Today in class we learned that the reason why economics is considered hard is that people look for explicit design in economics but there is none. We then went into a discussion about I, Pencil and the four main points that it posed. These points were Impersonality. This is because none of the hundreds of workers that go into making a pencil know each other’s name. We were told that almost everything we do is impersonal. The second point is self-interest. Of all the people working to help produce a pencil, almost none of them know each other or care about them. The main motive of all of the workers is too make money so that the can support themselves and their families. The third issue is cognitive issues. This is related to the phenomenon that it costs so much to get a pencil made, but it only costs about 10 cents for a pencil. The final point to I, Pencil is who gave the orders. The companies that sell the pencils don’t know how many pencils they are going to sell on a given day, but they still have them produced assuming that they will be sold. All of these people cooperate together to get a product sold. This illustrates what Adam Smith talked about with the invisible hand. The invisible hand is the possibility for people to cooperate with out cohesion. People come together with people giving orders. Adam Smith also said talked about tacit knowledge and how everyone has one thing that they know how to do better than anyone else in the world. This could be a personal thing or global.
Central planned economics don’t work. There is too much to plan/know for the central government or controller to do. These always end up with shortages because the planner doesn’t know how much of a product or supply to add/take away with shortages since they don’t specialize in what they are doing. The world changes too fast for these central planners to know how to respond to the changes. There are millions of decisions made on a daily basis that the central planners can’t understand/
In market economies, shortages make prices higher. Good decisions make money and bad decisions use money. An example of this is that Venezuela imports coffee even though they are globally known to produce the world’s best coffee. This is one of the bad decisions that happen in a market economy.
An important thing that we were told today was that price system makes people act in a market economy. Prices tell you how much you have to give to get. This provides incentives to us to do make the right decisions. No one sets prices in a market economy unless the government steps in and sets them.
To be successful, one has to tie theory and history together. By following trends, we expect to be better off in a 10 yr period than we are now. At the beginning of mankind, there was almost no progress with how they lived for a few thousand years. This is astounding based on the pace that we progress today. We live in a world of staggering inequality. We are 15x richer than the average poor country and 50x richer than the poorest countries. This statistic is an understatement. Sustained growth is the norm now; this wasn’t the case during the industrial revolution.
The GDP tries to add up the value of everything produced in the economy. Not everything that is valuable gets produced and not everything that is produced is valuable. If everyone spent more time with their families, the GDP would show them as poorer. This is amazing since they are doing better things economically by increasing the happiness of people in their family. If professor Rizzo’s kid were a cow instead of a child, the GDP would rise since a cow has a higher value than a child. The GDP has a lot of shortcomings. It constantly increases though. We get twice as rich every 15 years. We are 65% richer today than we were 10 years ago as an economy.
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