Costs
5. People respond to incentives

Important note: We live in a world of scarcity and there is not enough stuff to go around. A good example of this: If there were 10 ice cream cones for 30 people to share.

We then went on to learn about two of the first five topics above.

1. People face tradeoff

• When resources are scarce, it is required/inevitable that we trade off one thing for another.
• For example, if I spend an extra hour with my friends, the trade off is that I have 1 less hour to spend on my economics studying.
• Tradeoffs can also involve money. For example: If I spend $10 on a burrito, the trade off is that I have $10 less to spend on other items. This shows that I value a $10 burrito more than spending $10 on anything else.
• Thus, trade-ff reveals a lot about our values.
• Prof. Rizzo gave us another example of a tradeoff. Prof. Rizzo used to be a banker and had a $1 million income with a $250,000 tax. Now he makes $50,000 with a tax of $15,000 teaching. His job change hurts the economy because since he has less money to spend, there is less money being spent in the market and thus, his change in jobs hurts the economy. But for him, the tradeoff was worth the job change. Yes, he makes a lot less money teaching, but he traded off making more money for the satisfaction/happiness he gets teaching students. Thus, he values helping students learn economics more than he values making $1,000,000.

After this, we began to learn about what exactly a cost is and how nothing in this world is actually free. Prof. Rizzo supplied us with another example:

• The library is free right? No- people pay taxes that goes to the library, one has to drive to the library to get books (this cost is the cost of time to drive over and wasting gas), and the $12 million dollars that were spent on the library costed the community having something else- such as a new school, police station, etc. The use of paper for all the books cost us trees as well. 
• Thus everything in this world has a cost in one way or another.
• Is there anything that is free? No, there is no such thing as free. In fact, there is even a cost when one has "too much" of a good thing. If you have too much of a good thing, you lose other good things. For example, lets say we increase the amount of student who go to college. A result of this might be that roads on the street get destroyed more from more students having to drive to school. Thus having too much of a good thing (more students), could lead to the loss of another good thing (well-built roads).
• The cost of spending too much time to accomplish/get something good can also cause a serious cost. Consider this: If I spend too much time getting an A, I would be giving up time that I need to eat, go to school, and exercise. Thus, you are paying a cost if you give up your time to do something.
• Another example of something that may seem to be free that really is not: the FDA. There is two problems with the FDA keeping us safe.
1. Drug lab: It takes many years to test a drug before it gets to the market. The longer it takes to get to the market, the higher the cost. Lets say a medication is being tested, a medication that might save many people from a deadly disease. During that testing time, people are dying because a drug is not yet out to save them. Thus the cost is the peoples' lives.
2. Drug loss: Drug testing by the FDA is very expensive. The FDA spends $50 billion a year on testing new drugs, and yet only 20 new drugs come out per year. That is $2.5 million per drug for testing. Because of the high costs for mandatory testing of drugs, this might prevent other drugs from being created that can be life-saving because of the fact that all drugs can't be tested since it is too costly.
• VERY IMPORTANT: TRADEOFF=COST AND COST=ANYTHING THAT CONSUMES RESOURCES

Next we learned about opportunity costs, which are simply when we make choices, we must understand what we give up for that choice.

***Opportunity Costs= the net benefit/value/please one would have gotten from the next best opportunity***


An example of an opportunity cost: Coming to class cost me my extra sleep. It may not necessarily be a monetary cost, but there is a cost in coming to class. Thus, I lost my sleep.


A VERY IMPORTANT EXAMPLE PROF. RIZZO SHARED WITH US TODAY:


Lets say you win Bruce Springstein Tickets. There is also a Barry Manilow concert that same night that costs $40, but your WTP (willing to pay) for the Manilow concert is $50- Which do you go to? Assume you cannot resell the Springstein tickets. Here are your options using opportunity costs:

1. Barry Manilow costs $40, but WTP=$50. Thus, 50-40=10. If you go to Manilow, you are making $10 based on value (or saving $10 depending on how you look at it).
2. Thus, the cost of seeing Springstein is $10 because if you go to Springstein, you are giving up the $10 you would have saved if you went to Manilow. So, for you to actually go to Springstein, you need to find $10 worth of value of the Springstein concert, which would then make sense to choose Springstein over Manilow. 
3. If you just go to the Springstein concert because the tickets were "free" and not because you find value in going, then you are actually losing $10 because that is how much value you are giving up by going to Springstein.
4. Thus, if you are doing something that you do not value over doing something else, you are paying a cost besides actual costs like paying for transportation, etc.

Finally, Prof. Rizzo explained the Broken Window Fallacy:

• Some people claim that causing a problem such as destroying a person's roof is good for the economy because if we do this, he has to pay $1,000 which creates more work. But this isn't the case, because if his roof didn't blow off, he'd have $1,000 to spend on other things, such as a new driveway, which would also pay money into our economy. Thus, blowing Rizzo's roof off doesn't stimulate the economy one bit. It is just an example of job displacement. One net, there is no change in economy because same amount of money is being spent that would've been spent other wise.
• For Rizzo, there is a big cost. Before this happened, he had a roof and $1000. After, he had a roof that is fixed and a loss of $1000. Thus, he had to pay a cost of $1000 because it is something he wouldn't have had to pay for otherwise. He valued a driveway more, but couldn't buy that because he had to deal with paying for new roof. So really, it doesn't stimulate economy at all.

Reading Assignment #4- Aspen Ideas Festival Debate

A. 

Overall, I found the points made by Justin Wolfers and Robert Frank to be quite interesting. Broken up by what each of them had to, below is what I found to be most interesting:

Wolfers:
Wolfers did an extremely good job arguing that overall, people become happier as their income increases. What I found fascinating was that he showed the happiness trends in the US. According to Wolfers, in America, most people haven't had income gains, which explains why Americans aren't necessarily becoming happier.

I found this fascinating because as one of the richest countries in the world, I assumed the US was experiencing income increases. But perhaps as we learned in class, we are not experiencing such astronomical income growths as we did in the past because or economic growth is slowing down.

One other very interesting point Wolfers made was that while it appears income growth is directly correlated with happiness to an extent, it is NOT the desire of all humans to be rich. A perfect example of this is how no one goes from moving from poor America in southern Texas to northern Mexico, where those same Texans who may be poor would be extremely rich in Mexico, a poor country. Thus it appears we are all giving up the option of being rich in a poor country.

Frank:
As I explain in part C, I did not find Frank's argument to be that convincing, which really wasn't his fault. It is difficult to argue something that is proven untrue by statistical evidence, which is why in my opinion, Wolfers had such an easier time arguing his point.

This hockey player didn't wear a helmet, perhaps trying to gain a competi-
tive advantage. As Frank points out, this resembles the real life economy.

Nonetheless, Frank really did present some fascinating points that sort of proved that it is not necessarily money that makes us happy, but how we as human beings feel in comparison to other humans.

I really found Frank's example about how hockey players are a good example to show how competitive advantages in society work to be very interesting. He asked the question: Why do hockey players often wear no helmets when they have the chance to, but they will often vote to make helmet wearing a requirement?

Frank's response: If one person takes a helmet off, that player gets a competitive advantage because he can skate faster and move around easier on the ice without having to worry about a helmet on his head. The other team's response to a player taking a helmet off, however, is that they too take their helmets off. The end result is that now everyone skates without a helmet and neither team gains a competitive edge, and we are right back to wear we started.

I thought this was an interesting way to look at competitive advantages in the market because one of the things Frank was trying to show is how valuable competitive advantages are in the economy. In the case of the hockey players, they were willing to risk their lives by taking off their helmets. But competitive advantages are so desired, it is worth such a big risk.

I also found Frank's points about relativivity to be very interesting as well. He talked about how people set the bar for wealth in many instances. Take a mansion for example. People consider a mansion to be a house that is bigger than what is considered a normally sized house. But, if you live in a poor country where houses are small, a "normal size" house might be a mansion.

Also consider the example he shared about celebrity birthday parties. Celebrities spend millions of dollars on birthday parties, so other celebrities are pressured to do the same, and if they don't the party might not be considered a good party.

This is a perfect example of relativity because to one person, a house/party might be great but to another, it might be horrible. Thus, in many instances, we as a society decide what is good or bad and what will makes us content.


B.


1. In my opinion, Frank had the unfair task of trying to prove that income and happiness are unrelated. Have we gotten to the point where we can literally say that income and happiness are 100% correlated?
2. Frank also mentioned how it might be relativity that makes us all happy and not income. Do we as people really care about how much money we make, or is it more about how much success/materials we have in comparison to others in the world?
3. While the data does support that wealthier people seem to be happier, there have to be at least a handful of poor people who are happy (I don't recall either Wolfers or Frank mentioning this in the debate, this is just an assumption on my part). What is it that allows certain poor people to be happy when data suggests income is such a big part of happiness.

C. 

The video we watched for our weekly reading assignment was a video that covered the topic of the economics of happiness. In short, it was a debate between the two economic professors about whether or not income and happiness are related. Justin Wolfers argued that happiness and income are related, while Robert Frank argued that happiness and income are not related.

Here is a brief summary of what Wolfers had to say:

Overall, I'd say that Wolfers did a better job presenting graphical evidence about his argument. His argument that happiness and income are related was extremely convincing. One graph in particular that he showed was a graph depicting the 25 largest countries in the world and their reported happiness. What the graph showed was that richer people are happier than poorer people.

Wolfers showed several more graphs that proved his point- that it appears wealthier nations are indeed happier.

There were also some other findings Wolfers presented relating to income and happiness. Here is a list of them:

1. People who are wealthier have more enjoyment during the day
2. Less depression for wealthy
3. More stress in wealthy world- perhaps from having to work harder to generate more income
4. More likely to receive respect from people in richer countries
5. More likely people ate good tasting food recently in rich countries
6. People smile/laugh more in richer countries
7. Less pain experienced by people in richer world

I also found one final point of Wolfers to be fascinating: Love is not at all more likely in the rich world. What does the show? It shows that money can't buy a person love. Love is its own entity, and can be attained in any type of culture.

Here is a brief summary of what Frank had to say:

When it came time for Frank to debate his side of the argument, I feel as if he sort of shied away from the topic he was assigned, mostly because it seemed like he didn't entire believe that happiness and income are not related. You can't really blame him either- the is so much evidence to prove that income and happiness are indeed intertwined, so it was a very hard task for Frank to convincingly argue that income and happiness are complete unrelated.

Because of this, he sort of argued that money does buy happiness, but there are other aspects of life as well that lead to our happiness, such as:

1. Adapting to the world around us- this is very important
2. Relative income- perhaps it is not money that makes us happy, but rather, how much money we have in comparison to others, or how big our house is in comparison to others, or how much food we have in comparison to others
3. People care about relative consumption more in some domains than in others
4. Such concerns lead to expenditure arms races focused on positional goods, or those goods for which relative position matters most.
5. These arms races divert resources from non-positional goods, causing large welfare losses.
6. Top earners spend more because they have more money. This too can lead to happiness because these people can have more material gain.

One very interesting point that Frank made for his argument (an argument that actually was very convincing):

1. Large US counties with higher growth also had higher growth in commute times, divorce rates, and bankruptcy rates.
1. Clearly, all of the above things do not make people happy, which could point to the fact that areas with high income/growth could have unhappy people because of the strains/issues with which high income societies commonly have to deal.

Class Summary #13 for 9/30/11

Today's class was filled with Prof. Rizzo presenting ideas from economic philosophers, specifically Adam Smith.

First, Prof. Rizzo summarized what he told us about the philosopher Hume in the previous class. Hume argued why mercantilist thinking (that prices will adjust) on trade was hurtful (because what matters is how much stuff you can consume). You should expect prices to be the same everywhere.

Then, we learned about Adam Smith, the great economic philosopher who lived from 1723-1790.

In 1776, Smith wrote Wealth of Nations. In this book, Smith argues that government doesn't need to control the economy. Rather, we should be free and good outcomes will follow. Some government is good (so as it is not an anarchy), but more freedom from government allows for us to prosper more.

Prof. Rizzo then explained three important things Smith thought regarding what the government SHOULD do:

1. Create/control a police and court system
2. National defense- to protect us from foreign bandits
3. Take care of public works (roads, bridges, things that private companies probably wouldn't do if no one else did)

In short, Adam Smith completely believed in laissez-faire, which was the belief that transactions between private parties should be free from state intervention, intervention that may include tariffs, force/seizure, enforced monopolies, etc. This makes sense as laissez-faire is french for "let do", but it also has been translated to mean "let it be"or "leave it alone".

Below are three more beliefs of Smith that Prof. Rizzo emphasized in class. They represent ways we can flourish in a society that has some governmental control and is not an anarchy. Thus, we as people to have a flourishing economic environment need to have:

1. Rights to property
2. Division of labor- this is vital. Poverty and chaos will occur if we don't have this. Division of labor increases our propensity to make our lives easier.
3. Exchange has to be peaceful and mutually agreed upon (voluntary trade, not forced by threats)- in other words, one can't kill, rob, defraud you or secure special privileges for the authority through exchange.
4. No special privilege for anyone

If these all exist, a society resembling capitalism will exist.

The source of wealth according to Smith= our ability to produce stuff and exchange stuff that people value. In other words:

WEALTH=Produce and Exchange. If you can't do this consistently, it is hard to be wealthy.

Also, Smith believed that the way to get rich and increase production is by making rational decisions that benefit one's self-interests and do not take other's self-interest into account as ones main worry.

For example: A potato farmer wakes up at 5am to farm. Does he do this for us, so we can eat? No, his incentive to do this is to make money. Without incentive to work, nothing in the world would consistently get done. Sure, maybe the potato farmer cares about us. But the bottom line is that he is doing this job because it makes sense for his own best interest.

Another example of this is Prof. Rizzo. Does he teach us economics because he wants us to learn? No, he teaches us economics so he can get a pay check. He may do some things extra for free because he is a good guy, but overall, he teaches us because doing so gets him money. One needs incentive or it is hard to be motivated.

Smith also argues that while it may mostly be about our self-interest, it is not completely: For example, helping out others is important, and in fact, doing so may benefit our self-interests as well.

Another Smith philosophy is that effective competition is important to promoting production. It doesn't guarantee a utopia, but having effective competition seems to bolster production that does have no competition.

Another important belief of Smith is that the government allows people to be able to buy and sell whenever, wherever and with whomever they want. The keys to this are as follows:

1. Parties should be able to set own prices
2. People should be free to sell and buy anything
3. Enter into trade freely, no restrictions or force to trade
4. Any attempt to control prices prevents competition

Smith worried about two things in England. He felt future wealth was threatened by two forces:

1. Prejudices of public may sabotage ourselves
2. Main worry: Power of the interests may cause governments to pass laws to prevent competition/being overthrown. This is very bad for the growth of people/societies.

After the days of Smith, some very interesting things happened that Prof. Rizzo shared with us in class.

In 1790, after Smith dies, Grain (which was the name of corn) prices quadruple in England. Thus, people start bringing in food from abroad because of the prices. Naturally, the landowners in England hated this as did the government, so what is known as The Corn Laws resulted.

The Corn Laws basically stated that France could charge all citizens whatever price they wanted on grain regardless of where people bought the grain. Grain was hard to grow in England because it wasn't flat like other countries, so prices were high in England. Thus if a person bought grain in one country cheap, they'd automatically have to pay a traiff of the difference to match the price in England.

For example, if a person went to France to buy grain for $2, and the price was set at $10 in England, the person would have to pay an $8 tariff, thus making them pay $10 for grain.

In 1820, as would be expected, British citizens became upset and fought against the law- AKA the Anti-Corn Laws. In 1846, the Corn Laws were repealed.

Three years later, English reduced all food tariffs and eventually, there were no tariff at all. England was the first nation to have free trade. This caused prices to fall and competition/growth was spurred.

Prof. Rizzo concluded class by sharing some facts:

1. Karl Marx believed that capitalism was production for the masses. He argued that capitalism produced too many goods for us to handle.
2. When economists refer to necessities, they mean the same necessities that were necessities in the past. So a refrigerator isn't a necessity but not dying from rotten food is a necessity (so having good food to eat).
3. Proof of our progress in the world: Freeing the masses and us being at the point where normal people now have the opportunities that only wealthy people used to have in the past.

Class Summary #12 for 9/28/11

Today, Prof. Rizzo began class with the Factor Market/Goods Market diagram with which he ended last class.

Basically, the Factor Market is the top of the diagram, where people send stuff (their labor, machines, etc.) to businesses, and in exchange, people receive payments (money or anything else) from the businesses. Therefore, the flow of money in this instance is from the businesses to the people.

In short, the Fact Market is when businesses receive the input they need from people to make products.

The Goods Market is the lower part of the diagram and in short, it is anything you purchase. Basically, you as the person send any form of payment to the business to receive the stuff you desire.

Another important less was that all money spent by people becomes income for others.

Prof. Rizzo also presented us with a formula: (C-T) + I + G +NX

C= consume consumer goods
I= invest (purchasing financial assets for a company)
T= taxes
G= government purchases (like a bridge and its material, highway streets, etc.)
N= your spending on certain products.

Then Prof. Rizzo went on to speaking about the French Physiocrats, a group that he talked about last class as well.

The Physiocrats believed that food/production was the source of all income and wealth because we need food to live. Their model was that if farmers produce a surplus of food for their family, less people in the family need to work. Their idea was that these nonworking, "free" people can work on other crafts to improve farming productivity. Thus, it allows people to work on crafts, instead of working on the farm, to make farm production more productive.

One problem with this theory, however, was that the Physiocrats thought the craft making was a leisurely activity and not a necessary practice, but for the production of our world, it was completely necessary and un-leisurely.

Then, we move on to the Mercantilists, who didn't agree with the Physiocrats- they didn't think this was the source of wealth.


Rather, the Mercantilists believed the following were sources of wealth:

1. Gold in treasury (modern day equivalent= making of dollar bills)
2. Wealth/finances of king (modern day equivalent= tax revenues)
3. Positive balance of trade (modern day equivalent= still trade)

Then there was another group called the Scottish Moral Philosophers. The most prominent moral philosopher was Hume, who was mostly known for doing two things:

1. took modern approach to a lot of things, unlike physiocrats, he believed that the laws of economics could stand on their own. He also rejects mercantilistic doctrine and physiocrat doctrine (food is source of income).
2. Commerce was the source of economic growth

Another important idea is that of the Law of One Price, which stated that, for example:

• When British spend money in France or other countries, there is more gold in France, so prices increase in France because people have more money there, and prices in England decrease because people have less money. That is one of the reason why the kings of countries didn't want people spending money outside their own country- they didn't want to lose wealth.
• The belief, however, is that prices around world should be the same. Money is neutral, so the amount of money/gold in a certain country shouldn't alter the price of something.

Below are some other important notes from class:

1. Mercantilists believed trade has a zero sum and net effect of 0, and that money is wealth. At this time, the king controls trade because he had to make sure that gold kept coming in to stay wealthy.
1. Reason why this was the case was because there was a fixed amount of gold in production during this time period, which means as one country got richer, others had to get poorer. And of course, the richer you are, the better opportunity you have to engage in war more and win war, which is important to gain more land and defend yourself.
2. In result of all of this, the king restricts imports because then one country will get more gold and take away from country's wealth when their country pays for the import. It is, of course, ok to import from within country, but not from outside.
3. Kings of course would promote exports so they could get/take away money from other countries.

The end conclusion of all of this: Trade cannot be free. The mercantilists supported this in their doctrine.

The reason why its so imperative to keep gold in country and not encourage outside trade: Trade promotes individual gain in this time, and at this time, it is in social/community interest to have gold. Not about the individual, more about society as a whole, so its important to keep gold in country and not trade for personal gain at expense of country.

Hume continued IMPORTANT:

Prices across border will adjust

If money goes into other countries, three positive things happen:

1. Competition- lights fire under native population that you might otherwise never see. Without competition, production would not improve. Kodak film cameras would still be in use today.
2. Learning and Innovation comes from trade, learn new techniques/ideas
3. Without a lot of trade, there is no DIVISION OF LABOR, which is dividing up tasks for different people to do different things, thus being more productive by getting more stuff done. Also, this leads to more wealth as with new technologies, wealth is a result.

Class Summary #11 for 9/26

Today was a class filled with a ton of information. According to Prof. Rizzo, it was the first day we finally started talking about what economics really is.

Prof. Rizzo began class my discussing the importance of technology. Technology makes each worker more productive, which in turn increases the number of sales producers make and increases wages.

Therefore, there is a chain of events that occurs with the influx of technology:

1. Workers become-
2. More productive
3. Wages rise because there are more sales. This wage rise should motivate those who don't work or who don't produce to get into the production industry because wages are rising in that industry. That, in turn, causes more to be produced, which is good for the improvement of more technology.

A result of wage rises, of course, is that living standards rise as well.

Then Prof. Rizzo went on to discuss some of the reasons why we were able to begin the Industrial Revolution (18th to 19th century). Here are some of them:

1. The revolution did not occur because of one particular event, rather it was the culmination of many spontaneous changes that probably took 400-500 years to come into being.
2. More and more, people were encouraged to trade with/travel to other countries. 
3. There was a slow decay of religious mysticism. In other words, life today became just as important as life after death- prior to this era of IR (18th to 19th century), the after-life was emphasized. But now, religions began to preach how important it was to take advantage of our talents and make the most of our lives.
4. Certain material changes made market systems possible, as did scientific progresses.
5. This era connected groups of smart people who stole each other's ideas, which led to new creations. This was a huge benefit for our society.
6. We improved our defense systems- it is important to be able to defend ourselves to maintain our innovations and improvements.
7. We had many good ideas. The IR was as much about good ideas as it was about the actual creation of goods.
8. One scholar, Adam Smith, argued that institutions are most important determiner of wealth. An institution is something other than money that we do that helps us get better social lives.
1. respect of the rule of law=one part of institution
9. England's government offered more freedom and tolerance than other countries, which allowed for more innovation among England that led to IR.
10. People changed their attitudes on Bourgeoise (middle class)

After this, Prof. Rizzo shared with us some very important information about Mercantilism.

Mercantilism: a system that was present in the Western world before the IR.

1. It was a system that existed until the mid-18th century, system where kings saw it as a their right and duty to oversee and plan all economic activity.
2. AKA "progressive corporation"

Major aspects of Mercantilism included:

1. Heavy restraints on citizens by king
2. Protectionism 
3. Existence of craft guilds
4. Licenses
5. Government granted monopolies like British East India Company
6. Import/Export regulation
7. Restriction on free movement of people, free movement was prohibited
8. Limits on domestic production by kings. In other words, kings could stop people from making stuff.
9. Extensive price controls- king set the prices on items
10. Wage controls- There was a maximum wage limit, and people were incarcerated for paying people too much.

One reason why the king could do this was because back then, resources and people were deemed to be property of the kings. The kings owned 100% of the land and people and people accepted this. The king ultimately would only make decisions to better himself.

One the reasons why mercantilism declined was because of the French Physiocrats, who thought you could define how people interacted with one another. The most prominent man was Quesnay, who was the first guy to ever write the Circular Flow of Economic Activity (AKA Circular Flow of Money).

The circular flow was defined as follows (see your notes for diagram): 

• It included two groups: individuals and firms. There is always going to be a constant flow of stuff between these two groups because:
• People rent their labor to firms
• Then the firms pay the individuals money
• The individuals then use their money to pay for goods that are made by firms
• Thus, the flow of money is circular- it goes from the individuals to the firms and then from the firms to the individuals and all over again, this continues.
• In other words, all income spent is used as expenditures in some way and all expenditues become peoples' income when they work.

Therefore, the big message of this is that: 

INCOME=EXPENDITURES (they are both the same thing)