Class #18 10/14/11

Rizzo started off lecture by saying that if a worker makes $25 an hour worth of stuff, that that person’s wage is supposed to be value of stuff you produce. If the market is competitive, the person’s wage should be close to productivity. These workers are generally paid $15 an hour though.  These workers are being exploited by their employers by $10. A challenge in a command economy is producing stuff people want, not producing stuff. Prices are information. They say what consumer needs are and what their preferences.

Markets often don’t work well. When there is a lack of existence and a lack of institutions is when it is at its worst. Markets work well when producers and consumers have many options and competition. If one party has more information than the other, the market doesn’t work. Insurance is so expensive, because many healthy people don’t purchase it, and only unhealthy do, so insurance companies have to charge a lot to make up for their losses. What we want is to make sure that our outome and goals are efficient. By efficient, Rizzo means that producers are delivering what people want at the lowest cost possible.

Market can be very destructive, 99% of stuff fails. 1% that works is really good. Institutions matter. People buy and sell based on their own interests and prices. An institution is all the formal and informal mechanisms we stumble upon, to live with one another peacefully. Markets were an epic fail in Russia. To have a good institution, a good government needs to be established. Good societies are where the legislation reflects what appears to be the law.

For a law to work better “rule of law” it has to be adhered too.

1.   Every one treated equally under the law (doesn’t happen)

2.   Laws can’t be arbitrary

3.   Good laws must be general (not specific)

Must be predictable before entering situation.

Markets can’t work without the rule of law. The is a difference between North and South Korea is institutional structures. When the institution is right, it is non rival. The cost to develop good institutions once there are there, very fast increase of living standards.  

Inflation is the general increase of all prices in an economy. Inflation is caused when there is too much inflation around. Money helps exchange things. The only reason that all prices can go up is if there’s more money in the economy. Free societies work best when people are honest.

People find acting in self interests inferior on one who prevents others self interests over their own.We want society to be based on the gold rule if people produce for other countries. Do to others what you want done to you.