Milton Friedman

“A society that puts equality – in the sense of equality of outcome – ahead of freedom will end up with neither equality nor freedom.”

CREATIVE DESTRUCTION

Creative destruction• Vinyl > tape > CD > iTunes > Spotify• Horses > bicycles > cars• Want ads > Craigslist• Newspapers > internet > twitter• Desktop > laptops > iPads/phones• College education > MOOCs?

MOOCs• Massive Open Online Courses

MOOCs• Massive Open Online Courses• Khan Academy reaches 10 million students a month;

delivered 300 million lessons

MOOCs• Massive Open Online Courses• Khan Academy reaches 10 million students a month;

delivered 300 million lessons• Supported by Bill Gates (MSFT), Google and Carlos Slim

(richest dude in Mexico)

MOOCs• Massive Open Online Courses• Khan Academy reaches 10 million students a month;

delivered 300 million lessons• Supported by Bill Gates (MSFT), Google and Carlos Slim

(richest dude in Mexico)• MIT (Massachusetts Institute of Technology)

OpenCourseWare: all of its educational resources on web for free (or nearly)

Freedom in the states• Examines

GOVERNMENT FUNCTIONS

1787

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

What is Dr. S. saying in this chapter?

What is Dr. S. saying in this chapter?• Most basic function is to provide law and order

What is Dr. S. saying in this chapter?• Most basic function is to provide law and order• Enforce contracts, ensure property rights, set standards,

provide safety, national defense

What is Dr. S. saying in this chapter?• Most basic function is to provide law and order• Enforce contracts, ensure property rights, set standards,

provide safety, national defense• How does law and order accommodate economic activity?

What is Dr. S. saying in this chapter?• Most basic function is to provide law and order• Enforce contracts, ensure property rights, set standards,

provide safety, national defense• How does law and order accommodate economic activity?• Reliable network of laws can translate into economic

prosperity… and the opposite is also true

Sowellian thought:

“...where government restricts its economic role to that of an enforcer of laws and contracts, some people say that such a policy amounts to ‘doing nothing’ as far as the economy is concerned. However what is called nothing has often taken centuries to achieve – namely a reliable framework of laws within which economic activity can flourish...”

President Obama thought

“...the Supreme Court never ventured into the issues of redistribution of wealth, and of more basic issues such as political and economic justice in society…”

President Obama thought“It didn’t break free from the essential constraints that were placed by the founding fathers in the Constitution, at least as it’s been interpreted and Warren Court interpreted in the same way, that generally the Constitution is a charter of negative liberties. Says what the states can’t do to you. Says what the Federal government can’t do to you, but doesn’t say what the Federal government or State government must do on your behalf...”

When Law and Order goes wrong…..

When Law and Order goes wrong…..• High levels of corruption are associated with lower growth

and lower per-capita income

What is corruption?

What is corruption?• “Corruption is the abuse of entrusted power for

private gain. It hurts everyone whose life, livelihood or happiness depends on the integrity of people in a position of authority.”

source: Transparency International

What is corruption?• Bribes• Nepotism• Crony capitalism• “Pay for play” political donations

Such as…• 80% of Obama administration’s $20 billion in ‘loans’ for

“green” energy went to Obama donors• Solyndra went toes up, costing taxpayers $535 million and

counting. Major investor: Obama supporter George Kaiser

• Fisker went room temp with $529 million in taxpayer “loans.” Major investor: Leo DiCaprio, FOB

Most corrupt nations?

Most corrupt nations• Somalia

Most corrupt nations• Somalia• North Korea, Afghanistan, Sudan, Myanmar, Uzbekistan,

Turkmenistan, Iraq, Venezuela, Haiti, Chad, Burundi

Least corrupt nations

Least corrupt nations• Denmark, Finland and New Zealand tied for first

Least corrupt nations• Denmark, Finland and New Zealand tied for first• Sweden, Singapore, Switzerland, Australia, Norway,

Netherlands, Canada

Least corrupt nations• Denmark, Finland and New Zealand tied for first• Sweden, Singapore, Switzerland, Australia, Norway,

Netherlands, Canada• U.S. was 19th

When Law and Order goes wrong…..• High levels of corruption are associated with lower growth

and lower per-capita income• Russia, 154th most corrupt nation, with its huge natural

resources, is a shell of what it could be

Why does corruption lead to poverty?

Why does corruption lead to poverty?• “The law’s delay...”

Why does corruption lead to poverty?• “The law’s delay...”• Bureaucrat ability to delay often means an opportunity for

bribes

Why does corruption lead to poverty?• “The law’s delay...”• Bureaucrat ability to delay often means an opportunity for

bribes• The lost opportunity for SRTHAU in businesses not

started, investment not made, jobs not created

Why does corruption lead to poverty?• “The law’s delay...”• Bureaucrat ability to delay often means an opportunity for

bribes• The lost opportunity for SRTHAU in businesses not

started, investment not made, jobs not created• Which means fewer goods and services... and less

prosperity

Opportunity cost• Wants are many, but scarcity is everywhere• Scarcity forces choices• Opportunity cost is what we pass up when we make a

choice• We have $100. We can spend it on dinner with friends.

Or we can buy stock. • You have two hours to spare. You can study for next

week’s test or veg out on TV.

Framework of Laws• Laws must be reliable, not changing depending on who’s

in power, or subject to loose interpretation

Framework of Laws• Laws must be reliable, not changing depending on who’s

in power, or subject to loose interpretation• Britain roared in 1800s because of the dependability of its

laws… didn’t fear their earning would be confiscated or dissipated in bribes

Framework of Laws• We see impact today when high-crime neighborhoods are

less prosperous than safer ones

Property Rights

Property Rights• Dr. S contends that property rights need to be assessed in

terms of their economic effects on the population as a whole, not just property owners

Property Rights• Dr. S contends that property rights need to be assessed in

terms of their economic effects on the population as a whole, not just property owners

• All of society benefits from strong property rights, even those with little property

Property Rights• Dr. S contends that property rights need to be assessed in

terms of their economic effects on the population as a whole, not just property owners

• All of society benefits from strong property rights, even those with little property

• Property rights create ‘self-monitoring, which is more effective and less costly than third-party monitoring

Property Rights, take II• “The only animals threatened with extinction are animals

not owned by anybody”

Importance of social order

Importance of social order• The honesty, reliability and cooperativeness of a society’s

people are key to promoting prosperity

Importance of social order• The honesty, reliability and cooperativeness of a society’s

people are key to promoting prosperity• How does the U.S. stack up?

Importance of social order• The honesty, reliability and cooperativeness of a society’s

people are key to promoting prosperity• How does the U.S. stack up?• ‘Radius of trust’ varies greatly

Importance of social order• The honesty, reliability and cooperativeness of a society’s

people are key to promoting prosperity• How does the U.S. stack up?• ‘Radius of trust’ varies greatly• Honesty is more than a moral principle, it’s a major

economic factor

Importance of social order• Rent control encourages people to cheat

Importance of social order• Rent control encourages people to cheat• When government rules promote dishonesty, it

discourages business and wealth creation

Importance of social order• Rent control encourages people to cheat• When government rules promote dishonesty, it

discourages business and wealth creation• Leads to “off the books” activity

External Costs & Benefits• There are certain costs and benefits that fall outside the

parties to a transaction. Examples?

External Costs & Benefits• There are certain costs and benefits that fall outside the

parties to a transaction. Examples?• Clean air laws, military defense, police, etc.

Ext. Costs & Bennies, cont• “…there are things that government can do more

efficiently than individuals because external costs or external benefits make individual decisions, based on individual interests, a less effective way of weighing costs and benefits to the whole society.”

Which bring us to…

Politics

Round up the usual suspects…..

Politics and economics• Inseparable in a democracy

Politics and economics• Inseparable in a democracy• Remember: government is comprised of people who act

in their own self interest

Politics and economics• Inseparable in a democracy• Remember: government is comprised of people who act

in their own self interest• Urge to “do something” or government by crisis… a plane

crashes, pass a law

Politics and economics• Inseparable in a democracy• Remember: government is comprised of people who act

in their own self interest• Urge to “do something” or government by crises… a plane

crashes, pass a law• Nothing forces politicians to take into account long-term

consequences of their actions

Scare-C.T.

Assignment 4/8• Read chapter 18: Government finance

Assignment 4/8• Read chapter 18: Government finance• We will have a section test on chapters 15, 16, 17, 18