Tuesday, February 28, 2012

Public vs. Private - the battle of the beasts

Though I recognize the importance of a healthy road system, particularly in high traffic areas, I find Frank's contention that because counties are postponing road maintenance and allowing roads to turn to gravel we, as a nation, are worse off. Are all roads to be paved? Wouldn't an efficient allocation of capital be at a point somewhere between 'all roads should incorporate latest technology requiring extensive maintenance' and 'all roads should be natural occurrences with no maintenance costs'? Frank equates an investment in road maintenance to a high return investment, but who is to say that road investment is not correcting from a period of overallocation? This would be similar to me saying I need to buy a new pair of $200 shoes because my old pair of $200 shoes is wearying out. But if my pocketbook is shrinking, perhaps a pair of $100 shoes will suffice.

I am in relative agreement that growing inequality is harmful, in general, to society. But doesn't the excessive spending by the 'rich' on goods/services that provide only relative social value flow back into the economy through construction, employment, etc.? Who is to say (perhaps Frank is building up to this point), that taxing goods that provide only relative social value is the most efficient method of reallocating capital? Wouldn't it be more efficient to privatize the road systems with tolls imposed (absolute prices based on the relative position of the road) than a taxation system? This method would more efficiently identify those 18%/year investment opportunities based on actual revenue from individual road systems, instead of arguing that all road maintenance should occur because it's more expensive in the future... that just sounds wasteful.

ANTIGOVERNMENT EVANGELISTS

I'm just being facetious with the title here. A not so subtle reference to Frank's latest strawman.

I feel Frank either doesn't understand the argument against Keynes or isn't representing it accurately. There's a lot more to it than simply the idea that the threat of future higher taxes incentivizes people to save and not spend. Frank debunked this argument and I won't bother with trying to build it back up. Instead there are many good reasons not to want the government to engage in stimulus spending.

First is that the government cannot give to anyone anything that it does not first take from someone else. So any money that the government pumps into the economy it has to eventually take back out. A Keynesian might argue that this is necessary to give the economy a boost in the short run to return prices back to their previous levels or create some other boom in another sector. However, prices serve a vital function in the economy. They are key to allocating scarce resources. Prices are the signals to individuals, producers and consumers alike, that help them make decision about how much and what to consume or produce without perfect knowledge of the economy. When the government pumps money into the economy it is not dolled out to everyone evenly. Some sectors of the economy receive the stimulus while others do not. This distorts the price signals entrepreneurs use when deciding what to invest in. Previously unattractive investments begin to appear profitable. And so the economy begins once again to move in an unsustainable direction.

Distorted prices too far away from real market values are precisely what cause a bubble to pop. As efficient prices are at allocating scarce resources, they cannot perfectly reflect the resources available in the economy. People always speculate though. It is inherent in how entrepreneurship works. Business people invest their money thus taking a risk. When people speculate about future profitable areas of the economy, this creates a bubble. Eventually, however, those businesses that cannot compete are weeded out and only those that can make a sustainable profit at lower prices survive.

These are only some reasons why stimulus spending is the disease, not the cure. For more on this I would recommend reading more about the Austrian Business Cycle Theory.

There is one other topic I would like to speak on that Frank gives very little credibility. In one simple and short paragraph he dismisses the possibility of a society without government. He states that any territory not governed would quickly be conquered by other territories with governments. I would concede this point if there was no one occupying and owning this territory. However, why couldn't there be a society where people's property rights are respected? They could be protected by the expectation of the community. I am not well equipped nor is this is not the time to argue for Anarcho-Capitalism, but I do not dismiss it so readily. I recognize the necessity for rule of law. But sometimes the codification of rules gives them undue credibility and gives certain individuals absolute authority. Government is just a collection of individuals. Why are they any better equipped to make decisions for other people than each person is for themselves? If we are to have a government it should simply establish a rule of law and a standing army to protect the interests of the citizens. It should be decentralized and as local and as limited as possible. I have a serious ideological problem with trying to achieve the ends of a peaceful society through the inherently coercive force of government. When government gets too large, people begin to engage in favor seeking and look to it to solve the problems of the world. I would argue that we should look outside of government to solve our problems. Government should be instituted simply to protect individuals' natural rights, nothing more. Any further duties government takes on are likely to further infringe on property rights and liberty. For more on this I would recommend Frederic Bastiat's short essay "The Law." And I would love any recommendations for readings on anarcho capitalism or small government structures.

Monday, February 27, 2012

Two Sides to Every Story

Chapter 4 of Robert Frank’s Darwin Economy, deals with the matter of human consumption in relation to waste. In this rather thought provoking chapter, Frank addresses the idea of government and public interaction in relation to waste. 
Honestly, I have rather mixed feelings about this chapter as Frank presents basic concepts which are commonly accepted yet fail to substantially prop-up his claims. Some of his points I agreed with, yet others were difficult for me to buy into because of the inevitable fact that his reasoning still seems a bit diluted.

As covered this chapter, Frank explains that the drastic effects of entropy are simply inevitable. According to the second law of thermo dynamics, the quality of matter/energy gradually deteriorates over time and to illustrate this concept, Frank uses the analogy of highway erosion. He explains how when asphalt roads are not suffciently maintained, they begin to erode into dangerous highways which cost homeowners a substantial amount of money because of the dangerous shards of gravel which often crack windshields. Yet, I couldn't help but glean other implications from Frank's entropy analogy.

Throughout the course of the book, Frank has consistently maintained that groups must suffer with negative outcomes at the fault of individuals who act in their own self-interest. But what about the committee who voted for those tax cuts? Generally, not one person would decide the fate of the majority when deciding whether to divert to gravel roads. Yet, the issue remains that individuals must suffer the price of battered windshields all because of a group consensus, which they may have had no part in to begin with. Therefore, it is by the group that the individual suffers. This leads me to conclude that, as much as Frank has constantly reiterated that individuals who act in self-interest will force the group to an undesirable outcome; the reverse is also just as true.
Sometimes, collective interests diverge with group incentives, as in the case when individuals must pay for preventable vehicle damage at their own expense. Ultimately, both entities are not perfect and therefore, groups may equally, though perhaps unintentionally, fail to consider the unintended consequences of their interactions which may needlessly strain innocent-bystanders.

So if the collective can indeed negatively affects the individual…which in many cases it does… then is it really so surprising that certain individuals are against governmental branches plunging their tentacles into their personal affairs? People value their individuality, and when they feel threatened by the collective, it is understandable that many simply become defensive.
The opposite is equally true. Certain governmental involvement is, of course, beneficial. Humans thrive when there is some sort of framework to function within, but again, too much framework may easily evolve into a brick wall, shutting out those fundamental personal intersts which have the purpose of protection to begin with. I think people do, more than ever, care about political issues mostly because they see the “fruits” of what they deem as governmental involvement. A 15 trillion deficient is astronomical and for that reason, not easily ignored. Personally, I don’t think people are quite as ignorant as Frank seems to believe, and while many may not understand the instigators behind the number, 15 trillion is a pretty obnoxious and intimidating value if you ask me.

My basic feeling is that Frank makes many assertions about human behavior which are inconclusive. Happiness, specialness, and even wastefulness are not exactly, measureable concepts. They simply reside as traces of individual perspective: relative and oftentimes quite vague.
Consequently, I don’t blame people for reacting under the influence of these different concepts, because everyone has their own reasons, both as an individual and as a member of a larger system. To assert that people are unreasonable because of certain hesitations neglects the idea that there are always two sides to every story. Rather than assume people are uneducated, irrational, and wasteful it makes much more sense to examine the roots of those uncertainties, using them as beneficial indicators to prevent unnecessary waste in the future.

Chapter Four

I thought franks insights about California were interesting, and I'm glad that he pointed out the positive impacts that Californians have been able to make. It doesn't surprise me that Proposition 13 would pass, property taxes in California must be intense, but through this price ceiling on taxes, they did end up starving there owm government. As he says, the mere fact that group supports a project, does not mean that it serves the public interest, leading back to his theory of what is good for the individual may not be good for all. 

I feel like the theme of this chapter is feast or famine, we go back and forth between extremes; unattended gravel roads to CEO's daughter birthday parties. To me it displays the incredibly unbalanced distribution of wealth throughout the country, and as Frank points out, rather than the middle class be outraged about their failing dirt road and dwindling public services, they want to emulate these wasteful, wealthy habits. But then, criticize the government for it's wasteful spending, when in some cases, and extravagant expenditure is well worth the results. In this way I see a failure of the invisible hand, at least it's benefit to the many over the few, making one see how people would call for the need of government intervention.
And of course, the question is, how do we keep tax money flowing to the right programs, and how do we know what the right programs are? Can we vote on everything? Would that just be using more tax money that could be going to the programs that you're voting on whether or not to fund?I love the set up the California has, but it has some obvious downfalls. This chapter jumped back and forth a bit, so it's hard to focus on one thing, but I think it's was my favorite so far.

Spending Cuts.....What What?

      I have to say some of this chapter I agreed with for the most part. For one thing, I notice that the infrastructure in many places has gone downhill gradually. Then again it has decreased even before I was 13. Anyway, the point is that we want to have better roads that are stable and are easily driven on. However, infrastructure has been doing terrible since Hurricane Katrina hit a few years ago. Frank has a good point on the amount of money spent  just to repair a window or any other motor vehicle, but the fact of the matter is that we are charged a lot more with taxes added on in order to build safer roads. Usually, when told to fix pot holes on main roads, as well as back roads, those who work in construction fill it up with, asphalt....yes asphalt, or dirt and then call it good! So how much are we really spending to re-construct the streets?
     Overall I still feel that Frank likes to point fingers at the opposing side a lot through out this book. Granted, he has a lot of good points in this chapter with our allocation of resources as well as government spending. What are we truly spending our money on (besides the war overseas)? I still agree that he is more concerned about competition and conspicuous consumption. He uses some pretty well put examples to back up his opinion about the beast and how we must starve it to a certain extent in order to regulate our economy. Although this is true. We still need to discover which factors pertain to this beast. We also need to identify which beast we are wanting to stop.
     I don't believe anyone will disagree when we say that we need a government to help stabilize the country's economy, but how much help do we need? How far should they control the banks, the businesses, the franchises, and many other business opportunities? We are all seeking our comparative advantage in this country. So how come the poorer keep getting poorer and the richer keep on getting richer?

Crowding Out His Detractors

There is an annoying pattern in Robert Frank's work that seems to follow a general pattern. His arguments, while sometimes fair and valid, seem to be incomplete in scope. They usually consist of: first, pretending that his detractors (a.k.a. "right-wing extremists) have few, if any, reasoned arguments; second, picking a relatively obscure argument that some opponent may use to object to his theories and claiming that it is the only leg that they have to stand on; and, third, dismissing the argument he chose, and in doing so, the entire basis of the opposition. It's step two that I find the most offensive, as should any reasonable person who wants a fair debate on fiscal policy.

In chapter four, Frank mounted his counter-argument against those opposed to expansionary fiscal policy by quoting Lee Ohanian's comments on the issue. Ohanian summarized the Barro-Ricardian Equivalence Theorem, which essentially states that taxpayers will decrease current spending to accomodate an expected future tax increase, caused by the accumulation of government debt. In it's most extreme form, government cannot increase aggregate demand by deficit spending because consumers will decrease their current spending proportionally. The theory is controversial, even amoung economists on the right. Whatever it's accuracy, about which I cannot attest, it is not the main counterargument to those supporting expansionary fiscal policy.

The mainstream argument on the right would have been better (and harder) for Frank to rebut. It states that government borrowing raises the demand for credit, thus increasing real interest rates. The natural response of the business sector would be to reduce or postpone some investments. Consumers, reliant on credit and thus also sensitive to interest rate changes, would also curtail spending to accomodate the decreased availability of credit. Instead of simply increasing aggregate demand proportionally to the amount of borrowing the government does, some benefit is lost as public sector spending "crowds out" private sector spending. This is a mainstream argument against deficit spending that even some economists on the left accept as plausible to a degree. That's why I was surprised that Frank (apparently) has never heard it. He can't be blamed for his ignorance. Learning his opponent's actual arguments may have required him to come dangerously close to "right-wing extremists."

Living is not merely the act of being alive.

Consumption waste is a major topic in chapter 4 of the Darwin Economy. Simplified, Frank's argument is: competing individuals will over-consume in order to establish consumption hierarchies. The assumed problem with this is that the effort put into making a $12,000 umbrella stand could be spent innovating on something much more useful to the rest of society. But this desire for innovation is a questionable assumption. Many people need to buy rain coats. Why is it then that myself and many others do not buy the innovative new designs? Years spent formulating light breathable waterproof material and yet some still choose oiled cloth. A technology predating the middle ages. One should not assume innovation is good or bad, it is simply innovation.
Frank's relative consumption model assumes that everyone bases decisions off of a competitive, stratified society. This is true in some ways but false in others. Rather than over consuming to keep up with those around them a consumer may take the spartan approach. Warren Buffett could have a floating water fountain that follows him at all times, yet that doesn't change my opinion of my dry cabin. But I am not the average voter or policy maker.
We live in a society that teaches children to be "fair" and equitable. People on average do tend to value their happiness relative to others around them. This is where things get dangerous. Policy that is created to in reaction to the perception of equity inherently relies on the idea that innovation is good and should be shared with those who can use it. This idea will seem reasonable when applied to things such as medicines and health items but that leads to a great systemic problem: With a dogmatic reliance on innovation one can never appreciate what they have. Learning to eat right rather than taking vitamins, trying to stay healthy and away from dangers rather than relying on medical care. It seems that Frank would agree with this point when the logic is applied to luxury goods but not "quality of life" items such as health care. Perhaps I view my life as having higher quality when I forgo running water in order to afford certain luxuries.
For the majority (in a democratic society) to decide that healthcare is more important than art or music or any other luxury good is a death of culture. The opposite is also true. Individuals, not groups, must decide what the value judgement will be. I would not trade the risks and decisions I must make in order to extend my life.

To be free is to be human.

Thursday, February 23, 2012

Frank Interview and Lecture

I again recommend the link to the Frank interview by GMU economist Russ Roberts. I listened to it again today and it gives a good picture of Frank's thinking (also, some students learn better by hearing than by reading). Also, I just saw a YouTube link of Frank talking about his book that might be helpful to some of you.

http://www.econtalk.org/archives/2010/11/robert_frank_on_1.html

http://www.youtube.com/watch?v=HJUoHkGYsOA

No Cash on The Table

Frank reiterates his main point that individual and group interests do not necessarily coincide and that market failure occurs even when all mutually beneficial trades have been made. He also reminds us of the hockey helmet rule example, which I would like to briefly address. The NHL and the government are two different entities. Nobody is forced to play hockey, while it can be argued that the government is the only entity that can legally use force to make people take certain actions. So, at the end of chapter when he writes that the difference between NHL rules and governmental restrictions are differences of degree, not kind, I disagree.

His main example in chapter three is that of labor-managed firms (why we don't see more of these). He is correct in stating that the notion that worker-managed entities would be better is wrong because this "narrative implied that there were prodigious sums of cash on the table." In other words, if this is so good, we should see more of these types of entitites but we do not. I actually found myself agreeing with his responses to his colleagues (those in favor of labor-managed firms) like, for example, "...the very idea that a capitalist banking system migh persistently deny funds to creditworthy borrowers strains credulity..." and "But to suppose that a banker would pass up the opportunity to make a profitable loan for that reason is to completely misunderstand the essence of capitalism." My own response to his colleagues would have been that there are many who can follow but only few who have the skills to lead. The reason the CEO gets paid and should get paid much more than the basic worker is that the skills the CEO has are relatively more scarce than the skills the basic worker has. Sounds harsh, but the truth usually is.

However, I have to take issue with his comment on pages 33-34: "The problem is analogous to the tragedy of the commons that leads to overfishing...This is another form of market failure that results from the wedge between individual and group incentives described by Charles Darwin." The tragedy of the commons is not a failure of the market; rather, it is a failure due to lack of clearly defined property rights.

I also agree with Frank's observation on page 35 that ideology can cloud logical or critical thinking. It amazes me how many people on the left do not admit to the clear benefits of capitalism because their hearts feel something wrong. As I heard once on Stossel interview dealing with sweatshops, I wish people would think with their brains rather than with their hearts! Maybe I missed something, but his invisible hand explanation of workplace saftey seems correct (i.e., that if workers really wanted more safety, they would be willing to pay for it. If not, then they truly didn't value it even though they SAY they would).

Of course, Walmart had to be thrown in---the prime example of the evil "big guy" killing off "mom and pop" and "exploiting" the "little guy." My response to market skeptics regarding the locking in of employees is that IF workers knew the rules of the game before taking the job, then if they still voluntarily chose to work for Walmart, they were not being exploited. To be exploited in my view is to be forced to do something or if there is fraud or misrepresentation.

His main point (again, that the interests of individuals are often in conflict with those of the broader group and that life is graded on a curve...relative position v. absolute position) using school districts and bigger houses is I think a bit off. A better solution, of course, is to allow students/parents to choose the school (if you even assume that government should forcibly take money in the form of taxes from some people to give to others--those with children).

Finally, he argues, "The fact that individual and collective incentives diverge when relative income matters also calls into question the traditional economic doctrine of revealed preference." For some of you who might not be familiar with this term, it basically says that your actions speak louder than your words. For example, in my classes I use various examples of what people say and what people continue to do like "hating their boyfriend/girlfriend," "hating their job," or "hating school." I argue that IF you REALLY "hated" X than you would break up, quit, or drop out! My students sometimes respond with, Weeeelllll, you know," and I respond with, "No, I don't know that is why we are having this conversation!" In essence, your words say one thing but your continued action proves otherwise! And, as free-market libertarian, I don't believe that I have a right to cause indirect harm to others if "harm" is used in the true sense of the word--violating the property rights of others.

Tuesday, February 21, 2012

Who is Really to Blame?

I've started to make better sense of what Frank is trying to get across. However, it seems he has yet to place the blame on no one other than the employees that work in any industry. Now I have to admit that not all the power lies in the hands of the general employee. There are people in a higher position than them that make many of the decisions necessary in order for the business to succeed.
 I would also like to point out the concept of no cash on the table. I was intrigued by the concept of there being no competition. I have to disagree and say that there is always competition of whose goods are worth consuming and who is producing. This applies to the law of Supply. If there is more of a copy-cat brand and its a cheaper price, wouldn't many consumers demand more of this type of product? Another point I would like to make out is the skills of a developing employee. If that employee were to in fact build their skills within the firm, competing firms would pay close attention to their work ethic and dedication and want to take that away to obtain their comparative advantage. In some ways, I do see Frank's Perspective on the thought of survival of the fittest, but I am still not sure how it applies to economics and the invisible hand theory. In fact if we were to look at our economy now it is a mixture of both socialism and economics. Unfortunately, not many people agree but it's the truth our government as well as congress base a lot of their decisions off of the public. Supposedly giving society a bigger role in their decisions, however no so much.

What About The Law of Supply?

For the first ten pages of this chapter, I was more or less on board. He wasn't straw-manning the right. He was actually using sound economic ideas. Things were going well. Then he repeated what in my mind is Frank's biggest oversight. He applies economic principles of demand more or less accurately but then he completely forgets about supply. He does this whenever he talks about individuals bidding up the price of something. That price is signaling something. It is offering a higher reward to people willing to supply that good. Therefore, more will be provided. Frank seems to think the price will just get higher and higher and everyone will lose out. Granted, I'm over simplifying his point. But let's take a closer look. (And please, someone correct me if I'm wrong here.)

Frank argues in the first part of the chapter that individuals will determine for themselves which job offer is right for them. He first explains this very two dimensionally only considering two factors: risk and salary. In reality there are many factors that go into an individuals decision in the job market. Later he recognizes another one of these factors: how interesting the job is. Frank says it's fine for people to trade off risk for salary. In a perfect world everyone would have a job that was safe, interesting, and paid an infinite amount of money. (For some reason people still have to work in this utopia.) But because we live in a world of scarce resources, people must decide for themselves what is important to them. Frank more or less explains all this (though arguably not that well) and I take no real issues.

But now all of a sudden we introduce the fact that some individuals are parents and that just screws everything up. Now all these parents only want a high salary because they only want their kids to go to the best school. And the only way to have your kids go to the best school (apparently) is to buy a nice house in that area. So now all these self interested parents are taking dangerous high paying jobs and buying nice houses because they want their kids to go to the best school. And what a disaster that is, because this is bidding up the price of nice houses and no one is getting anywhere because these parents keep having to send their kids to nice schools so they keep taking dangerous jobs! And somehow the fact that every thing is relative makes this all true.

In reality, when there is an increased demand for something, price does increase. This does not, however, occur in a vacuum. That increased price leads to increased supply. Beautiful. Additionally, we can't say that all parents will sacrifice all reasonable safety precautions to earn higher wages. The need to pay for a nicer home so that their children will attend a better school may in fact influence certain individuals decisions one way or another. But isn't it also true that parents think about their own safety so that they can be around to provide for their children? Yes, many things are valued relative to other things. But at a certain point, parents will decide that a certain school is good enough. 

I don't believe Frank is introducing an earth shattering new concept when he talks about relative value scales. No one was denying or ignoring this before. People decide for themselves. How they decide isn't important. We just know that they do decide, and act, in their own self-interest. Economics already acknowledges that people compare things relative to other things. Taste and preferences are largely influenced by our expectations. That's inherently relative. So what? 

This example was so close to making Frank's idea real. But it still missed the mark. Still waiting for a good example...

Oh! and in response to this quote at the end:
"No one can dispute that, beyond some point, the ability to achieve many important goals in life depends on relative purchasing power. A direct consequence of that fact is that when someone acquires additional income, she not only enhances her ability to achieve those goals, she simultaneously makes others less able to attain them. Or, to put the same point in the economist's parlance, the same activities that put additional income into one person's pocket impose negative externalities on others.

Many movement libertarians will be content to either ignore the problem or to insist that they have a right to cause indirect harm to others as they please."

 I would never argue that I have to right to cause indirect harm to someone unless we are calling competing with others in the market indirect harm. (A facetious argument could be made that I'm doing them a benefit by holding them to a higher standard.) If I am causing someone indirect harm it is because I am not aware of my actions or because I am in a situation of moral hazard (the costs are externalities). In such cases I can only hope that those bearing the cost of my actions act in their own self interest by either speaking up to make me aware or billing me for my actions against them. If they do not do this for themselves than I don't think I can really be held accountable for things I am unaware of. 

But this isn't even what Frank is talking about. He seems to be claiming that everyone should agree to a lower salary because then things will be less expensive and more resources will be available to improve other areas of labor (safety, benefits, vacation time, etc). This relative income idea ignores the law of supply and it ignores the fact that money is not just a number. It represents real value. Would it make anyone any better off if we all decided that we were going to cut the value of the dollar in half? Imagine that this is somehow not achieved through inflation but instead everyone now magically has double the number of dollars in their bank account and all prices are twice as much. It wouldn't change anyone's position for the better or worse. 

So when I make money, I am not making anyone worse off unless we are to accuse me of taking a job someone else could have. What makes them better than me? I was chosen for the job, was I not? If they can take it, let them. The gains from trade actually indicate that I am creating wealth and making everyone else better off. So once again, Frank seems to be telling a fallacious argument and strawmanning libertarians.

Also, the hockey league imposing helmet regulations is nothing like government regulation. If you want to play hockey without a helmet. No one is stopping you. If you want to play in a league, you have to follow their rules. To argue that the league is like government is like saying that the rules of any game are infringing on personal freedom. 

Okay. I'm done.

Decisions Derisions

In Chapter 3, No Cash on the Table, Frank continues his argument that relative standing incentivizes individuals to make decisions that act towards the detriment of the group. There are two points I'd like to address here, first, the assumptions Frank uses to support his claims, and second, his passionate defense of worker-managed firms and his assumptions about specialization.

To anyone that has a basic understanding of systems, it is clear that aggregate effects are produced not necessarily intended or devised by the constituents. Frank argues the actions of these constituents often act to the detriment of the system. This is true, particularly in a case where incentives are not aligned to bring the greatest available value to the system and the participants.

When investment banks determine their leverage ratios in risky financial products, return relative to competitors comes into play. Higher leverage entails higher return (loss) and higher risk, yet individual firms are incentivized to take on these risks to remain competitive. Despite the recent financial crisis, if they did not increase their leverage, they very well may have been run out of business. The systemic nature of the problem is clear when one views the system first, components second.

Frank appears to be arguing that these system/participant problems can be solved. I don't disagree and look forward to understanding his proposed solutions. Though he did clarify at the end of Chapter 3 that prohibition is not required, his solutions have yet to be clarified. The problem with any government-based top-down solution, that I see, is that these decision-makers hold the same lack of perfect information as the individual participants (investment firms in this example) with the additional bonus of slow reaction time and the inability to recognize unintended consequences. It appears to me that a direction for the solution would be founded in the concept of increased transparency. Additional information produces relatively more efficient decisions (on the part of the constituents investing with the firm and on the part of the firms themselves, in this example). As information technology advances, information overload becomes less of a problem.

The second idea I'd like to address is Frank's argument for worker-managed firms and his assumptions of specialization. Briefly, worker-managed firms react to the external environment slower and less efficiently than firms with a central nervous system. By specializing the decision-making process, firms are more able to make efficient decisions. It is not always the case, in other words, that additional perspectives contribute to more efficient outcomes. It depends on the problems being solved.

Furthermore, some individuals prefer a more specialized/mundane/secure/repetitive/certain style work environment. Not everyone prefers a job that is plagued with uncertainty. As well, the increased productivity of individual workers, in my opinion and in all appearances, derived from an increase in control over the firm itself, would more than be offset by the decrease in productivity derived from specialization.


Monday, February 20, 2012

Fatal Consumption

The phenomenon of human decision-making is truly a complex and beautiful thing. It’s no mystery that people act…it’s the very foundation of Adam Smith’s “invisible hand” theory which functions on the belief that when individuals make a decision, they will do so out of pure self-interest. For, as Smith theorizes in the Wealth of Nations, “It is not for the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from regard of their own interests.” Not surprisingly, Adam Smith observed that need is often supplied by demand, in most cases generating a beneficial outcome for the whole. Yes, people act, but they do so through individual means driven by various factors which insist, as in all areas, that tradeoffs must be made.
 I was rather disconcerted after reading Robert Franks first two chapters because they seemed to lack direction and a sufficient amount of coherence.  Chapter 3, on the other hand, began to make Frank’s points visible in an understandable and meaningful way beyond elk, hockey helmets, sports cars, or overly-priced suits …
Personally, I was interested in Frank’s logic behind human action and his reasoning as to why the “invisible hand” seems overly simplistic. Frank’s main premise within Chapter 3 is an attempt to paint a picture of his views behind human intentions by establishing how the complexity of self-interest has other ramifications when considering the context in which those choices are made. At the end of the day, it really comes down to definitional barriers between relative vs. absolute costs and how they function within the framework of personal desire.
 Frank views “self-interest” in a relative perspective which is impacted through more than just human consumption but through personal measures of worth. Therefore, Frank argues that self-interest as defined by Adam Smith, is not as universal of a concept because it seems to ignore the additional factors which are likely to play a prominent role in influencing the unique decision-making process of an individual.

Likewise, self-interest may be redefined according to each individual’s perspective because not everyone values consumption at an equal rate.  As Frank points out on Page 42, “when relative income is important, the invisible hand breaks down,” because it is based on the idea that humans weigh additional costs and benefits solely on the inherent promise of absolute consumption and nothing else. Obviously, humans value more than the temporary promise of the tangible and react likewise.
Therefore, Frank argues that self-interest is not nearly as one-dimensional as Adam Smith seems to believe, because humans act beyond tangible expenditures. Possibly, this is why Frank has so avidly made his argument based off of Darwinism, which I still find unnecessary accept for its unique biological appeal.

Still, there are obvious risks in attempting to manifest some regulation aimed at creatively confining personal measures of self-interest.  After all, it is one thing to presume how certain individuals act within a particular context and an entirely different matter to assume that there is actually a correct implementation to control those diverse responses effectively, especially when many are apt to disagree. In those cases, everyone is left with the question of who decides.
Even though Frank is beginning to consider human nature as more complex than Adam Smith’s initial argument for the validity of the "invisible hand," I understand where Frank is coming from more so than I have in chapters past. Anyhow, if self interest is going to be so trivial and self inflicted decisions really don’t end up benefiting the group as Frank suggests, there must be some way to alter individual incentives to merge with the collective. The most assured way of making the group work as a whole is to provide them with no other choice but to conform to some set of rules. In this way, those limitations might be viewed as equalizers, preventing the majority from feeling overly pressured to conform to the ideals of the group...that is, if those pressures really are as harmful as Frank seems to think...

Ultimately, human nature is such that it is not easily captured nor defined in any academic sense. After all, between sociology and psychology, I can’t help but wonder how far the economic scope may realistically stretch in theorizing the root causes of human action. Frank is attempting to dig deeper in explaining market imperfections due to the common perspective of the human condition in a way that is insightful yet undoubtedly, difficult to define.
Granted, Frank’s arguments were much more to the point and his examples more effective in this chapter but I can't help but wonder if in assuming that humans act with varied and diverse intentions, his methods still to come may prove fatal, only forcing the majority towards a mandatory, overly generalized, one-dimensional response, hindering the significant complexities of individual self-interest.


He Is a Liar.

I spent at least half an hour reading about why a labor-managed company does not actually command any competitive advantage. Jesus H. Christ Bob Frank what are you doing? The reason labor-managed companies are not wide spread is because skilled managers are not wide spread. This is why humans, wolves, bees, and ants have this amazing concept of division of labor. I was reading this chapter , groping for some sort of stand out or controversial thinking, and it struck me that he is just reiterating basic economic concepts at the moment. If he is trying to disagree with Adam Smith he is doing a really bad job of it, as he has affirmed many of the facts that Smith laid out in the wealth of nations. Like how it is not morally askew to assess safety with a cost-benefit analysis. Well DUH! If it was morally incorrect then everyone would be wrapped in bubble wrap, driving vehicles would be illegal, and they would make sure that all head phones were quiet so kids did not hurt their hearing. None of this is new or surprising to me, he is not pointing out anything actually wrong with Adam Smith's reasoning. I don't mean to sound bamboozled, but I have been. I don't think Frank was telling the truth when he said he disagrees with Smith, I think he only used that as an attention gainer. To me he explains Smiths invisible hand and then uses its flaws to champion light touch government regulation through taxes and incentive programs to affect market outcomes. I agree that Darwin's ideology that competition is based more on the ability to relatively consume rather than consume in general. This is why I don't really give a hoot what celebrities wear or how many islands Bill Gates owns. I do care that most people my age have cars and I do not on the other hand. This is just common sense though. Only a crazy person would try and consume more that someone they did not know or interact with. It would make no sense, thus the reason that my GPA means nothing to a Russian student who lives 4000 miles away and vice versa because we are not relative to each other in the slightest. If say this student did want to compete with me and I had no clue who he was, then all the power to that strange minded individual because it means little to nothing to me. If anyone else feels like they are not learning anything new, please speak up. I understand his ideas about governing with a light touch to nudge people in the right direction through market forces and democracy, but as for trying to tell us that he disagrees with Adam Smith, I am calling him a liar.

Simple

H.L. Menken supposedly once said, "there is always a well-known solution to every human problem - neat, plausible, and wrong." Robert Frank's explanation of market failure was described as "simple," but the former three adjectives would suit the purpose better. His explanation rests on the central premise that, by competing, workers find themselves coerced into a situation where they end up seeking sub-optimal outcomes to secure their relative position. Thus, life is a zero sum game (almost exactly like hockey!) where a portion of the participants win only at equal expense to the losers. Were relative measures of wealth the only major factor in an individuals career decisions, Frank would have a point. However, life is much more complex than the Frankian model of the human psyche.

Frank uses the example of workplace safety as an area where market failures occur because of the strong incentive to forgo safety in exchange for increased relative wealth. Because we all do it, no one ends up seeing a gain in their relative status, and we all are resultantly worse off. Frank's argument rests on assumptions that he never properly addresses. For example, he assumes that absolute income doesn't matter. It doesn't matter, he argues, because the most important goods are allocated in proportion to one's relative income. The example he features most prominently is that of school districts. The best school districts are generally in the wealthiest areas. Because of this, only the upper echelon of workers have the opportunity to give their children a decent education. Any worker who cares enough about his or her child would certainly, then, take a riskier job to secure a better salary and ensure a better education for their child. To the extent that this happens, and to the possibly greater extent that it would happen in the absence of worksplace safety regulations, this is somewhat unfortunate. However, such a situation is not the product of the market. Instead, it is a product of the public education monopoly. If we stopped determining school attendence by geography, much of the problem would be alleviated because the quality of a child's education wouldn't be determined by income of their zip code.

Barring such government failures, there are few area's in life where relative income means more than absolute income. Houses, contrary to what Frank implied, are not a fixed quantity. Instead, when absolute income rises we see many middle-income Americans buying second homes. In some other countries, middle income people would be lucky to have a house at all. Even though they share the same relative income as their American counterparts, their poor on every measure that matters. This is because life, it turns out, is not a zero-sum game. The absolute gains that we make by increasing efficiency and even accepting higher risk are real. Trade-offs are are reality of economics and everday life, we shouldn't step in and bar individuals from making them because those same actors chose to compete.

Chapter 3

Yet again I found myself distracted from his actual argument because I was seeing so many holes in his analogies, but I will try to refrain from picking it all apart as I realize this isn't a literary club :) 

I believe that he is correct about some markets failing even when all ideal circumstances are met; some things simply become obsolete, as with his example with the record store. It certainly could have been an operating inefficiency due to the power structure with the employees, but when was the last time anyone bought music in a record store? It still has a certain romantic appeal, but hello iTunes. The other store was probably able to stay in business because it had a stronger corporate structure. In a local example, Box Office Video went out of business long ago, but we still have a Blockbuster video, even though that store is probably "leaving money on the table"for the sake of remaining seen by the physical public, and not just as an online asset, like we see with Netflix or other similar companies. 

As far as food coops, or any others, I think it comes back to supply and demand; if there is enough demand for an organization like that, then it should get enough public support to make it successful. But there also lie problems of not having a higher management, if the employees can't agree on every business aspect, it is bound to unravel eventually. 

Frank says that the foundation of capitalism is that people are greedy. I guess that's one way to put it, but if both parties will benefit from he trade they make, as in The Wealth of Nations, then that greed is leading each party to it's optimal outcome.

And, I just must pick a little bit about the example of the blade guard, he is only weighing the costs and benefits of the initial amount of the device and it's maintenance, but what about the business owners insurance premiums? Surely, the safer the workplace, the lower the occurrence of workman's comp claims= lower insurance premiums. Not to mention the manufacturer of the device, someone else is going to add that safety feature for free, or a comparable price, therefore selling many more devices than the other company that's selling a much more dangerous product. There really are no benefits to not having the blade guard. The   incentives are much higher to have safer, happier workers. 

These reasons are exactly why there are so many laws about labor; how old you must be, how many hours you can work without a break, minimum wage,ect. but there are alternatives for those who do choose to trade safety or other comforts for higher pay, such as some overseas jobs that have become available for civilians in places like Iraq or Kuwait. People are able to make a lot of money, tax free, by willing to risk the safety net of the U.S.. Each individual will weight their own costs and benefits, whether they have a family, significant debt to pay off, or maybe want to take advantage of the travel opportunity. I guess it depends on how "greedy" they are, but we're all going to choose the option we hold in the highest regard. 
Okay, I think I'm done, may add more later, but I'm getting tired and I feel ike I'm rambling and getting distracted.

Labor-Management Business Ideas

Finally Frank is starting to delve into more than just beginning examples. Although decently put together (or at least I thought they were) the only one I truly had issues with was his beginning understanding. Now I may be misinterpreting it and if I am please point this out to me at the next meeting but example or subsection regarding the labor-managed firms and the reason why they fail. First of all as an accounting major, the idea a business would relinquish control of their management to all workers is a little odd. Since I am taking managerial accounting I would be more skeptic on their strategies they would provide as a business to let control, what I would only hope, of the majority of the decisions that managers would have to face monthly.
First off lets look at the benefits. Solely the increase in production by 15% and suggested profit of 10%. Interesting, despite the fact that the pay is not increased but the measure of purpose within the store that gives a 15% boost to production. Then Frank complains about the banks not lending the money to those stores or businesses for little reason. Shrugs off the notion by suggesting that the business may have their employees too occupied in meetings and so they miss them and give up on the ideal. But rather I would like to pose another motion.
I believe that the individual workers themselves may impose a negative externality when it comes to decision making. Although it is well and good for those workers to feel that their work is more of a concern for them that they are there as a board of leaders, I think an issue of business understanding is lost among employees. Negating intelligence or any other factors that could be considered insulting I believe that the information managers receive from sales software from registers and expenditures should be dealt with according to those who would be more responsible to handle them. Also time is a factor of this as well. Before anything can be established in this sort of business it would first have to go through the meeting which might cause this decision to be hindered rather than immediately dealt with by the middle-management.
Yet my expertise in labor-managed firms are truly limited. I have nor studied, or grew up with them to say that I know them indefinitely. But it seems to me that the time and knowledge of the middle or say upper management is far more crucial regarding decisions related to finances, marketing, etc. There is a company however in Australia there is a software company that allows their employees to take on day off a quarter, to come to work and do nothing but to think of new software or products. They could fool around a little bit but at the end of the day they had to produce their results to the upper management. Remarkably they have found various new selling software that would never been thought of if they didn't have this sort of tradition. Now i'm not trying to portray that I am two faced about this idea or argument. But when it comes to a business I believe it would be best if some business dealings should be handled by the ones who are trained and responsible for it.

Thursday, February 16, 2012

Comments on Darwin's Wedge

I don't think we should be so quick to dismiss Adam Smith's insights and the miracle of the invisible hand. Many of you might be familiar with the famous essay "I, Pencil" and John Stossel has a wonderful clip entitled "Rinkonomics" to show how truly miraculous self-interest guided by the invisible hand is (see http://www.youtube.com/watch?v=EVHw_U1v3HI ). I agree that, for example, the perfect competition model is not reality. In fact, I think this model is dangerous because antitrust activitists who view competition as static and not dynamic, will use this model as justification for government intervention. Frank writes on page 28, "Another economist speculated that many of our colleagues fear that taking context seriously might signal a lack of rigor. After all, many economists take considerable pride in their ability to formalize their theories mathematically..." I definitely agree that what passes for economics is just fancy math. Economists who are "serious scientists" believe mathematical rigor is necessary for economic analysis. I wonder if Adam Smith or von Mises would receive a Ph.D. today for their "verbal economics"(read, "not really serious economics")? Moreover, I think too many economists, in the name of "science," are afraid to inject normative analysis. But we forget economics used to considered a "moral science." Finally, I am sympathetic to NOT depending on fancy, technical models of human behavior as reality. Any skilled mathematician can make the agents in a model do whatever he or she wants.

Frank loses me, however, when it comes to his point that people spend their money in a wasteful fashion. What is "wasteful" in the eyes of Frank might not be from my perspective. I understand his individual v. group thinking and absolute v. relative point, but I definitely do not want the government fashioning policy to get me to "spend correctly."

Some links I encourage you to look at:

http://falkenblog.blogspot.com/2010/11/robert-frank-wrong-on-curing-inequality.html
http://www.econtalk.org/archives/2010/11/robert_frank_on_1.html

Antler Signals, Objective Libertarians and Bad Analogies (Again)

I was glad to see Frank start developing his arguments in Chapter 2, "Darwin's Wedge". However, I still am not satisfied with depth or stringency of them. In particular, his elk example does nothing for helping me understand his position. Multiple posts by other students have pointed out a great number of flaws in his analogy, and while that doesn't necessarily mean Frank is wrong, it does mean he is not communicating effectively.

Some of the points about the analogy I thought particularly interesting:

1. Antlers as "market" signals (Daniel, Adam and Colleen)

2. Facts about elk populations and life cycles (Kristen)
--Shed their antlers during the winter so don't have to bear the burden all the time
--Larger, heavier antlers often shed cleaner (likely increasing the animal's survival capabilities and overall fitness"
--Populations thriving in natural habitats (are antlers really that much of a burden?)

3. Evolutionary stability of antler size

If larger antlers are so bad then those elk with them will be more likely to die and not pass on their genes, leading to a negative feedback mechanism that corrects the positive competitive force pushing towards increased antler size. Theoretically (and practically, from what I gather from Kristen's post) this should lead to an evolutionary "optimum" antler size.
(This point is something I was thinking about but I think some others touched on it as well.)

I feel petty picking away at his example again, but it seems to be a large part of the development of his argument.

I plan to look over his points on relative scales and contextual models again and will hopefully have some deep, brilliant insights with which to amaze my fellow Scholars. Don't count on it though. ;-)

Finally, I'd like to thank Garrett for accurately representing libertarians (which is actually difficult to do considering what a vague, blanket term the word tends to be). Although, I admit to being puzzled by his use of the adjective "objective" immediately preceding.

"I think the majority of objective Libertarians hold the view that, on net, markets are preferable over government. This does not mean that markets will always lead to the preferable outcome but they find government more detrimental."

I enjoy not being straw-manned. It's quite wonderful.

Tuesday, February 14, 2012

Somewhat Confused

In a way I think that Frank is trying to make out that whether he is libertarian or if he is for the conservative side of the right. Again he refers to Darwin's thought process of the "survival of the fittest". To be honest, I still don't know what point he is trying to bring but the Invisible hand brought up by Adam Smith and the evolutionary theory are in my opinion are on different concepts. Still I need to know more.

Monday, February 13, 2012

Dubiously Blind

I think this chapter rocked. It outright pisses on the invisible hand as being the model humans should prescribe too while also supporting its sound theoretical value. Most the posts I have read so far denounce him and funnel a lot of “ no this is totally wrong” backlash, but I think they are trying to apply his insights to a Adam Smith perfect society in which people will always end up at the best possible solutions through pure unbridled markets. Adam Smith’s ideas flat don’t work in the real world. I feel Frank touches on a lot of good points that individual utility functions are not always best for the community as a whole and I think many who read this missed that. They only seemed to read “ The invisible hand is wrong” and “ Individual wants and needs are below the needs of the group” which I think would piss off any pure economist. I mean , what economist would dare say that pure competition and the invisible hand are incorrect statements? It shatter the belief of economic heaven where all suppliers meet consumers demand at the most efficient level possible, in an ethical and timely manner, and that barriers to entry and exit are nonexistent. I don’t believe in economic heaven, call me an agnostic. I don’t think it will ever happen for the same reason I feel no market will ever be at true equilibrium. Why? Because humans are imperfect and so are the systems we create. Frank does a wonderful job showing that individuals want things that ultimately have no benefit, due to willful insanity. He doesn’t say peoples utility functions are nessicarily wrong, but he does say that they can logically unsound and have a habit of not always being for the greater good. Personally I am a greater good guy, I think if more individuals got together and promoted the general welfare ( Constitutional Reference) mabey it would create a society in which economic priciples are harnessed to generate superior utility on an aggregate level. That is why I believe our nation is the best in the world, and quite frankly it is. With the worlds largest economy, military, and sphere of political influence it is no wonder why even the countries that despise us still envy our success and regaurd our nation as the land of opportunity. I am amused , for the reaction to this chapter is as expected. I feel like Democritus when he affirmed Pythagoras’s theory that the earth was round, not flat, and that to be flat was simply illogical and dubiously blind.

video

Spence's Wedge

Robert Frank believes that one hundred years from now Charles Darwin will be held in higher esteem as an economist than Adam Smith. If his understanding of Darwinian theory is correct, and Darwinian theory implies that evolutionary factors that motivate sexual selection are ultimately detrimental to the group as a whole, then I have a counter-proposition: I propose that one hundred years from now Michael Spence, winner of the 2001 Nobel Prize in Economics and father of the job-market signalling model, will be held in higher esteem as an evolutionary biologist than Charles Darwin. Signalling theory states that, all other things equal, good workers will be willing to undergo a more rigourous education and pay a higher opportunity cost (i.e. tuition) than bad workers. Thus, educational attainment, even if it doesn't necessarily correlate with increased skill or knowledge, is an effective signal of work-ethic and intelligence because it signals a willingness to work hard, learn new skills, and make tradeoffs for long-run gains.
Signalling theory is a big reason that we go to college: not just to get smart, but also to prove that we're smart.
Animals send signals, too. The main reason that bull elk grow antlers and fight each other with them is not, as Frank implies, because female elk randomly all decided (or randomly evolved to think) that exposed bone is sexy. Antlers exist to transmit information. Large antlers are a sign of a healthy immune system and high nutritional intake. THAT, is sexy. Antlers accurately send the signal to prospective females that the male is A) healthy and in fighting shape, B) able to take care of himself nutritionally, and C) disease resistant. How increased offspring from such elidgible males is bad for the species overall, I cannot say.
Although the free-market, like the ecosytem, isn't perfect, it allows participants, sometimes in clumbsy ways, to seek out the best available methods and options. Some things that, superficially, are detrimental or unnecessary for an individual make the group better off overall. Mother elk know this innately, Michael Spence know this theoretically, and Robert Frank sometimes doesn't seem to have a clue.

Libertarians and other scum

Every time Frank talks about Libertarians he groups them with some other more radical group. This time it was "libertarians and right-wind zealots." But enough of that. We get it that Frank doesn't like Libertarians (not that he seems to really understand them).

Signaling 
How can we really say that elk antlers are really too big for the species? Those with big antlers seem to do pretty well in spite of them. They are there and have stuck around for a reason. I think the point Daniel (I think it was Daniel) pointed out last discussion is really relevant: Those antlers help signal other elks. Big antlers do require energy. But how can we say that this is a bad thing. Big antlers not only attract healthy females, but also deter other elks who know they wouldn't stand a chance against them. That saves energy. A lot of agression within a species is first postering. They save fighting as a last resort when the challenge goes that far. Also, does this really reflect conspicuous consumption? Maybe I'm misunderstanding Frank's point but big antlers don't seem to be a negative thing at all. Everything has a cost, but the benefits of being able to signal other elks about their strength clearly outweighs the costs of maintaining antlers. The antlers might also deter other would be predators. They look scary. I would call these antlers part of the transaction costs of mating.

As humans we also use signaling. From a purely Darwinian analysis, every part of what we do is just for sex at the most basic level. I'm not so sure I agree with this analysis, but even if and when it is true, these things help us identify each other. 

Frank states that "The Darwinian framework is the only scientific framework available for trying to understand why humans and other animals are motivated to behave as they do." This made me do a double take. REALLY!? I don't think it is the only framework nor a very good one at that for explaining human behavior. How does it account for homosexuality? Are these people to be classified as dysfunctional? Do they not also possess the capacity to live out happy and fulfilled lives? I think this gets to the heart of the matter. People do lots of different things to make themselves feel happy and worthwhile. A lot of the times this means finding someone truly special to spend your life with. But not always. Many people live out their entire lives without ever reproducing and feel entirely fulfilled. We can't classify human behavior based on our own personal valuations especially not when we talk about economics. We can only say that people decide for themselves based on their information about their utility function that only they can possess and understand. This reminds me of Mises' study of Human Action. Mises says that we should not presume to know how or why a person decides to pursue a particular goal at a given time, we can only observe that humans do act and that they choose the best option they are aware of at the time of decision. This immediately limits the study of economics to observing what comes of the fact that we act. Any speculation or modeling that tries to explain why people behave in a certain way would fall outside the realm of economics for Mises. This seems to be something Frank does not understand about the Libertarian philosophy. 

Clearly mainstream economics looks at people's behavior and Frank recognizes the potential cross over into sociology when we do this. But he continues to places value judgements on things that from my perspective, just aren't that bad. So what if people buy expensive suits? Frank clearly doesn't have a problem buying expensive cars. If people demand nicer suits, for whatever reason, the market process provides it. Wonderful! Context and relative positioning are inherent in how humans make decisions. Mises recognizes this when he says that humans act toward their best option. 'Best' is inherently relative. Austrian economics doesn't ignore this. So what is he talking about? I feel like maybe I'm missing something so maybe someone can explain it to me.

I would also like to point out, once again (see last weeks post), that these examples where Frank talks about people's relative desires only resulting in bidding up the price is short sighted and just plain wrong. This price bidding is the market process at work. When demand increases so does price, when price increases so does supply, thus satisfying the increase in demand in the long run. That's how it's supposed to work. How would Frank allocate scarce resources otherwise?

See you guys on Thursday!

Darwin's Wedge

I understand what Frank is trying to say about market competition resembling competition in nature, but through the entire chapter I kept asking myself "Why do they have to be mutually exclusive?". He speaks later in the chapter about context relativity, which I think he should have applied to his analogies of economics and the wilderness; an animals antlers may seem cumbersome to us, and I see the logic he used about how smaller antlers would benefit the species better as a whole, but he's not addressing the positive benefits of the larger antlers. Larger antlers do help fight each other when in competition for mates, but also just represent a stronger,larger male. In brutal winter conditions, or times of scarcity, the larger of the species will survive, had they all been bred smaller, such conditions could be catastrophic to the species survival. Being able to represent  this strength give the bigger bulls an advantage in their "market". Yes, it is beneficial for the gazelle to be as fast as possible to outrun a cheetah or other predator, but had evolution chosen to make the gazelle bigger, with large antlers, maybe the cheetah would simply go after easier prey?
And through all of this, I see The Invisible Hand at work. In my understanding of this concept, I never thought of The Invisible Hand as striving for a perfect and equal outcome, it merely is the interactions of all parties coming together to use and share resources, and the consumers will choose what they deem the best value, thus the survival of the fittest. I hope I am not misunderstanding that concept, I apologize if I am.
Something that Sherri was always saying in class is that the Economy isn't static, it is constantly shifting and changing. Likewise with evolution, neither one has a specific goal in mind, they are simply changing to meet demands of the moment, and trying to adapt should an environment or resource change, some thrive, some die out.
His metaphors sparked one of my own that I would like to share: ( A little background: I'm a biology major and have volunteered on a wildlife refuge in South Africa)
There is a market for something called 'Canned Hunting', in which someone owns land, fences it in, and supplies it with Lions, Elephants, Zebras, Rhinos, what have you. Trophy hunters pay to come "hunt" this land, as it is a guarantee of a kill, the animals have no where to go. In addition, a guide is usually provided so the hunter has even more security and safety....Sounds like a subsidy if I ever heard one :) Having a guarantee of acquiring the outcome one wants with virtually none of the added risk that would normally be involved with killing such deadly and rare creatures. Just a thought.

Frank's Wedgy

In competitive markets, relative position is more important than absolute position and individual agents will work in the best interest of their relative position notwithstanding a disadvantaged absolute position. Individual's make irrational decisions, weight costs and benefits differently, weight short-term and long-term interests differently, are motivated by interests other than pure selfishness, etc. I agree with these points, but Frank is lacking in his evidence for why these observations should result in the marginalization of the invisible-hand theory.

It isn't just the invisible-hand theory that is based on overly-simplistic assumptions...

I agree that evidence-based, tangible, direct/indirect harm in society should be the centerpiece of taxation through representation. Furthermore I agree that concern with relative position may impose negative pressure on society's absolute position in some situations, but when Frank makes the final leap towards the governmentalization of morality, he loses my support. "...tax remedies for collective action problems are no more an endorsement of envy than speeding tickets are an endorsement of driving too fast." (pg 29)

Evil Corporatist Consumers

In this chapter Frank begins showing the darwinian side of his argument but not before establishing that he is a 'good guy' and not a silly stupid wing-nut. Is the pandering truly necessary? Frank talks of libertarians as if they are members of some great inhumane cult praising the market as the great provider. And though there may be some or even many that hold this view of faith in the market, it doesn't really matter. A market is not some magical provider of goods and services it is not some ocean that ebbs and flows based on the S&P 500. A market is a description of the natural allocation of scarce goods and services between individuals.
However, his view of the rights' faithful relationship with the market is only a distraction from what is the truly important mistake in his argument. Ignoring the ad-hominem, the poor biology and the moral sentiments just look to his separation of people. Frank talks about the dichotomy between producer and consumer, erring on the side of the evil or greedy producer. He describes advertising as "...Madison Avenue hucksters [persuading] consumers to want..." So now supply can create demand? Frank even refutes his own claim with failed advertising examples, but then tries to dismiss them as the exception to some arcane rule. Advertising can create a preference but a demand for spending must already exist. Demand is not a measurement of want but a measurement of willingness and ability. I might want to buy a restored Series III Landrover but I can not afford one so I am not part of the demand curve. This is however a digression from the point that Frank does not understand what a producer is.

Let me elaborate:
Producers = Consumers
Buyers = Sellers
Individuals = Traders
People = People
Groups =/= Individuals

A producer is a consumer. A consumer is not necessarily someone pushing a cart at a Walmart or a Wholefoods Market. A business can be a consumer. It will likely need to be. The notion that a producer is trying to screw other producers and consumers is scale-able. This applies to consumers as well. The issue that arises with this is not the greed or malice, it is the potential for a higher economy of scale. This is a group problem. A group can better economize the malicious process. This however, is only a problem when the group is not subject to the same rules as individuals.
Under Smith's notion inefficient production will lead to reaction from corrective market forces. This seems like an acceptable response to the fear of the arms race. The only place I see this as a problem is the groups that can cheat and enter into an arms race with no risk of repercussion, no check on inefficient behavior. I am of course talking about the state, the very tool one must assume Frank hopes to enact a tax on envy.

Technology and Progress

Robert Frank is really starting to put some interesting notions on the table and will probably be examined more thoroughly and clearly than I would be able to in one blog post. Rather, I would like to touch up on his main theme if you will using Darwin's idea that perhaps the competition is more likely to bring negative than positive outcomes. I have a few problems with this and the way he begins this matter or narrative debate. I believe Darwin had a more reasonable sense to apply his methods to biology and not economy. A common aspect that you can pick from one scientist makes him no less of the "father of economics" than claiming that the methods Newton portrayed as he discovered that "what goes up, must come down". If I was to write an english paper regarding a new father of economics Newton would be a good choice. For example he completely explains the business cycle of economics by the way if things are tossed up they also fall, like a fluctuating normal market. Consider a human constantly tossing an apple up and down with each vertex symbolizing percent GDP growth, I think I may have found the true father of economics!
Perhaps that was a little too harsh to stab at his examples, he does extrapolate to cover more of his premise that competition ultimately has a negative outcome by mis-allocating resources. This is finally a more interesting topic to look at than who is the actual 'father' of economics. I believe to a certain extent that human consumption, or in the extreme case which we are observing (that is to say over-consumption), is a very rough area to observe. As it is more difficult to point out the physiological evolution of ants compared to a relatively small species of elk. If Frank wants to consider the first aspect of this, say the individual ant, is mostly unimportant until the demand is aggregate to a more reasonable number. Let's say that a colony or nation of ants have recently have grown a large demand (unexplicably) for cell phones. Now whether or not these cell phones now in production to profit from a large demand from this colony is a mis-allocation of resources could almost never be known.
We do know however that these ants now have the capability to communicate in a much quicker and mass spread that their old method of hive-mind has become obsolete. Yet to suggest that these resources after competing producers that are making better, more advanced cell phones, are a waste of resources that could perhaps been used for better structural integrity of the colony is unknown to the ants. At least the colony utilized their resources to come up with a product that is reasonably enough useful to keep. If these producers of cell phones hurt the colony in any other way of competition it would be unknown to them.
If Frank is only concerned with the resources that are expended in these common practices he should come out and say it. Although I understand his hesitation to do so. It would mean that someone would have to control these resources and prevent them from being wasted, but who is the only 'true' power that could try to tip markets? Although they have failed before, I think government would believe they are a prime candidate of such a position. To say that the regulations they impose is to protect ourselves from the harm of competition to say is very reverse for me to believe. I don't see OPEC benefiting in the long run when they halt production or speed it up after the meetings and hand shakes between CEO's are over and they turn to stab each other in the back. He may be right in the aspect that if all OPEC decides to speed up production and ruin the oil fields by removing too much too quickly, we be understandable. But I would like to believe that most well established companies would consider the long run disadvantage in their profits. Forsaking a few billion dollars in current rates all for the reason of gaining a few million dollars of profit is hard to believe by this student.

Compete or Cooperate



Well, I am starting to grow a distaste to reading the thoughts presented in this book by Dr. Robert Frank. I almost feel as if indulging into his ideas are engendering ill thoughts about Libertarians and Human Nature into my thought process. It almost seems as if he has forgotten about his role of antagonizing Libertarians about the very broad claims that a few of them probably made. Nevertheless, he still seems to be peddling the same idea that when people compete they end up competing themselves into being super efficient and making no profits. (lol)

First off, I do like the idea that the Invisible Hand is only one but many of the possible cases. I can't imagine the alternatives too clearly, though. In a competitive Free Market, the Invisible Hand will guide the competitors into an efficiency seeking process that ultimately benefits the consumers. I understand that there are cases in which the Social Cost will outweigh Aggregate Individual Cost because of the Invisible Hand (as explored in Chapter 1), which should call for some sort of intervention to balance out the costs. This would lead me to believe that the invisible hand is not a "special case" of some broader theory, but rather just a component of a broader theory (namely Economics). After all, the Invisible Hand is a theoretical concept, not a concrete item or scenario. Maybe somebody can figure out what Bob Frank was going for. Right now I'm just left with the idea that the "special case" he was talking about was the case in which the invisible hand is all that is necessary for maximal profits. Of course, that could never be true, because there needs to be some sort of human force involved in human competition...

Anyways, there is a criticism of the Free Market that occurs time and time again in the first couple chapters. That is, consumers are the only beneficiaries of competition. As we saw with the Prisoners Dilemma last Thursday at the SWEET Scholars discussion session, it is very clear that when competitors compete then altogether they are not making optimal profits. The Prisoners Dilemma explicitly illustrates that competitors are best off when they cooperate, but individual choice gets in the way. However, when different producers cooperate then mergers, cartels, oligopolies, and monopolies form, right? These are not best for the consumer. So it looks like we have the fundamental rule of Economics on the stage: Tradeoffs.

There appears to be Tradeoff between consumer and producer benefit directly related to if the producers so decide to cooperate or if they so decide to compete. In our current situation in America we are zealous advocates of consumer benefits, and so naturally competition is highly encouraged on the Market. Conversely, we see attacks on cooperation of producers, because that would result in a the producers getting the benefit and the consumers paying for it. The indoctrinated side of me agrees that this is how it should be, but the open minded side of me wants to humour Robert Frank's thesis that this sort of Competition Bias produces negative effects. However, the open-minded side of me will still not humour that our Utility Functions are analogous to some arbitrarily deduced Utility Function of an Elk.

Finally, he attacks the fact that humans have improving standards that are a direct resultant of the individual choice of wanting to be better off than thy neighbor. He claims that people want better cars than they did before simply because they are better than what became the standard. He argues that this is bad because it raises the cost to gain such luxuries. First, personally, I don't think he is in any position to be judging the Utility Functions of a society. Secondly, the producers are competing so they'll surely find a way to lower their production costs and sell at an affordable price, or, y'know, not produce at all. In all of these situations both the producers and the consumer are doing things they want to do, so why is it bad? Because eventually they'll have to up the ante again? Idk, to me, that sounds like a pretty freaking awesome process that vitalizes human advancement.

He's the one that professes Economics at Cornell, though.

Thursday, February 9, 2012

The Road to Hell

I read through Chapter 1 of "The Darwin Economy" the other night scribbling notes about numerous things I disagreed with. I thought his examples were contrived, one-dimensional or irrelevant. He claimed to dismantle the entire libertarian philosophy with three sentences, and he presented claims with very little supporting evidence. However, I recognize the purpose of an introduction is exactly that--to introduce the ideas and framework of the book. Because of that, I am only going to focus on a couple examples that really bothered me and then will hold off on further judgement until Frank expands his arguments. I am genuinely curious as to his justification for some of them and look forward to reading more on his perspective.

Helmets and Hockey

I'll accept his conclusion that wearing helmets is beneficial to all the players and so when competition results in all the players going helmet-less I'll admit this to be an undesirable outcome. However, I am not confident that this scenario would be true for all players and for all leagues everywhere. One-size all solutions rarely work out well for humans and this is one of the problems of government regulations. Those Who Legislate almost never have all the information required to make the proper decisions for all concerned. This is related to the famous ideas of economic calculation as developed by Mises and Hayek and is the reason for the failure of central economic planning.

Now, that's not to say that "planning" in and of itself is bad. It is certainly acceptable, in my opinion, for leagues to mandate helmet requirements if they choose to do so. When left in the hands of private individuals and organizations it becomes a private property issue and is easily resolved.

Expensive Suits

This seems to be the most contrived example (other than the animal ones which I am simply going to ignore). I understand the point he is trying to make, and may even agree that it is a problem in some situations. But, consider suits. Are they really the largest factor in obtaining a job? What about:

  • Confidence
  • Experience and qualifications
  • Political or personal connections
  • Firm handshakes
  • Luck
  • Good posture and good hygiene
Surely all of these play at least some part in a successful interview, with things like connections and job qualifications playing a larger role than the cost of your suit. Also, what about suits that are cheap but look expensive?

Finally, were I to be facetious, I could point out that an "arms race" in expensive suits might be a bad thing for the individuals up for the interview but beneficial to the economy as a whole. It certainly would be a Keynsian style stimulant to the suit industry. And furthermore, it seems likely that purchasing expensive suits would be putting money into the American economy as more expensive suits tend to be made in America while otherwise the money would likely have been spent on cheap Chinese or Vietnamese goods.

My point here in nit-picking apart this example is that I reject his assumption that situations like these where there is the potential for competition to degenerate into an "arms race" that is detrimental to all, doesn't mean that it will necessarily happen. The assumption that the potential for a negative outcome is a justification for government intervention is a bad one from my perspective.

Nuclear Materials

Finally, I want to take a quick look at something he said on page 2 when lamenting all the crucial government programs which were losing funds:

"Funding has been cut for programs to lock down poorly guarded nuclear material in the former Soviet Union."

How could anyone disagree with funding government programs that lock down nuclear material? Surely to do so would be un-American and possibly borderline suicidal. You never know what terrorist organization or country might get their hands on nuclear material.

Ahem: http://democrats.energycommerce.house.gov/index.php?q=archive/110th-congress/department-of-energy-program-funds-russian-nuclear-work-in-iran

The road to hell is paved with government intentions.

Wednesday, February 8, 2012

I admit I have enjoyed reading Robert H. Frank's books The Economic Naturalist and The Economic Naturalist's Field Guide. I respect economists who attempt to communicate economics to the layperson in everyday English (if only more professors would do that instead of focusing on math and "scientific" economics). Anyway, back to the point. I am not shocked obviously by Frank's lack of embracing the Libertarian/free-market ideology completely and I agree with a few of his points. However, I have a few comments that, while perhaps minor, I would like to make. I also recommend that you all go to this link: http://www.thefreemanonline.org/book-reviews/falling-behind-how-rising-inequality-harms-the-middle-class/

In chapter one (Paralysis), I noticed Frank sometimes criticizes Libertarian ideology but he would not give substantive arguments. For example, it is debatable that workers are worse off today than in the past (see link above). He mentions that infracture "has been steadily falling into disrepair" and that "Water supply and sewage systems fail regularly." John Stossel had  wonderful examples of privatization in his special Stossel Goes to Washington. Perhaps infrastructure and water delivery is failing because of who is in charge--the government. What if private entities were in control (examples in the Stossel special dealt with water supply in Jersey City, air traffic control in Canada, and a private stretch of highway in California) instead of the government?

He goes on to write that "our political system is paralyzed." Many people measure Congressional productivity by the amount of legislation that is passed. I think maybe it's not so bad when Congress is in a gridlock! Moreover, Frank supports government "stimulus" when the economy is in a recessionary gap. But let us not forget that the money government uses to "heat things up" could be used in other ways or could be kept by the taxpayers and used in more productive ways.

Finally, on page 5, I come to agree with Frank. He believes that the government should provide defense and enforce property rights. Even though some Libertarians believe in the private provision of national defense, I believe it is a legitimate function of a limited government to provide a military and for the government to act as a referee in enforcing property rights. Where government goes wrong is when the "referee" gets involved in the game directly. For example, wouldn't it be a bit weird to hear, "Wow, did you see the referee knock Brady to the turf and then intercept his pass on the next play?" Referees are not supposed to hit the QB or intercept the ball!

On page 8, Frank refers to Thomas Schelling and his ice hockey example. He eventually asks, "What about the libertarian's complaint that helmet rules deprive individuals of the right to choose?" and on page 12, using the sprinter example, he writes, "Yet many self-described libertarians insist that it should be a sprinter's right to take performance enhancing drugs if he choose." This might be another minor point but I will make it anyway. I will not claim to speak for all Libertarians, but I have no problem with a private entity making up their own rules (i.e., the NHL or Olympic committee). If the rule is to wear a helmet and a player doesn't want to, they don't have to play. It's not a right to play in the NHL or run in the Olympics. However, when the government says people have to do something then that is coercion.

Toward the end, I again side with Frank's opposition to wasteful government spending and subsidies to oil and ethanol industries. However, it is clear from this chapter that Frank believes government has a larger role to play in the economy. Let's see what chapter two brings.