Wednesday, October 28, 2009

Unseen Co-operation

The co-operation we see in the economy without explicit direction is indeed quite impressive when it works. However, there are times when it fails to satisfy our wants either through inefficiency or lack of ingenuity. If I want a loaf of bread the system works. I can get in my car, go to the bakery and get a freshly baked loaf of bread within minutes. But, if I want a doughnut with strawberry frosting and rainbow sprinkles I could spend days looking in south central or the interior and find nothing (I have heard rumors of a place in Tok. I guess that is next). I really want this doughnut and would be will to pay quite a bit to get one. However, the Alaskan market for such a good does not seem to exist. In this instance the economy has failed. I suppose the internet and the creation of online shopping can help correct for these thin geographic markets but who wants to eat a doughnut that spent three days in the postal system.

It could be argued that this is not a failure because substitutes exist which generally give me the same level of utility. Unfortunately, in this instance no substitute will do. The all taste like disappointment. It has to be a strawberry doughnut with rainbow sprinkles. Every bakery or dounghnut shop I walk into is perplexed by the inelasticity I have for this good. However, my rational should not need to be explained. All that the market needs to know is that I DEMAND this good and with this great invisible co-operation I should get it. I guess this instance is the exception rather than the rule. The system works 99% or the time and in every instance which really matters (Shelter, water, food, etc). But it has failed to satisfy my slightest whim and that makes me a dissatisfied economic actor.

Tuesday, October 27, 2009

The New Art

My entire life every time I have looked up at the stars to look at crisp beautiful stars, something happens inside. Perhaps it is my ego settling its deferences with the universe or some might say its my soul connecting with God. No matter what it is I suspect every person reading this knows exactly what I am talking about. The night sky is a beautiful composition of dots of light to my eyes with some dots beaming hundreds of years old light to me and others like the moon only a few minutes old. At any rate I have to say it is like a perfect art. Amazing.

This most recent article brought back if not the same scene as the stars a very similar one, ego crushing and humbling. I've never quit experienced economics like this and I will give credit where credit is due. It was the authors intend to do exactly this. It worked. Economics is art.

No Professor Roberts, I won't Marvel!

I've got bad news.


The economy is so easy, even a caveman could do it.


To hear where I’m coming from, listen to the planet money podcast for October 21st. Here's the link: http://www.npr.org/blogs/money/2009/10/podcast_economics_for_monkeys.html

“Human beings aren't the only creatures who make economic decisions. It turns out that monkeys do it, too. Scientists have observed our primate kin exchanging goods and services and adjusting prices.

Ronald Noe, a professor of primate ethology at the University of Strasbourg, says the vervet monkey of southern and eastern Africa uses grooming as a kind of currency. They determine the value of food providers and divide their attention according to the law of supply and demand.”

The price system is most likely an emergent property of various social behaviors in the primate brain. Most of them are hard wired. Concepts like fairness, equity and for lack of a better phrase ‘monetary value’ seem to be built right into not only us but our primate cousins as well. In my opinion, based on the architecture of our brains, it would be more amazing if this price system didn’t exist in human society.

I feel like I’ve been getting a lot of traction by disagreeing with Professor Roberts, so I’m not going to stop now. To quote his last paragraph:

The price system, along with the profit we allow producers to earn for responding effectively to prices, keeps our economic lives orderly in the face of those changes. Teachers of economics, this one included, should be looking for ways to illuminate the unseen workings of that incredible system. It is a system that is often described as competitive. Yet it is ultimately a system of cooperation. No one designed the system. It works without anyone being in charge. Marvel at it.

The price system scales nicely upward from our ancient beginnings in small groups on the African savanna. I refuse to marvel at it, any more than I would marvel at a chimpanzee who grooms his cellmate at the zoo and expects to be groomed in return. Our price system is just six and a half billion shaved apes with cell phones ‘grooming’ each other.


Don’t get me wrong, I want to grovel in amazement at this apparently un-designed wonder of the universe. I remember the first time I went to Niagara Falls. I really did marvel at the size, power and sheer scale of that waterfall. I marveled all the way home. I was still marveling when I accidentally spilled a glass of water on the kitchen counter. When I watched the water pour across the tile and onto the floor, it hit me. Niagara Falls was just a solar powered kitchen spill writ large.


Nice try Professor Roberts:


I’ll see you next week.

I hate titles.

I was going to start this post by saying something along the effect of "we've lived so long in a system that has operated consistently and independently of us..." when I suddenly realized that's not really true. The price system, the system of cooperation in an untold number of markets is entirely the doing of humans. So I guess the more proper way to say it is that the system operates without anyone telling anyone else what to produce and how to trade it for something. There isn't some global leader who knows everything who is telling the coffee grower how much coffee to grow so the pencils I'm going to do my other econ homework with keep showing up in stores. The coffee growers have a general idea of what amount to produce, and they didn't think about me needing a pencil.
I was going to use the example of the team of musicians I often find myself playing with, except it doesn't work at all. As a fellow musician, I actually have to be constantly conscious of what others are doing and base my decision on what they are doing, and most of the time, there is a leader telling everyone what key to play in, and the overall feeling of the music produced. This is quite unlike the formation of a pencil- the coffee growers don't care about the manager of pencil making factory's decisions, they're going to produce how much coffee they think they're going to sell regardless. The fact the coffee grower and manager of the pencil making factory get along through markets is, I think, nothing short of a miracle. (On one hand, though, the manager of the factory is going to decide which coffee brand do buy and therefore which coffee farmer to support, so he is somewhat aware, hopefully, of what coffee growers are doing.)
Why would we ever want to get our hands involved in something that has gone on for thousands of years without our controls? That's just more work for us. It seems rather counter productive to me.
Let the markets cooperate by themselves, they do a good job.

I Will Only Notice You When Your NOT Around

As I read this week's readings, I was thinking about the causal nerdy conversations of economists. I was thinking about how excited they can get when they talk about cooperation and coordination in the market place. I went back to the days of my Political Economy 100 class. Remembering a very energetic professor with her arms raised up her face filled with pure excitement as she talked about muffins...yes that's right muffins. (she was saying something similar to the following...note this is paraphrased as my verbal memory is not that good)"The person who grew the oat that went into your muffin doesn't care about you. It not compassion that drives people to coordinate to provide all of the goods and services that we all enjoy. They don't wake up in the morning and say well I better get to work or someone in Alaska won't get a muffin this morning and then due to low blood sugar will fall asleep in there classes." (By the way Sherri you rock)

As we economists speak of the market place with wide eyes and are overwhelmed by an amazing price system that allow people to coordinate and cooperate so the city Paris won't have to worry about where food is going to come from the next day or how nobody really needs to know how to make a pencil other people those non-economist people are there with their eyebrows raised. How can you talk about coordination with such passion they say or how come every-time you walk in to Fred Meyer you freak out(like Josh when he goes to Fred's) as you speak about the number of individuals around the world all working to make a huge number of goods available so you can get exactly what you want went you want.

If you ask me this excitement that economists show is a talent. Most individuals don't possess this skill. They only notice systems when they are broken. Like Paul Heyne's illustration of social cooperation as rush-hour traffic. People complain about traffic, but don't think about how fantastic it is that such a large number of people can all get to a number of different places at the same time. Many people who have experienced real shortages of food stables (in say Communist Russia) can be moved in to tears when on a trip to the grocery store because they know what its like when the system is broken and you can't find any bread or milk to feed your children.

Often times we forget how amazing the cooperation and coordination of markets to produce goods and services we enjoy really is.Rather then waiting for the system to fail to realize how well it works, it is a good idea for us as individuals to take a page out of the "causal nerdy conversations of economists" and think about how amazing these two concepts are, as it is very foolish to live by the principle of "I will only notice you when you are not around" (which I also consider to be fabulous dating as well as economic advice note that that doesn't occur to often with economic theory...except for in the case of Opportunity cost ;-)

System of Cooperation

I am not sure if there is a better place to start then college. Take for example the cooperation of 4 out of my 5 professors all having tests this week. Unfortunately I don’t have time to marvel at the system. Rather I have to study the systems of how steel is made and of electrical circuits.

I worked in a 3 million square feet warehouse this summer and looking back on the meetings and projects I was involved in it is really amazing how many people were involved to ship out a part the size of a penny to a part the size of a car. Working as an industrial engineering we tried to make the cooperation in our warehouse more efficient. They have done a good job at this, take for example if you need a part and you go down and place an order at your dealership it will arrive in about 2 days (Alaska excluded). This part took the cooperation of thousands of people to arrive for your use.

I started to write all the people that would be involved in shipping the part but the list would get out of hand in a short time. We seldom stop to think about the cooperation and probably take it for granted, although in the case of my 4 tests in the same week that cooperation needs to be stopped. I am going to stop marveling the cooperation that goes on and get back to studying.

Tuesday, October 20, 2009

WARNING: READ AT YOUR OWN RISK

There once was a one person economy. This person provided all that was needed. He even made enough luxury goods to be very happy. This person would be slightly happier with more luxury goods but his marginal utility diminishes very fast so he would not be very much happier. This person clearly had a strong preference for free time over additional luxury goods. Lets call him Bob.

Fortunately for Bob, one day he learned how to double his productivity. He worked just over half as much as before, produced the same amount of necessities, and slightly more luxury goods. His utility increases dramatically mostly due to the large increase in free time. He used it to go swimming in the summer and snowshoeing in the winter.

Unfortunately for Bob one day he met a politician. Lets call him Mr. McBamabush. Mr. McBamabush told Bob that he would be happier if he had more luckier goods. Bob told Mcbamabush that he gained very little from more goods and enjoyed his free time. Besides all the exercise kept him healthy. Mcbamabush insisted that more good would mean a lot more happiness and that Bob should double his work from part time to full time to produce the goods. Eventually Mcbamabush succeeded in convincing Bob that he would be happier with more goods.

When Bob began to produce more he did gain a little happiness from the additional goods. He lost much more happiness in lost free time. He didn't notice but his doubled work was taxing the environment in an unsustainable way making it unhealthy to live in. Mcbamabush kept repeating the lie and even though Bob was less happy he continued in the belief that he would be more happy with more goods. Eventually due to the degrading environment Bob became unhealthy. In need of health care he came to Mcbababush for assistance. He offered Bob a deal, if Bob gave him half his income he would provide unlmited free health care. Bob was very sick and desperate so he accepted.

Bob went to collect his health care. Mcbamabush gave Bob one free band aid to fulfill his promise of healthcare. Now since Bob was unhealthy he was also going to need help supporting him self in his old age. He new this and went to Mcbamabush for assistance. Mcbamabush offered him a deal. Bob agreed to give him the other half of his income for free retirement.

Time went by and Bob somehow managed to survive on nothing until it was time to retire. He went to Mcbamabush and asked for goods for retirement. Mcbamabush told him that he had to wait 2 more years due to unforeseen difficulties. After two year when it came time for Bob to collect he had a heart attack. Mcbamabush eventually put a band aid on him but it was to late. At least Mcbamabush didn't owe Bob healthcare or retirement anymore.

Mcbamabush went on to other people. He convinced them all that they wanted more than they really did. He took the product of their labor while promising more goods for free. It seemed he had enslaved all the people he ever met.

Luckily for the people this story is not over. You see Mcbamabush never changed the peoples utility functions. He only convinced them that a foreign utility function belonged to them that did not. He did not actually change their preferences but confused them .The laws of the utility function still govern them as the laws of physics and when they rediscover them Mcbamabush is in for a real surprise.


The Other Side

"Not everything we do well as individuals or as a nation is worth doing." I can think of a lot of people that would strongly disagree with this statement with all their hearts, are they wrong for that I don't think so. While I will agree that specialization and trade are great processes that add wealth to those involved, it easy for us to forget the costs of this process.

Roberts speaks of decreasing number of workers in Agriculture and manufacturing that frees up capital for ipods and other glorious things. While this is entirely true, it is easy to forget about the displaced workers when writing like this. Maybe they are know open to so many great opportunities that the otherwise wouldn't have had but that doesn't mean they are better off. It is easy to say from the tops of our ivory economic towers that somebody that lost there job can go out and find a new trade or job and make a better living then before but is it that simple?

While I may sound cynical, put yourself in their shoes. What if you were a worker whose skill was no longer needed with no formal education and you have kids at home to feed. When you are on the other side of the economic process, it might be hard to see how losing your job to an oversea company benefits yourself or your family. If you were in that position wouldn't you complain too?

To Post or Not to Post?

This week I was trying to decide whether it would create more wealth on our Blog site to…

-Make one specialized post.
-Comment on others posts.
-Not post.

If I were to spend my time all on one super mega post that post would (according to specialization not my schizophrenic writing skills) would be of higher quality as I have more knowledge on my specific topic. Or I could comment on all of the other posts and in a sense trade my ideas with others. Or not post, if I were to do this I would only create more wealth if in place of my post all of you guys were to lots of great posts (now I know that everyone has the potential to do so and do every week, but as of now there are not many new posts so I’m going to assume that blog space is not a scarce good). I going to take a quote from our buddy Russell Robert’s “Not everything we do well is worth doing.” This how I feel this week about the super mega post option. So I’m going to try something different from what I normally do, and comment on others posts for my participation.

Wednesday, October 14, 2009

Comparing Advantages

The thing about comparitive advantage is...what if your wrong? I say this becasue no one is ever told to pursue their coparitive advantage...We are all told tht we can do anything we want if we just try hard enough...This is not so becasue in the mean time you have other people who have figured out the truth and who are pursuing their comparitive advantage and nudging you out o the way and messing with systems you have been working on for months...

You know what is semiunfortunate? You don't even ever relly get to pursue your comparitive advantage until...college. High schools mandate students take certain classes a certain number of years and I see this as a good thing because there are some things you should just know, in order to be a part of society, but maybe you don't consider math a comparitive advantage becasue you HAVE to do it so by the time you are done with high school and begining college ou just want to do anyhting beides math so you study art but you suck at art, but damned if your going to admit it.

My point is...well it got kind of lost and basically all I am really trying to say is that while comparitive advantage is a comple and easily applied concept, it isn't widely taught or considered and this is why we should appreciate the open entry and exit in our economic system...

Comparative advantage.

I like to think of myself as a very capable individual who really can do anything. I know that will come off as sounding like an after school special with a statement such as "you can do anything you put your mind to". However, it is something which I find at least in my life to be accurate. What makes this statement more substantial is that not only can I do anything but I can usual do it really well and with little or no effort.
Case in point. Where I work I do a lot of different tasks and typically I am never doing the same thing for more than a few days. Not one of these tasks is particularly hard (at least I do not think so) and it is not uncommon for me to finish a task in half the time I was given. My propensity to finish these jobs quickly and to a level of quality beyond the satisfaction of management lead to the creation of the phrase the "Didymos Factor". Typically when I would receive an assignment my boss would give me a time estimate saying, "This would take a normal person about a week, however with the Didymos Factor you should be done in about three days." Unfortunately as my boss learned the Didymos factor was incorrectly applied to his calculations and I would finish the task in about six hours. Management would sometime be skeptical that I could finish something so much faster than anyone expected however I was usual providing results which greatly exceeded what they were expecting. What I found to be the most curious aspect of my high productivity skills was that I was not trying. I would just go on assignment and work. As far as I could tell I was not doing anything special. And it would have, in my opinion, been harder to work any slower. It became obvious to everyone at work (or at least to management and myself) that I had a comparative advantage in basically everything.

So what is to be done when I have a comparative advantage in everything? What type of work should I specialize in? Well unfortunately I did not get to decide that was up to my boss. There were quite a few times that my boss expressed an interest in cloning me and replace most of his employees with those clones. However, since it would take years for the clone to reach maturity the plan was scrapped. My boss wanted these clones so that he could have everything that I could do done as quickly and correctly as possible. My boss had as issue with the opportunity cost of me working on any particular assignment. Eventually human resource added another person to my department names Klim. Klim was the exact opposite of myself and seemed to have a comparative disadvantage in everything. Every assignment she was given took longer than expected and was so perforated with mistakes that I would scarcely call it complete. However, Klim was able to keep her job despite her lack of ability because even though she had a comparative disadvantage in everything she could still get something done and that freed up my colleagues and myself to do more specialized tasks which added higher value to the company.

It would have been best for me to do everything, and if I could have I would. However, I could not be at two places at once so I had to accept that Klim was going to do everything very inefficiently because that was the only way it could get done. And this allowed me to do more specialized tasks. Similarly the Palmers in this weeks reading had a comparative disadvantage in surviving. However, that did not mean that they could not survive or that even by them specializing in something they were not that good at that the overall wealth created on the island would not increase. So while Klim was comparably less efficient at the same tasks as I was it was beneficial to keep her employed and working. However that does not mean it was not frustrating. And I, much like the Fishers, was often wondering how can it be so hard for them to do such a simple task.

Tuesday, October 13, 2009

Although a simple concept, trade--augmented by comparative advantage--shows us how our interactions with others can lead to a net benefit for all parties involved. However, when we consider the benefits of trade on the level of nations, we must consider more than the benefits of mere material gain. It is undeniably true that open and free trade allows nations to develop or at least increase their prosperity. It is also true, however, that each nation may not benefit to the same degree. A rising tide lifts all boats, but not equally. As nations develop through trade their relations (especially their power relations) change. Superpowers fade, new dragons rise. With this in mind, it is important to remember that while trade increases every nation's material well being, it does not preserve each nation's place. Thus, we are forced to weigh the benefits of relative position vs. absolute gains. It may be that in terms of security and the ability to project power to achieve national objectives, it is better to forgo an absolute increase in living standards, for the sake of maintaining a relative advantage over other nations. By trading with another nation we may, in effect, be advancing our own demise. While we will be better off materially, we may suffer in terms of prestige and relative power. These elements are not considered by Mr. Ricardo (to my knowledge), nor are they addressed in Mr. Roberts's tale; but it is important to remember that the complexities of human life (and its benefits and dangers) extend beyond the solely material world. The obvious benefits of free trade are real, but a nation must consider more than those benefits, it must also consider the associated costs; which although not necessarily economic, are essential to the lives and status of any people.

Does everybody gain from trade ALL the time?

In the second part the author states that "everybody gains from trade all the time." It was clear that the Palmers where slowly dieing of starvation. The article mentioned that they where losing weight and strength. It was evident by trading and increasing their consumption they where able to scare off starvation. Lets suppose instead that even after they trade water for fish and increase there consumption they still are dieing of starvation, however now that they are trading they are dieing more slowly. In the long run with out trade the Palmers die. In the long run with trade the Palmers still die. Infact they die slower and more painfully than they would with out trade and they hurt themselves rather than making themselves better off. The best thing for them to do would be to climb one of the large cliffs and jump to the bottom on to some really sharp rocks. This would allow them to die more quickly and less painfully than the super slow starvation. I would like to recompose the quote to say, "Everybody gains from trade, except when they still die."

There was a point where they where considering four options to survive: plunder, invest, beg, or trade. Trade worked in the authors version of the story. In my version they simply died more horrific deaths than they would have on there own.
Brace yourselves, there was a fifth option that the author negligently overlooked. However I will let those that read this to ponder what it may be, and no this is not a joke, there is an obvious 5th option. I'll give you two hints, its kind of like stealth plundering, and it is done on a daily basis around the world. Happy pondering!

The Pursuit of One's Comparative Advantage

When I see a price that seems to be usually high, I try to then to figure out why: Is this a scarce resource? How many potential substitutes are there? What is the Elasticity of Demand? However, when prices are relatively low I don't even have to think about it’s the magical concept of comparative advantage at work. Pursuing ones comparative advantage lowers costs.

One of the best places to evaluate the process of comparative advantage and specialization is Wal-Mart. Most American's enjoy a good-ol trip to Wal-Mart to buy lots of plastic junk with wide eyes because it is just so "freak'n cheap." Why is this stuff so cheap? Who do we have to thank? China...thank you China for following your comparative advantage in labor. This has not always been true in China’s past they have been known to pursue to industrialize industries in which they lacked an advantage and suffered. The main example is that of the production of natural resources. At the height of Mao, Communist China was trying to emulate the Soviet Union’s resource economy and decided that it would be a good idea to produce steel. The Chinese government then went through and collected pots, pans, and farm implements to melt down in kilns and sell. The result was very poor quality metal that no one wanted to buy. It easily to see the waste of resources that took place in this situation but it’s not always so simple.

While it’s easy to look at areas where countries or groups of people have skills and strengths that they are good at, and hence should pursue, it becomes more difficult on a personal level. I’ve been raised by this American idealism that with a can do attitude I can do anything if I invest my time and effort. This is an expensive attitude as far as resource allocation goes, and well it seems clear from a standpoint of a country it is hard at a personal level. For example I am not the best at math so I have to invest a substantial amount of work and time to improve my skills, and even if I were to work on math six hours a day (I know that also the law of diminishing returns would account for this too, throwing a little math like thinking in here) there would still be a large group of people who are naturally more amazing at math than me. It seems obvious that I should outsource my math requirements, but I can’t there is an internal part of me that wants to get the math, complete it, and grow and even if that is relatively expensive the benefits outweigh the costs (plus economists are supposed to be good at math). So on a personal level not pursuing one comparative advantage is viable if the benefits outweigh the costs.

Comparative Advantage and Nobel Prizes

Before I started reading about Ricardo in high school I was stuck thinking in terms of absolute advantage. There's so many brilliant and talented people in this world, I thought, and no matter what I do there's always going to be countless others who can do it better than me so what's the point? I pretty much suck, and no matter how hard I try I'm still going to suck compared to so many others so why bother?

Discovering the subtle logic of comparative advantage made nonsense out of my old defeatist attitude. Just because someone else might be better than me in every conceivable measure of absolute achievement that doesn't necessarily mean I'm completely worthless, I can still have a comparative advantage in something! Doesn't sound terribly reassuring when you put it like that, but still, it made me feel a little better about myself.

For example just because I'll probably never become a Nobel laureate like Elinor Ostrom doesn't mean I'm wasting my time in college. Ostrom is a political scientist by trade but she's also an intimidatingly brilliant economist. Say one day I get a PhD in economics and a masters in political science (yeah right). Ostrom is still a much better economist and political scientist than I could ever be. She has absolute advantages in both political science and economics. Say she can publish 5 papers in the political science journals or 5 papers in the economics journals in a given year. By comparison I'm a disgrace, I can only publish 1 paper in political science or 2 in economics in the same year (and I write all my drafts in red crayon because I'm just that hopeless).

Ostrom will put me to shame no matter what subject she writes on, but that's OK. Being as brilliant as she is she has a higher time opportunity cost for writing research. For every paper on poli-sci she writes she has to give up on writing one econ paper. By comparison for every paper on poli-sci I write I have to give up writing two econ papers. I have a comparative advantage in writing on economics. If Ostrom focuses on publishing research in political science and I focus on economics and we both read and learn from each others articles the amount of research produced and knowledge gained will be greater than if we both produced the research on our own.

Of course in the real world I'm still writing hasty blog posts that almost no one will read and Ostrom, thankfully, is producing important research in both poli-sci and econ that will be read by countless people the world over. I just felt like working in something about the first female recipient of the Nobel prize in economics this week. Congrats to both Olstrom and Oliver Williams, who shared the prize this year.

Comparative Advantage--The Engineering Way

Hi, my name is Gareth McDonald and tonight I'm writing Sam's econ post for him. I am a fellow EE student and we have spent many hours doing homework and labs together over the past couple years. Tonight he asked me to write his econ assignment for him to illustrate the principle of comparative advantage in a somewhat usual way. Here's how.

I am better at Electrical Engineering than Sam is (according to him, anyway). He is better at Econ. We both have a midterm in our Communcations Systems class tomorrow and he has this post due tonight. Looking at the simple definition of Comparative Advantage--"do what you're better at" one would think that he should write his Econ post while I study for the midterm. Then we can trade and exchange. I'll help him with the EE studying and he will share economic insights with me.

But we live in a world of scarcity. There may not be enough time for him to do both. So now we have to start looking at opportunity costs. Is it worse for him to do badly in the midterm or to not write an econ post? Well Sam tells me he loves econ but EE is his major so it is more important for him to study for his exam.

Why am I writing his assignment then? I don't have the "comparative advantage" at econ. Well the answer lies in the true definition of comparative advantage, one that takes into account the opportunity costs of situations. Sam needs to study for his midterm but also needs to post his econ assignment. It's very expensive for him not to study for his midterm, but not so much for me. I can study a little bit and do very well at the exam because I have a very good advantage in electrical engineering. So while Sam studies I write this econ post.

What's the incentive for me to write the econ post (you should ask)? I am hedging against future uncertainties based on past occurences. I got sick last week and missed a take home quiz, the professor allowed me to take it late and Sam helped me with some of the concepts because he had done it already. This could happen in the future, I might miss a homework assignment or not have time to read up on a chapter and if Sam has, he can help fill me in. So by writing his assignment tonight I engaging in some sort of hedging action.

Besides, he says he'll give me the $5 he gets for posting this assignment.....

Tripped by Simplicity.

The notion of comparative advantage and trade is simple. I am relatively better at producing x, you are relatively better at producing y, we both want both, so we set some sort of price and trade, making both of us better off. Or, I have something you want (but I don't) and you have something I want (but you don't) so lets trade and then we both get what we want. Children are notorious for doing this at lunch time- "I'll trade my bologna sandwich for your cookies." Anyone who's been in Sherri's Econ 100 course has played the trade and exchange game. It's simple, it's fun, children could do it, and it does an excellent job of demonstrating how trade creates more of this notion we call wealth. By the end of the game, hopefully, each persons hands are full of things they value more than what they gave away. In my case, I grew up in a house with a small balcony over a wooden floor and a father as a dentist. Candy wasn't valued, but bouncy balls provided hours of chandelier almost-shattering fun. I traded all my candy for bouncy balls. I gained wealth that day (bouncy balls are more highly valued in my world) and so did the person who wanted more candy.
I think the world trips over the simplicity of the whole notion.

Monday, October 12, 2009

Treasure Island

I have actually been to Treasure Island it was in the Wisconsin Dells, I don’t think it was the same place that the author was referring to but maybe. What an interesting reading, except I couldn’t get the movie Castaway out of my head during that whole island scenario story. I mean he and Spalding survived on an island without some fancy trading system.

Comparative advantage is all around us every day. When you stop and think about it is pretty amazing. Even people like Josh with absolute advantage in potty stories don’t necessarily have a comparative advantage, giving hope to the rest of us. Our economy like Adam Smith says allows people to seek their comparative advantage. Isn’t that why we are taking the courses and pursuing the things we do? Because we consider ourselves better at certain things than others, but not to say that we don’t have a comparative advantage in the things we are not good at.

I also like the line “Amazingly, everyone always has a comparative advantage at something.” I worked at a grocery store in high school and I am pretty sure I have worked with a few people that hold very few comparative advantages. In fact them not helping me and getting in my way would be their comparative advantages. But to be fair they were really good at things like complaining and making sure you knew what “they had just done” like it was a novel concept that you actually work while you were at work.

Know I know that those people who I have worked with actually do hold a comparative advantage just maybe not in the grocery industry, maybe in something like the lazy boy tester industry would suite them best.

Thursday, October 8, 2009

Clearance

So I work at Old Navy and I have for almost three years now...And one think I have noticed that demonstartes how a market can set a price is when we clearnace merchandise to get it out of the way for new stuff.

I don't know if anyone here shops there ever, but I am there thirty hours a week and recently we had these ugly tunic type tank top...things that were diagnolly stripped, had bows on the straps and were just ugly. They were priced at $12.50 and spent most of their shelf like on promotion for $10. They didn't sell. They were picked through because of the sale sign and I often had to straighten out the rack, but they didn't sell despite tunics being (for a reason beyond me) very in style.

FINALLY they were clearanced to $8.99 and suddenly they were selling! So corporate found equilibrium. Despite customers being willing to look at them, the shirts weren't worth even ten dollars, but minus, $1.01 and suddenly we had a deal!

Although they were willing to buy them, customers did in face have an IDEA of a price they were unwilling to pay as well as one they would. I guess essentially this just backs up a point made in the previous post. Corporate finally had to relinquish some profit in order to create space in the stores and get rid of unwanted merchandise (the fun term we use is Mark 2 Move). I guess consumers really do have more power then sometimes it may seem as big business gets all the tax breaks and prices increase. They key is to hold out and think in terms of needs and wants so that we aren't forced to pourchase at above the equilibrium price just to get an ugly tank top...

Wednesday, October 7, 2009

A point of intersection?

The notion that markets set prices is generally quite a good one. However, the symbol that is often used to present this idea (two lines meeting on a graph) is a rather poor descriptor for the true mechanics of this concept. When a buyer and seller meet in a free market they do not meet at a Euclidian point where supply and demand intersect each other precisely. Instead, they meet within a range. The buyer is willing to buy at any price below a certain level, and the seller is willing to sell at any price above a particular level. They do not meet exactly, instead they have wiggle room--sometimes more, sometimes less. If their respective ranges do not overlap no exchange is possible, if they do then they must settle on a price within that range. But how is the actual price set? Just as no exchange is possible without overlap no exchange is possible without a specific agreed upon price. Enter skill. Negotiation must now take place, with the greater share of the range going to one or the other party. It is no longer a question of how much is wanted or available, but how well each party can fight for a better deal (within the relevant range). With this view in mind, the lines of supply and demand cannot be said to meet at a point, but rather in a fuzzy zone with an exact place to be worked out without regard to desire or capacity to provide. Exchange is not accomplished through a physics like process that produces a certain and necessary result. Instead, it is the result of art constrained by differing values between parties. To claim that price is merely where supply meets demand is to ignore the necessarily human--and subjective--element that so greatly impacts economic exchange. This point is sometime washed over by speaking of a large market of millions of actors, but price is always unique. Each exchange is a particular, singular event, the negotiations of which are influenced by the other transactions, but never exactly set by them. Although it can be pointed towards (and is a useful concept) the market price--in reality--is nowhere to be found.

Tuesday, October 6, 2009

The Price of Money

In todays world there is a massive misconception about money. Most people, I would argue, intuitively believe that money is the financial measuring stick. Anytime you want to measure and good or service you see how much money it is worth. Say you have an apple and it cost one dollar, people would say it is worth one dollar. Supply and demand works on that dollar the same as it works on that apple. People would be equally justified in saying that a dollar is worth one dollar. If the price of goods at the grocery store go up people automatically assume that what I just said is true, good are more expensive. How do they know in fact good are more costly and not that dollars are cheaper? More likely of course some mixture of both is the case. If you believe that people comprehend an increase in price and goods becoming more costly as I do you may see the problem. When it takes more dollars to buy the same goods as one bought yesterday they like to blame greedy capitalistic pigs. However if they perceived the dollars to decrease in value perhaps they would blame irresponsible monetary policy of the central bank. This could be very political very fast, but to say the last I would encourage the reader to look at the perspective I offered of decreasing dollar value rather than increasing cost of goods.

We can draw a supply and demand curve for dollars as we can for apples. When we look at Q* we will see X dollars and when we look at P* try to see apple or ounces of silver or gallons of unleaded fuel or your preferred good and perhaps you will see prices in a new light.

The Price of a Human Life

Prices for the most part just plain make sense. Econ 100x shows how prices are formed in the market process and how interworkings of the system were buyers compete buyers and sellers compete with sellers helping price to be determined. Prices are usually the the most efficient way to allocate resources. Notice the words "most" and "usually" in the previous sentences (If you're a diehard Austrian fan "woot-woot" I bet those words felt like a red hot serrated knife cutting out your invisible heart and feeding it to your friend's pet giraffe named Skippy -note I am really sleepy right now.

In all seriousness though: I do believe that some things shouldn't have a monetary price tag attached to them. One of these things would be human life. Can we really put a monetary price on someone's life?

Well the answer to this is you can, and that's exactly what the Ford motor company did. In the 1970's the Ford motor company put a price on life, this price: $200,000

Why, did the Ford Company do this? They were simply being good economists setting up a cost-benefit analysis to help them make a choice. They did so after creating the "flaming deathtrap of doom" the Ford Pinto (which had it's gas tank ridged so if someone rear ended you, your car would explode into a ball-o flames, and due to another engineering glitch all of the doors would also jam at the same time...oh how convenient). Soon after discovering the gas tank flaw the Ford Company developed a small part that cost about $11 (about $56 today adjusting for inflation) that could be installed into the Pinto to prevent the whole gas tank blowing up issue. Ford then assigned the price and did a little math. They stated that a life was worth about $200,000 and calculated the number of people who would be killed by the Pinto and compared this number to the amount that it would cost to install the said part into existing Pintos, and found that it would cost them less to just leave the Pinto as was and make payouts to the families who would lose loved ones (In the long run it ended up costing them a lot more because of all of the negative PR and the avenge of Ralph Nader)

I am not at all arguing against the price system here. But there is something seriously wrong with Ford's past logic. We need markets to create prices! Somethings shouldn't have a price because there is no market for them due to their abstractness, and by assigning a price to these things in a way we are using a round-a-bout method of creating price controls hence we get the same ugly gut feeling that occurs when Hugo Chavez states that a pound of beef will cost no more than a certain amount.

I love the subjectivity of prices because they can show us how much we value things. They reflect our own personal elasticities of demand for certain goods that then can be compared with that of others in measurable units. But, shouldn't somethings be just left priceless?

PS I don;t mean to sound like a master card commercial here (as noted earlier me sleepy). I think I still agree with all of the above unless I get a job selling life insurance...

Prices and Bulk Purchases

There are many distorted views when it comes to prices and the benefits we receive from the goods we purchase. One such view is something I like to call the Sam's Club effect. I am certain that it has a different name as the concept is not that original. To learn about the other views you would need to read my book, "Feminomics: Irrational Actors in the Market Place". Anyway, the Sam's Club effect is basically a real world example of diminishing returns.

Take for example something which you can purchase at any grocery store across Alaska. Something such as mayonnaise. You typically only need a couple of bottles to last you and your family for more than a month or so. Which is good because mayonnaise has a fairly short shelf life. It is not like a bottle of wine which could last you years if it remains unopened. When it comes time to replenish your families mayonnaise supply you perform your due diligence as a rational actor in the market place and attempt to find exactly which place has the cheapest mayonnaise. You find that the cheapest single bottle of mayonnaise can be purchased at Fred Meyer's for three dollars. However, you can also find at Sam's Club that you can get a pack of three bottles for seven fifty (two dollars and fifty cents a bottle).

Well you want to get your mayonnaise as cheaply as possible and two fifty a bottle is the cheapest in town. So you purchase the three pack at Sam's Club. Then return home and proudly proclaim to your family the great deal you got on mayonnaise, hoping that they will look on with envy for your inhuman bargain hunting skills. Unfortunately, they are less than impressed and point out that the household typically only uses two bottles of mayonnaise before the expiration date on the three pack would pass. You argue that is fine because it is still only two fifty a bottle so the mayonnaise is still cheaper than if you had bought two individual bottles for three dollars each. An undeniable point they all admit. However, they point out that the amount of utility they will receive from the three pack is equivalent to only two bottles of mayonnaise (thanks to the expiration date). So while the price per unit is lower the price per util is substantially higher. Let us assume that one bottle of mayonnaise provides use with one util of utility up to two bottles. After which we receive no benefit at all.

Purchasing two bottles at Fred Meyer's for three dollars each also equates to purchases two utils for three dollars each. However the three pack at Sam's Club costs two fifty a bottle but costs three seventy five per util of utility (7.50/2) since you can only use and thereby benefit from the two bottles. So in fact it was more expensive to purchase the three pack at Sam's Club than it would have been to buy the amount you needed from Fred Meyer's. Since you are not really purchasing mayonnaise but the benefit which it could provide you with. Obviously there are a variety of ways in which you could still come out ahead from the Sam's Club purchase such as selling the additional bottle for one fifty one or more. Or you could change your diet to include more mayonnaise (maybe that would be a benefit?). However, let us imagine for this argument that no such options are available. Well now it should be clear what the Sam's Club effect is. It is taking into account price per unit without considering the marginal benefit we receive from each unit. Basically it is purchasing more than you need because it is cheaper that way. Often when people are bargain hunting at Sam's Club they fail to take into account how they will actually use their five gallons of soy sauce or in this case all that mayonnaise.

Oh... and the book I mentioned earlier isn't real... Sam's Club might not be either... I would have to check...

Monday, October 5, 2009

Price in Sports

In the Midwest football is fall, Friday Night High School games and Saturday filled with college games. You can go to a high school football game for a few dollars or shell out about 50 dollars for a Big Ten game. You get to see football at both, I mean my high school has a video screen (way over the top in my opinion). Simply put the demand for tickets isn’t even close, when I was in high school there was 6,000 people at a game, my town only has a population 6,000. Yet that doesn’t compare to the 100,000 people that can fit into the Horseshoe at Ohio State that almost always sells out.

While the schools have set prices for their tickets unless you know somebody with a ticket it is sometimes difficult to get that ticket to the “Big Game.” That is where you go to a scalper or get on eBay to find a ticket. Here is where you get to see how prices are set, two crappy teams hey guess what cheap tickets below the marked price on the other side two good teams with a championship on the line hundreds of dollars for the nose bleed tickets.

In the sports world a lack of coordination between supply and demand can certainly correlate to empty stadiums and potential loss in revenue for a team. For example the Chicago Cubs have some of the most loyal (and obnoxious) fans and manage to sell out Wrigley Field routinely, leaving fans searching for tickets. On the other side of town the White Sox struggle to fill US Cellular Field because a lack of demand for the high price on tickets although the World Series victory has helped sell some more tickets.

Now all we need is for a team named the Economists playing in Adam Smith Stadium. They would never play in front of an empty crowd because the market for tickets would always clear. It does make me wonder if Economists ran a sports team would the price of a beer still be six dollars?