Seven Major Sources of Economic Progress Common Sense Economics James Gwartney, Richard L. Stroup, Dwight R. Lee, and Tawni Ferrarini Show Everything’s Amazing and Nobody’s Happy – discuss the importance of institutions and economic progress

Why Do Incomes Vary Across Countries? As illustrated here, per capita incomes of the United States and Switzerland are about fifty times those of poor African countries. Why are there variations in income across nations? Source: The World Bank, World Development Indicators

Questions to Consider Capital investments and new technology clearly contribute to economic growth and prosperity. What else is needed and what can governments add? How important are factors such as secure property rights, governmental policies and money of stable value? Why might institutions and policies influence income levels and living standards? Why do the incomes of people in some countries grow rapidly while the incomes of people in other countries stagnate and remain low? These are questions we will answer in Part II of the book.

Source #1 Legal System The foundation for economic progress is a legal system that protects privately owned property and enforces contracts in an evenhanded manner.

The Foundation for Economic Progress Private property rights grant the owner of property the right to buy, sell, or derive income from their land, natural resources, capital and entrepreneurial talent.

Property Rights Encourage people to use their property productively. Promote wise stewardship. Encourage people to develop their property in ways beneficial to others for possible exchange, transfer or sale. Promote the wise development and conservation of resources for the future. Once again it is all about incentives

Who wants to go fishing? Do the Goldfish activity to give an example of the tragedy of the commons and how property rights can fix it. 20

Tragedy of the Commons The commons exist whenever there is a resource, such as grazing land, a hunting area, or a fishing grounds, which is open to all. The problem of the commons refers to the absence of any automatic mechanism or incentive to prevent the overuse and depletion of the commonly-held resource. This is what we get when property rights are not clear or enforced.

Tragedy of the Commons When one person uses a common resource, he diminishes other people’s enjoyment of it. Creates a negative externality. Common resources tend to be used excessively. Government can impose a tax or regulate the use of the common resource or it can turn the common resource into a private good (privatize). 18

Examples of Common Resources Clean air & water Wildlife/wildflowers Public restrooms Oceans 19

What happened to the buffalo? 1870 – 14,000,000 1871 – 12,400,000 1872 – 7,500,000 1873 – 2,500,000 1874 – 1,500,000 1875 – 1,000,000 1876 – 700,000 1877 – 600,000 1878 – 525,000 1879 – 455,000 1880 – 395,000 1881 – 325,000 1882 – 245,000 1883 – 160,000 1884 – 70,000 1885 – 20,000 1886 – 5,000 1887 – 1,000 1888 – 500 1889 – 150 Source: F.G. Roe, The North American Buffalo (Toronto: University of Toronto Press, 1951)

Tragedy of the Commons The herds get smaller. The hunters shoot the buffalo. You better be quick and hunt them before someone beats you to the punch.

It’s All About Incentives The tragedy of the commons is solved by restricting access to the commons by assigning property rights Property rights – stops the tragedy of the commons by establishing the profit motive as an incentive to take care of property

Buffalo Today Government Managed Buffalo Privately Owned Buffalo about 20,000 buffalo – population kept at a steady level Privately Owned Buffalo Estimated over 500,000 in the U.S. on 4,000 private ranches Privately owned buffalo have been increasing about 25-30% a year 20

Key Elements of Property Rights Defined/transparent – everyone must know who owns what. Enforced – government must enforce contracts. Excludable – owner must be able to choose to prevent access to property Transferable – must be able to buy and sell property 20

Property rights of smoking have changed over the years. It used to be, “Would you like a smoke”? Then it became, “Do you mind if I smoke”?

Then it became, “Thank you for not smoking.” Finally, an outright Who has the property rights for air, smokers or non-smokers? It seems like we have given those rights to non-smokers. If that was codified and clear then smokers and non-smokers could negotiate (i.e. smokers could pay non-smokers to allow them to smoke in public places). Then it became, “Thank you for not smoking.” Finally, an outright ban on smoking.

Importance of Property Rights The market fails to allocate resources efficiently when property rights are not well established. The absence of property rights is a major problem in third world countries. Property can be used as collateral to get a loan – helps poor people get access to capital GDP of developing countries is understated by 50% due to lack of property rights (World Bank) 20

The U.S. Will Run Out of Oil! Or Will It? In which year(s) did experts predict that the U.S. would run out of oil in the near future? 1914 1926 1970s 2008 All of the above Answer: e

Why Have Doomsday Forecasts Been Wrong? When the scarcity of a privately owned resource increases, the invisible hand of the market takes over and prices rise. Buyers and sellers seek substitutes, discover ways to conserve, and innovate! Historically, competitive markets and flexible prices spur conservation, substitution, and technological advancement. And the “sky” never falls!