Wednesday, September 30, 2009

Sociology

So I am double majoring in Sociology and economics and let me tell you, it rocks my world to get such opposite ideas of how the world works every week.

This week in class we watched the documentary SiCKO. It was about health insurance in the U.S. and I know we beat this topic to death i our first meeting, but seeing as it is a huge national issue, I can't let it die just yet as if I had a choice...

The movie gave some interesting (Though clearly left slanting) points on the way insurace compnaies run. Some of the major features they focused on were one: Insurance companies deny care to people who are sick either refusing to cover them or calling necessary procedures experimental; two: if you do recieve coverage and actually need to use it, many insurance companies look for ways out and still try and deny payment.

Again, this was a "documentary" that clearly favored socializing health care and I was very upset with the blatant bias because documentaries are supposed to try and pretend they don't have any. But newayz...my point.

Insurance companies have just as much right as any other business to operate within the market system we have in the United states. They offer a service people deem valuble enough to pay for and of course, it is their right to attempt to make profits by charging as demand for their services increases. The business operates well within the system we have developed into as a nation, but the people running them have corrupted the system and given it a bad name making the case for socializing a strong one to the majority of American's who cannot afford health insurance. I guess this is the unfortunate thing about market systems. Compared to the four other market types, it is ideal in theory sort of like communism, but when you add people into the mix, human emotion including greed can make any system seem...not ideal.

Coincedentally, this is why I have chosen to study both economics and socialism. I want to know why such great theories don't work out... and how can they?

Tuesday, September 29, 2009

Market System Swap Shock

I was not raised in a family that would take the time to think about markets in the sense that typically think of them. This is because I grew up in rural Alaska in an area with one small store that no locals went to because it was a "rip off"(now I realize that they were just taking advantage of a more inelastic demand for certain goods). So the idea of trading goods in a market place was something I didn't really think about to often. "Living Off the Land" was the way of life and rather then trade money for food we would trade time and ammo (I know ammo costs money but I did not really buy the ammo as a child so I think this is irrelevant) for moose...yummy! In a sense this resembled more of living in a traditional market.

This leads me into thinking about the complete extreme of my situation. I mean I went to a store about once in every four-to-six months growing up. But, I still went to store and used services that allowed me to process how a modern economy works. I think it's very interesting to think about what it must be like to live in a traditional market having (that being the only market system you have ever known) and having that changed drastically to a mixed market (like that of the US). This is what many indigenous people around the world have faced.

There are four basic types of market systems: free markets, command markets, traditional, and mixed (most markets today are mixed). Looking back in history I think it is interesting to think about what it must be like to live during a time when a market system changes quickly. Typically the first thing that comes to mind is the fall of the Soviet Union. But, I would like to go back to the situation of Alaska Natives. How could have the change in market structure impacted different Native peoples and their culture? Many people talk about "culture shock" but could there be such a thing as "market shock" (which I am now renaming "Market System Swap Shock"...just because I like alliteration)? When you either move to an area with a differing market system or the market system of the area that you live in changes drastically.

The market for lost money

As I walked form my eight o’clock class this morning I found what I though was 10 dollars it turned out to be thirty dollars. I was hesitant to pick it up I always feel like somebody is going to jump out and say “I got you”, well that luckily didn’t happen. I turned the money into the office of the building I found it in and in a week it may be mine. That money would have kept my Washington’s company in my wallet.

I have been on the other side and most often then not you don’t end up with whatever you lost. I figured I didn’t plan on finding/making 30 dollars Monday nor did I do anything to earn that money. To me the money wasn’t free as somebody lost it, it wasn’t until later that I thought, what would other people have done? Would they have kept the money and figured it was there lucky day or turned the money in. Now I would like to think most would have turned the money in but I have a feeling that isn’t the case I once found a Frisbee golf disc and it read “if found call this number or rot in hell” I did call the number as I didn’t particularly want to rot in hell.

Just like the situation I found myself in, markets are made of people that go about there everyday life in the way they see fit. Nobody told me to pick that money up or turn it in, I just did what I felt like I doing. And this may be why markets are so hard to predict with all its variables, I think that the engineering way of thinking suites me best.
I love when I read something new pertaining to economics and it illustrates something about everyday life that is seemingly simple, but is also profound.

“We” as a society craft new vocabulary, make it through rush hour traffic every day, and basically coexist with everyone else all on our own. There is no ultimate authority that tells us exactly how to go about our business. There are very few regulations. Individuals make their own decisions based on frameworks that have been set up, be it by grammarians or governments. People manage their trade-offs all on their own.

So why is it that so many people, or at least the vocal people, think that the government needs to regulate or be involved in every aspect of our economic markets? If they trust the market that emerges during rush hour, shouldn’t they trust the market that involves millions of consumers and producers? It is interesting to me that people demand that the government deal with the “problems” that they perceive: this position in a company makes too much money, this company doesn’t pay their entry-level workers enough, etc. Do people think that the solutions to traffic problems should be dealt with by the government? …some might, but I don’t want to think about them. I just think it’s curious that the economy is something that people seem so afraid to deal with on their own, when so many aspects of our lives work out when they are left alone.

Pirates, Paper, and Purchasing Power

In the late 17th century the Massachusetts people every few years would plunder the French in Nova Scotia. Ordinarily the soldiers would win the battles and loot French goods. In Massachusetts these goods would be sold and the soldiers paid from the proceeds. So this colonial army was a pirate army of sorts. In 1690, however, things did not go as planned. The French this time where waiting for them. They built strong forts and repelled the Massachusetts pirates. When the soldiers got back home the government realized it has no means to pay the soldiers. It was already deep in debt and had no specie to pay the solders with. The government, fearing an angry mob of unpaid soldiers, crafted a cleaver solution. Although it had never been done before, the Massachusetts government decided to issue 7000 pounds of paper currency as a substitute for specie. In order to convince the market to accept this currency it first promised it would never print money again. It also promised that the paper currency would be redeemable in specie in a few years. So the paper was backed by the belief that the government could raise future revenue in specie to retire the debt at some future date. It worked; the currency was circulated as a perfect substitute for specie.

The solution was brilliant. Prices only marginally increased due to the increased money supple and the government had avoided disaster. Only a slim bout of price inflation for paying the army was certainly worth the cost. Unfortunately for the holders of this paper currency two months later Massachusetts said that the 7000 pounds did not cover all of its needs. It issued 40000 pounds of additional paper currency to pay off all its debt. It again promised that no more paper would ever be issued. One year after the original issuance the currency had depreciated by 40%. The government continued to issue paper currency and never did redeem the currency for specie. Needless to say it devalued it currency to the point of ruin.

Other colonies soon followed in Massachusetts lead in issuing paper money and later destroying it though the ravages of inflation. The government of Zimbabwe must have thought that colonial Massachusetts monetary policy represented the ultimate form of monetary policy. Post world war one and pre world war two Germany must have been a great student of Massachusetts money policy. Sometimes I wonder about Ben Bernanke.

The unintended consequence here was the devaluing of the currency. The temptation for government to print money when it was complete and utter control of the monetary system is too great for it to resist. This has happened in modern US history too. After world war two the dollar was fixed at 35 dollars to an ounce of gold. During the 1950’s and 1960’s the US government printed additional dollars without increasing the gold reserves. By 1971 foreign holders of dollars had discovered this and where demanding gold in exchange for their dollars. The US gold reserves fell so drastically so fast, and with no way to redeem all the dollars in gold it was forced to abolish the gold standard. We all know that the period right after was marked by high inflation.

So I ask you, is there anything that the US government is doing now that will have drastic unforeseen consequences? Are we wiser than colonial Massachusetts? Is it somehow going to be different this time around?

*The source of information for the colonial money was a speech of Murray N. Rothbard given at the Mises Institute. http://www.youtube.com/watch?v=Wfyp_i7y1t0

Fear

We would do well to remember the emergent nature of prices, especially in times of crisis.

I found this quote worth re-quoting and commenting on.
I hold to the fact that prices spike in times of crisis out of nothing but fear. People fear scarcity and not having what has previously been readily available to them, managers fear running out of goods and services, so demand suddenly skyrockets, and supplies tighten down. We become willing to give up more money for the good (or spend more money for more goods so we have enough for x amount of time) out of fear. The supplies are tightened because managers fear running out and having to shut down their business. I wonder what would happen if another Katrina sized hurricane decides to pelt the nation, instead of prices of, say, gas, skyrocketing if we didn't change the prices, we just decided to wait. What if the nation, instead of cultivating a culture of fear after natural disasters, we tried to think rationally and find quick, efficient ways to help as opposed to freaking out? I tend to think prices would probably stay low in times of natural disasters.
I also hold to the fact that things like price controls, which are detrimental to economies, are made entirely out of fear of the same thing. We fear we won't have enough money for some good or service, or that some good or service will become obsolete while we still need it, and so in an attempt to ration them in a more efficient (and possibly "fair") manner, we institute price controls. But the controls don't fix the problems, they create more problems. Set the price too low, and suddenly the shortage becomes larger. Set it too high, and there is a surplus because more people are willing to sell at that price than are willing to buy.
Fear is detrimental to economies. What would happen if we freed all the markets and let the prices do what they want?

Monday, September 28, 2009

The Spontaneous Order of Markets

In a market economy there is no central planning authority to dictate what goods get produced, how much should be made or who gets what in the end. The production, distribution and consumption of scarce goods and services is determined on the market through the interactions of many buyers and sellers all acting in their own self-interest. Therein lies the fundamental insight in this weeks readings: This complex market system that emerges through these interactions is a product of our collective actions, but not necessarily of our design.

According to Roberts the idea of relating the natural emergence of complex systems to social phenomena like the development of human language or markets dates back to Scottish Enlightenment-era thinkers like Adam Ferguson and Adam Smith and were later elaborated on by F.A. Hayek's writings on "spontaneous order". Although some scholars, namely Murray Rothbard, have noted that this idea pre-dates the Scottish Enlightenment in the writings of Chinese philosopher Zhuangzi who first noted that "Good order results spontaneously when things are let alone".

Regardless of its origins this concept of spontaneous order has also been influential in other fields like evolutionary biology. Richard Dawkins first coined the term "designoid" to describe a complex object or system that looks like the product of intelligent and deliberate design but is actually the result of an unguided natural process, i.e. evolution by natural selection. In this sense free markets can also be thought of as a designoid system.

As a designoid system the market, like evolution, is driven by natural forces. Natural selection is the key mechanism behind evolution, like supply and demand are the key mechanisms behind the market. There's no need for an intelligent designer behind biological phenomenon like natural selection, just as there's no need for a central planner behind economic phenomenon like mutually beneficial exchange.

While it's true that we don't always have to like the way in which these natural forces compel us, for someone to blame the free market because gas, food, health-care or any other commodity is priced higher than what they would prefer seems as futile as blaming natural selection for endowing them with a superfluous vestigial organ.

Victim of the Market

Markets are such an amazing mechanism and are so ubiquitous. Everything we do has a market even though most of our actions fall outside the tradition concept of the market. The previous discussions on opportunity cost helps us to further illustrate this concept. By writing this post I am providing a service and receiving some level of benefit which exceeds the cost of my time and effort.  Since I am writing this post I clearly value contributing to this blog more than all of my possible alternatives at the moment (assuming of course that I am rational).  I am choosing to participate in this market of intellectual exchange because it provides me with a greater benefit than working out or watching the clouds move down the valley while i drink a cup of coffee and smoke my last pack of cigarettes. Actually that last one sounds pretty good. So I will make my point as succinctly as possible. We like to hold the market accountable for all of the problems we encounter when we interact with other people. Particularly when we are used to consuming a good at a particular price, quantity and level of quality and then are forced through our income restriction, change in market demand or supply to consume at a reduced level. The example which the author provides of rush hour traffic is very apt. Individuals enjoy getting from points A to B as quickly as possible but when traffic slows us down we have a tendency to blame everyone else. The other consumers of that roadway are clearly responsible for our tardiness from work. While simultaneously all the other drivers are complaining about the same thing. We all will blame the faceless market for our problems while denying our own contribution to our reduced consumer surplus. In the end the market is acting just as efficiently as always. However, we are now experiencing this reduction in the level of benefit we receive even though we are well aware of the effects of rush hour traffic and the lose we will experience by not leaving for work early. We blame others (i.e. the market) even though we know full well that participating in it at this time will provided us with a reduced consumer surplus. In the end we accept that and choose to participate anyway. We know we are going to receive less and do it anyway because we still benefit. We just like to complain that we are not benefiting as much as we could. Which I suppose in the end is not a bad thing but it is definitely tedious to listen to on the news every night. 

Tuesday, September 22, 2009

Apparently I posted on oppurtnity costs early becase evn thogh it as late, my last post s spposed to be about last week. Not going to lie, I was kind of lost last week, but this time I think I got it.

In sociology 100 today, we discussed health care and the new reforms being planned for it. What strck me most was the way in which people do not seem to be actively considering any opprtnity costs. Oppurtunity costs are accmulative and the more you spend, the more you give pp or sometimes earn. My frustrations with the discssion stemmed from the way in which my classmates insisted on searching for an instant solution to a very deep rooted problem with the American lifestyle. Insurance companies may soon be forced to price competitively and while some people feel this will lower the quality of healthcare, eventually the market will inevitably reach equilibrium and lower proces will mean a larger consumer ase so things will ultimately even out. No one wants to wait. The average person does not consider oppurtunity costs on a daily basis and we sffer on a national level becase people are so focused on the here and now.

I've recently learned about sunk costs in my econ 100 class and it resonated very strongly with me because it dramatically simplified the decision making process. I was going somewhere with this, but I have lost my train of thought.

The Fallacy of the Risk Free Opportunity Cost

In finance the opportunity cost of an investment is often the risk free rate. The rate used is US government treasury bills, or US debt. That is a promise by the US government that if you give them dollars now that they will give you the same amount and some extra at a certain date in the future. It is clear why people may think this is risk less. The government surely will repay you your dollars and interest at that date in the future. Even if the government can't raise the dollars to pay you, it will issue more debt. After in recent history every treasury bill has been paid. Certainly the future will be just like the past and even if the government can't raise the dollars in though taxes or debt it can always print up the difference. This means in any circumstance you will indeed get your dollars back.

Finance Professor Craig Wisen of the University of Alaska Fairbanks taught us a little about scams in his real estate class. There are certain words used that are clear warning signs that something my by wrong. Use of certain words and phrases like "sure deal" and "can't lose" were included in his lessons. The use of the phrase "risk free" is just that, a warning bell all smart investors should be wary of. Considering this is commonly used as the opportunity cost, economist ears should perk too.

The reason the risk free asset is riddled with risk is simple. The future value of the future dollars in uncertain. It doesn't matter that the payment is certain. What can those dollars purchase in the future?

According to USA Today the unfunded liabilities of the USA government is at 59 trillion dollars. http://www.usatoday.com/news/washington/2007-05-28-federal-budget_N.htm If you think thats bad, think again that article was published in the middle of 2007. Thats before any of the Bush stimulus and Obama bail outs. At that time the average US house holds would have had to pay 31,000 dollars per year for 75 years to extinguish the governments liabilities. On top of that lets also not look into US personal debt. The government budget is around 2.6 trillion. http://www.warresisters.org/pages/piechart.htm

Bottom line can an organisation that owes 59 trillion ever pay it off with budget of 2.6 trillion yearly? True we do have a GDP around 14 trillion, or we had before the economic down turn began. One might say thats only about 4.5 times the GDP. Well lets not kid our selfs. This would be like a bank lending you 590,000 dollars when you earn 140,000 dollars yet your discrestionary income in 26,000. You can only afford less than 26,000 dollars a year to service the debt. No rational bank would do such a thing. It is obvious that the US government will default on its liabilities. The person arguing that the asset is risk less will reminded me that the government will simply print up what it can not come up with by issuing debt and with taxation. This is true. I forecast the government printing away the 59 trillion dollars in liabilities. This is defaulting on the debt by monetizing it. This monetization will cause significant monetary and price inflation. The question becomes who wins and who loses.

Losers - Benifeicaries of US Liabilities and US dollar holders
Medicare and Social Security
Military Benefits
Government Employee Benefits
US Dollar Creditors

Winners - Owners of US Liabilities
US Government
US Dollar Debtors

So I ask you Wall Street, is there any risk in a risk free asset? What will your future dollars buy you when your treasury bill matures? What it the future of the US Dollar? How can we trust a financial system that believes in such risk free assets? Fiat currency failures are as certain death and taxes so long as fiat currencies exist. There is no such think as a risk free asset and opportunity cost needs a new ruler in the world of finance.

The Cost of Twittering

Yesterday I did something that I swore I would never do: I created a Twitter account. My roommate had to get one for a business class and she swiftly became addicted. So I got one too. And now I spend way too much time on it. My rational mind does not understand what is so great about posting statuses under 140 characters long or seeing what celebrities deign to post to their fans, yet I constantly catch myself refreshing my page to see if anyone has posted something exciting. This has shone bright flashy lights on all my opportunity costs, which compounds the guilt I feel.

The time I spend on Twitter is time I don’t spend catching up on my Russian homework, reading for Econ, making my bed, doing the dishes, or being productive in any way, shape, or form. Now that I have made that guilt inducing list, I believe I shall post this, turn off my computer, and wash the dishes.

The cost of a wedding...

This post is very late. It was supposed to be up about 6 days ago. The cost of me spending the entire weekend (including last thursday) with my family and my man and attending Sarah and Chris' beautiful wedding was me not posting this blog. But, it did give me something interesting to write about.
Disclaimer- I am a female, I think pink. Blue people (males) may not quite understand this one.
The cost of a wedding isn't just the amount of money spent on the dress, venue, and flowers or the time spent pulling it together and actually performing the ceremony. A wedding means a person is committing to spend there entire life with the person they say "I do" to. That means they have given up all other options. The "cost" of marrying a person is everyone else you could have potentially married. Sarah and Chris gave up all other options forever the moment they said I do. Sarah found Chris so amazing that she willingly gave up all other potential suitors, and vice versa. So, the cost of a wedding (or marriage, really) is all the other people you could have been with.
Opportunity cost is everywhere.

Monday, September 21, 2009

Opportunity Cost

I am sitting here listening to the podcast and writing my blog because the opportunity cost of listening to the podcast by itself is a half of hour studying for a quiz tomorrow and also whatever I could be doing during the time I write his blog. The idea of opportunity cost is an every day occurrence and by thinking like an economist I can try to make more informed decisions.

Being a big time sports fan, I have never thought about the opportunity cost of buying a scalped ticket, or what I am giving up by attending a live sporting event for that matter. One would be watching the game on a TV and avoiding the cold and obnoxious opposing fans, i.e. Iowa and Ohio State fans. Russ Roberts take on Duke basketball tickets was really funny in how the profs asked for raises, yet wouldn't sell their tickets for 10 or even 2,450 dollars more then face value. You could darn well bet that my tickets would be on eBay for 2,500 dollars.

I think students myself included seldom think about the true opportunity cost of college. The jobs and things we could be doing during this time as well as the sum of money we pay to get educated. There are certainly some days where I wish I could go and work rather then take a test but in the long run it simply isn't worth it.

As I sit here and struggle to make this more then just a few short paragraphs I realize that I am sacrificing time on other homework. So I will exercise my opportunity cost right and get to studying!

Sunday, September 20, 2009

The Value of Foregone Opportunities

This week we'll be thinking about a simple, but powerful concept: Opportunity costs. The opportunity cost of any decision - the true cost - is the value of the next best alternative forgone in order to pursue that decision.

In a world of scarcity our decisions are often constrained by choices between two or more mutually exclusive opportunities. We face scarcity in our budgets: Given a limited income I might be faced with a choice between purchasing a candy bar or a soda. The opportunity cost of the Snickers I buy is the Coke I don't, or vice versa. We face scarcity in time: The time I take to write blog posts is time I don't get to sleep, work on other projects, or goof off. The opportunity cost of this post is the other paper I'm not writing instead.

We all face scarcity. Limited budgets, limited time, limited resources...

The opportunity cost of keeping your savings under your mattress is the interest you could've earned had you invested it. The opportunity cost of a college education might be the income going unearned due to your delayed entry into the job market. In the Ricardian trade models Robin I are JUST SOOOO FOND OF STUDYING IN ECON 463 the opportunity cost of producing more of good X would be the units of good Y that aren't made instead.

Often these trade-offs seem simple, but for such a seemingly simple concept, opportunity costs can also be notoriously difficult to work with.

One problem lies in how exactly we're supposed to quantify and measure opportunity costs. This problem is embodied in the distinction between 'economic costs' and 'accounting costs'. Since an opportunity cost might not involve any explicit monetary terms or a measurable price index that can be incorporated into a financial statement accountants ignore opportunity costs. If only economists had that luxury. Remember that a firm might be operating at a profit according to their balance sheets but operating at an 'economic' loss when opportunity costs are taken into account.

Opportunity costs are sometimes referred to as 'hidden costs' because of the difficulty involved in considering the forgone utility that might've been generated by an option that was never pursued.

For example say the local government is thinking about different uses for a currently empty plot of land. There's a lot they can do with that land. They could use it to build a new sports stadium, or a school, or a parking lot; but they can't do that all, there's a limited amount of land available. Whatever they end up deciding to build the cost wont just be represented by the final price tag. We also have to consider the opportunity costs associated with the forgone value of all the things that weren't built on that land.

Say the government decides to use the land to build a stadium only to find that their local team sucks and no one will pay to watch them play in their new multi-million dollar building. The townspeople realize the land would've been put to much better use had they built something else. Besides a painful lesson in sunk costs they also learn that there's a great deal of speculation and guesswork involved in comparing different opportunity costs.

Hindsight is usually 20/20 and sometimes we find that what we thought was the best available opportunity really wasn't, thus 'hidden costs'.

Wednesday, September 16, 2009

Oppurtunity Cost

I find the conpcept of oppurtunity cost absolutely fascinaing. This is how it was first explained to me:
"If you choose to go to college immediatly fter high shool, it does not cost you ust your tuition. There are books fees, housing, etc, as well, but college does not just cost you the money you spend on it... College costs you all the money you could have made had you worked full time instead."

It kind of makes you wonder what you're really missing out on. Right now I am thinking about taking a trip to Chicago over Winter Break to visit my dad, but that means I can't work at all and although th value of time with family is invaluable I do need to make money to make it rhoguh next semester! What's a girl to do?

Considering oppurtunity cost is an extremely useful tool though unfortunetly can sometimes be a bit short sighted. I may decide to skip going to see my father and work, but then get a scholarship that covers all fees for next semester. I guess there's a risk with everything and since nothing is a garuntee I can only base oppurtunity costs on what I know now...

Sorry if anything is missing a letter..I recently had a freind spill soda on my laptop and now the w sticks so I also need to consider if the time spent revising my work is worth more then the money I would spend on a new laptop. I am thinking no, and that I need to just bite the bullet and get a new one...

Tuesday, September 15, 2009

Reminder

Just a reminder for members of the SWEET scholars group: our first meeting is this Thursday, Sept. 17 at 5:00 p.m. in 216 Bunnell. The deadline for postings on the first set of readings was tonight but if you haven't posted yet please go ahead and do so anyway.

Also the first general SWEET meeting of the semester is this Thursday as well at 1pm in the Econ office. We'll be holding elections for President, Vice President, and Financial Officer. Please email nominations to Michael Schulte (sweetuaf@gmail.com) prior to the meeting.

Incentives

Now that I’m a Junior, I’ve reached the point in my studies where I pretty much only take classes in my field of study. I’m a Foreign Languages major (German and Russian), with a minor in Economics (yay economics!). Personally, I get decent grades because I need to get decent grades. Even in ridiculous classes like Art Appreciation and a very strange “Freshman Year Initiative” class that was required at a college I attended before settling here (I still don’t know what the point of that class was.). Now, some of my fellow classmates just plain don’t care about their grades in any subject, but others, who previously did the bare minimum are now reaching classes they actually get to choose and are turning into A students.

I understand the need for core classes. Many universities today want to assist us in becoming well-rounded individuals. Core classes tend to be boring. They can generally be spotted while passing classroom doors. These are the classes where many only show up on test days, half of those in attendance are slumped, texting, or sleeping. There is no incentive for some students to participate or do well because they have to do it. And in turn, some teachers know that they have to spout this information and they either don’t care if the student’s take it in, or know that most won’t, so the teachers themselves do the bare minimum.

In upper level classes, in probably any field of study, there is a different tone. Students show up to class, they have done their homework, they discuss the subject with their professors, and they are most likely getting good grades - because they got to choose these classes. It interests them. They have an incentive to engage in their classes because they have an investment in it (apart from the monetary investment that pervades the entire college experience). I admit that I behave differently depending on what kind of class I’m in. In my biology lab, I sit in the back and try to avoid eye contact with the professor. I find the class interesting, but I feel no need to participate. In my language classes, I sit in the front, with my book open, ready to participate. It interests me. I’ve decided that it has a bearing on my future, so I am involved.

Basically, behavior in classes is driven by incentives. So novel. Who knew?

Opportunity Cost

Reading about and discussing opportunity cost has always been particularly interesting to me. Opportunity cost evaluation is useful in many ways, from an effective excuse for procrastination (not until the last minute was doing my homework worth foregoing all other activities) to a valuable tool in decision making and time management. While the monetary and accounting aspects of opportunity cost are the most often cited examples (e.g. the cost of foregoing taking on a part-time job or contract work to plant a garden or go on a hike) I find that non-monetary valuations have more room to exhibit the plurality of human utility and preference differentiation. Non-use and non-monetary valuations can be more abstract and subjective than monetary ones, but I think they incorporate aspects of human decision-making that monetary valuation of opportunity cost lacks. Take for instance the labor-leisure tradeoff, while from a monetary outlook taking on a second job may be the opportunity cost minimizing decision when allocating time not spent on one's primary employment, it is possible to make the decision to choose to walk your dog or learn to cook and still make a utility maximizing choice. The Income Effect states that as income rises a person will desire more of a normal good, if we consider leisure a normal good, then as income rises a person predisposed toward leisure will choose not to take on a secon job and perhaps will glean more utility from a vacation or archery lessons. I find it fascinating to consider human behavior and opportunity cost valuation from the viewpoint of utility and I believe it represents and possibly explains human decision making in a light that dollars and cents alone does not capture.

Monday, September 14, 2009

Choices...

One of the first things that I took away from a beginning economic course was the study of economics does not equal the study of money and banking. The study of economics is the study of human choices. Each person has their own idea of what is worth something and they make decisions out of this idea. The articles only served to drive this point home, especially the one about incentives and opportunity cost.
I liked the ending line, "Perhaps every man has his price." I would say "I would do just about anything to save the life of a child," except I think that statement would more accurately read "I will do anything to save the life of a child." To me, the life of a child is more important that anything in my life or even my life. The "cost" of losing that child is greater than the "cost" of losing my own life. I'll pick the "cheaper" option- take my life. (This hasn't been tested, mind you, I'm still here. The opportunity has not presented itself, so I am assuming my response based on what I know about myself.)
Here's another choice presented to me in the very recent past:
I am enrolled in a class where the teacher at the very beginning gave all students a contract to sign. This contract determines if you will have the ability to end the class with an A or a B. A contracted "A" student has the responsibility of 4 or 5 projects throughout the semester, including a group one. A contracted "B" student does not have to do these projects with the understanding that their exams will count more toward their grade and no matter how well they do, they cannot get higher than a B for a final grade. It's definitely the easier path if you're a good test taker, but if you really want that A, it's not for you at all.
I chose option B. Here's why: This semester, I am taking 18 credits (I want to graduate in May, I have an incentive), I am working part time (I like having disposable income), and I am undergoing therapy to recover from Tendinitis in both arms. 2 of my classes are labeled as "writing intensive" and one of my classes is online. That equates to a larger than normal amount of typing, which is what gave me the darn problem in the first place. Not to mention this, which only adds to the typing. Choosing option A would've meant more typing. Admittedly, there are preventative measures I can take that won't render my arms useless again, such as wearing the obnoxious braces while I type. Even then, though, I have to take breaks and let them rest. And then there's the time factor- 18 credits is a heavy load, and school is not the only thing vying for my time this semester. There's work, church stuff, therapy, and keeping up an apartment. So not only would it put my arms at even more risk than they already are (I've typed too much today finishing up an essay, I can feel them getting sore), but it puts even more constraint on my time.
The "cost" of an A for me far outweighed the benefits- I'm satisfied with a B if I know I've done my best. The "cost" of a B for me is virtually nothing. I have acted in my own self interest- I'm sure I could add something to a group, but I still picked B. It was cheaper for me.

This is the study of economics.

The Economics of NASA?

Wow, it appears I am not the only engineer interested in economics. Nate, where have you been all my life?

I worked for one of my professors this summer, technically under the auspices of the Alaska Space Grant Program, designing a ground control station for satellite tracking. Sounds very technological and impressive, doesn't it? Let me put it in more simple terms: I spent NASA's money this summer. Antennas, rotators, radios, LNA's, a computer etc.

Apparently the Alaska Space Grant has "left-over" money from a previous grant that needs to be spent or it "disappears" (reverts back to NASA). Because of this I was told not to skimp on equipment. I shelled out some hard cash for quality components.

What does this have to do with incentives, or even economics? Well, being a student I am in the permanent college saving mode. I frequently would try to figure out ways to save costs on equipment but was told to go ahead and spend the extra money because it was in the budget. There was no incentive to save money because it was grant money that had to be spent. This was good news for my project, but got me thinking about government spending.

It's easy to think that it's not a big deal because it's NASA's money and they have a LOT of money. But where does NASA get their money from? The government. Who gets it from taxpayers...hmmm. Starts to get closer to home.

This seems pretty typical for government spending, it's not the most conservative or efficient system out there. How could incentives be provided to make government spending more efficient? (Hint: privatize!) Could NASA be sold to a private company? Should the government contract out it's space program?

Anyway, this is what I've been thinking about in response to the reading. I'm looking forward to the discussion on Thursday!

Plastic Bags

This week’s topic on incentives got me thinking about plastic bags…that’s right plastic bags.

The Fairbanks Borough has just passed a new law that would tax individuals 5 cents for not bringing their reusable bags when making purchases at larger stores in Fairbanks (Fred Myer, Wal-Mart, Safeway etc.). The revenue then generated would then fund what scant recycling programs we have in Fairbanks. Most of Fairbanks’s major retail outlets object to this policy and state that they already promote reusable bags to their customers. I’m not going to rant on how I am "for” or “against” this tax. I’m just shifting attention towards it because A.) It’s interesting B.) It will be an interesting opportunity to monitor the public’s and retailer’s incentives and possible reactions.

How will people react? This is definitely something I want to track. I was talking to my boss about this new bag tax and he said that he thought it was a good thing. In is family his wife usually remembers to bring their reusable bags to the store, but he forgets. He said “Now I’ll remember to take the reusable bags with me.” On the flip side of the coin, 5 cents now days is a really insignificant amount in comparison to the total cost of groceries most people may not even notice or care about the charge. Also since it’s a flat tax of 5 cents the more stuff you buy and the more bags you use the cheaper your cost is (So the kings and queens of cheapness the economists will use 3x as many bags JK).

America is WEIRD!

When I went to Norway you had to pay for your plastic bags quite a lot actually ($1-3 USD). Most places in Europe this bag thing is the same and oh my gosh there’s more you have to pay for things like napkins and ketchup packets. When I talk about this with Americans they say this make’s them feel ripped off. You see in America we don’t like to “pay extra” for things. We what the most bang for our buck (we like are fries supervised thank you very much). I’m not saying that people in other countries don’t want to find the best deals. I’m just trying to point out a cultural difference. For example: for restaurants in Korea it’s considered ultimate customer service; if you give women smaller portions than men because it means the person making the food was thinking about your needs. If this were to occur in America the ladies would probably be just a bit angry (“I paid the same amount as him; Why don’t I have as much food?!”) I think American’s are focused on obtaining goods and services on a monetary level of "How can I get the most?" We don’t think of TANSTAAFL we think that yes, we can get it free (when everything has a cost). We do pay for these things though, when we go to the College Coffee House the internet is not free, and the price of the purchase you made reflects these things. Every thing has a cost and costs are I’d say the main factor that determines incentives.

It is interesting how Whitman simply states that the slavery problem was induced by a focus on freeing people bound in Slavery and not on the capture of more slaves. When there are loop holes in the system people find them, as mentioned in Robert’s when he talked about how bread producers in Chile decided to shrink a loafs of bread to get a price closer to market price. Could there be such problems from this new bag tax?...this something to think about.

Incentive in Industry

I figure I will warn you from the start that I am an engineer. I know that we have a bad rap on being social awkward and inept but I will try to dispel those myths. I guess I took a different route then some of the others and tried to examine where I had seen incentive used in industry.

I had an internship this summer working in the industrial engineering department at one of the largest part distribution warehouses in the world. Our department was a liaison between the company and the union workers. Our headaches arose from this very concept, incentive. As not to bore you with engineering lingo, teams of employees strove to become more efficient in the way they picked and stored parts compared to historical data.

The teams were rewarded through various means for being more efficient. Certainly Sounds simple but was in fact far from it. Because employees were being paid for their work that they did, they demanded to be compensated accordingly. Maintenance of the “rules of the game” was an everyday occurrence. Being between peoples work and their money is a place that an intern might not always want to be put in but was great learning experience.

The team concept was used so everyone had an equal stake in the work and undoubtedly some still do not see it worth the monetary incentive and continued to work at an unsatisfactory pace. This is more evident in places where they are implementing the new systems, lots of employees are amazed at the pace the incentive employees work at, they simply don’t see it worth that much effort and end of leaving.

By offering an incentive overall efficiency has improved as well as quality. They are to quality numbers that prior to the new system seemed unattainable. The old system allowed for people to take advantage of the system which they did to make almost twice as much as they would normally. They did this by improving their method to that of the engineers (the one they got paid based on). By using the current system both the workers and company share in the continuous improvement. Having been out on the floor for various projects it is very evident that the incentive makes people for the majority very driven to improve quality and efficiency.

Incentive is indeed a powerful tool, I guess I did more economics then engineering this summer.

Sunday, September 13, 2009

Can we disincentivize unintended consequences?

I posted most of this as a comment to Richard's post, but like a Grizzly caught in a revolving door, it bears repeating.

One of the first things you learn in Econ. 101 is the Law of Unintended Consequences. According to Rob Norton in the Concise Encyclopedia of Economics, "The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or unintended."

How does that help us!?

It reminds me of that shirtless guy you see on the TV show Cops. You know the guy who is being handcuffed and tossed into the back of the police cruiser muttering, "I just knew something like this would happen." I mean, he knew something would happen, but then so do the economists. They just didn't know what.

It's possible that I don't know all there is to know about the law of unintended consequences. In my opinion the law of unintended consequences is saying something like this. "Good Luck, Smart Guy!" It's as if Chaos Theory drank a six pack of Red Bulls, picked up his old buddy Murphy's Law, and drove toward his ex-girlfriend's house: first stop, the liquor store.

At least we're trying, right? I liked the part of Whitman's article where he mentioned the difference between the "Guy on Cops" and a "Lousy Economist". "A person with little or no economics training often ignores incentives entirely, by treating people like robots who just respond to their programming. They keep on doing what they're doing, however much we alter their surroundings. A lousy economist regards people as more sophisticated robots. They change their behavior in response to changes in their incentives, but only in specified and highly predictable ways."

He then goes on to talk about the task of a good economist. "A good economist realizes that human beings are imaginative and clever. They change their behavior in response to incentives in both predictable and unpredictable ways, constantly seeking to improve their lives in light of new conditions." In all the examples of incentives gone un-intendedly wrong mentioned in the article, buying back slaves, rent controlled apartments, Italian basement viper breeding, and gun buy-backs, the economists were always a step behind. (We predicted that we'd be behind, we just didn't know how far.) Thank Saint Gosh, we didn't have to recommend any economic policies to deal with slave owning, gun toting, viper breeding Italians living in rent controlled apartments. We might have ended up in the back of that police cruiser with the muttering shirtless guy.

Heyne's "The Economic Way of Thinking" really brings it home for us in chapter one. "It's important to realize, however that economic theory by itself cannot answer any interesting or important social questions. The economic way of thinking has to be supplemented with knowledge drawn from other sources: knowledge about history, culture, politics, psychology, and the social institutions that shape people's values and behavior."

I wish us all luck, we have our work cut out for us.

Roads Paved With Good Intentions

Reading Whitman's essay “The Role of Incentives in Creating Unintended Consequences” this paragraph jumped out at me:

“What distinguishes good economic thinking from bad is recognition of the subtle, creative, and often unforeseen ways that people respond to incentives. Ignoring the complex operation of incentives is a recipe for unintended consequences.”

One of the coolest things about this nifty little apparatus of the mind we call economics is its ability to cut to the bottom of things. To confront people with the constraints limiting their utopias and the unintended consequences of their actions. Whitman and others rightly note that the main difference between a great economist and a lousy one lies mostly in their respective abilities to look past simple first-degree linear causalities like cause and effect and look instead at cause and effect... and effect... and the effects of other effects ad infinitum.

Bastiat wrote about this distinction and the importance of predicting unintended consequences over 150 years ago in his essay “What Is Seen and What Is Not Seen”

“An act, a habit, an institution, a law, gives birth not only to an effect but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession—they are not seen: it is well for us if they are foreseen"

Most politicians, voters, pundits, journalists, etc. would only like to concern themselves with what is seen. A good economist will look ahead and attempt to illuminate what goes unseen.

Slave redemption, “fair” trade, or car allowance rebate schemes might seem like fantastic ideas when you're shortsighted enough to only look at their immediate intended effects, but the economic way of thinking allows us to look deeper into the potential consequences of these well intentioned, and usually popular policies. Often we look back and find that the intended effects of such actions are quite different from the effects that we actually get. Sometimes we find that our good intentions result in outcomes that end up doing even more harm to those we were originally trying to help.

The Law of Unintended Consequences is one of the most important principles one can take away from their study of economics. That said, what are some of your favorite unintended consequences?