Economics for Leaders Lesson 1: Scarcity & Economic Growth

Economics for Leaders Hypothesis for the Week: Human prosperity and social cooperation develop spontaneously in societies that protect private property rights and encourage voluntary trade.

Economics for Leaders Why Should We Care?

Economics for Leaders For Whom Should We Care?

Economics for Leaders That is... Human prosperity & social cooperation Develop spontaneously In societies that – protect private property rights and – encourage voluntary trade

Economics for Leaders Low, Middle, & High Income Nations A Question worth pondering: Why are some peoples rich and others poor?

Economics for Leaders More questions to ponder Can the poor become rich? – China Can the rich become poor? – Zimbabwe How does one get from poor to rich... and avoid going from rich to poor?

Economics for Leaders ERP-5: Understanding based on knowledge and evidence imparts value to opinions. Opinions matter and count equally at the ballot box. But on matters of rational deliberation the value of an opinion is determined by the knowledge and evidence on which it is based. Statements of opinion should initiate the quest for economic understanding, not end it. Economic Reasoning Principle #5: Understanding based on knowledge and evidence imparts value to opinions.

Economics for Leaders Our mission: To scrutinize our hypothesis (Human prosperity and social cooperation develop spontaneously in societies that protect private property rights and encourage voluntary trade ) based on – reasoning – evidence If you are not uncomfortable, you are not conscious... so let’ s go!

Economics for Leaders Scarcity We live in a world in which there are – Limited resources – Unlimited wants The combination is called scarcity – “Everyone” (even Mother Teresa!) has unlimited wants – “Everyone” (even Bill Gates!) has limited resources Scarcity is NOT optional: everyone faces it

Economics for Leaders Choice, cost and conflict Because of scarcity, we (and Bill and Mother T) must make choices – More of “this” means less of “that”: a cost is incurred – What shall we choose to have? – Who shall live, and who shall die? Hence, a world of scarcity is a world of conflict

Economics for Leaders Competition and Institutions Competition is the process by which conflict is resolved You all want A’s in school, but not all will get them; how to we resolve this conflict? – 100 yard dash – Beauty – Cash – Exam performance How do these rules shape incentives—the positive and negative consequences of action? The nature of this competition is shaped by the institutions of our society

Economics for Leaders Institutions and Incentives Institutions are – the formal and informal “rules of the game” that shape incentives and outline expected and acceptable behavior in social interaction Institutions determine whether the competition is – Peaceful and cooperative – Violent and non-cooperative What role do institutions play in... Dating

Economics for Leaders Standard of living Defined as “output per capita” This simply means – The total amount of goods and services – Divided by the number of people consuming them “Output” is not just BMWs and YSL – Properly accounted for, it includes everything that contributes to human well-being— freedom, security, clean water, clean air, nice views, etc.

Economics for Leaders Economic Growth Economic growth is a rise in the standard of living – Growth does not eliminate scarcity – But it does affect the choices we are able to make – And it alters the level of well being we experience

Economics for Leaders Productivity Productivity is – output produced from a given set of resources in a given period of time Economic growth occurs because productivity rises Hence, we are interested in this crucial question: – What determines the productivity of resources?

Economics for Leaders Key source of productivity growth Innovation—the development of new ways to use resources—is essential to growth Innovation has enabled growing population and rising standards of living For a simple example, consider the tractor

Economics for Leaders Hours to plow a 40-acre field 4-horseFarmallFarmallDeere team F

Economics for Leaders ~1750 Population Growth and Important World Events

Economics for Leaders Progress and poverty This rising population has been accompanied (many places) by a rising standard of living The improvements in living standards have been across the board—in those nations where growth has occurred That is, where the rich have gotten richer, the poor have gotten richer too.

Economics for Leaders Economic Growth improves the lives of the poor by making the pie bigger Bigger “slices” mean higher standards of living

Economics for Leaders This stunning decline in poverty has been made possible by three key institutions

Economics for Leaders Key institution Rule of Law – Consistent legal arrangements applied uniformly encourage long-term investment – Result: outcomes don’t depend on force or on the personalities of power

Economics for Leaders Key institution Property Rights – Human rights to use and exchange property – Rights of ownership facilitate trade, raise wealth – The most fundamental property right: The right to self

Economics for Leaders Key institution Open Markets – Trade creates wealth – Can people freely enter and exit markets in response to opportunities and challenges?

Economics for Leaders Capitalism, growth, and prosperity The extent to which these institutions are present is a measure of economic freedom or “capitalism” – So, strong property rights, rule of law, and open markets makes a nation “capitalist” – Weak property rights, rule of man or force, and closed markets makes a nation “anti-capitalist” Capitalism supports and promotes both entrepreneurship and innovation – Which in turn promote economic growth – The result is higher standards of living at all points in the income distribution

Economics for Leaders Economic Growth Growth is – Not even across times and countries – Not automatic – Not irreversible BUT! It is the most powerful weapon against poverty ever discovered! (to be continued tonight....)

Economics for Leaders FINIS... for now...

Economics for Leaders Country United States ,8064,0919,56115,03018,57723,20128,403 Canada ,3302,9117,29112,05016,17618,87222,366 France ,5972,8765,27111,66415,10618,09321,277 Japan ,1801,9219,71413,42818,78921,051 United Kingdom7141,2502,3304,4926,93910,76712,93116,43020,159 Germany ,4282,9853,88110,83914,11415,92918,982 Italy1,100 1,3501,7853,5029,71913,14916,31318,786 Mexico ,3662,3654,3206,3206,0857,249 Brazil ,6723,0575,1984,9235,556 China ,0611,8713,421 India ,3091,885 Total Africa ,3551,5381,4491,474 World Per Capita REAL GDP: Source: GDP data from Angus Maddison, "Historical Statistics of the World Economy: AD.“

Economics for Leaders