Monday, November 28, 2011
Sunday, November 27, 2011
I want to be a politician. I used to think if you had good values and a big heart you could become president and single handedly change the fate of the nation. As I grew older this ideolodgy started to show its flaws, by the time I was fourteen I had seen the onset of two wars and the housing bubble burst right in my face. At first I thought that corrupt businessmen were to blame for these hard times, and then later I assumed that in fact the government was out to get me and that all in power were corrupt and inherently evil. These ways of thinking soon left me as I came to understand how people thought, when I started to study philosophy. In my head I saw life as being a flow, a miraculous combination of hundreds of different decisions made by people and people made these decisions on what they thought was best at the time. So I assumed any politician who takes the time to get your vote probably has other incentives than just to benefit his countrymen. Some like the power and prestige, some enjoy the financial benefits associated with the post, and others are people pleasers, out to satisfy the wants of the masses. So I now know I cannot trust any man to govern people unbiasly and not take incentives to do ill that are so heavily propped around him.
My bone worth picking lies in the election process, to be able to give any sort of effective campaign a candidate must raise a boat load of cash. It is ridiculously expensive and the demand for it only serves to raise prices for ad time and marketing strategys. Therefore only the ones with extensive support from the private sector are able to garnish the needed resources to get elected. This system inherently places obligation for that candidate to help his supporters out since they gave him the essential aide to even be in office. This system is flawed.
In Germany they have reasonable restrictions of the amount of spending a person can do on a campaign, and limits airtime for radio and television to try and level the playing field in elections. I like this idea, to have some basic and very loose restrictions to prevent campaigns getting to be worth more than fortune 500 companies and to prevent people from buying up massive amounts of air time to try and outspend opponents. I am not at all a backer of any free trade restrictions but limiting private sector involvement in the voting process I think is fair.
Tuesday, November 22, 2011
Sunday, November 20, 2011
Perhaps what the 'invisible hand' is trying to sell is not individual songs but rather popularity of music. A song is a piece of art but trying to monetize its use is rightly difficult. The best use of the song is marketing the artist. Author Neil Gaiman once believed that piracy was wrong, but when he released a free PDF copy of one of his books he noticed that the sales of that book and his other work greatly increased. The cost of a good is stratified, the cost of stealing, the cost of purchasing and the low cost of being an effective consumer.
Those who are effective consumers and can purchase a good or service at its lowest opportunity cost are using the tax of the market placed upon pirates and buyers, or those with lesser purchasing capabilities. These are the dynamic innovators. Even though their actions may incur costs upon others they breed innovation and competition lowing the aggregate costs for all.
Friday, November 18, 2011
Externalities are very common to an individual, and even more so to a college student. Every college student pays certain fees that support all sorts of different campus functions like student recreation centers and waste recycling. These functions were established under the premise that they will provide benefits to students and that is why the students are required to pay for them. The issue with this is that not all of the students use these services or ever wanted to, meaning they are required to pay for goods and services that they have not reaped the benefits from.
This is to me a negative externality, since the cost is shouldered by the entire student body and the entire student body does not partake in these activities. That means that those students who do not take advantage of the goods and services they are made to pay for suffer, since they received essentially nothing for the money they were required to pay. This negative externality is odd because it is a direct cost that is mandatory, but use of the product or service is not used. Since usually a negative externality is seen as a transaction that has costs borne by a third party, many do not think of negative externalities of mandatory fees.
These fees act like taxes, and to an extent they are. Taxes are placed on peoples within the governing body’s jurisdiction to pay for the services and products that the government provides them with. Since there is no guarantee that these will be utilized by all of the people who pay their taxes, the people who cannot or do not use them are essentially throwing their money away.
To some their utility function might make them feel happy about paying taxes and some might even be so generous as to gain utility from paying for services they know will only be used by others. But even if this is so, it does not account for the fact that many are unaware of how much they are actually paying to support things they do not consume. It is this unawareness that plays to the favor of those that do use the product. Since they are able to share the costs with people who are not consuming the product, they are able to pay a much lower price than what they would actually pay if only consumers of the product were to bear the cost.
This is a double edged externality sword. The positive externality of the uneducated tax payer paying for goods and services they do not use it that the consumer of said goods is able to gain the benefits they provide at a lower cost to themselves. On the other hand, since the cost is shared by consumers and non-consumers alike the non-consuming tax payer suffers a loss. This phenomenon is seen in all sorts of governing, and explains why programs that only allow some to receive benefits while others are excluded are in essence defunct. Things like welfare are not fair at all to the majority of tax payers who are not allowed to reap the benefits of these programs because they do not meet the criteria to do so.
The hopes behind this are that if everyone helps pay for a service (even those who don’t use it), those who use the service will be able to gain enough from it to make it worthwhile. The fallacy behind this is that if people are made to pay for something they don’t want or use then it is not mutually beneficial and in a sense destroys wealth. In the few situations where other positive externalities come into play to make up for the loss suffered by the non-users (things like roads, fire departments, and public safety) then they can be economically feasible. All programs in government should be this way, to provide overall more benefits to the governed than costs, and when they do not it will only serve to destroy wealth.
Monday, November 14, 2011
There was a recent discussion in the blogosphere on this topic. David Henderson asked his blog readers who was the modern day Bastiat. Bastiat was a French economist who is famous for many insights regarding the benefits of trade and markets. Center-left blogger Karl Smith voted for Paul Krugman while others thought that Russ Roberts, Thomas Sowell or Steve Landsburg was the modern day Bastiat. It was an interesting discourse with some of economics most interesting people interjecting their views. I would encourage you to check this out.
One of my favorite lines came from the hard-hitting and awesome Don Boudreaux--
Krugman spends the bulk of his time today, when writing for the general public, assuring the general public that its economically untutored instincts are correct.
And another thought,
Adam Smith may or may not have been referring to God with his "invisible hand" simile, but I can understand how humans turn to a deity to explain such phenomena. Many people seem to hold "the market" in a religious like reverence that I find interesting.
I may be mistaken but there seems to be a positive relation between traditional Christian values and some degree of respect for markets. If you are a religious person are you more likely to support "the market" than someone who is not?
I was once asked by a child of three, what is god? This question had never been asked of me and for the first time I wondered. The answer I gave the child was that god is the unseemly order behind things, the “something from nothing”, basically when you could not rationally explain why something worked out the way it did that is god. Then I grew older, I went through many changes in mind and body and when I was a junior in high school I was again asked by my first professor, what is god?
By then I had a better answer, I had refined god down to everything. By everything I meant that all things came about due to random happenstance, a moment in time where things could have gone awry but did not. I was marveled by things where there was no human hand, yet peaceful balance existed. Things like ecosystems, the water cycle, evolution, or metabolisms. Millions of actions and reactions that happened with no person directing them, a symphony with no conductor. This to me is what I firmly believed god to be.
Finally I achieved the graduation of high school, and was college bound. I was sitting in my economics class and I was presented with the idea of an invisible hand that seemed to guided cultures and civilizations forward through mutual self-interest. This blew my mind, here I was seeing the same thing that I called and knew as god being explored and presented in how human’s decisions are made. It was astounding how much logical sense it made, things work out because people want what they think is best. They aren’t always perfect solutions that make all parties involved totally satisfied, but statistically it has improved nearly all aspects of human life by having better thing happen then bad.
What struck me most was that I chose to worship this concept before I even knew it was a part of economics. I trust that this spontaneous order that appears is not a giant bearded man in the clouds. When I tell someone that the lord works in mysterious ways and that he always has a plan I mean it. I trust but do not understand, and that is where my faith lies. I trust that the invisible hand is there, and I understand it won’t always be working in my personal self-interest. That is also why I love it.
Sunday, November 13, 2011
Saturday, November 12, 2011
Monday, November 7, 2011
Most economists who have any grasp on reality realize the impossibility of a pure free market. Perhaps we should also dismiss laissez faire politics for the same reason. Those with money have power. Those with power distort the market through coercion. In America this is done by "buying" a little bit of the coercive force that the government has monopoly on through lobbyists and special interests. Therefore the market will never be "left alone," those with established market power, whether it be from money or otherwise, will always have the hand of those with political power in their pockets. Not because politicians are crooked (which they are), but because they are rational (which they aren't, jk) and are doing what's in their self interest.
So when we argue against government policies that provide funding to the poor it may be a good thing to keep in mind that the rich aren't on their own either. The market is already distorted. Some intervention may be needed to help move toward a level playing field.
This is essentially the point Howard Zinn makes in his book Declaration of Independence. He says we should do this because its "fair" (a dirty word). I say we should do this because it helps bring closer to level an ever changing and ever skewed playing field. Because we trade off economic growth (whatever that is) when we regulate or intervene on someone's behalf, the decision is always murky. Who knows which policy is better in "the long run?"
The Division of Labor:
This here’s a very interesting concept. The division of labor is not necessarily in regards to those who can do a job the best but in interest of time. For example, your boss might be better at your job than you, and have a much more intimate insight in the company, yet out of the interest of time he hires out positions to other people in order so that he can handle all that needs to be done on the business end, such as management and similar matters. A person can only do so much.
This becomes quite interesting when looking into the possibility of total self-reliance. We all know throughout history that societies which tried to do this ended up with significantly less wealth and prosperity than societies that chose otherwise. Although in theory a society could potentially be controlled in such a manner as to make this plausible, the reality plays out quite differently. The bureaucratic division of labor, I feel, is incapable of meeting the demands of the fluctuations of the market and there’s no way for people to seek their comparative advantage and contribute most to the general good if they aren’t free to follow their own path.
The reading made a good case, where the United States government chose not to bail out Chrysler in the face of competition with Ford and yet they did with Honda. The continued assistance, interference, of the government allowed the company to become somewhat complacent and simply weren’t able to become competitive. It was a division of labor in a sense. Nobody was forcing employees of Chrysler to be forcibly kept around to manufacture cars but on a cooperate level the government said that it was Chrysler’s business to make cars and thus, in a way, chose their comparative advantage for them. Their sub-par products were to be favored in point of fact because it was “good policy” to have Chrysler running according to the example.
When I think of the words division of labor, I harken back to my days as a child when my father would make a duty roster for all of us kids to follow. Each of us had different jobs on different days to be what he called “Fair”. As an economist I now know that this method is lunacy and madness. Because I was horrible at doing the laundry, and my sisters were horrible at doing the dishes, when it was our respective turns the dishes would turn out dirty and the laundry would be faded and wrinkled. If my father understood basic economical concepts such as comparative advantage and efficiency then he would know that allowing us to trade jobs as we saw fit would be in everyone’s best interest. I would be able to do the dishes and make them impeccable, while the laundry would be cleaned and pressed in half the time. This was not to be so, our dissatisfaction with our jobs was atrocious and it gave an incentive to just avoid doing the jobs we hated so much.
When I observe people grouping into areas of labor that they are best suited to I call that division of labor. The spontaneous act of self-interest to pursue ones comparative advantage is what drives this division and truly determines who should be doing what. When someone intervenes and tries to command the division of labor I believe this is dangerous and can upset the process of pursuing comparative advantages. Since it is through the time saved when capitalizing on comparative advantage that improves the standard of living, controlling the division of labor is going to diminish the overall standard of living by default. Since no one has the informational capabilities to understand another’s true comparative advantages then it makes sense that no human could ever accurately depict the needs of labor.
Just as my father, places like communist Russia and colonial India they made the mistake of trying to control the division of labor and suffered. Do not make the mistake of controlling a process which you do not comprehend or fully understand, the repercussions can be quite disastrous.
Sunday, November 6, 2011
What does comparative advantage mean to me as an individual? It is easy to think of it on a large scale, such as the comparative advantage of a certain region or the collective comparative advantages of a nation or people, But what about at the personal level? Where does comparative advantage have an effect on my life?
The answers to these questions are complicated, but with simple logic one can come to understand their pertinence. I understand comparative advantage as the ability to produce something with relatively the smallest opportunity cost compared to anyone you have the ability to trade with. With this in mind I wonder where my comparative advantage lies. Can I have many comparative advantages?
The answer is yes; a person can have many comparative advantages and usually has several. This is what allows us to trade an exchange in our benefit; if we could not make something at a lower base level cost than someone else then there would be no reason to trade at all. Mutually beneficial trade hinges on the hope that whatever you are exchanging will be worth less to you than what you receive. With comparative advantage, this means that you can produce something of obvious value at such a low cost to yourself that it becomes advantageous to produce for exchange purposes. Since people values change continually then it would be smart to have many things you can produce at a comparatively low cost to ensure you always have something to exchange for what you want. This makes the total wealth of each of us bigger by default, growing out metaphorical economical pie.
For myself, I look at this also in the labor exchange. People exchange labor for wages, ergo they produce labor and in return they are given money. If I can produce labor for a lower cost to myself than others it is in my best interest, and also in society’s best interest, if I produce that labor in exchange for acceptable wages. But also it is up to me to determine the worth of my labor to make sure that the exchange is profitable. This is why I would choose a job close to my home at 10$ an hour over a job far away from my home at 12$ an hour. This is because the opportunity cost is much higher to travel farther from my home and over time makes the ten dollar an hour job more economical.
All in all, the individual effects of comparative advantage are the ability to gain through mutually beneficial trade, the mechanisms used to determine the cost of producing labor in exchange for wages, and a way to benefit society by producing goods at low costs. When someone actively pursues their comparative advantages it benefits not only them, but also those who they trade with by saving them the time needed to produce that good or service themselves. It is this essential function of a market place that allows the economic pie to grow, whereas participating in things that are not ones comparative advantage would shrink that delicious pie. Since I work, and I would like to gain wealth throughout my life, I think it is definitely in my best interest to pursue my unique comparative advantages.
Saturday, November 5, 2011
Let us say that thousands of local jobs are lost in a specific industry do to outsourcing (although tens of thousands of jobs may be gained overseas). Thousands of individuals who thought that they were working within their comparative advantage, are forced through market coercion to reevaluate their comparative advantage, and quite possibly to find a completely new livelihood and specialization. But changing one’s specialization isn’t exactly like flipping a switch, it requires time and sacrifice to develop new skills. For individuals who have worked within a specific industry for twenty years, I imagine that this level of change may be terrifying. They brought themselves up to a certain standard of living through prior sacrifice and specialization, and there is no guarantee that they will find a way to maintain this current quality of life. In all likelihood, their quality of life will fall in the short run. They may even be forced to do work they don't want to do while they are figuring out what their new comparative advantage is.
This isn’t meant to be a slap against outsourcing, in fact, I agree with the principles behind it. If we look at some semblance of the whole picture, we will find that the local and global economies benefit immensely from outsourcing in the short and long run. Nevertheless, I sympathize with individuals who are having trouble coping with the change it undeniably brings.