10/12/2011 Class17

Simple laws can lead to unintended consequences
Example: minimum wage law intends to improve the workers' well being,but in fact it can exacerbate unemployment.
Employers just don't hire workers.For example,if the minimum wage is 10 bucks an hour, employer won't give the job to a worker who only worth 9bucks an hour.The worker's labor is wasted.It reduces production and exchange.

Government policies sometimes get the incentives wrong.
When you try to regulate a complex system with a simple set of rule, unintended consequences will happen.
Government officials have shortcomings: limited information,retarded response to instant change in market.
Example: Soviet Union has a controlled market,people have to wait a long line to get a loaf of bread while there are too many belts in stock to sell.What a waste.

When regulations push against the incentives,the incentives push back.People respond to the policy differently.


Argument: Capitalism is basically racist and sexist.
Fact: Government change people's incentives.
Example: minimum wage law and law to protect the disabled workers.

Task of economists is to identify who all the interested parties are whose cost will be changed from the rule.


Trade is not zero-sum.(Comparative advantage)
pie-fallacy:some people think that the world has a fixed amount of wealth,so the rich are exploiting the poor.
But imagine: Without Bill Gates,one of the most billionaire ever,will we be richer? Will we be better off without computer and internet?

Consequences of pie-fallacy: stagnation of economics growth; policy to give money from the rich to the poor,(That's disastrous. Poor people will get money without extra work,they will then work less,waiting for money;the rich will respond to the law: now I work and get less, I don't have incentive to work.);a small group of people have great power(think about Cultural Revolution in China)

Rich people actually produce more.
Example: We go to see Justin Timberlake's show and gain pleasure from it.Suppose 4million people each get a dollar of pleasure in one show.That means JT produce 4million bucks in one night. Rich get more because they produce more.