Wednesday, October 28, 2009
Tuesday, October 27, 2009
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
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
Nice try Professor Roberts:
I’ll see you next week.
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.
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 ;-)
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
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?
-Make one specialized post.
-Comment on others posts.
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
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...
Tuesday, October 13, 2009
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.
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.
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.....
I think the world trips over the simplicity of the whole notion.
Monday, October 12, 2009
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
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
Tuesday, October 6, 2009
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...
Monday, October 5, 2009
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?