1. Modern Principles Microeconomics and Macroeconomics Tyler Cowen and Alex Tabarrok See the Invisible Hand Understand Your World

2. From Marginal Revolution to Modern Principles Marginal Revolution, daily blog written by economists Tyler Cowen and Alex Tabarrok. –New posts every day for the last seven years. –Eclectic: economics, politics, science, art and much more. –One of the most popular blogs on the web. Lessons learned from writing MR. 1.Get to the point! 2.Entertain as well as educate. 3.Make economics come alive. Videos, powerpoints, experiments, and blog posts that are especially relevant to teaching principles of economics are collected at SeeTheInvisibleHandBlog.comSeeTheInvisibleHandBlog.com

3. The Romance  Roses in February in Chicago. Quite incredible. Where do the Roses come from? Not from nearby greenhouses!

4. Bloemenveiling photo by Wilfried Overwater.

5. Markets are Cooperative  A rose is a truly international product.  The market for roses links romantic Americans with South American flower growers, Dutch clocks, Finnish cell phones, Colombian coffee (to keep the pilots awake) and much more.  Hundreds of thousands of people from Ecuador to Chicago cooperated to bring the rose to our handsome young man and they did so voluntarily, on the basis of self interest, and without central direction - this is the invisible hand in action.

6. Markets are Creative  When oil was cheap roses were grown in heated greenhouses in NY and PA.  A rising price of oil in the 1970s was a signal to entrepreneurs to look for ways to use less oil so they could reduce the costs of growing roses.  Entrepreneurs discovered that transporting millions of roses thousands of miles was cheaper and greener (!) than growing them locally so rose production moved to Ecuador, Colombia, Kenya, Thailand and other countries with warmer climates.

7. Markets are Connected  Markets are connected in a complex web.  When one price changes every other price responds as entrepreneurs recalculate and reconfigure to help solve the “great economic problem” of producing as many valuable goods as possible from our limited resources. Map of the World Wide Web ( Barrett Lyon OPTE Project )

8. Modern Principles: The Rose  The rose is a symbol of worldwide cooperation.  The story of the rose demonstrates the power of trade and the creativity of entrepreneurs as they respond to the dual role of prices as signals and incentives.  The rose illustrates the invisible hand – how markets generate cooperation and coordination around the world.

9. The Role of Prices A Price is a Signal Wrapped Up in an Incentive

10. Understanding the Price System

11. Understanding the Price System With Price Controls 1.Shortages 2.Reductions in product quality. 3.Wasteful lines and other search costs 4.Loss of gains from trade 5.Misallocation of resources

12. Understanding the Price System with Price Controls

13. Reading the Price Signals  In January news organizations reported that cold weather was increasing the price of oil and related products such as gasoline.  At the same time the WSJ reported that the February futures price of oil—the price for oil to be delivered one month in the future--was falling because of expectations of warmer weather. Cold Temps Drive Higher Prices At Pump WHIOTV, Jan 13, 2010 OIL FUTURES: Crude Falls As Temperatures Rise The Wall Street Journal, Jan 12, 2010

14. VS The Use of Information in Markets Roll, Richard. 1984. Orange Juice and Weather. American Economic Review, 74, 5, 861-880.

15. From “The Use of Information in Markets” to Information Markets or Hayek to Hanson Friedrich Hayek Robin Hanson

16. Iowa Electronic Market 2008 Presidential Candidates $0.63 $.37 One “Obama share” pays $1 if Obama wins. Nothing otherwise. One “McCain share” pays $1 if McCain wins. Nothing otherwise. Prices On August 8, 2008

17. Prediction Markets are Now Widespread Prediction markets are about harnessing the amazing ability of markets to aggregate and summarize information. Prediction markets are not miraculous but they do tend to outperform other prediction mechanisms such as expert opinion or polls. Prediction Markets (click)

18. Seeing the “Invisible Hand” throughout Principles of Economics

19. The True Importance of the P=MC Condition of Profit Maximization

20. A How to Minimize the Total Costs of Corn Production Across Two Farms Increase in Costs Savings C = A-B Decrease in Costs $ 200th unit Cost of Producing 200 th Unit MC 1 Quantity (Bushels of Corn) 0 25 $ Farm One MC 2 Quantity (Bushels of Corn) 200 175 $ Farm Two C B

21. MC 1 0 40 Quantity (Bushels of Corn) $ MC 2 160 Quantity (Bushels of Corn) $ Farm One Farm Two To Minimize Total Costs Set MC 1 =MC 2

22. Pat Sets P =MC 1, Alex sets P =MC 2 as a result MC 1 =MC 2 A Much More Difficult Problem $2.50 Price of Corn MC 1 0 40 Quantity (Bushels of Corn) $ MC 2 160 Quantity (Bushels of Corn) $ Pat’s Farm Alex’s Farm

23. Price of Corn MC 1 0 40 Quantity (Bushels of Corn) $ MC 2 160 Quantity (Bushels of Corn) $ Pat’s Farm Alex’s Farm Pat Sets P =MC 1, Alex sets P =MC 2 as a result MC 1 =MC 2

24. MC 1 0 40 Quantity (Bushels of Corn) $ MC 2 160 Quantity (Bushels of Corn) $ Pat’s Farm Alex’s Farm Pat Sets P =MC 1, Alex sets P =MC 2 as a result MC 1 =MC 2 Price of Corn

25. MC 1 0 40 Quantity (Bushels of Corn) $ MC 2 160 Quantity (Bushels of Corn) $ Pat’s Farm Alex’s Farm Pat Sets P =MC 1, Alex sets P =MC 2 as a result MC 1 =MC 2 Price of Corn

26. MC 1 0 40 Quantity (Bushels of Corn) $ MC 2 160 Quantity (Bushels of Corn) $ Pat’s Farm Alex’s Farm The True Importance of the P=MC Condition is P=MC 1 =MC 2 …=MC N Price of Corn $2.50

27. Institutions and the Invisible Hand The invisible hand does not operate in a vacuum. It is a product of institutions such as:  Property Rights.  Competitive and Open Markets.  A Dependable Legal System.  Honest Government.  Political Stability.

28. A Natural Experiment Let’s compare two countries with the same culture, the same people, and the same history but one of these countries has none of the institutions necessary for the invisible hand to operate and one of the has all of them (at least to some degree.)

29. Seeing the Invisible Hand from Outer Space!

30. Institutions and the Invisible Hand The invisible hand does not operate in a vacuum. It is a product of institutions such as:  Property Rights.  Competitive and Open Markets.  A Dependable Legal System.  Honest Government.  Political Stability.

31. Property Rights and the Free Rider Problem In 1949, the Communists under Mao abolished private property in China. In the “Great Leap Forward” (1958-61) farmers were put to work on collectives of up to 5,000 families. The result was mass starvation.

32. “Families boiled tree leaves, bark and any edible wild plants; we ate whatever we could find.” Yan Junchang, Xiaogang Village “…After consulting with some other villagers, I made up my mind to contract land to individual households no matter what penalty would be imposed on me. We didn't want to starve anymore.” Yan Junchang, Xiaogang Village

33. The Heroes of Xiaogang Village In 1978, farmers from 18 households in Xiaogang Village risked their lives by secretly ending land communism. Instead of collective ownership the villagers divided the land by household. Each household would deliver a quota to the government but they would keep whatever remained. A clause in their secret contract translates “If any word about this is divulged and one of us is put in prison, other team members shall share the responsibility to bring up his child till he or she is 18.” Farmers from 18 households signed a secret life-and-death agreement with their thumb prints. China Today.

34. The Second Chinese Revolution Under the “household responsibility system” output in Xiaogang village increased by a factor of 6 from 15,000 kg to 90,000 kg. Per capita income went from 22 yuan to 400 yuan. The household responsibility system spread rapidly and by 1982 became the official system. China’s second revolution had begun. A sculpture in Xiaogang Memorial Hall commemorating the secret beginning of China's rural reform.

36. World History: 1820-2007 in in 32 Seconds

38. Seeing the Invisible Hand Worldwide cooperation and coordination (roses, pencils, snickers!). The importance of the price system (not just single markets). The dual role of prices as signals and as incentives. The “use of information” in prices illustrated with information markets. The minimization of the total costs of production as a result of profit maximization. –A product of human action but not of human design! The operation of the invisible hand depends on institutions. Over time the operation of the invisible hand has enormous effects on the standard of living.

39. Modern Principles Microeconomics and Macroeconomics Tyler Cowen and Alex Tabarrok See the Invisible Hand Understand Your World