Lecture Principles of Microeconomics: Chapter 17 - James D. Miller

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

Learning Objectives

• 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 do we give non-monetary gifts?

• How does the stock market work?

• How does education provide signal?

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.

Technological Utopia

• A technological utopia might push us past all the limits humanity currently faces

• Economics is essentially about

decision-making when resources are limited and

individuals are forced to make tradeoffs

• It might, therefore, make economics as we know it today obsolete

Technological Utopia by 2050

Assumptions:

$1,000 doubles every year, will continue to hold at

least until 2050

a human brain

human intelligence

that think a million times faster than human scientists

death and give us wealth beyond our imagining

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

Using Invisible Hand

Strengthening airport security:

act as fake terrorists

tied to how well they do against the fake terrorists

Rehabilitating ex-cons:

officers should be in charge of ex-cons’

rehabilitation

succeed in rehabilitating ex-cons, but punished if

they fail to reform them

Using Invisible Hand

A billion for Bin Laden:

enough to attract professional firms to hunt Osama Bin Laden

to enlist the efficiency and creativity of the free

market

School choice:

students

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.

Economics is Everywhere

Economics of crime:

of criminality exceed the cost

because it destroys rather than creates wealth

kill all criminals

people as they face lower opportunity costs and

careers costs of crime and going to prison

Economics is Everywhere

Gift giving:

own pleasure Most humans seem to receive pleasure from giving to those they care about

gift sends a signal of understanding and empathy for the recipient

with buying certain luxury items for oneself explains

some non-monetary gifting behavior

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

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

Do You Know?

• Why does the invisible hand not motivate public schools?

Public schools do not have economic incentive to do

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 do not have good living conditions and high paying jobs, their

opportunity cost of going to jail is lower than the rich and middle class

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

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