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Chapter 17 - Economics is everywhere. After reading this chapter, you should be able to answer the following questions: How does Adam Smith’s invisible hand improve technology? What is technological utopia? What will happen with the artificial enhancement of human intelligence? How can we use the invisible hand to strengthen airport security, rehabilitate ex-cons, to catch outlaws, to improve schools, to fulfill quest for knowledge?
Chapter 17 Economics Is Everywhere McGrawưHill/Irwin Copyrightâ2009byTheMcGrawưHillCompanies,Inc.AllRightsReserved Learning Objectives ã How does Adam Smith’s invisible hand improve technology? • What is technological utopia? • What will happen with the artificial enhancement of human intelligence? • How can we use the invisible hand to strengthen airport security, rehabilitate ex-cons, to catch outlaws, to improve schools, to fulfill quest for knowledge? • What is economics of crime? • Why we give non-monetary gifts? • How does the stock market work? • How does education provide signal? 17-2 Markets’ Potential • Markets have unlimited potential • Firms, in the selfish quest for profits, keep pushing the technological frontier forward • Adam Smith’s invisible hand constantly pushes companies to find better ways of satisfying customers • Markets coordinate people’s efforts to create products of continually improving value 17-3 Technological Utopia • A technological utopia might push us past all the limits humanity currently faces • Economics is essentially about decisionmaking when resources are limited and individuals are forced to make tradeoffs • It might, therefore, make economics as we know it today obsolete 17-4 Technological Utopia by 2050 • • • • • Assumptions: Moore’s Law, i.e the computing power one can buy for $1,000 doubles every year, will continue to hold at least until 2050 In 2030 a $1,000 personal computer will be as fast as a human brain In 2050 we will have computer software that simulates human intelligence So, in 2050 we will have one billion computer-scientists that think a million times faster than human scientists They would almost certainly figure out how to cure death and give us wealth beyond our imagining 17-5 Enhancing Human Intelligence • Intelligence drives innovation • In the near future we humans may artificially boost our intelligence • Widespread use of intelligence enhancing drugs could add trillions to the world economy • Workers would take the drugs only if the extra pay was worth the increased health risks • Countries will find it extremely costly to ban the use of intelligence enhancers 17-6 Using Invisible Hand • • • • Strengthening airport security: Ordinary citizens should be given the chance to act as fake terrorists The salaries of airport security workers should be tied to how well they against the fake terrorists Rehabilitating ex-cons: Private firms rather than government parole officers should be in charge of ex-cons’ rehabilitation These private firms should be rewarded if they succeed in rehabilitating ex-cons, but punished if they fail to reform them 17-7 Using Invisible Hand • • • • A billion for Bin Laden: $25 million reward offered by the U.S is not enough to attract professional firms to hunt Osama Bin Laden A $1 billion bounty for Bin Laden will allow the U.S to enlist the efficiency and creativity of the free market School choice: School choice forces public schools to compete for students School choice makes it in the self-interest of public schools to satisfy their customers 17-8 Using Invisible Hand • • Prizes: Through offering a prize, one could cause the invisible hand to motivate people to accomplish nearly anything Curing cancer with auction: The medical team that bids the most would be the one most confident in its ability to find a cure for cancer 17-9 Economics is Everywhere • • • • Economics of crime: A criminal chooses crime because the benefits to him of criminality exceed the cost For society, crime differs from most other professions because it destroys rather than creates wealth Marginal deterrence is one reason why we shouldn’t kill all criminals Most property and violent crimes committed by poor people as they face lower opportunity costs and careers costs of crime and going to prison 10 17-10 Economics is Everywhere • • • • Gift giving: Economists believe that people seek to maximize their own pleasure Most humans seem to receive pleasure from giving to those they care about Some economists believe that giving a non-monetary gift sends a signal of understanding and empathy for the recipient Some economists believe that a stigma associated with buying certain luxury items for oneself explains some non-monetary gifting behavior Other economists think that people might not give cash gifts precisely because cash is so valuable 11 17-11 Economics is Everywhere • • • • The stock market: Companies issue stock to raise money When one buys stock in a company, one owns part of that company and is entitled to some of its future profits The value of a company’s stock is determined by estimates of these profits Economists believe that stock investors should hold diversified portfolios, i.e invest in many types of stocks Diversifying lowers risk without lowering average gains 12 17-12 Economics is Everywhere • • • Education and signaling: Signaling occurs when someone tries to show others that he has some desirable hidden trait such as intelligence A signaling theory about college shows that college could increase a student’s earning capacity even if it teaches him nothing of value, e.g The Ford Modeling agency Economists disagree over the validity of the signaling theory 13 17-13 Do You Know? • Why does the invisible hand not motivate public schools? Public schools not have economic incentive to well They are neither rewarded for good work nor punished for failure • How does opportunity cost partially explain why the poor commit more crimes than the rich and middle class? Part of the cost of going to prison is the difference in happiness one receives between living in the current residence and living in jail As poor people not have good living conditions and high paying jobs, their opportunity cost of going to jail is lower than the rich and middle class 14 17-14 Do You Know? • What does it mean to hold a diversified portfolio? Having a diversified portfolio means investing in many types of stocks Diversifying lowers your risk without lowering your average gains To fully diversify investors should buy stocks in foreign companies • Why, unlike steroids, would widespread use of intelligence-enhancing drugs benefit humanity? Sports fans care about the relative performance of athletes But outside of sports, it’s absolute not relative performance that counts If, for example, intelligence enhancers improved the skills of all cancer researchers, software engineers and teachers then society would indeed benefit greatly 15 17-15 Summary • Adam Smith’s invisible hand constantly pushes the technological frontier forward • Widespread use of intelligence enhancing drugs could add trillions to the world economy • In a technological utopia computer-scientists almost certainly figure out how give us wealth beyond our imagining • A technological utopia make economics as we know it today obsolete • Invisible hand and markets can be used to strengthen airport security, rehabilitate ex-cons, to catch outlaws, to improve schools and to fulfill quest for knowledge • Economic analysis can be applied to crime, gift giving, the stock market and education 16 17-16 ... Rehabilitating ex-cons: Private firms rather than government parole officers should be in charge of ex-cons’ rehabilitation These private firms should be rewarded if they succeed in rehabilitating ex-cons,... creativity of the free market School choice: School choice forces public schools to compete for students School choice makes it in the self-interest of public schools to satisfy their customers 1 7- 8... cancer 1 7- 9 Economics is Everywhere • • • • Economics of crime: A criminal chooses crime because the benefits to him of criminality exceed the cost For society, crime differs from most other professions