1. 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

2. 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

3. 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.

4. 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.

5. 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.

6. 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

7. 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

8. 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.

9. 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

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

12. 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)

13. 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.

14. 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

15. 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

16. 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

17. 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”?

18. 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.

19. 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

21. 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

22. 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!