Class Summary #21 for 10/21/11

Prof. Rizzo began class today by explaining that trade creates wealth for people.

Although the actual act of trade may not create anything new materially, it does create something: more wealth for people.

A perfect example of this can be gleaned from last class, when Prof. Rizzo explained his baseball card trade when he was a kid. By adding his Kirby Puckett card, more wealth was created because Rizzo obtained a card that gave him a full set (which increased the value of his cards a humongous amount) and the person he traded with received a very valuable card in Kirby Puckett, a card that made him more wealthy materially and monetarily.

This can be connected to the general world. Simply put, trade is the basis that allows the world to get richer/wealthier.

As Prof. Rizzo explained, trade occurs because people don't value certain items as much as other people do. We then talked a little bit about efficiency, which Prof. Rizzo explained in the form of a graph:

Task	Mike	Rich
Weeding	80 mins	120 mins
Mowing	40 mins	120 mins
Total	120 mins	240 mins

In terms of time efficiency, it is clear that Mike is much more efficient than Rich. But, does that mean that Rich can be of help to Mike? Not necessarily. Here is the trade that Prof. Rizzo outlined:

If Rich offers to weed 3/4 of Mike's lawn in exchange for Mike mowing Rich's lawn, then Mike will be mowing for 40 minutes plus 1/4(80) = 40 + 20 = 60 minutes, instead of 120 minutes. Rich will be working 120 mins mowing and 3/4 (120) = 90 minutes, so he  will be working for 210 minutes as opposed to 240 minutes.

Thus, both parties became wealthier by making a trade- wealthier in terms of available time to work on other chores.

Then we learned about Production Possibilities Frontier (PPF), which can be shown on a graph. Here are some facts about it:

1. Absolute Advantage= who can make more.
2. The points on the PPF represent productively efficient data. For the outcome to be efficient, it must represent production of what people want.
3.  On the graph, slope represents the tradeoffs. In other words, it shows how much you need to give up to get something.
4. The change in slope represents the "Law of Diminishing Returns". In other words, when you take away one thing to improve something, you reduce the quality of the other thing.
5. Economic Growth comes from:
1. When more resources are created/found
2. Technology improves to allow us to find/use better and more efficient resources
3. Trade

Reading Assignment #7: Individualism vs. Altruism

A.
Truthfully, I did not find the document to be overwhelmingly interesting, as most of it was just a bunch of notes. But I did find a couple examples that were provided to be interesting to think about.

One example of altruism that really stood out to me is the one about saving a stranger child who is drowning over your own (see part C below for the example I am talking about).

Like the document discusses, a truly altruistic person would elect to save another child over one's own. I'd be hard-pressed to believe that any single person in the world would prefer to save a child who is a stranger over one's own child. This just is not a pragmatic concept. I found this example to be very interesting and it made me think that the document is completely right: no one in this world can be completely altruistic.

One final thing I found interesting was how individualism is actually beneficial to our society. The document does a beautiful job explaining how thinking in one's self-interest actually benefits all because it spurs more production and exchange. This idea made me think that when people do something I consider "greedy", maybe it is not greedy at all. If a person does not want to donate money to a charity, maybe it is not greedy on his/her part because he/she might spend that money elsewhere to spur economic growth that could help more people than the charity could.

This made me think that when I call someone greedy, maybe it is actually me who is the greedy one since I am not looking out for others well-being, but rather, the people's well-being who I believe are more important.


B.
1. What would our world look like if everybody truly was altruistic? Would we have a productive economy with technological growth or would the world be stagnate as it once was prior to the Industrial Revolution?
2. Were/Are there ever any completely altruistic societies, and if so, how did/are they fare/faring?
3. Can a personal actually be considered selfish/greedy even if he/she is taking his/her self-interests "too far?" This document shows how acting in one's self-interest is actually good for society in many ways, so, are the people who claim that self-indulged people are greedy actually the selfish ones?

C.

This compilation of a book excerpt/notes included an excerpt from Hayak's book, in which he discusses the meaning of Extender Order as well as the idea of individualism vs. altruism.

The document begins with discussing how the morals of the market economy cause us to benefit others, but this isn't the case because we intend to do so.

In short, we benefit others because the market makes us act in a manner that allows that effect take place. According to Hayak, the Extended Order is to thank for this. The extended order is simply what happens when a system embraces specialization and trade and thus constitutes an information gathering process that no governmental/high authority or any one individual could know how to attain.

The document later goes on to discuss how our moral obligations extend ONLY to our own values. For example, if I provide financial charity to a mohair farmer, I am not doing it as an altruistic action. Rather, I am doing it because of my values. Maybe I value human life, and therefore, it is in my best interest to donate to this farmer.

Another great example this is provided in the document is one about attaining wealth. Let's say I want to become wealthier for my own personal well-being. But to do this I must, as the article puts it, "enter society and become a social being."

This simply means that I have to trade and produce to attain wealth, which are actions that benefit everyone else in the economy. This shows perfectly how when one tries to act in his/her own self-interest, he/she is being altruistic even though he/she may not have necessarily meant to have been.

The individualism segment of the document concludes with the idea that individualism is the basis of the institution of private property- altruism rejects private property, and I have learned throughout this course, property rights are vital because it gives people incentives to work harder/produce more/exchange more.

After this segment, the article discusses altruism. Here are some notes from that section that were important:

1. Altruism: one's devotion to the interests of others more than one's own interests
2. There is nothing wrong with having the best interests of others in mind, but the bottom line is that an individual will almost always be more likely to be motivated by his/her own values than others value.
3. The morality of altruism is simply: sacrifice
4. A couple great examples of why altruism is not as realistic as it may seem:
1. If a friend is in financial trouble, you may give him money. While this may seem like altruism, it is not. Clearly, by giving your friend money, you are showing that the satisfaction you receive by giving your friend money is of greater value than the money and the material goods the money represents.
2. Many people consider themselves altruistic, but think about this: if two kids are drowning and one is yours and another kid you don't know. You can only save one kid. Which one would you save? Almost definitely your own child. If you were a pure altruist, you would pick the stranger because you'd be thinking in the best interest of others above your own interests.

Class Summary #20 for 10/19/11

Today in class, we learned about many things. First, we discussed Feedback Loops:

1. Feedback loops exist to ensure performance. If Fed Ex fails to serve someone appropriately, word will get around by word of mouth that they aren't a good company. 
2. They try to keep their reputation intact because they know that customers who have a bad experience or don't have their packages delivered will tarnish Fed Ex reputation. 
3. Competition is a part of this, as companies don't want to give other companies an edge to get business over them.
4. Feedback loops only work well when people feed guilty about doing a bad job. In short, people need to actually give a hoot.
5. Places we enjoy the most have feedback loops because people are pressured to keep up work to make money and beat out the competition. There is a lack of it in places where we have issues, such as politics, public education, health care, etc. If we have more feedback loops in these areas, it is possible we'd complain less about them.

Trade and Exchange:

Three questions of basic economics-

1. What should be produced?
2. How do we decided what to produce?
3. Allocation System--> how do we get items from producers to consumers?

Then we learned about the production process. Prof. Rizzo outlined it the following way:

Inputs----> Black Box----> "Stuff"

Inputs= stuff that lying has been lying around on the Earth. They are resources. The black box is simply the production process where we mold things together. Finally, stuff is what the end result is.

Factors of Production

1. Factors of Production=inputs
2. Land= natural resources. Anything that was pre-existant before we came to Earth. An economic resource differs from a general resourse. Until we find out some valuable way with which to make stuff, it is a land resource.
3. Labor= bodies and people on Earth
4. Capital means two things:
1. Physical Capital- something produced to produce something else, such as a crow bar. It is created to take off tires of a car. So we produce the crow bar to produce something else for us.
2. Human Capital-all the things we do to help us become more productive/talented. It's whatever we do to make our abilities better. In other words, it is any addition to the stock of skill. Therefore, all the time we spend doing this is an investment of sorts.

Later on, Prof. Rizzo explained some very important characteristics of the study of economics, such as:

1. Doing work by yourself reduces economic activity. For example, if Prof. Rizzo makes a pizza in his house, it might only cost him three dollars. If he buys a pizza, it might cost him fifteen dollars. Thus, doing this reduces GDP in our country by $12 (in this instance).
2. Why do people produce? 
1. Simple answer = to acquire wealth.
2. What is wealth?
1. Wealth is all subjective. To an economist, wealth is whatever it is that people value. To me, I value baseball cards. If I have a lot of good cards, then I can be considered wealthy, even though baseball cards might not be a source of wealth to other people.
3. Economic growth happens when society has more of the things it wants. Things aren't necessarily material, either.
4. Trade is never an exchange of equal values. Exchange only does occur when people's values differ. In short, people exchange for different reasons- to benefit from what they are getting.

EWOT Goggles #7

Last night, I attended a Varsity Student Athlete Advisory Committee (A.K.A VSAAC, which is a committee made up of varsity athletes at the school who do things to promote U of R varsity athletics and the like).

At the meeting, VSAAC's advisor, women's basketball coach Jim Scheible, made the announcement that he needed four representatives to attend the U of R's Athletic Hall of Fame Induction banquet on this coming Friday night.

Having trouble finding volunteers, Coach Sheible tried to present some incentives for people to go, such as that it is a yearly tradition of VSAAC to have representatives attend this dinner, and thus, if no one goes, it will not be a good reflection of the organization.

He also mentioned that by going, the four volunteers would receive a "free dinner" at the banquet.

Now, I already knew I could not attend the banquet as I am going to be away for the weekend and won't be on campus on Friday night.

But even if I could attend, the incentive that Coach Sheible presented would definitely not have convinced me to go. The second he mentioned that a "free dinner" was up for grabs, I thought of economics and cringed at his comment.

As we have learned in class, NOTHING is free. There is always some sort of cost in everything, whether it be a monetary, non-monetary, or opportunity cost.

In this case, the dinner may indeed be free in terms of money, but by no means is it actually free. Let's say I was around campus for the dinner. If I decided to go, I'd be giving up a few hours of my time to attend the event. Therefore, the cost of attending the dinner would be the time I am giving up by going.

Lately, I've had tons of homework to do and a number of exams to study for. When I am away this weekend, I am going to be doing a lot of homework and studying.

Thus, if I were available to go to the dinner and I did end up going, the cost for me would be a loss of time to put towards my studies.

Because I VALUE being prepared for my classes so as to have the best opportunity to get good grades, there would actually be a steep cost for me to attend the dinner if I was not going away for the weekend.

As much as I hate to say it for the well-being of VSAAC, I value being prepared for my studies much more than attending the dinner and getting a "free" dinner ("free" referring to not having to pay any money for the food.) Therefore, I definitely wouldn't have volunteered to attend the dinner even if I could because I'd be incurring such a significant cost by doing so.

For some people. the incentive of receiving a free monetary dinner might be an extremely attractive option, but for me, I value getting my school work done much more than getting a "free" meal, which explains why the "free" meal is not so "free" after all.

Class Summary #19 for 10/17/11

Today in class, we learned about the Golden Rule (do to others what you want people to do to you) and its place in economics.

Prof. Rizzo started off class explaining that many people think it would be nice if the world worked based on the Golden Rule. According to Prof. Rizzo, the Golden Rule works in certain conditions, but in a commercial society (buying/selling), or in other words a very impersonal interaction, this rule doesn't work. It's great when you're dealing with people you know, but the bottom line is that there are countless examples that prove the Golden Rule fails in commercial systems.

It fails not because of selfishness on that part of others, but rather, because we are not omniscient (do not have complete/unlimited knowledge).

Here are a couple examples Prof. Rizzo taught us in class:

1. From 1958-1963, China mandated that farmers work to feed people in society, rather than to make profit. What happened? Millions of people died.
2. Every single time in history when we've tried to produce for people as opposed to profit, we've starved people.
3. Imagine Prof. Rizzo is a school boy trying to catch a bus in NYC. Rizzo is late, and the bus is about to leave. If the bus driver follows the Golden Rule and stops for him, this is what may potentially happen, which outlines how following the Golden Rule can be harmful in a market system:
1. Other people on the bus may be late because the bus driver stops. Let's say 55 people are on the bus and all of them are late. Maybe they miss their transfer and can't get on to the subsequent bus they need to catch.
2. How does the bus driver even know that Rizzo is worth of being picked up? Maybe Rizzo is a criminal trying to commit a crime, thus by picking him up, the bus driver will be causing more harm than help.
3. Finally, the bus driver probably doesn't consider this, but Rizzo points out that he probably should: If all of the people are on the bus are late to work because the bus driver waits for Rizzo, let's say the people on the bus are all 5 minutes late to work. If the bus driver does something like for 1 month out of the year, people are losing 5 min X 31 (days of work) = 155 minutes worth of work time which could definitely cause less production.
4. In short, one could claim that by stopping for Rizzo, the bus driver is actually arrogant to pick up Rizzo. How can people plan for when to get on the bus when the bus driver is doing things like this? To catch the next bus, people might need to get on the earlier bus to make up time for this to happen.

Thus, Prof. Rizzo explains, a commercial society operates on the Silver Rule. 

• Definition: Do not do unto others what you would consider unfair if they did it to you. It's important to only use this rule when working with strangers, not against family/close acquaintances. 

Prof. Rizzo also discussed how people have a skewed vision of self-interest and greed. Economics define self-interested motivation as: we're encouraged to do things that benefit our own self.

Some of these things include going back to college to get a degree, exercising to lose weight, quitting smoking. 

It is very weird how it is applauded to do this as a person when people look down upon self-interested people. That is the irony in all of this. Self-intersted actions are applauded when benefits are felt by the person, but not applauded when other people are involved. I.e.- Jogging is applauded by people, but selling sneakers at high price is not. It's the same thing- both actions are looking out for self-interest.

Finally, we learned about Reciprocal Altruism.

Tony: receives a kidney to save life

Tina: Her mortgage is under water. She receives $20,000 donation from church and gets house fixed

Same type of behavior but looked differently upon. Or consider the Coupon Show on TLC- people are applauded for great savings in stores. For example, one guy bought $300 worth of food for $18 all due to coupons. He was applauded for this. But why? This was self-interested on his aprt. Why isn't he considered greedy? Why are certain self-interest actions applauded while others aren't? The man basically took a lot of money away from the business. Isn't this the same as the business trying to over charge us for an item and take away money from us?

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.

EWOT Goggles #6

Earlier today, I was at the gym working out. My roommate, Steve, also happened to be at the gym but he was doing a separate workout.

We both arrived at the gym at around the same time, so we were ultimately on the same schedule. I finished about ten minutes before him, however.

Before leaving, I went up to Steve to say bye, but he told me I should wait 10 minutes for him to be done his full body workout and then, I could do a forearm workout with him.

I agreed to stay and wait for him to be done so I could do Steve's forearm workout.

I waited about 10 or so minutes and Steve was not yet done. He said he would be soon. But I didn't have that much time to spare because I had to go finish homework and take advantage of some free time I had in my schedule.

At this point, I started asking myself what I should do: stay or leave. My mind initially told me to stay and continue to wait- I had already waited 10 minutes, so I might as well continue to wait because if I leave without doing the forearm workout, then I effectively wasted my time.

But then I thought back to something we learned in economics class last week:

• Sunk Costs: resources that are not recoverable at all when I make my decision

I thought back to the story Prof. Rizzo shared in class about having a girlfriend for 5 years. He talked about how if a guy wants to break up with his girlfriend of five years, he should do so. Part of his thought process shouldn't be that he should stay with his girlfriend because if he breaks up with her, he would have wasted the last five years of his life.

In both instances, the time lost is a Sunk Cost. I, nor the guy with the girlfriend, could get the time (resources) back that I lost.

Because of this, I realized that it would actually be in my best interest to leave the gym while I was ahead. Sure, I had wasted 10 of my minutes, but if I stayed, I would be wasting more of the time that I needed to do my homework. My time lost was a Sunk Cost and I could never get it back.

I weighed the cost/benefits of staying after waiting 10 minutes and going back to my room to do work. In the end, I chose to go back. This decision was honestly completely made because of that story Prof. Rizzo taught in class about Sunk Costs. 

In the past, I probably would have stayed to do the workout because I would've had the mindset that I would have wasted my time if I didn't do the forearm workout I had been waiting for. But from what I have learned in Econ, I now understand that none of that matters because the time in this instance is a Sunk Cost, and I cannot/couldn't ever get that back.