hi everyone welcome back last lecture was uh just a general overview of the economic way of thinking and uh five assumptions that that we use when we're looking at the world around us the complex economy the complex society that we live in think of the global economy and the trillions of dollars worth of goods and services that are produced bought sold in markets and that's what we're trying to make sense out of what are the rules and the incentives and the policies that shape economic and social activity these are the kind of how do we coordinate our plans as everyday workers as consumers as as producers of simple products you know a box of kellogg's cereal to very complex products like the phone you own and all the parts inside the phone how did all that get coordinated and how did it end up in your hands these are the kind of questions that uh we'll be asking throughout the course of the semester and i want to finish up with chapter one with uh actually i'll start with the discussion that the textbook begins with in that chapter and uh you notice we have a a short discussion of of highway traffic and and the rules of the road economics is about actions choices consequences and it's also about interactions how you and i deal with each other how we work with each other uh how we how we get along with each other there's also issues of power and discrimination and a lot at work in a modern society whether it's here or elsewhere and so we want to focus on choices interactions and consequences and patterns of actions and results that unfold in society and so we start chapter one with a discussion of traffic and this is really interesting because it parallels first thing you think this has nothing to do with economics cars on the road well yeah people buy gasoline and so on they have pay insurance for their for their vehicles and all that but we're not talking dollars and cents here looking at highway traffic is an exercise in economics think about when we're talking about driving think about information signals this how an economist looks at things how do we coordinate our activities on the road my driving how do i coordinate it with maybe hundreds of other people who have never met who i don't know and who i really don't know what you're up to when you and i are on the highway or in the in the streets in town here's a safe assumption i don't want to get in a wreck you don't want to get in a wreck in an accident we want to get to our destinations we all may have similar destinations we're all going down down the road in this direction for now but then we turn here we turn there we stop we turn around whatever it might be so how are all these cars on the road coordinating as drivers how is each one of us coordinating our plans with all the rest of the vehicles on the road interactions we're talking about now right and the parallel with the economy is how do we coordinate all of our activities think of all the things that you buy in a week or in a month or all the things that i buy from my clothes to gasoline to food to to to books on amazon i purchased books whatever it might be how do we coordinate all of this and um similar as to how do we coordinate something simple like drivers on the road and in both cases we notice there's not a central plan there's not a central office guiding the economy that would be something more similar to socialism and there's not like a central source like a helicopter or a drone informing all the drivers what to do at every moment on the highway or driving through town here we are basically informing ourselves and we're also being informed whether we realize it or not we're often informing ourselves as drivers each one of us are informing others and we also have info obvious information signals as well so think about something like this highway and traffic in general works well in general because we have a whole host of information signals we have clues as to what we're going to do or what you're going to do next for example there's stoplights traffic lights think of that invention yellow red it's an information signal as i see i'm approaching the intersection at 35 miles an hour i see it turns yellow and i slow down i've been informed what to do next and you all are doing the same thing those cross traffic drivers receive and now get the signal of the green light and they proceed through the intersection so this is an information mechanism is it not it's a practice that we have by the way to be a driver you have to prove that you know the rules of the game the rules of the road that you understand them to stay a driver and not get a ticket you have to actually follow those rules of the road and we understand what a stop light is a stop sign etc so things like stop lights stop signs are information signals that allow us to to to accomplish what we're trying to do when we're in vehicles these are informing us uh think of like speed limit signs exit signs signs signals etc the us of our options oh the exit is coming up in two miles i better start getting into the right lane so i could you know reach that at that exit and get off the highway appropriately these are information signals as well so we can imagine all that signs announcements whatever it might be road congestion ahead might be on a highway or a tow way something like that but then also think about how each one of us whether it's intended or unintended that this is interesting how each one of us may inform others and what we're doing or what we're about to do next for example using the directional the blinker on the car i'm informing you i'm informing people behind me and maybe even people are facing me at that intersection i'm going to make a left i put on the left blinker that's an information signal i want to inform you some people don't use their blinkers that annoys me right i i feel you should be informing me and others but anyway the directional or the or the blinker is is relaying my intention to you i don't even know you i might not even care about you i might find you're a wonderful person i don't have time to get to know you i just want to inform you i'm going to make a right or a left here think of things like brake lights for the most part it's an unintended signal i'm simply trying to slow down and so i press the brake but it sends a signal to drivers behind me the same type of thing saying you better slow down too this the car ahead of me is slowing down it's time for me to slow down as well or switch lanes or something like that so brake lights are information terribly important information signals imagine if cars didn't have brake lights there'd be a lot more wrecks and so something like this reduces the number of wrecks and mistakes nothing's perfect but it reduces those incidences because we're informing others sometimes rarely but sometimes i use brake lights to purposefully let you know someone's riding fast behind me and i might tap the lights turning whatever they're a ball rolled out in the road whatever there might be a wreck ahead and i tap the brake lights to purposefully inform you hey i'm slowing down and buddy you better slow down too directionals brake lights etc and these things work remarkably well you got hundreds of thousands of people heading from the suburbs let's say into the city at work in the morning rush hour traffic you got the same number of people heading from their workplaces out into the country or the suburbs or wherever it may be you got people going in both directions all the time as well and wrecks happen often tragically they may be mistakes happen but think about every day the millions of people millions upon millions of people who are driving in our own country day in and day out through the night many people as well and it generally works and it works well without some central drone telling us what to do every step of the way we follow the rules of the game the rules of the road and we make interactions and adjustments based on the information that's being signaled in front of us interesting stuff this is economics it's about choices results consequences see something that's that's going to parallel what we're going to draw from when we're actually talk about the economy itself is how prices for goods and services serve as information signals no one is willing to build no profit seeker entrepreneur corporation is willing to build gold-plated buses it's not because it's physically impossible it's not because there's laws and regulations against it it's because they get price signals they get informed in the market gold is around two thousand dollars an ounce who is going to waste gold on making making school buses the people who are buying the school districts and so on who are buying school buses don't want to pay for that okay and so those producers are going to use other scarce resources steel and some steel paint and paint the buses yellow as opposed to you know coat them in some type of gold plating those prices serve as signals to help businesses whether small businesses or huge corporations calculate costs and benefits profits revenues and costs potential profits potential losses so that's where we're ultimately going with this but something that we all understand at least most of us understand is how the roadways operate and when you think about it now cars interacting with each other it gets we're taking an everyday mundane phenomenon and examining it through the lens of of rules choices information interactions and all that it gets it's it's yet another way of thinking about traffic and i want to show you something here's another information signal maybe uh maybe we should add it towards the top here where we talked about stop lights stop signs etc the center line the solid or the dashed line see on a highway that's an that's an institution it's a custom that we use in the u.s and it informs us there's a two-lane highway dash center line i'm heading in this direction you're heading in that direction speed limit says 55 miles an hour that's a rule of the game is it not but even some rules are there's some wiggle room in those rules a lot of us drive over 55 miles an hour don't we maybe 60 62 some of you might drive 70 in a 55 mile an hour zone uh in town it might be 40 miles an hour i've on campus i think it's 20 miles an hour i've seen countless students driving intentionally over 20 miles an hour on campus the enforcement of the rules of of of the road uh there's some wiggle room the police might give you five six miles an hour over the speed limit and we tend to understand that and so we have an incentive in fact to drive a little faster then legally and officially we are allowed we're breaking the law but we understand that that you know cops aren't going to nail us exactly at at 21 miles an hour when the speed limit is 20 at least they typically don't but they might pick on some drivers systemically at any rate center line i'm i'm driving 60 miles an hour they're driving 60 miles an hour the last thing we want to do is face a collision and think of this information signal this custom of the dash center line and it allows us to successfully yes there are wrecks but 99.9 of the time there aren't how valuable that center line is and here's something interesting those who are from the area probably or might already know this where was the center line first created it was created in the us we created the automobile industry so it's no surprise that we someone came up with the idea of a center line they didn't always exist and do you know where the first center line was created in marquette county on the old road between marquette and nagani if you take if you're heading out of out of town uh there's the there's the pizza hut and you make a left at pizza hut and you drive about two miles a few minutes and this is the old road to nagani nagani marquette negones to the west and you make that left that pizza hut and you go about i don't know five minutes six minutes something like that maybe maybe two miles and there's going to be a marker and historical marker and at least allegedly that is where the first center stripe was created eupers did it can you believe that and that simple idea has now been used on roads and highways not only throughout the u.s but throughout the world now think of the billions upon billions upon billions of accidents that did not happen as a result of this simple invention this simple custom that all of us recognize learn and try to fit ourselves within that particular role of the game so it's really interesting this the simple practice here has allowed us to interact with each other as drivers in an extremely productive and successful way so this is why we start out the book and if you could understand that then your several steps along with understanding something much more complex than driving on roads with other drivers we could begin to understand something as complex as our 20 plus trillion dollar economic system and the customs and practices and information signals that lead to its coordination over time and distortions in those signals perhaps that can lead to the deterioration of the economic system or parts of the economy affecting some groups here other groups there we could understand how how the system works to coordinate driving plans or production consumption plans and once we understand that get our hands on that we could begin to understand how coordination might break down in society people thrown out of work here a recession unfolds throughout the country our question first is how the heck can our economy go on day after day week after week month after month year after year once we understand that we can understand how maybe something like a shutdown or federal reserve unintended consequences of federal reserve policy might lead to a breakdown a recession in the economy it's like to first understand uh say how cancer affects the human body we have to have a really good idea of how the heck can the human body work successfully to begin with right and once we get that how the organs and all that work together as a as a whole unit ultimately once we understand it's working successfully then we can understand how odd you get this group of cells in the body and it begins to break down certain organs certain systems within it so first we understand a successfully functioning organism or economy instead of markets in our case and once we got our hands on that we could begin to understand how markets might not work well or break down or whatever it might be the other thing i want to talk about is is economics i said it studies choice and unintended consequences economics is not mere opinion sociology as a discipline is not mere opinion only opinion anthropology is not mere or only opinion now i know i could i don't have to convince you that physics and biology and astronomy and so on aren't mere opinion their sciences right we call them the hard sciences they deal with hard data and so on easy to test and that well economics is a social science like like say sociology political science aspects parts of psychology um and what we're not i'm not giving you my opinion on whether on whether stoplights help inform us of what to do at intersections or not that's my not my opinion and you know what i said is just as good as what anyone else might say about it i'm using a particular framework a way of thinking to say ah see how this works how when people are informed they tend to slow down they tend to do this or that see how the system is connected the system of drivers and all of that what i want to say is economics is a theory a scientific theory so is physics so is astronomy so is molecular biology and as a theory we see cause-and-effect explanations of the world around us physics does that astronomy does that so does sociology so too is economics in our theory our claims about whether it's information signals on the highway or claims about i mentioned i think in the last lecture minimum wage right some people believe that minimum wage will actually systematically improve the lives of all the working lower income masses they're working with a theory they think a 20 an hour minimum wage will indeed improve the well-being of these folks because they'll receive a larger paycheck over the course of the week and so on and so forth they'll be able to purchase more things that they can't currently afford they're working with a theory cause and effect well we could test that claim in the real world and see if it really works that way whether you know i'm just mentioning minimum wage but but this this is true of any rule institution policy and so we see cause and effect explanations and we don't want to be fooled by data alone data never speaks for itself data empirical evidence always has to be interpreted it has to be explained we use data to in fact support a theory aha and hypothesis but the data doesn't speak for itself and what we've got to watch out for i mentioned this briefly in chapter one as well we got to watch out for statistical correlations alone every time this happens event a event b follows uh every time the fed lowers interest rates whatever that means we'll explore that of several weeks from now when the fed uh lowers interest rates um this stimulates economic activity let's let's say that's the case well economists have a theory of framework to show exactly how and why lowering interest rates here lead to more business investment there that it's not an accident or even better is is not simply a coincidence that the central bank lowering interest rates leads to these consequences okay that there's a causal reason to believe it think of this let's say i set my alarm an hour before the sun rises let's let's say i do that every day of the year so my alarm goes off in the morning and lo and behold an hour later the sun rises and let's say that happens a hundred percent of the time first the alarm then the sunrise none of us because we understand astronomy and alarm clocks on the phone none of us would think because the sun always rises after the alarm goes off none of us would think that the alarm going off caused the sun to rise it's a correlation right it's a coincidence one always follows the other but the alarm going off does not cause the sun the effect to rise we all understand that but when we're looking at society whether it's as sociologists political scientists economists we're looking at society there's a lot of correlations there's a lot of coincidences and we might be fooled if we're not working with a clear theory of cause and effect we might think well we see this out there in the world and this always unfolds therefore this caused that to happen we we don't want to be fooled by data alone and so anyway just as a brief discussion here economics is a theory about choices and interactions and all of that and we're going to use that theory to explore the real world around us the patterns of change economic growth economic decay industries rising in some areas industries being destroyed in other areas think of the what the pc the personal computer did to the typewriter industry it destroyed it and we're going to have a theory economics a theory of cause and effect to explain how innovations in this sector of the economy generated losses and therefore shutdowns and other sectors of the economy so there's a lot going on but anyway economic theory is is more than a matter of opinion now i might have an opinion on what i think we should do as policy makers and i might have advice on what what i think they should do with regulations in this industry or that so i might have opinions on the matter but the opinions are guided by an underlying scientific theory and that's what we're going to be exploring this this semester um and so we'll really begin to develop our theoretical analysis starting in chapter two chapter one is just an overview and you're going to find that economic theory is a lot of outside the box thinking a lot of my economist colleagues say all economics is really just common sense and i don't think that's the case i think there there is a bit of common sense in economics but there's also some some uncommon sense in our theory we think outside the box quite a bit and we'll see how that develops as we continue through the semester thanks