[SOUND] Now let's do the third principle that we're going to do this week.

We did opportunity cost, we did, benefit principle.

Now we're going to do the third principle.

We had, the first 2 have to do more with, individual decision making.

This 1 has to do more with what is a result of those individual decision

making. Another society level.

We're going to call this principle, I'm going to call it the invisible hand

principle. And I'm going to tell you why we're

going to call it that way in a second. The idea of the principle is, that, when

people, behave to try to do the better for themselves, when everyone follows the

net benefit principle that we discussed in the previous principle, then society

benefits from it. That's in general what it means, right?

Now, again, I think the best way to prove the thing is to give you an example.

Because again, we asked with the other principles, it looks a lot easier when

you pose a definition then when you try to apply it.

Say you don't own a car, and you cannot buy a new car.

The only thing you can do is to rent a car, and you have only 2 options to rent.

You have an old car that costs you about $100 per year and it give you about 20

miles per gallon. Or you can rent a newer car, would cost

you more up front, $600 per year, but it give you more miles per gallon because

it's newer, so you can go farther with a gal, with a tank, than the other one, 40

miles per gallon. And to make the situation simple, let's

assume that the cost, the cost of gasoline is $1 per gallon, again, gas,

doesn't matter where you live, probably you've got to pay more for gasoline, but

this is just for simplicity. It wouldn't make a later on we'll change

the numbers. And then furthermore let's say the

driving distance you, in every year you drive on average 7000 miles.

And finally let's make an assumption to make this even more interesting,

that the, your main goal in life, if to reduce the total amount of fossil fuels

used in the world. If this is the situation, which car

should you rent, the old car or the new car? When you take a moment, calculate

any numbers you need to calculate. and then try to make a decision.

And I'll give you a few seconds and then we go over the answer.

Okay, so what do you do? Well I bet that if

this is the case with most of my students, you probably answered the new

car. I would say that, in my opinion, the best

answer is the old car. Then you probably say well, how can you

answer the old car, when the new car only uses a lot less fuels because it actually

gives you more miles per gallon? Well, I bet that in your answer, you assumed that

if you didn't rent the old car, the old car was not going to be rented by anyone.

And that is a pretty strong assumption and I didn't ask you to actually make

that assumption, so we'll have to talk a little about this.

So let's, let's calculate the numbers to talk about this before we move any

further. I calculated the number here beforehand

for you. And by the way, we're using gallons which

is a center of use, a measure of use in the U.S.

but the answer wouldn't change if you actually use a different measure or a

different unit of measure. Okay, so the cost of the old car are

straightforward. $100 upfront and then the next costs has

to do with the miles you drive. You drive 7,000 miles each each gallon

cost you a dollar, so in total in here you spent you spent $450 on this car.

The, the new car actually you spent a little more because it's more cost

upfront, even though it gives you more miles per gallon the cost of [UNKNOWN],

so in the end you spend $775. And like I said, if, if I were going to

behave according to the the principles, and even if my main goal was to reduce

the total amount of fossil fuels, I will go for the, for the old car, because it's

cheaper, $450. Now again, most of you probably say well

but that's not true because, if you go for the new car, then, you're spending a

lot less fossil fuels. But remember that my stipulation that,

not that you will, you will try to reduce the fossil fuels you consume, but the

fossil fuels in general, the total amount of fossil fuels.

And wouldn't we if, if the old car have to be rented by someone, wouldn't it be

better if that old car is rented by someone who doesn't drive very much and

the new car are rented by people who drive a lot? Right? So if both cars are

going to be rented, right, there's no reason to think that they won't,

then because there might be people out there who doesn't have the same principle

as you have, right. There's people out there who might not

really care about the environment, about the fossil fuesl.

But, if people actually behave according to their cost benefits,

if, and if the individual person behave according to their own cost and benefits,

the individual cost and benefits, people who drive a lot will go for the new car,

and people who don't drive a lot, in this case you, 7,000, will go for the old car,

right? In the extreme, you can think that someone who actually doesn't drive at

all. If I don't drive at all, which car should

be better? Well clearly if I don't drive at all it doesn't matter which car, which

car I rent because I'm not going to spend any fossil fuels.

But if I don't drive at all and I want to take one of the cars out of circulation,

I'll probably want to take the old car so I don't give a chance to someone who

drive a lot to rent it. So I, if I have one car in my garage and

never use it, I want to have a car that uses a lot of mileage per gallon,

because that way, someone else who drive more than me cannot use that car.

So that's the idea, right? So, so what is happening here is that, if each

individual person chooses according to their own individual costs and benefits,

society as a whole would actually use the less amount of fossil fuels.

Now I'm sure you have many many questions and, and that's great,

because as more, the most questions I was able to encourage, the better.

Right? All these questions we won't be able to answer here, we will answer in

the discussion. But I'll try to go over some of those

questions, right? Well one clear question is, well, the cost of gasoline is not $1,

it's really more. Perfect.

Right? In, in this class what we're going to do is we're going to recreate

reality with, with numbers that are simple at the beginning, right, like

we're doing right now and then we can understand things a lot better and then

we can complicate things. Once we understand, we complicate it.

So this is a perfect example right here. if the cost of gasoline instead of being

1 dollar was 4 dollars. Now if you change your cost now you will see that if the

cost of gasoline is $4, probably the new car becomes such a bargain for someone

who drives 7000 miles. And someone who drives 7000 miles would

probably go for the new car instead of the old car.

So this is a first clue as to what is the best way to encourage people to drive

cars that consume less gasoline, is to increase the the price. Because

when the price goes over $4 most people behaving individuals are going to make

the individual choice of choosing cars that don't consume any gasoline.

The government doesn't have to tell people which cars to choose, they only

have to the price only have to change. Or in

other words, the government could simply change the price and that would let

people behave on their own and they will, by behaving on their own, get the cars

that consume less gasoline. Now, another very simple example of this

principle, that's why I call it the invisible hand, because it's not like

anyone is, everyone is pushing anyone to do something, but it's like an invisible

hand pushing society to do their best by each individual person doing what is best

for themselves. And this is why Adam Smith said, the

father of economics more than 200,000 200 years ago when he published his work in

1776. Right? And that's he called it the

invisible hand, so we're calling it the invisible.

But think about another very simple example.

Let's go to, we're going to introduce this later on in the course.

You go to a movie theater, you go to a grocery store, and there's different, you

know, there, there's, you have a choice of which line to, to put yourself on,

and you have like three different cashiers Which one you choose? Well, you

usually choose the one that has the less number of people.

And everyone behaves like you because they all want to get to the movie or to

buy the stuff in the fastest amount of time.

So everyone behaving selfishly, trying to reduce their own time, the result of that

is that everyone, as a whole, gets out the place or into the movie in a faster

amount of time. You don't have a person at the grocery

store leading people into the different lines.

All you need to do is to assume that every person will actually try to get out

of that grocery store in the fastest amount of time.

I mean the system is well in place, you have enough cash registers, and the, and

the signs are clear to, where everyone has to go, then the society will be able

to do their best. So this is a principle.

I don't want you to believe me right now, right, if you don't have to.

this is one that we're going to come back time after time, because it's a critical

one. But it's one at the center of what we

call capitalism, capitalist societies, today.

With the fact that if we make, societies free, that each individual action will,

will create the most social welfare. So we come back to this one and I'll give

you more time to discuss this things in the discussion forums.

Again, the more, you should be skeptics, the more questions we have the best.

We have one more principle to do and that's trait, let's do the next.

[MUSIC]. Produced by OCE, Atlas Digital Media at

the University of Illinois, Urbana-Champagne.

2.4. The Invisible Hand Principle

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