Chapter 5: Things you learn in this chapter are, Why you need institutions in society, but not in the Robinson Crusoe scenario to deal with scarcity. The difference is that in society you cant take something from someone to achieve our goals. In the Robinson Crusoe scenario Robinson Crusoe is the only one on the island. He can take what ever he wants, because it isn’t owned by somebody else yet. The three main institutions that deal with scarcity are: capitalism, socialism and a mixed economy. Capitalism is based on private property. In capitalism there is no single organisation that owns the economy as a whole. People can own private property and do a lot with it, with very little regulations that limit it. Capitalism also had free enterprise, anyone could enter any kind of job they wanted. In socialism the government decides what everyone produces. No one except the government and maybe the friends of the government own private property. Then in a mixed economy, people can still have private property, but the government can make rules about what they can do with private property.
Chapter 6: In this lesson you learn about direct exchange and barter, why people trade with each other. How prices are formed in barter or in other words direct exchange. The reason why people trade is, because the trade should benefit them. You would not trade for something that is worse than what you already had. This is true if you’re trading with somebody else and nature. Direct exchange is when you trade for something that you plan to use in the future. Indirect exchange is when you trade for something you don’t plan to use, but trade it away for something else you do wan’t. In barter there is no money that you trade there is only the two goods. Instead of buying a apple with $2 you trade a apple for a banana. In barter you are a buyer and a seller. In the previous example you are the buyer of apple and a seller banana. Prices in barter depend on holdings preferences, but in real life even if you might have predicted what might happen there is always a chance on something else happning. In other words economic logic doens’t always tell what will happen in an exchange. The outcome of the exchange might change depending on how many people are in the exchange.
Chapter 7: In this lesson you learn the disadvantages of direct exchange and why indirect exchange is better. You will, also learn why indirect exchange is better with money and where money came from. In direct exchange you can only trade for something you will use, which means you can’t trade for something you’re going to trade to someone else later. For example if you wan’t a banana for breakfast and you sell apple’s you have find somebody on that particular day who sells banana’s and want’s apple’s for breakfast. The chances are pretty small, but it get’s even harder. With bigger items, like a boat it is almost impossible to find somebody who’s willing to buy a boat for 10 pounds of bacon. It is almost impossible to build big items, like cars, boats and plane’s. IF the economy is only with direct exchange people will have to specialize in certain jobs, like fishers butchers and farmers.
In indirect exchange without money if you can’t find somebody willing to buy your apple’s for banana’s you can ask the banana seller what he wants. Let’s suppose the banana seller wants nails or bread. Now you have to find somebody who want’s apple’s and sells either bread or nails. Indirect exchange without money increases your chanses of getting what you want, but you’ll have to remember what everyone wants for only just one trade.
With money it becomes way easier, because almost everyone will accept money, but money can only be certain things, because money has to be: durable, easy to transport, divisible and convenient market value. The reason gold is conciderd as money is, because it’s scarce, it is durable, easy to transport and convenient market value. The reason cows are not money, because to be able to buy something you will need a lot of cows and cows are not easy to transport. Money didn’t come from somewhere it slowly developed as time went on.
Chapter 8: In this lesson you learn about the division of labor, aka: specialization. You will also learn about the productivity of labor and the difference between absolute advantages and comparative advantages.
Specialization is really important, because without it people would have to make everything by themselves. This is chaotic and almost everyone would die. The reason this happens is because of productivity of labor. There are a few ways to increase productivity of labor, like saving and investment. There is also another way to increase productivity of labor, which is division of labor. Productivity of labor means how much stuff you can produce or how many times you can do your service in a certain amount of time.
Division of labor means that instead of you doing everything yourself you specialize in one task. For example, imagine that you live in your five person community. Instead of doing everything yourself you become the painter. Your friend becomes a butcher. There is also a farmer, a dentist and a furniture builder. This way you increase the total amount of productivity of labor a lot. You can paint more houses if you specialize in painting, instead of doing everything yourself. So if everyone specializes you’re all better of than if you wouldn’t have done so. Another reason why productivity of labor is better when you specialize, is that you don’t have to spend time switching between tasks.
In the division of labor there is the comparative advantage and the absolute advantage. I’ll explain the difference in an example. For example: if Bill is good at painting houses and Kate is good at making furniture that is neither a absolute advantage, but they do have a comparative advantage. But if Bill learns how to make furniture faster than Kate. Then Bill has the absolute advantage, which means that Bill is better than Kate in both tasks. Kate has the absolute advantage in neither tasks, which means that Kate is slower than Bill in both tasks. A comparative advantage means the task that you’re better in. Bill’s comparative advantage is painting houses. Bill can paint houses better and quicker than he can make furniture. The opposite is true for Kate.
Chapter 9: In this lesson you learn, why entrepreneurs are important in a free market economy, why competition is good in a free market economy and why workers get paid the price what they produce due to competition.
The entrepreneur is a person who has a idea of what could be added to the market and tries to make it a reality. if it works out the entrepreneur succesfully judged what the consumers want. The entrepreneur drives the market economy forward by creating new jobs, and if the entrepreneur judged correctly, also inventing a service or product that the consumers wants. The entrepreneur hires workers, buy’s raw materials, land, equipment, maybe electricity and semi-finished goods. The entrepreneur tries to make a successful business. You make a successful business by keeping your expenses low and your revenue high. Expenses is money that the entrepreneur spends on labor, raw materials and other inputs. Revenue is money the entrepreneur earns from consumers buying his products. If the expenses are higher than the revenues the entreprenuer makes a monetary loss. If the revenues are higher than the expenses the entreprenuer makes a monetary profit.
Competition drives entrepreneurs, to have lower prices than their competitors, but not too low that you don’t make any monetary profit. It also makes entrepreneurs keep improving or making new products. One more thing that competitions makes entrepreneurs do is to pay workers a higher price than their competitors.
Competition allows workers to get paid what they produce. This is so, because if you underpay the worker a competitor can offer a higher wage to win over the worker. If you want to keep the worker give them a higher wage, but don’t make it too high that the task the worker does is more epensive than the product.
The best way of determening if you should get a new worker is to see if the task he will do makes more money than you pay the worker. For example if you sell banana’s and each banana is worth $ 1. With a new worker you can get 20 banana’s per hour. You can pay him up to $ 20. The next worker you get can only get 10 banana’s, which means you can pay him up to $ 10 and so on.
As preparation for the exams I read, watched and listened to the following supplementary materials:
- Listen to mises.org/media/1367 (capitalism our benefactor- DiLorenzo)
- Ralph Laico – liberalism video 1 + 2- mises.org/media/4358
- Read Economics for Real People + chapter 4
- Barter game with Pappa and my brother, we used candy to better understand how our preference rankings impact exchange
- Watched Doug French video on Money on mises.org/media/4286
- Read Bob Murphy’s article on “the origins of money and its value”, mises.org/daily/1333
- Read “Economics for real people” chapter 5
- Simulated economy game with Kim and my brother.
- Read Man, Economy and State, p 187-198
- Watched “the private supply of money” video at mises.org/media/3037
- Read R.A. Radford, “The Economic Organization of a P.O.W. Camp,” Economica vol. 12, 1945, available at http://icm.clsbe.lisboa.ucp.pt/docentes/url/jcn/ie2/0POWCamp.pdf
- Read Bob Murphy’s article on “superman needs an agent”, mises.org/daily/2242
- Read “Economics for real people” chapter 6
- Read Man, Economy and State, p 95-102
- Read “Economics for real people” chapter 7
- watched Jeffrey Tucker’s video on “Technology and social change” on mises.org/mediaplayer.aspx?Id=4990
- Watched R.Q. Grant’s video on “Tom Smith and his incredible bread machine” at youtube.com/watch?v=ycGRERrGsMo
- Watched Tom Wood’s video “myths and facts about big business” at mises.org/media/1887
- Read Human Action, p 269-279 (the sovereignty of consumers & competition)
- Watched Thomas DiLorenzo’s video about “Competition and Monopoly” at mises.org/media/4356