 What I hope to explain a little bit is how people make decisions in the economy and how individual decisions get translated into the big picture in the market and then how markets, in turn, influence people's behavior. So what I'll try to do with each topic is to start with a couple of basic ideas and then see how we can apply the ideas to the world. So economics starts with the simple idea that scarcity exists. Human beings have wants, but we don't have enough resources to be able to realize all those wants. So our bodies, our knowledge, our time are limited, and so is the natural world. So we can't satisfy every last want that we have. And because of this, in order to make ourselves better off, people have to make choices. Choice is another one of the fundamentals of economics. And understanding the choices people make, why they make those choices, and the implications of them, that's what economics is really all about. There's also one other very important aspect of choice that I'll come back to later, and that's the idea of cost. Every time we choose something, we also have to choose not to do something. The example Professor has always used is that in order to be here, you have to give up being somewhere else. So that's the cost you have, although that's probably not a great example, because my guess is that some of you maybe didn't have a choice about whether or not you wanted to be here. But the point is that for everything we get, we have to give up something else. So there's no such thing as a free lunch. But in order to make choices, we look around at all the different possibilities available to us. And then we do that thing, which seems like it would give us the most benefit. This is another one of the basic insights of economics that all people are constantly trying to improve their situation in the way that they think is the most important. And that's where incentives come in. Incentives are basically a way of talking about how people make choices. At every moment of our lives, we have a whole array of choices of what we can do. And incentives are sort of the results of the choices that we make, the rewards, the benefits, or costs of different actions. So when I work, I get paid a wage. And the wage is supposed to be my incentive to do the work. And if you read in economics, especially mainstream economics, you'll hear a lot about incentives. This is catchphrase economists like to repeat. Incentives matter. And it's kind of like a mantra economists use. It's almost like they're actually trying to cast a spell or something. Like incentives matter, incentives matter. And they just repeat it endlessly. But what they mean is that it is actually quite simple. Incentives just mean that people do those things which they believe will make them better off. So incentives are all those different things out there in the world that people want, the things which influence people's behavior. And as we'll see, this is a very simple idea, but it has an enormous impact on the way the world works. So I'll start with good incentives, and then gradually I'll work my way to the bad and the ugly ones. So probably the best example of a good incentive is the institution of property rights. Private property provides a huge list of good incentives, and not just for individuals, as Dr. Thorin was pointing out, but for society as a whole. And this is one of the places where costs come in. I mentioned the costs before, because one of the important things about owning property is that owning means that you have to pay a certain cost. That might sound strange, because you think, well, I don't like having to pay a cost. I always want the least amount of costs possible. But why it's important is that the cost of ownership is responsibility. If the thing you own increases or decreases in value, you're the one who gains or loses from that. Or if you think of if you just have a supply of something, say you just have a bunch of widgets or something, then if that supply increases or decreases, it's you who reaps that benefit or pays that cost. And this is extremely important, because it means that owning property gives you a big incentive to take care of it so that you don't suffer a loss in its value. And I'll come back to this again in a minute when I talk about bad incentives. But property is one example of a good incentive. So even subtle changes in benefits and costs can change people's behavior in a big way. An example I'm using now, and maybe you won't relate to this, but I'll give it a shot anyway, although it does sort of relate to our flip-flop discussion. But the example I'm using now relates to the behavior of myself and some friends of mine. Every Monday night, we play trivia at one of the local bars. And in the trivia game, there are various rewards if you win. But recently, they added a new rule to the game, which is that every week, the team with the cleverest team name wins free beer. Now, before this happened, the teams had the same team names for years at a time. And it was kind of like a point of pride that you've got to be a part of this great intellectual trivia tradition. But starting immediately after the new rule appeared, every team started changing their name every single week because there's this new motivation. And so it seems kind of obvious to say that if you change people's incentives, if you change the rewards and the benefits of behavior, that you can change people's decisions. But this very simple fact is usually lost on employees of the government. And so there are literally thousands of laws and regulations which provide bad or maybe even ugly incentives. And so I'll give you a few examples so you can see this at work. The first example is a popular one I like to use. It relates to safety, which is one of those issues that people take very seriously, usually. And often, people believe that really, people just can't be trusted to behave responsibly and safely in society. So we need people out there like policemen and so on to force us to be responsible, and not just to prevent us from robbing and beating each other, but to make us do things like wear our seatbelts and keep us safe from car accidents. So we might think that intuitively a law that requires people to wear their seatbelts, for example, is a good thing because everyone wants to be safe. There's nothing wrong with being safe. But seatbelts laws are actually a great example of terrible incentives at work. So a few years ago, an economist did a very famous study of this problem, and he showed quite clearly that actually the total amount of deaths were the same after the passage of seatbelt laws as before. So there was no gain in safety in that way. And in fact, the total amount of accidents actually went up. So why would that be? Well, because of the law, more people wore their seatbelts. And also, more people believed that other people are wearing their seatbelts. So in general, people feel safer than they were without the law. But the trick is that when people feel safer, they behave less responsibly. They tend to take less care than they otherwise would. So they tend to get in more accidents because they drive more carelessly. And I think pretty much anyone can see the logic behind this. I mean, if I say something like, look, just hand me that glass of water over there. Well, you might reach out and grab it and toss it to me kind of carelessly. But if I say, pass me the water and you reach out and around the glass of water, it's like barbed wire and chainsaws. And they're like knives poking at you and stuff. You would behave differently in that situation. You would take a great deal more care. And it's because the incentives are different in the two situations. The rewards and benefits are different. But again, this logic is completely lost on most government regulators. So in the case of seatbelt laws, the law that was designed to help people actually hurts them. And what economists who studied this problem discovered was that, as I said, the number of accidents actually went up after seatbelt legislation was introduced. Because when people wear seatbelts, they feel safer. And when they feel safer, they behave less responsibly. Now, I think examples like this are important because they show that with a little economic reasoning and research, we can see that a lot of these economic regulations which might seem very completely insignificant actually have a profound effect on our behavior and even on our very lives. Coming back to the issue of property rights, you may have realized before that bad incentives often arise when there are no property rights or when property rights are violated in some way. And as usual, the biggest bad incentive problems happen with public ownership. As I said, when you're responsible for property, you tend to take good care of it. But the flip side of that is that when people use resources without having to be responsible for them, without paying any cost and without bearing any sort of responsibility, they tend to take relatively little care of those resources. And in the case of government, you have an institution which taxes people to gain resources, which it then uses for various things. But the spending of money doesn't actually affect the people in government, the people who are doing the spending. If they put money into some program and then the program fails, nobody in government really loses anything. And the money that's taxed is taxed whether they spend it or not and whether they succeed or not. So because they're using other people's resources, they have very little reason to spend those resources wisely. So this is a textbook example of bad incentives at work when there are no effective property rights. Another good example that I like to use comes from natural resource economics. And I'm sure everyone at one time or another has heard someone say something like, look, governments need to regulate the use of natural resources so that we don't exploit this natural heritage that we have, which can't be replaced. If you allow markets in important areas like natural resources, you're inviting greed and exploitation. And personal motives will just lead everyone to make a quick buck and exploit the environment and completely destroy it because everyone in the market has a short run view. And it's only government that can take the long run approach to things. But of course, that's exactly the opposite of the case. It's because of private property. It's because of personal motives that markets provide the greatest incentive to responsible, sustainable decisions about what to do with resources. And this is because if you have a resource, say, a forest. I think forests are really good examples. Sure, you might want to just cut down all your trees and sell them, make a profit, and then just turn the place into a wasteland. Yeah, you might want to do that. But the value of your property then disappears because your resource is gone. But if you want profits over a long period of time, which most people do, then you have to take care and only use a part of your resources at any given time. And you have to take care to do things like regrow your forest and so on. And if you do that, you can earn more profits over time than you could if you just took everything all at once. And because of reasons like this, that private ownership of natural resources creates wonderful incentives and wonderful motivation for people to be responsible stewards of the environment. Of course, people can always do things which defy logic. I mean, it's always possible that some crazy capitalist somewhere just burns down his forest for kicks. But the point is that private property and free markets provide the greatest reasons not to do things like that. And if you look at the data in essentially all countries, you see this principle at work. Private reforestation stewardship of the environment and so on levels are up here and government levels are down here. And this relates to what Dr. Thornton was saying about the invisible hand. Private foresters are mindful of the present and the future because they care about their own welfare. And that leads them to care also about the environment that they use. Governments, on the other hand, have little or no stake in the long run effects of their policies. So they engage in practices like leasing out natural resource reserves for a period of years to some firm that pays the government for the temporary use of the resources. But by lending land to, say, forestry firms to use for harvesting for a short period of time without transferring ownership, they created an incentive to overuse the resource. And what happens is that the foresters just clear cut everything and then don't look back. And this kind of incentive problem was behind practically all the famous examples of environmental destruction that we hear about. The rainforest, for example, are destroyed and not replanted and all the wildlife is killed off because the people who use them have no incentive to use their own resources to improve them at all or to try and maintain them. Any kind of reinvestment for them is just a loss because they don't own the land. The government does. And now the same thing is true for other famous examples. The American buffalo and endangered species, which have been hunted to extinction or near extinction. Historically, nobody owned them or the land they inhabited. Hunters had everything to gain and nothing to lose by killing them without regard for the size of the population. Since nobody bore the cost directly, it seemed like there was no cost. This is a very famous problem in environmental economics called the tragedy of the commons. And it's a direct result of having a lack of property rights and thus a lack of positive incentives. Moving on to ugly incentives. I actually had some really good examples of this, but they were really morbid, so I'm going to have to stick to something that's kind of tame. Going back to government spending, as I said, government employees have little incentives to spend resources carefully. But when you add into the fact that they have no profits or losses to guide their decisions, I'll talk more about profits in a second. But when you add the fact that government has no profits or losses, it's almost impossible for them to even know whether they're succeeding or failing or not. And it's because of this that government programs, even the ones which have failed by every available measure, never really go away. Because without a clear way to determine whether money is being wasted and without an incentive to control spending, then even if governments can be convinced somehow that there is a problem, they tend to assume that the problem must be that there isn't enough spending. And so the conclusion is always that, well, if we can tax and spend more, then everything will be OK. And this is an important part of the explanation of why government budgets always grow and why spending problems tend to get worse over time. And it's all due to this incentive structure that exists within government. So just as a way of wrapping up this topic, I would point out that you can learn a lot about economics and about the world by drinking beer with me at trivia. No. You can learn a lot about the world by just thinking about rules, regulations, and laws in terms of incentives. What kind of behavior does a law reward? Or what kind of behavior does it punish? How does it change the situation from what it was before? What kind of choices might it now encourage, which were not encouraged before? OK, so that's incentive. So the next big topic is competition. And competition is related to incentives, as I'll point out as we go. But competition tends to be understood even less than incentives, I think. And part of the reason for this is that people often don't think enough about what makes market competition unique. They often think about competition in other terms. Now, Ludwig von Bises made a very important distinction between what he called the two kinds of competition. The first kind of competition is what he called biological competition. And this is the kind of competition that we see in nature, for example, where the means to survive are very scarce and there's no cooperation. And because of this, you have all sorts of lions and tigers and oysters and shrimps and things that are constantly locked in this life or death struggle with each other. And this is how people often think of the market as a survival of the fittest situation, where one person ends up on top and everyone else serves him or gets eaten. Or sports competitions are less dramatic, but they're the same way. In that case, too, there are winners and losers. And the winner gets the trophy and all the rewards and the losers go home with nothing. This is how people think of the market as a place where there are a very limited amount of goods that everyone wants. And so someone gets them and someone doesn't. But this is the wrong way to think about competition in the economy. When economists talk about competition, they mean something quite different, as Mises pointed out. The life or death, everything or nothing situation is not the situation of human beings in society. What Mises was so brilliant to point out was that the meaning of competition in the market is completely different from the biological idea of competition. In the economy, we engage in peaceful exchange with each other. And we have made a decision to move away from biological competition. Because by producing and exchanging together, we produce much more for ourselves and for others than we could by constantly trying to kill each other off or steal what the other guy has. Cooperation is more beneficial than violence. If we specialize in doing what we do best and then exchange with each other, we can produce so much more than if we simply fought over everything. So instead of a contest where somebody loses, competition in the market is a process of improving everyone's satisfaction. So how exactly does it work? Well, competition is mainly a competition between entrepreneurs, the people who produce things. Entrepreneurs produce, and then they try to sell what they produce to consumers. But because consumers are notoriously fickle, entrepreneurs have to compete for their business. And that means they have to find ways of making what they produce attractive consumers. They have to give people an incentive to buy. And as Dr. Thornton pointed out, the result is that when entrepreneurs compete, they're forced to offer more service of a higher quality at a lower price. Being more productive and expanding the range of things available to the public, while at the same time lowering the price benefits everyone. So there simply aren't winners and losers in the ordinary sense. In fact, market competition is really a form of cooperation, because it depends on voluntary exchanges and interactions, voluntary agreements. If there's one thing you should take away from this, it's that the market economy is the most productive and useful form of cooperation that's ever been despised by human beings. Even the so-called losers, the entrepreneurs who go out of business, for example, can benefit from market competition. And now as far as consumers go, it is true that, for example, if I take a pair of those flip flops off the shelf at the store, they're not there for the next guy who comes along. There is competition in that sense. But by buying shoes, I have not eliminated the next guy's opportunity to find a pair of shoes of flip flops or whatever, because entrepreneurs are constantly attempting to anticipate this demand. And if it's ever the case that the supply runs out while people are still waiting to buy, that means that an entrepreneur can make a profit by producing more shoes. There's an opportunity and an incentive to produce more. The possibility of earning profit is a powerful incentive that motivates entrepreneurs to provide this amazing stream of goods and services to society. And when entrepreneurs can't do that, when they fail at providing what people want, or they provided at prices which people think are too high, then it's these bad entrepreneurs who get eliminated from the market and the successful ones who get to go on. So even when entrepreneurs fail, it's only because somebody else has succeeded better than they did. It's only because people have simply chosen to buy one thing and not to buy another. And so in this sense, there is a kind of survival of the fittest in the market. But it's the survival of those entrepreneurs who do the best job of serving consumers. In a free market, the only way to accumulate wealth is to do a better job of giving people what they want. And that's what market competition is. It's a battle between entrepreneurs over who gets to make consumers happier. I wanna keep going with this idea of winners and losers and just go over one or two other arguments that people make against competition. People are often horrified when economists recommend competition in certain areas of the economy like education and healthcare. And I think it's because of this mistaken idea of winners and losers. That idea is very persistent. People really believe that in a market, you can just get lucky and you can win and you get to be a fat cat or you get unlucky and you lose and then you get to be homeless. A few weeks ago, in fact, Judge Napolitano, who's a friend of the Mises Institute, was on the Daily Show with John Stuart and Stuart posed this question to the judge and he asked, but what about the losers in the market? What happens to them? And what he implied was that economic losers just kind of have to starve and that that's unfair. But the point he missed in asking that question is the point Mises makes, which is that everyone in society benefits from competition between entrepreneurs. There are no losers in the sense of a sports competition. And there's another important way to think about this competition issue as well. And that is that when people make losses in the market, it tells us that resources are being misused. Whether we're talking about factories and equipment or human beings with special skills, losses show that there are more urgent needs for the resources that the entrepreneurs are using. And seen in that light, so-called losing is actually an extremely important and necessary aspect of the economy because it allows people and resources to move from less to more productive employment. And this brings us to the next step, which is to think about what happens when government forcibly intervenes in this competitive process. And I may not surprise you to learn that the results are not pretty. And that's because competition performs this absolutely vital function by weeding out entrepreneurs who don't do a good job of producing things that people like. And if you prevent that from happening, you also prevent this very important form of competition. In fact, this gets back to the problem of incentives. When you prevent competition, you actually end up rewarding the losers and punishing the winners. The great example of this, of course, is government bailouts. What bailouts do is allow failed entrepreneurs to keep using scarce resources, which would otherwise be going to the entrepreneurs who have actually demonstrated the ability to produce things people want. So bailouts create a tremendous waste of resources right now in that sense. But they also encourage waste in the future because of the incentive problem, because if people believe that if they fail, well, they'll just be rescued, they behave more recklessly. And they are just encouraged to make more bad decisions in the future. And so the incentive scheme is actually quite similar to the seatbelt problem I talked about before. So you can see how the problem of individual incentives can get translated into very big economic problems. Now I think many people would acknowledge the point about bailouts to some extent. And most people understand on some level that you just can't mindlessly support this too big to fail argument. You can't just keep bailing out the losers. But a common counter argument goes something like this. Well, sure, it's good for entrepreneurs and capitalists to go bankrupt. It's not good for them to waste resources. It's good to let those people fail. But what about all the workers they employ? I mean, why can't we bail them out and just fire everyone on the company's board of directors? The workers aren't the ones making these crazy decisions. So why should they be punished for someone else's mistakes? And this is basically what happened with the American auto industry. And the answer here relates to what I was saying earlier about how failure moves resources to their most productive uses. Because if you artificially support workers by, say, bailing out the company but only replacing the management, you keep people trapped in employments which aren't productive. You are preventing them from getting stable employment in an industry which could make a better use of their labor. Or, and this is actually more commonly the case these days, you prevent people from seeking out the skills which will enable them to find lasting employment. So for example, you discourage workers from going back to school to learn alternative skills. And you're really just postponing the inevitable while at the same time, you're actively wasting human resources and human potential. And you're doing the work as a great disservice by enticing them to keep doing unproductive work. And the list of problems which arise when you stifle competition just goes on and on. Another important effect is that when you regulate competitive industries, you encourage a different kind of competition, sometimes called political competition that has many names. But this kind of competition encourages firms not to compete to produce things for consumers, but to compete for opportunities to take advantage of government regulations. Because in many cases, it's easier to profit from an appeal to government than it is to profit from actually producing in the market. And then there are many ways this can happen. The most common is for firms to lobby for special regulations to help suppress the market competition to give them a step up. And typically it starts with something which seems like it might be well-intentioned, like again, an additional safety regulation. Say companies are required to install new machinery that meets a certain safety standard. But of course, complying with this regulation imposes costs on everyone in the industry. And if you have very deep pockets as many firms that lobby do, that's maybe not a problem for you. But if you're a small business, this could be the difference between profit and bankruptcy. And so this is a very sneaky way that large companies often use to eliminate their smaller competition. One of the reasons that this is significant is that this kind of political competition actually transforms the market competition into a kind of biological competition by forcing people out of business, by finding ways to avoid producing things for consumers. Government and the firms it colludes with actually do create winners and losers. Because instead of producing new things, firms have an incentive to use the government simply to redistribute what everybody else is producing. All government intervention, no matter how well-intentioned it might be, involves redistributing resources. And once you do that, once you establish that someone will be rewarded through regulation, you encourage people to try and capture those rewards to win those favors from government. And so firms spend billions of dollars trying to do just that, trying to win friends and influence people in government. And that money that they spend doing that is money that is diverted from the production of real wealth in the economy. Okay, so what you should take away from all this is that human motivations, human goals are at the core of everything that goes on in society and in the economy. Every person from politicians to consumers to entrepreneurs is trying to improve the quality of their lives. And the question that we all have to answer and that I'll leave you with is this. What process do we wanna rely on to help people to do this? Do we want a system of free exchange and market competition? A system of invisible hands where in order to make ourselves better off, we're obliged to help other people as well? Or do we want a system where our interests are pitted against each other, where success is achieved through political competition and political manipulations? So thank you.