 Hey Kevin here, welcome to Invisible Hands, the series that makes economics easy and helps you see the beauty of trade and cooperation with Puppets. Hi Kevin. Oh, hey Fiona. Let's talk about how markets and economics work in the real world. That's a good idea. Who wants to talk about alternate universe economics anyway? Well, I would. Sounds kind of cool. But we're doing something important here. Oh, okay. As I'm sure you remember, people respond to incentives. If we change the rules and institutions in society, people will probably make different choices. So this stuff really matters. Alright, I got that. But what does that really mean? What kinds of rules and institutions are we talking about? Well, think about this. We've already talked a lot about the benefits of voluntary exchange, right? Sound economic thinking can help us understand which institutions promote more wealth-creating activities like trade and entrepreneurship and which ones don't. That's right. If we want to make the world a better place, we need to think about how we can best achieve social cooperation among countless strangers in a world of scarce resources. That seems like a really big job. It is. And it's made even more challenging by the incredible diversity of humanity and nature, by always changing individual preferences, and by our own imperfect knowledge. So how we confront these challenges largely depends on society's rules. So, what rules do you think might help make us better off? Hmm, I'm not sure. I guess the first thing would be making sure that everybody's able to trade with each other easily and freely. And I suppose that means the rules need to be clear and simple to follow, and they can't just change for no reason. And we need to stop people from stealing or cheating. You know, what you're talking about are two really important ideas called property rights and rule of law. Let's start with rule of law. Okay, big fan. I loved him in the holiday. Not Jude law. Rule of law. Yeah, I'm talking about a system of impartial rules that are applied uniformly to everyone. It's about having a society where everybody is treated as an individual deserving of equal respect and dignity under the law. As opposed to a system where authoritarian rule is in law makers arbitrarily decide that the rules of society only apply to some people. Like Venezuela or North Korea. Yeah, even just thinking about it as a moral issue, a fair legal system should respect people's rights equally. Of course. But rule of law is important for practical reasons too. Like what? Well, for one thing, a few simple stable rules and expectations are essential for economic growth. Arbitrary and overly complicated rules are confusing, unfair and make it impossible for people to plan ahead. Or even trust each other. Plus, when people in power can make up the rules as they go, it's pretty much an open invitation for corruption. Yeah, that sounds pretty bad. The worst. It really is. Excessive laws and regulations can introduce unnecessary chaos and conflict into society. The more barriers government creates, the more difficult it is for aspiring entrepreneurs to pursue productive ventures. And for workers to find the job opportunities created by those businesses. Wait, so rule of law affects my ability to get a job? What? Looks like I'm applying for that graduate degree. Now you speak in my language. Novelty burdens some regulations and licensing laws, corruption and regulatory uncertainty makes entrepreneurship difficult. So what you're saying is we should be really thoughtful about the kinds of rules we make so it's possible for people to live out their dreams. That's right. And as for the specific kinds of rules we need, one of the most important is property rights. That just means people don't steal each other stuff, right? That's definitely part of it, but it all comes back to the idea of scarcity. The fact of scarcity creates the possibility of conflict when two or more people want control over the same set of resources. We could just get them to agree. That's harder than it sounds. Remember, values are subjective and people often want to do totally different things with the same resources. So whose goal will we pursue? Who gets to decide and how do we settle the conflicts that are bound to happen? For example, we may disagree on the best way to use your car. What if I want to use it for a demolition derby? Uh, no. I need my car to get to class. I bet you do. But you only get to make those decisions for yourself if we respect each other's property. And by showing respect for your property, I'm also showing respect for you as a person. By acknowledging my right to decide what happens with my stuff, you're saying I don't get to tell you what to do with yours. That's right. A system of property rights can help diverse groups of individuals effectively cope with disagreements about how resources should be used. We do this by establishing clear rules on how individuals can come to own property. That means you have the authority to use, modify, exchange and dispose of your property, so long as you don't interfere with others' rights to do the same. Like with my car. The fact that it's my property means you don't get to smash it without my permission. Yep, you get to decide what happens with it. You can loan it to me, share it with someone else, sell it or trade it away or just keep it for your own use. It's your choice. Property rights also make planning possible. Without them, people are discouraged from innovating or producing goods and services since they have no confidence that they'll be able to keep what they earn. And we see this happen around the world in countries with weak property rights and rule of law, like Zimbabwe or Afghanistan. I see. Do go on. Both history and theory have overwhelmingly shown that the most efficient means of coping with scarcity in society is the institution of private property. Property rights enable us to care for both ourselves and each other as human beings. That's pretty heavy. It is. Societies are shaped by the ideas they embrace. A society that embraces values like honesty, integrity, individual responsibility and entrepreneurship creates more jobs, produces more wealth and allows people to exercise their creative talents. Okay, so incentives are created by the rules and institutions we accept and the good ones are going to make people wealthier and better off. Totally. But without rule of law and property rights, people aren't rewarded for their good work. It would be like taking a test and having the professor here change everybody's grades arbitrarily. Why would I even study? Good question. Without the right incentives, you probably wouldn't study. The same thing happens in the economy. Without good rules in society, people won't have the incentives to create businesses and make things for themselves and other people. Good rules and institutions like Respect for Property Rights are the foundation of a healthy market economy. And that makes for a better life for us all. That's right. Now let's all hit the demolition derby. Yeah. Not in my car. That's fair. What's the weirdest rule you've ever encountered? If you have questions or just want to know more, leave a comment on this video and check out courses.feed.org for tons of additional information. And we'll see you next time.