Bus 150: Exam 1

I. I. Module 1 – Scarcity and Property Rights
A. Scarcity
1. Economics is the study of
a) Choices, or put another way:
b) The study of scarce resources that have alternative uses
(1) Too few resources exists for all the ways people would
like to use them
(2) Scarcity makes choice (tradeoffs) necessary
2. Who gets to decide who makes the choices?
a) Question ushers in the idea of property rights
b) Different societies have different rules for who gets to make
the choice
c) Subjective Value of individuals drives choice about the
alternative uses of scarce resources.
(1) The theory of subjective value says “...that the value of
any good is not determined by the inherent property
of the good, nor by the cumulative value of
components or labour needed to produce or
manufacture it, but instead is determined by the
individuals or entities who are buying or selling the
object in question.” (Wikipedia)
(a) Ex. Diamond-Water Paradox – whereas
diamonds are scarce and non-essential, water
is abundant and essential...
(b) Compare: Ricardo’s Labor Theory of Value
states value is directly correlated to labor input.
(2) Subjective value means economic value is “in the eye
of the beholder”
(3) Prices are just exchange rates, a mechanism that
succinctly utilizes information about the productivity
of resources and directs them to their highest use
(a) Money is just a measuring device measuring
the market value of one thing to another
(b) Market value was borne out subjective values
d) Voluntary Exchange among individuals of value-for-value is
an act that creates Wealth
(1) People engage in voluntary exchange only when they
expect the exchange to make them better off
(2) Wealth is measured by the flow of value through time
(a) Wealth as a Present Value formula
(3) Wealth creation happens at the point of voluntary
exchange
e) Frederich Hayek – knowledge & subjective value & wealth
(1) Economic systems are knowledge systems
(2) Same resources today as there was millennia ago
(a) What changed? Knowledge

(3) Economic problem of society is “...how to secure the
best use of resources known to any member of society
for ends whose relative importance only these
individuals know. ...”
(a) Knowledge is dispersed throughout the
population:
(i) Knowledge about objective facts, and
(ii) Knowledge about subjective perceptions
(which motivate human action)
(a) Ex. Ice cream flavor preference
(iii) Known to many individuals
geographically dispersed
(4) Free Markets that are decentralized with freely
fluctuating prices best coordinate the broad and
diverse subjective perceptions, and exchanges
thereof...
(a) Requires well-defined rules of property rights
(b) Prices merely coordinate your subjective
perceptions with society
B. Property Rights
1. Property rights are decision rights
a) Property Rights activate wealth creation by giving people
authority to make voluntary exchanges which shifts scarce
resources from lower valued uses to higher valued uses
(1) Exist even in primitive society: the case of the
exception proving the rule when the tribe recognized
rights belonging to the men who made the
“investment” in the climbing tree to obtain the
communal fruit.
b) Secure property rights create the incentive to invest time and
effort in risky endeavors that are wealth creating
(1) Why invest time and effort if another can take your
property rights?
2. There is no record in anthropological studies of societies that were
unaware of property rights
3. Fifth Amendment protects property from governmental takings
4. Building on the individual as the unit of analysis, four basic tenets
guide the economic analysis of property rights:
a) People’s choices are constrained due to limited resources
(scarce)
b) People act rationally to pursue their self-interests by
adjusting to the benefits and costs of their actions.
Rationality means that people have well-defined preferences
and act systematically to maximize their well-being subject
to their wealth and income constraints

c) People will compete for control of scarce resources and that
the nature of the competition will depend on the rules of the
game
d) well-specified and transferable property rights encourage
gains from trade
5. Historical Notes and Quotes
a) Hobbes, The Leviathan – ‘...life in a world ... without rules
and property rights would be “nasty, brutish, and short”’.
b) Plato, The Republic – communal property (ownership and
use) to avoid conflicts
(1) Plato’s view is known as “The Tragedy of the
Commons”
(a) Examples of “The Tragedy...”
(i) Pilgrims, 1620 – Gov William Bradford
after two years, assigned private
property rights, which caused great
flourishing.
(ii) China, 1948-1976 – then afterwards the
“Great Leap Forward” – a great famine
caused the government to assign private
property rights.
(b) Antidote to “Tragedy of the Commons” –
decentralize property rights.
c) Aristotle, Politics – private property because “that which is
common to the greatest number has the least care bestowed
upon it.”
d) St Thomas Aquinas, (holding with and advancing Aristotle)
e) John Locke, The Second Treatise on Government –
(1) property rights existed before government existed
(2) they are the primary justification for government
(3) property rights are natural rights (like life and liberty)
(4) man should own the fruits of his own labor
(5) “The great and chief end therefore of men uniting
into common-wealths, and putting themselves under
government, is the preservation of property.”
(6) If a ruler violates property rights, then ruler is “at
war” with owner, and owner may disobey.
f) Adam Smith, Wealth of Nations –
(1) built upon Locke
(2) private property created a role for government in
defending property
(3) existence of government created the security to
stimulate the creation of new property
(4) relationship between property and government
justifies government’s role in
(a) providing national defense (protect property
from external threats), and

(b) administering justice (protect property from
internal threats)
C. Taken Together
1. Property Rights are socially recognized rights of action with which
we may exercise over scarce resources
a) Raises question: who decides who gets the property rights?
b) Those who have property rights can evaluate net value of
alternative uses of the property (resources). In the book
chapter these are referred to as a “bundle of sticks.”:
(1) Exclusive right to possession of resource
(2) Exclusive right to profit of resource
(3) Exclusive right to transfer resource
2. Well-defined property rights do not eliminate competition for
scarce resources, but rather:
a) Eliminate violent competition
b) Motivate peaceful exchange
(1) If others see greater use of property, then they may
engage in peaceful negotiation for that property
D. Opportunity Cost
1. Opportunity cost is the value forgone when we choose to use a
resource in one activity versus another
a) Milton Friedman - popularized the phrase that “there is no
such thing as a free lunch” to help remind us that the use of
scarce resources always has a cost even though the cost may
be hidden or not obvious
E. Day 3: Power of the Poor Video
1. Extra-legal vs Illegal
a) Illegal – Acts expressly forbidden
b) Extra-Legal – Acts outside of the law
(1) About 80% of the world’s population
(2) Common cultures of rules form
(a) But not recognized outside of local culture
(b) Consider Bern Switzerland out-take and the
guy who developed a “common law” of
subcultures into the now-wealthy Switzerland
c) Hernando de Soto worked to ‘elevate’ the extra-legal culture
into the legal culture through documentation of the property
rights understood in the extra-legal environment
(1) Shining Path was the Marxist rallying effort of the
extra-legal culture
(2) Documentation of extra-legal rights brought extra-
legal culture into legal culture
(3) Entrepreneurial risk taken within legal environment
of documented legal property rights
F. Day 4: Catch Shares
1. Terms
a) IFQ – Individual Fishing Quotas

b) ITQ – Individual Transferrable Quotas ... same as IFQ
2. Property Rights assignment to prevent “Tragedy of the Commons”
in oceanic/sea fishing – over fishing leading to destruction of
species
G. MGH Thoughts on Module 1
1. Error
a) Error: Terry Anderson: “He (St Thomas Aquinas) believed
that for humans to perfect themselves spiritually, they need
the security pro-
vided by ownership.” St Thomas could not have said that –
but he did support the Aristotilean view. St Thomas
recognizes spiritual perfection gratuitously derives from God
in whatever context the person may be found.
b) Fourth right? Exclusive right to destroy? No, generally.
2. Property as “bundle of sticks” and variants of property rights:
a) Exclusive right to possession?
(1) Yes, personalty and realty
(2) Yes, license (but with contractual limitations)
(3) Yes, patents (but with time limitations)
(4) Yes, trade secrets
(5) Yes, trademarks (but with obligations to society)
(6) Yes, copyrights (but with posthumous limitations)
b) Exclusive right to profit?
(1) Yes, personalty and realty
(2) No, license (usually not)
(3) Yes, patents (but with time limitations)
(4) Yes, trade secrets
(5) Yes, trademarks
(6) Yes, copyrights (but with posthumous limitations)
c) Exclusive right to transfer?
(1) Yes, personalty and realty
(2) No, license (usually not)
(3) Yes, patents (but with time limitations)
(4) Irrational, trade secrets
(5) Problematic, trademarks
(6) Irrational, copyrights
d) Exclusive right to destroy
(1) No, personalty and realty (stewardship)
(2) Yes, license
(3) Yes, patents
(4) Yes, trade secrets
(5) Yes, trademarks
(6) Yes, copyrights
3. Louisiana Purchase
a) Louisiana Purchase and the Errant Fox Hunter
b) Louisiana Purchase and Chain of Title

4. Engagement Ring
5. Nate Bargatze and Birth Certificate
6. Chiffons vs George Harrison
7. Fiduciary Duty
8. Zapline Case
H. Transition
1. Handfuls 1/2/3

II. Module II – Fairness and Equality
A. Preliminaries
1. Fairness and Equality are political topics, not economical topics
a) All economies are political economies
(1) Societal rules (political) influence how people
(a) make economic choices, and
(b) think about outcomes
2. For our class, the relevance of fairness and equality is
a) “What are the trade-offs inherent in how scarce resources
are allocated when economic systems use different rules
according to fairness and equality?”
B. Equality
1. Equality of Opportunity
a) Milton Friedman, Free to Choose
(1) Entrepreneurs pursue bold ideas are risk takers
(‘gamblers’)
(a) To do so
(i) property rights matter, and
(ii) investment capital matter
(b) because:
(i) they define who gets to make what
decisions
(ii) they define the ‘rules of the game’
(iii) free to choose different ways to use
scarce resources that have alternative
uses
(2) Friedman (and McCloskey) says “Created Equal” is an
ideal – to be strived for although probably never
attained
(a) Explicitly taken from the Declaration of
Independence
(3) Friedman
(a) definitions
(i) Liberty – everyone is his own ruler
(a) Liberty = economic freedom
(ii) Equality of opportunity – a career open
to the talents with no arbitrary obstacles
(iii) Equality of outcome – everyone have the
same level of living or income, “finish
the race at the same time”
(iv) Fairness – can’t be defined precisely
(b) Naval Ravinkant phrases Friedman this way:
“Free people make free choices. Free choices
mean you get unequal outcomes. You can have
freedom, or you can have equal outcomes. You
can’t have both.”
2. Equality of Outcome

a) See Fairness below
b) Harrison Bergeron story
(1) Vonnegut’s reply to opposing views of the story:
(a) Personal experience of self-pity and envy
tamed, if not tamed, you have the
“Handicapper General” illustrated by three
assassins!
c) ...Everyone should finish the race at the same time. As the
Dodo said in Alice in Wonderland, “Everybody has won, and
all must have prizes.”
d) If all are to have fair shares, someone or some group of
people must decide what shares are fair—and they must be
able to impose their decisions on others, taking from those
who have more than their fair share and giving to those who
have less. Are those who make and impose such decisions
equal to those for whom they decide? Are we not in George
Orwell’s Animal Farm, where “all animals are equal, but
some animals are more equal than others”?
3. Equality Before God
a) Friedman
(1) Taken from the Declaration passage, “We hold these
truths to be self-evident, that all men are created
equal, that they are endowed by their Creator...”
(a) Primarily authored by Thomas Jefferson
(2) Equality before God, because people are not
identical...
(a) “Priority given to ‘equality of opportunity’ in
the hierarchy of values generally accepted by
the public after the Civil War ... There were to
be no arbitrary obstacles. Performance, not
birth, or religion or nationality was the
touchstone.”
(b) After the abolition of slavery, ‘Equality before
God’ evolves to ‘Equality of Opportunity’
4. Equality – generally
a) Alexis de Tocqueville, the famous French political
philosopher and sociologist, in his classic Democracy in
America, written after a lengthy visit in the 1830s, saw
equality, not majority rule, as the outstanding characteristic
of America. “In America,” he wrote, “the aristocratic element
has always been feeble from its birth; and if at the present
day it is not actually destroyed, it is at any rate so completely
disabled, that we can scarcely assign to it any degree of
influence on the course of affairs. The democratic principle,
on the contrary, has gained so much strength by time, by
events, and by legislation, as to have become not only
predominant but all-powerful. There is no family or

corporate authority. . . . America, then, exhibits in her social
state a most extraordinary phenomenon. Men are there seen
on a greater equality in point of fortune and intellect, or, in
other words, more equal in their strength, than in any other
country of the world, or in any age of which history has
preserved the remembrance.”
b) Tocqueville admired much of what he observed, but he was
by no means an uncritical admirer, fearing that democracy
carried too far might undermine civic virtue. As he put it,
“There is . . . a manly and lawful passion for equality which
incites men to wish all to be powerful and honored. This
passion tends to elevate the humble to the rank of the great;
but there exists also in the human heart a depraved taste for
equality, which impels the weak to attempt to lower the
powerful to their own level, and reduces men to prefer
equality in slavery to inequality with freedom.”
C. Fairness
1. Friedman suggests this idea leads to Equality of Outcome
a) Friedman says
(1) Measures to achieve fair shares for all reduce liberty
because it is likely that to achieve such an outcome
there will be use of force (or threat of force)
(2) Fairness is not an objectively determined concept
once it departs from identical shares... Fairness is in
the eye of the beholder...
2. John Rawls, A Theory of Justice
a) Summary of his statement on ‘justice as fairness’ – It is okay
– it is fair – to have measured inequalities in society so long
as the processes in place work to the advantage of the least
well off people in society.
(1) Problem: how do you know which system of rules,
over time, will best advantage the least advantaged?
(a) Friedman and McCloskey ‘answer’: uplift the
poor, do not level down the rich
(b) When freedom and fairness conflict, choose
freedom – because it will result in greater
fairness over time – freedom allows for
innovation
3. “Fair shares for all”
a) The modern slogan that has replaced Karl Marx’s, “To each
according to his needs, from each according to his ability.”
4. Johan Norberg video: “Equal or Fair”
a) We don’t hate inequality, but we do hate unfairness
b) Boys cleaning their rooms
(1) Without further nuance between the two boys: they
should get paid the same

(2) But, if one boy worked harder, then fairness
demanded he get paid more
(3) Summary
(a) People prefer fair inequality over unfair
equality
D. Liberty/Freedom
1. “to shape one’s own life”
2. Friedman
a) Equality of opportunity is consistent with liberty/freedom
b) Equality of outcome is not consistent with liberty/freedom
c) End of Video quote from Friedman:
(1) “The society that puts equality before freedom will
end up with neither. The society that puts freedom
before equality will end up with a great measure of
both.”
3. China
a) Pre 1976 – Mao Zedong
b) Deng Xiaoping – institutes economic reforms toward liberty
rather than leveling pre-1976
(1) “let some people get rich first”
E. Great Enrichment / McCloskey
1. McCloskey: the explosion in economic growth after 1800
a) Outcome of this:
(1) Before: most people lived at about $3 per day (todays
terms)
(2) Now: at about $123 per day (a factor of 30?) perhaps
by much more
b) McC explains the seeds of this were made around 1600:
(1) As a result of luck – a series of historical accidents in
northwest Europe
(2) Netherlands, Britain, France then British North
America putting the right rules in place...
(a) These are the rules we want to study
2. Bourgeois (Meaning today’s ‘middle class’)
a) Virtues
(1) Ethics in a commercial society
(a) Behaving with integrity in commercial
relationships
(i) Responsible
(a) In hierarchial society: this means
‘duty’ to master
(b) Now, duty is a character trait
motivating responsibility to
owners, employees, customers
(ii) Reliable
(iii) Trustworthy

b) Dignity
(1) Elevated business people to ‘respect-worthy’ from
not-so in the hierarchial society, but now so after the
Great Enrichment – this ‘respect’ helped establish
economic freedom
(a) Economic freedom in turn supported the idea
of ‘equality of opportunity’
(b) This influenced the idea of ‘fairness’
c) Equality
(1) Ideas generate innovation
(a) More ideas put into play by entrepreneurs, the
more the chance for human betterment
(b) Innovation – more than anything else –
explains the Great Enrichment
(2) Institutions and Capital
(a) Institutions – for example property rights
(b) Capital – investment money
(3) What mattered the most, though, that society
recognized entrepreneurial activity was respectable
and responsible – it was ‘ethical’ in the bourgeois
sense of the word
(a) In Netherlands, Britain, America, society
valued people who created innovations to make
people better off (and recognized profits as
rewards for their efforts and risk)
(b) So, a lot more people started trying out new
ideas
(c) And the implementation of these ideas made
society wealthier
(i) See Adam Smith, A Wealth of Nations
(4) McCloskey (and Friedman) says “Created Equal” is an
ideal – to be strived for although probably never
attained
F. Day 3: Income Tax
1. Proportional
a) Flat Rate
b) Promotes Equality by rate – eg, 7% for everyone
2. Progressive
a) Flate Rate until a point, then newer flat rate that is higher for
extra income beyond that point, and so forth
b) Not Equality
c) Promotes Fairness (to some people) in that it suggests the
more you have, the more you should contribute
(1) This is true of proportional
(2) But a bump up in Progressive
3. Digressive
a) Progressive with a “Stop it, already!”

4. Regressive
a) Like Progressive, but at some point the higher rates actually
become lower than the preceding rate
b) Not Equality
c) A fairness of sorts – as wealthier will continue to pay more,
but experience a reduction of that burden after a certain
point
G. Day 4: Minimum Wage
1. Price equilibrium is the wage at which the number of jobs exactly
matches the number of workers willing to labor at that price
2. Quotes
a) “We stand for a living wage ... (one that allows the worker to)
secure the elements of a normal standard of living — a
standard high enough to make morality possible, to provide
for education and recreation, to care for immature members
of the family, to maintain the family during periods of
sickness, and to permit of reasonable saving for old age.” —
President Theodore Roosevelt
b) “If (a minimum wage increase) means very small increases in
prices — that we have heard a good deal about — and in costs
— and I believe it does mean increases in both — the
American people will accept this as a better answer than
denying human beings a decent wage.” — President Lyndon
B. Johnson
c) “When you raise the price of employment, guess what
happens? You get less of it. Why do we want to make it
harder for small employers to hire people?” House Speaker
John Boehner
(1) Ed Leamer: “This is model-driven thinking. For
opinions about the effects of minimum wages, the
model on center stage is a labor market supply and
demand model, which implies that minimum wages
cause reductions in employment. On minimum wage,
Republicans are model-driven thinkers.”
(2) “When you hear folks saying, well, if you raise the
minimum wage that’s going to be fewer jobs — it turns
out the states that have raised the minimum wage
have had faster job growth than the states that haven’t
raised the minimum wage.” — President Barack
Obama
(a) Ed Leamer: “This is like saying the sickest
people always get the most medicine, so the
medicine must be making them sick. We don’t
know which is cause and which is effect here.
Do higher minimum wages cause job growth,
or do places that have fast job growth raise
wages?”

3. Finding a good study design to collect data on the matter
a) Quotes
(1) Ed Leamer: “A lot of studies look at fast food. They
have a lot of minimum wage workers. But restaurants
have an escape valve that other industries don’t:
prices. They can raise prices (instead of cutting jobs)
to cover the additional costs (of a rate hike). Retailers
and manufacturers compete internationally and can’t
do that.”
4. Theories
a) “When you raise minimum wage, somebody pays. Maybe
employers cut jobs to cover the added costs. Or they pass on
those costs to their customers. Or maybe it just comes out of
profits. But that money doesn’t just appear out of thin air.”
― Edward Leamer
b) Monopsony: a sort of monopoly whereby the business has
buying power over labor rather than selling power over
buyers. Monopsony could be keeping wages lower than an
absolutely mobile work force would produce, meaning
employers forced to pay a higher minimum wage don’t feel
as much pain as theory would suggest.
(1) Regardless of any employer’s unnatural wage-setting
power, most economists believe the classical laws of
supply and demand take over at some level.Module 1 – Scarcity and Property Rights