Week 4 - Free Exchange and Wealth Creation

Day 1 - Getting Started

Use economic reasoning to evaluate the following statement: “The unemployment rate is high and therefore it is time to stimulate the economy! I propose that we use tax dollars to pay car dealers to destroy older cars and send them to the dump. This will cause people to buy new cars which will increase economic activity and put us on the path to recovery.”
It would be a waste to the physical benefits we already have before us.
A few days after the 2001 terrorist attacks on the World Trade Center and the Pentagon, economist Paul Krugman made the statement below. Use economic reasoning to evaluate his position.
He believes the big businesses spending to rebuild will have a positive impact on the economy.

Day 2 - Creating Jobs

Incentive Structures and Wealth Creation
1. What important lesson can we learn from government programs like the 1933 AAA legislation and the 2009 Cash for Clunkers that destroy valuable resources?
Destroying valuable resources doe not benefit the seller or buyers. As people cannot afford the newer stuff, and if there is no older stuff to sell the never items have to be sold for less than what its worth for any sales to be made. Hurting the economy.
2. While the employment supported by the government spending can easily be seen, what is often overlooked?
That the jobs provided need to be good productive jobs to benefit society.
3. What does the apocryphal story about an engineer visiting China illustrate?
That sometimes the importance of creating jobs is taken too far.
4. Will a higher level of government spending on “projects” increase employment and create jobs? Why, or why not?
Yes, it will create new jobs and opportunities, though they might be great ones.
5. What do we need to understand regarding the source of increasing prosperity in order not to become sympathetic to destructive public policies?
Economic success is proving as good or better products for less.
6. What is the relevant question we must ask in order to assess whether or not a government program has truly created jobs?
If the jobs created will generate wealth.

Creating Jobs vs. Creating Wealth by Dwight Lee

Day 3 - Opening the Markets

Competition and Innovation
7. What two conditions must be present in order for economic progress to occur in a market economy?
Opportunity and competition.
8. Aside from gains from trade as a source of economic progress, what are three other sources that generate economic growth?
Investments in physical and human (education, skills, training) capital improvements in technology improvements in economic organization
9. In a free market economy, who acts as the ultimate judge and jury on goods, services and business activities?
10. What is the “invisible hand” to which Adam Smith refers and what is the principle behind it?
the price system
11. What explains how the quantities of milk, bananas, candy bars, television sets, notebook paper and thousands of other items available in your hometown are approximately equal to the quantities local consumers want to buy?
market prices
12. In a market economy, what incentive is there for producers to keep costs down and quality up?
Lower cost = more profit. So high quality low cost

Day 4 - Finding Real Abundance

The Image of God and "Men Without Chests"
13. Which biblical commands inform us about our responsibilities to God as well as to our families and neighbors in the here and now?
The biblical commands are "1. Love God with your whole being [and] 2. Love your neighbor as yourself" (3).
14. What reason do the authors give for their claim that socialism has failed to improve living standards?
The authors say that socialism has failed to improve living standards "because it does not correspond to the motions of the human heart and soul. It is not socialism but economic freedom that most closely corresponds with our human needs and desires... real abundance is not found in a nation’s supply of gold and silver, but in the ability of its people to create and trade goods and services and to do so freely, driven by a desire to improve their own interest" (3).
15. According to Adam Smith, where is “real abundance” found?
According to Adam Smith, "real abundance is not found in a nation’s supply of gold and silver, but in the ability of its people to create and trade goods and services and to do so freely, driven by a desire to improve their own interest" (3).
16. Free-markets and true free exchange are economic displays of what biblical truth?
Free markets and true free exchange are economic displays of the biblical truth that as "creatures made in His image, we desire to relate to others, as well as to create and provide for ourselves and for others. Our sinful hearts will move us toward a naked individualism in which our self-interest devolves into selfishness...Yet such “individualism” does not satisfy, but rather leads to isolation and misery" (4).
17. The authors state, “Our present and deeply troubling economic realities are more the result of our moral failures than our market failures.” How do they explain this failure?
The explanation for this failure is that our "appetites have become much larger and stronger than the constraints of our souls. We prefer instant to delayed gratification. We are creating “men without chests,” as C.S. Lewis put it" (5).
18. What human institution is most responsible for producing the kind of people our markets require?
The human institution that is most responsible for producing the kind of people our markets require is the family.
19. Why does a free-market system require truth and honesty?
A free-market system requires truth and honesty because without "honesty, there can be no trust. And, without trust, there can be no vibrant system of trade" (6).
20. In the conclusion of the article, the authors state that the free-market system “cannot function strongly and fairly if our culture produces men without chests.” What do the authors mean by the term, “men without chests”?
The authors explain their meaning in the article: "Drawing from Plato’s idea that each person is governed by three sources—the thinking (head) rules the appetites (stomach) through moral strength (chest)—[C.S.] Lewis explains, “It is by this middle element that man is man: for by his intellect he is mere spirit and by his appetite, mere animal.” A market economy demands participants whose “chests” can govern both their minds and their stomachs" (5). In our current system of economics and morality, we are unfortunately producing "men without chests."

Morality and Economic Freedom by J.Daly and G.T. Stanton

Day 5 - Understanding the One Lesson

The Impacts of Secondary Effects
21. What fallacy states that destructive acts create employment?
The fallacy that states that destructive acts create employment is called "the "broken window fallacy"" (41).
22. What is Hazlitt’s “one lesson” of economics?
Hazlitt's "one lesson" of economics is "that when analyzing an economic proposal, a person: ...must trace not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences, and not merely the effects on some special group but the effects on everyone" (41).
23. According to Henry Hazlitt, what is the most common source of economic error?
According to Hazlitt, the most common source of economic error was the "failure to apply [his one] lesson" (41).
24. What was the result of not considering the impact of secondary effects in the case of fuel efficiency standards, sugar tariffs, and pencil stubs?
The result of not considering the impact of secondary effects of these cases is that prosperity is decreased. Jobs are lost, money is not used efficiently and effectively, and sometimes, even lives are lost.
25. What reason do proponents of trade restrictions most often give to support tariffs and import quotas?
Proponents of trade restrictions support tariffs and import quotas by arguing that U.S. jobs in the areas of interest will be protected, jobs will be saved, and employment will increase.
26. Do tariffs and quotas protect U.S. jobs? Why, or why not?
Tariffs and quotas do not protect U.S. jobs in the long run. Initially, tariffs "and quotas may...protect the U.S. workers who make similar products at a higher cost" (42). However, jobs in other areas will eventually be decreased. It is important to realize that there "may be more jobs in favored industries, but there will be less employment in others" (43).