Naked Eco

Class discussion 1

This is from the unique perspective of the United States.

Charles Wheelan is the author.

* He was a correspondent for The Economist.

* He was a senior lecturer at the University of Chicago

Invisible Hand t

* It is the theory that if the market is left alone it will fix itself.

* Adam Smith- "By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it"

o These two statements say the same thing. People do what is best for them on a daily basis, which is relative to that person (it will not be the same as what is best for everyone else). You are fulfilling your preference and making sure your own interest is being taken care of. Ex: the people who aren't in class fulfilled their preferences by not coming because that is in their self interest. All of that together (when everyone is fulfilling their own self interest), it promotes the market. When governments try to control that, you don't get that so much.

* So what is the invisible hand? You could say several different things

o Supply and demand

o God

o Motivation

o Energy

o Anything that makes people do whatever they do

* Why did the Soviet Economy collapse?

o Too much government control, because you cannot allocate all things to all people. You cannot control everything and expect it to work, you have to leave it alone.

o Allocating resources without a functioning price system is not going to work.

* Why did China open up their economy?

o Because that way of life and government is not sustainable over the long term. China never collapsed because they changed their exposure to capitalism

Oseola McCarty

* She left a lot of money when she died to a university she never attended.

* She was a laundress (seamstress) in Hattesburg, Mississippi living in very poor conditions her whole life in order to save and save so that she could leave this money to the university when she died.

* She could have done anything else with her money than leave money to a university that she never attended to people she never knew.

* This proves that everyone's preferences are different and we seek to fulfill those. This is what maximized her utility.

Chicken crosses the road to maximize his utility so why do entrepreneurs?

* To make more money

Why doesn't Brad Pitt sell insurance?

* He can make more money doing other things because of his talents.

* This maximizes his utility and fulfills his preferences.

* This is what ultimately makes the market work

Incentives

* How you get people to do what you want them to do when that may not be maximizing their utility.

* Adverse selection

o Making a bad choice from not having enough information

o What industry works with adverse selection? Could say used cars but wants to talk about health insurance because that applies to everyone.

o Health insurance is there to reduce your out of pocket expense and you are supposed to pay for that risk every single month through your health insurance premium. Whether or not you ever use it, doesn't really matter. It is there to offset risk when it comes to people's health. You pay premiums every month and you pay a co-pay.

o How do you get health insurance?

* You have to qualify

* you will have to be employed and this is where adverse selection comes into play.

* Sick people drain the resources of the health insurance industry. You are all paying into the company's pool of money so they have money to pull from for the people who need it. They are the ones that are really using all of the funds that are there for the health insurance to be paid. So this is basically adverse selection for health insurance because they are paying for all of these people who they don't