Reading: Lesson 3 – The Rules of the Game

Description:

The rules of the game, or institutions, influence the choices people make. The laws, customs, and culture are examples of institutions that influence our behavior. Economic growth occurs when institutions promote and encourage entrepreneurial activity. Areas of the world where poverty still exists today largely lack the institutional incentives that encourage economic growth.

In this lesson, students will watch and discuss a video about institutional changes that contributed to the dramatic rise in wealth over the past 150 years. Next students will read and discuss an article about how changes in people’s attitudes may be responsible for igniting economic growth. Finally, students will play a game which illustrates the tragedy of the commons and emphasizes the importance of property rights.

 

Time Required:

45 min

 

Required Materials:

Internet connection, writing instrument 

 

Prerequisites: 

Module 3 –How Can Entrepreneurs Use Economics to Make Better Decisions?

6.3.A – Watch and discuss the following video using the questions below to guide your discussion [10 min]:

Video:(Learn Liberty, 3:18 min)

“Throughout the history of the world, the average person on earth has been extremely poor: subsisting on the modern equivalent of $3 per day. This was true until 1800, at which point average wages—and standards of living—began to rise dramatically. Prof. Deirdre McCloskey explains how this tremendous increase in wealth came about.”

Discussion Questions: Why Does 1% of History Have 99% of the Wealth?

1.  According to the video, what are some ways to promote economic growth and reduce poverty?

1. Professor McCloskey explains why wages and living standards suddenly became so much better after the 1800’s: “Two changes in Holland and England in the 1600’s and 1700’s which was a rise in economic liberty and social honor for inventors, merchants, manufacturers. Prior to 1800, these were dishonored occupations.  After 1800 they became honored and out of that became a tremendous burst of innovation that had been earlier discouraged because they weren’t free and they weren’t honored.”
2. Encouraging social honor & good attitudes towards entrepreneurs, inventors, manufacturers and business people would encourage innovation and entrepreneurship, increasing standards of living in society.

 

2.  Why have some countries become rich while others stayed poor?

1. Some countries have limited economic freedom due to protectionist policies such as tariffs, subsidies, restricting competition, & trade embargoes as well as discouraging or not allowing small businesses, trade or innovation in the marketplace.
2. These protectionist policies limit technology, innovation, cause unemployment and lower consumption and the range of goods and services available to people living in these countries.
3. Lack of enforced property rights discourage people from being innovative or producing more since they have no incentive to keep what they earn.

 

6.3.B - Read the following article using the questions below to guide your discussion [20 min]:

Article: Liberty and Dignity Explain the Modern World: An Essay Based on Bourgeois Dignity: Why Economics Can't Explain the Modern Worldby Deirdre McCloskey and with an Introduction by Tom Palmer (deirdremccloskey.com)

“In this essay, the economic historian and social critic Deirdre McCloskey argues that the growth of modern capitalism and the world it made possible cannot be adequately explained by "material factors," as generations of historians have sought to do. It was a change in how people thought about business, exchange, innovation, and profit that created modern capitalism and liberated women, gay people, religious dissenters, and the previously downtrodden masses whose lives were brutal, painful, and short before the invention and commercialization of modern agriculture, medicine, electricity, and the other accessories of modern capitalist life.”

Discussion Questions:  Liberty and Dignity Explain the Modern World

1.  According to the author, how did progress, the industrial revolution, and modern society come to be?

1. “Economists and historians are starting to realize that it took much, much more than theft or capital accumulation to ignite the Industrial Revolution-it took a big shift in how Westerners thought about commerce and innovation.”
2. Instead of glorifying imperialism, people began to glorify traders and innovators.

 

2.  What is creative destruction and how is it connected to progress and modern society?

1. Creative destruction refers to the process in which the introduction of new products results in the obsolescence or failure of old ones.
2. An example of creative destruction is the automobile industry replacing the horse and buggy industry.
3. Without creative destruction, new ideas, products, inventions, etc. would never come to be. We would live in a stale society, never replacing products or processes thus never seeing any progress.

 

3.  Prior to the 17^th and 18^th centuries, what kinds of people were honored?

1. According to the article, basically only soldiers or priests held “honorable” positions in society in the 17^th and 18^th centuries.
2. “People who merely bought and sold things for a living, or innovated, were scorned as sinful cheaters.”

 

4.  What big change occurred in the middle class in Holland and England from 1517 to 1789?

1. Honor was brought to innovation and trade, which gave the middle class a level of liberty and dignity not known before: “Europeans and then others came to admire entrepreneurs like Ben Franklin and Andrew Carnegie and Bill Gates.”
2. “People signed on to a Middle-Class Deal…the middle class started to be viewed as good, and started to be allowed to do good, and to do well.”
3. People were finally free to have ideas and were encouraged to innovate due to this giant shift in thinking.

 

5.  What are some of the positive outcomes of this new, “honored” middle class? Can you think of other examples not mentioned in the article?

1. “the steam engine, the automatic textile loom, the assembly line, the symphony orchestra, the railway, the corporation, abolitionism, the steam printing press, cheap paper, wide literacy, cheap steel, cheap plate glass, the modern university, the modern newspaper, clean water, reinforced concrete, the women's movement, the electric light, the elevator, the automobile, petroleum, vacations in Yellowstone, plastics, half a million new English-language books a year, hybrid corn, penicillin, the airplane, clean urban air, civil rights, open-heart surgery, and the computer.”

1. “…in the numerous places that have adopted middle class liberty and dignity, the average person makes and consumes over $100 a day. Remember: two centuries ago it was $3 a day, in the same prices. And that doesn't take account of the great improvement in the quality of many things, from electric lights to antibiotics to theories of economics.”

 

6.  Did anyone, other than the middle class benefit from this new way of thinking?

1. Yes! The poor especially benefited because now even the poorest people could come out of poverty. Opportunities became abundant for anyone willing to put forth the effort and creativity.
2. Historically, economic liberty has been the primary vehicle for alleviating poverty and raising standards of living around the world.
3. “The poorest five percent of Americans are now about as well off in air-conditioning and automobiles as the richest five percent of Indians.”

6.3.C – Complete this activity and be prepared to discuss your ideas with the class [15 min]

Activity: Tragedy of the Lemonade

Directions:

1. Set out a large, opaque container mostly full of lemonade (but not enough for everyone in the class to have a glass).

2. Place cups to where students can get them, and encourage them to get a drink.

3. Reassure these students by saying that everyone who wants lemonade will be able to have some. What is likely to happen is that the first students to get a drink will choose the bigger size cups and will fill them to the brim, leaving students further back in line without lemonade.

4. After the lemonade runs out, discuss with the class.

 

Discussion Questions: Tragedy of the Lemonade

1.  Why did the lemonade run out? Why were some students left without lemonade?

1. The lemonade was unowned, and as a result, there were no limits placed on how much lemonade anyone could have.
2. Without private ownership and market prices there was no incentive to conserve resources people may value.

 

2.  Why does common usage lead to exploitation?

1. There was no incentive other than their thirst (which we can override) to limit the amount they took.
2. Some students might have even taken more lemonade than they could drink.

 

3.  What are some examples of common resources?

1. Oceans
2. Rivers
3. City parks
4. Public restrooms
5. Federal grazing lands managed by the Bureau of Land Management (BLM)

 

4.  What changes could we make to help ensure that resources are available to those who value them?

1. There are strategies that can be employed to ensure the long-term survival of a resource in spite of the natural tendency toward exploitation. These are incentives, privatization, communication, and education.

Lesson Recap

• The rules of the game, or institutions, influence the choices people make.

 

• The laws, customs, and cultural are examples of institutions that influence our behavior.

 

• Economic growth occurs when institutions promote and encourage entrepreneurial activity. Areas of the world where poverty still exists today largely lack the institutional incentives that encourage economic growth.

 

• An increase in dignity and social prestige of inventors, manufacturers, and merchants plus the increase of economic freedom (decrease of government intervention) has led to the conditions necessary for the wealth and high standards of living we enjoy today.

 

 

 

Additional Resources

Article: Private Property and Opportunity Costs by Dwight Lee (FEE.org)

“Private Property Motivates Cooperation”

 

Article: Rent-Seeking: A Primer by Sandy Ikeda (FEE.org)

“What Is the Difference between Profit-Seeking and Rent-Seeking? “The difference between profit-seeking and rent-seeking is akin to that between peaceful trade and armed robbery. Both require time, energy, and skill, but one creates wealth while the other destroys it; one encourages peaceful cooperation, the other undermines it. How does the author define “rent-seeking”? How is this different from free market renting? And “profit seeking”?”

  

Article: History of Entrepreneurship by Ryan Allis (Startupguide.com)

“The original entrepreneurs were, of course, traders and merchants. The first known instance of humans trading comes from New Guinea around 17,000 BCE, where locals exchanged obsidian, a black volcanic glass used to make hunting arrowheads for other needed goods. These early entrepreneurs exchanged one set of goods for another”