Class 5 - How Rizzo Gets His Coffee

In our fifth class we discovered why it is important to study economics. We want to understand wondrous things, learn important concepts, and get the facts right. In our society, too many people have opinions about how economics work or how the government should be spending their money. If I asked a random person if America is spending too much on foreign aid, they will probably respond with a resounding yes. If I then asked them how much we are currently spending on foreign aid, they will probably stand there dumbfounded. Everyone has an opinion, they just don't know the facts.

We then discussed the Type C and Type M parts of our brains and how they respond to economic problems. For example, if oil prices rise our Type C (analytical) brain will ask why did this happen? However, our Type M brain (empathy) will wonder who rose the oil prices and the go off blaming the oil companies or some random country. We use our Type M too much.

We then went on to discuss how Rizzo gets his coffee every morning. The process is impersonal, as we don't know anyone involved in the millions of tangents that made the coffee. It is also based off of self-interest as no one does this so Rizzo gets his coffee, the people just want to exchange their goods. They could care less about Rizzo getting a headache. The process is also based on cognitive issues as no one knows how to do all the steps, shown in ipencil, and if they did, they could not sell the coffee for only $2. Finally the process is undirected, as no one called to make sure Rizzo gets his coffee; it's just there. The people don't really interact with each other, they just work together and get along because they are in a commercial sphere.

There is order. Everything works in a process and we don't realize until it doesn't work.

This is the invisible hand at work. By everyone's individual incentives or exchanging goods, something good happens: Rizzo doesn't get a headache. We do our own things and amazing things get done in the process. The thread that guides the invisible hand is the price system.

The last thing we talked about was tacit and dispersed knowledge, how people can't explain or are unaware of their knowledge in the marketplace and don't realize how it affects others. When people do understand their knowledge, there is uncertainty.