· If you ration by price, only the people who are willing to pay will buy it
o If someone spends $30 to make a guitar, they won’t be producing unless they are producing for the line between D1 and S5
o If someone spends $15 to make a guitar, they can sell at equilibrium
· Chicago School of Economics
o “Markets are always efficient”
o False
o If you see a $100 bill on the streets, leave it there
§ Why? Because in theory the dollar should not be there
· Rationing by central planner
o 4 central problems
o If you randomly pick consumers, there will be profitable side deals on the side (black market)
o Problem 1: The central planner, in the process of getting the information, says S4 will produce one guitar
§ The value at $25 is the opportunity cost for not entering another industry (when he makes a guitar, the world is poorer by $25)
§ In the end, S1, S2, and S4 are producing guitars, but the world is poorer because S4 is not producing guitars when he could
§ Allocation that does not choose S1, S2, and S3 hurts sellers because S4 and S5 could be producing other goods at equilibrium price
o Problem 2: The market will force D1, D2, and D3 to be consuming, but the central planner says that D1, D2, and D4 will get the guitar
§ If D4 gave his guitar to D2, the world will be $10 richer because D2 values it more
o Problem 3: How do you determine that the ideal amount of guitars to produce is 3? The central planner doesn’t know, so he says, lets produce 2
§ There are too few guitars
§ A black market for guitars develops as suppliers make guitars under the table in order to sell them for profit
o Problem 4: The central planner says to produce 5 guitars
§ Loses money in market because S4 and S5 won’t profit and D4 and D5 don’t value the guitar enough
§ Therefore, S4 and S5 will pretend they made guitars because it is more profitable to produce other goods
· Hypothetical Guitar Market
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· Health Care
o Our health care plan is based on Massachusetts’ plan
o Problem: Massachusetts is generally a more liberal, healthier, and had more doctors and fewer people
§ Therefore, when National Health Care Bill did not work in America because it made it harder to see doctors because premiums and payments techninically were to remain the same
· Russia
o Economic freedom helped country to flourished after reign of “the Greats”
o In 1880, Railroad technology was advancing rapidly in Russia
§ In Moscow, they denied the ability to build the Trans-Siberian Railroad to foreigners because they believed they could do it themselves
§ Czar Alexander III tried to build a 5000 mile railroad by borrowing a ton of money when foreigners could have built it
§ His son, Nicolas II, couldn’t finish the railroad in the early 1900’s
§ Led to a massive debt problem in Europe in 1907
§ Russia’s economy could not recover, leading to the Czar being unable to fight WW1 efficiently and losing the Bolshevik Revolution in 1917-1918
· Lenin didn’t think he’d succeed because he didn’t know how bankrupt Alexander and Nicolas had made the country
o Example of the
· First World
o Over 40 years, several trillion dollars were given in foreign aid
o There is not a single paper that has shown a link between foreign aid and development
o This aid has not been successful because the planning mentality has tried to reduce poverty by planning the solutions in a quantitative state to people who have no incentive to meet the needs of the poor people in the nations
§ By 2015 “all the world will have water” under these plans
§ Markets are better equipped to provide incentive to help these people
§ No accountability in a central planning
o This is not against aid agencies, because when UN or NGOs don’t meet goals, they get more money, providing no incentive for them to succeed
§ Also, corruption at all levels probably factors into it
o Contrasting that planning mentality to searchers
§ They cant process all the information in the world because there is too much information
§ You can’t mimic this in an aid situation
o If agencies lost incentive and money if they failed in achieving their goals, they’d get more incentive to succeed
§ Example: bed nets for malaria not being distributed to those who need it, but instead being sold as fishing nets
· Moral of Examples:
o The only way to succeed in these situations is to decentralize the decision-making in the economy and allow for the market to take control
o Assembling millions of experts will not get this process solved
o A good experiment will be to make individual states use plans to experiment different ideas to see if they work
· Keynes
o Stated that we needed more planning instead of less, but community should do the planning instead of the experts because the people would be in the right minds and hearts as to what would be best for the economy
§ Ideas were based on everyone being moral in the economy
§ Hayek could never write a response because Keynes died shortly after stating this
· What a price is is a reflection of what is going on in the economy
o When people don’t like a price, they try to regulate it and change it
§ Like a thermometer, banning it from going over or under a certain temperature
o People will always hate prices, sellers hate low prices
o Nothing short of uniform prices at the equilibrium will make everyone happy
o Gas prices
§ If gas prices raise too much, people think companies are “price gouging” customers
§ If gas prices are too low, people think companies are “exploiting the workers” and creating unfair competition
§ When prices are the same every, its collusion
§ WHY IS THERE SO MUCH COMPLAINING!!!!! AAAAAAAAHHHHHHHHH!!!!!
· Sorry
· Price Ceilings
o Rent controls
o Some people see cheap housing as a natural right
§ However, raises practical and moral issues
§ Some states or cities have laws in order to stop landlords from raising prices too much
§ Too much ambiguity in laws
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