Profits 12/12

-> Profits = Total Revenues - Total Costs (Explicit and Implicit)

-> Contracts reduce uncertainty, helping facilitate transaction

-> "Interest" - Price paid to consume today though you haven't earned it yet, and cost for loaner to not have that money over loan period

-> Even if accounting flow brings in positive monetary profits, economic profits may be negative due to implicit and opportunity costs

-> No such thing as guaranteed profits

-> Competition drives prices down and increases worker profits; preventing it does the opposite

-> Losses insulate against waste and curb risk-taking, preventing resource misallocation

The Entrepreneur 12/9

-> Entrepreneurs need 3 things:
1. Land
2. Labor
3. Capital

-> In determining profits, entrepreneurs can't ignore opportunity costs of using the land, labor, and capital they have for their business rather than for other means

-> The formation of entrepreneurial businesses is key to the economy and should not be overlooked in determining policy. 

New Ruling on "Plan B" Contraceptives

Recently, the government overruled an FDA recommendation to allow "Plan B" birth control without a prescription. The decision has come under heavy fire from the left and right, and especially from Female-interest groups and groups dedicated to advancing women's equality and liberty. But as the decision holds, anyone over the age of 17 can get "Plan B" without a prescription, while those under 17 must get a prescription. Hopefully it won't hold for long. 

The rationale provided by the Health and Human Services Secretary Kathleen Sebelius for ignoring the FDA recommendation was that the study conducted failed to assess the impact on girls of all ages. Additionally, she worried that girls under the age of 17 would buy the pill and use it incorrectly. Another argument I have heard is that girls under age 17 could also come to abuse it in other ways, such as relying on it as a form of birth control. Frankly, I find these arguments ridiculous. First, Sebelius wanted the study to include girls all the way down to age 11. I don't think this is a reasonable claim. Second, imagine how easily a black market will develop. Girls who want to get the pill without a prescription will simply find an older friend or even a sibling and have them buy it instead. The same tactic already occurs with alcohol, which, let me remind you, is not hard to get by any measure despite the age limit. Third, girls who are on the fence about taking the emergency contraceptive may now be incentivized to err on the side opposite caution, since the cost of getting the pill has just been raised. And four, the "Plan B" contraceptive only has a 72 hour period of effectiveness after any sort of pregnancy scare. For some, the added time of finding out how to get a prescription, locating a doctor to prescribe it, and then finding a pharmacy to fill it may take too long for some. What if the doctor is out of town, the pharmacy is closed, or there are other extenuating circumstances? 

To give the other side a point I have not yet heard, this does have at least one benefit, which is that now girls must go to a doctor to get a prescription, which means that both a doctor and likely a parent will be involved, which will make the use safer. This will also facilitate discussion about sex, pregnancy, and contraceptives, and promote responsibility. However, these reasons are not enough to offset the high cost of this decision. It will be interesting to see if there are more teen pregnancies in the future.

The Sumptuary Manifesto

"Sumptuary" - Regulating or otherwise limiting consumption

This particular JSOTR piece was a brief satire aimed at dismantling the ridiculous and arbitrary nature of laws that regulate consumption, termed sumptuary laws. The piece was short and pithy, a very easy read. Essentially it was a description of different hypothetical laws that limited various types of consumption, from housing sizes to liquor to facial hair, with the justification being the mutual benefit of society. At the beginning and end, in a nice symmetry, the "Peerless Leader" remarked upon the outdated, misguided view of liberty held by the enemy party of libertarians and the like.

I personally enjoyed reading the piece. It conveyed a simple insight into the arbitrary and often ridiculous nature of attempts to regulate consumption, using exaggerated examples to drive the point across. In our society, there are certainly people who believe that there is too much consumption and wish we could do something to deal with it. Many point to a consumption tax as the solution. Perhaps this would work, perhaps it wouldn't, but is there really an issue of over-consumption? Efficiency should be lauded, and some people certainly do lead extravagant lifestyles, but who are we to tell them what they can and can't do, based on our subjective and vague perception of what is "too much" consumption"? The exception to this rule is when there are externalities to the consumption that directly affect others. However, given that every dollar spent has an opportunity cost of whatever else it could have been spent on, is it moral to give money spent on excess and re-direct it to those who are more needy and would use it to buy food, water, or other necessities? This is the mentality behind wealth re-distribution and social safety nets. The economic argument would be that the dollar to a person who is poor has a greater marginal utility than a person who has much money and spends at least some of it on excesses such as super nice cars or extravagantly large houses. Now, I personally try to live within my means, and would be happy without a nice car, but is it necessarily moral for me to turn to someone else who makes more and say "because you have too much money, you should give some away?" In my opinion, this is an immoral mentality. However, assuming that the money is spent well, and used towards infrastructure and social programs, is it a necessary moral casualty to help those in need? This is an open question and one I am personally still debating.

Legal and Economic Incidence 12/7

1. Cost of taxes includes the deadweight loss and the cost of collecting, in terms of time and money: also includes cost of time spent preparing taxes and cost of hiring others to do it, again in terms of time and money

2. Whichever side of the market is more inelastic will always take the brunt of the tax, despite who the tax is aimed at -> RELATIVE ELASTICITY is the key to analyzing tax revenues and determining who takes the burden of taxation

3. Legal incidence and economic incidence are orthogonal

4. "Incidence" - Who really pays

Supply-Demand Changes 12/5

1. Illegality of drugs encourages:

• Less moral people to enter the market
• Stronger drugs
• Need for enforcement, which takes time and money

2. Taxes are neither a cost nor a benefit, since they only shift money around; however they prevent potential transactions, called the dead weight loss. This is where they hurt the economy.

3. Placing a tax on sellers is essentially taxing buyers; can't just isolate one side of the market for taxation without affecting other side

Golf at Bethpage Grey

This article dealt with the overwhelming demand for tee times at a newly renovated golf course in NYC, one of the most population dense areas in the world, and the legal black market which developed as a way to get people tee times. In the end, the demand created a sort of lottery system: the second tee times were open to buy, people would desperately call in, and the lucky few who got through would purchase a chance to play on the US Open quality golf course, while the others would just get the beeping of a busy signal and be forced to try again. The author detailed his own experience with the system and those of others who have also had difficulty in getting a reservation. Though overseers have attempted to regulate the NY Golf Shuttle company, which constitutes the black market, they have largely failed. Each attempt at shackling it only causes more issues, often to the detriment of unintended customers. How can this situation be fixed, or at the very least improved?

I have one response, which is that the golf course should raise its prices. This is the best way to remove the scalping issue. Though people will cry foul and say that this is biased towards the more wealthy citizens, which it is, it is a logical solution. The scalping business is an example of a de facto "black market" caused by the excess of demand relative to supply, and the forced inability of the market to equilibrate by raising prices. Despite well-intentioned attempts at regulation and keeping the price of the golf course the same, the black market seems to defy all attempts to regulate it. Though the price for a tee time is $120, it seems the only way to actually get a tee time is to use this booking and shuttle service, which for the author of the piece cost $850 and was inconsistent with times. Raising the price would solve this problem, decreasing quantity demanded and letting people realistically plan with the golf course, rather than using a middle-man service that blitzes the phone system and scalps tee times. As Rizzo said, there is money left on the table here for people to earn by exploiting the disequilibrium of the market, and the NY Golf Shuttle is certainly taking advantage.

Saving the Last of my Declining

This week I finally got around to purchasing a clamshell. I don't know why I didn't earlier. Honestly, it is one of the best investments anyone with an unlimited plan can make. For $5, you can buy access to clamshells for the entirety of the school year. Then, you can take as much food as you would like from either of the unlimited dining centers, which are a sunk cost, and bring it back to the dorm to save for times when you get hungry. Instead of going to the Pit or Hillside, you can just take the food you stored from Danforth or Douglass. Over time, the money saved adds up. Maybe I wouldn't have so little declining if I had just invested in the clamshell earlier.

Now, here's the interesting thing. I was baffled that the price of the clamshell was so low! Honestly, $5 for the entire year? Given the fact that you only have to purchase the clamshell once each year, the demand should be relatively inelastic, and the price elasticity should be very low. I would pay much more than $5 for access to the clamshell. Even a $20 price would seem low given how much it would save me. And again, I only have to buy it once? I truly would buy it a a lot more than $5. So why is the price so low? Well, I figured it had something to do with the price of tupperware, and the price of other potential containers, which act as substitutes for the clamshell. However, I don't believe people will turn quickly to tupperware. The clamshell is too convenient, and people often don't care to invest the time to utilize the alternative options. For me, it was a relatively spontaneous decision, made when I was in a rush but wanted to eat more. Buying one had been in the back of my mind for some time, but I had denied that I needed one. Guess having $15 left in declining changed that mentality...

Class Notes 12/2

1. Price controls create need for security which creates opportunity costs of what enforcers could be doing. Security is a cost.
2. Housing vouchers would be much better than price ceiling
3. Increase in price decreases quantity demanded, not demand
4. Minimum wage does not help the poor, but admittedly it doesn't hurt too much either; a better system would use an Earned Income Tax Credit (EITC)

Price Controls 11/30

Outcomes of Price Ceilings
1. Reduced availability of good; harder to get! -> Shortages
2. Lower quality goods
3. Development of Black markets
4. Misallocations
5. Other neighborhoods face higher demand and higher prices
6. Lack of fairness
7. Discrimination since there is a lower cost of being discriminatory
8. Costs of enforcement

Market Equilibrium 11/28

1. Prices economize and give information to solve economic problems, without comprehensive knowledge on either side of the market -> personality traits, lifestyles, etc... Despite this, prices force consumers to take into account how much other people value goods

2. Markets have trial and error advantage over politics and central planning

3. Planned economies suffer from a knowledge problem and leave room for side deals and other hidden transactions, despite attempts to prevent this.

The Duke Room Draw

I will give the administration the benefit of the doubt here, and assume that though they may not have taken specific issue with the dorm trade that is cited in the post, they did not want to encourage a market centered around buying and selling assigned rooms. The administration's main argument would likely center around the idea of fairness and the worry that money would become an overly coercive factor.

Is this argument valid?

Is trading in this case unfair? The author of the blog makes the case that the administration is being ridiculous, and I would tend to agree, though he is a little too abrasive and sarcastic. Why would the administration complain about fairness? The fear would probably stem from a situation where the richer students offered overly coercive sums of money to buy the rooms that they wanted, which would likely be the highest quality rooms. Those who couldn't afford to buy a room would be relegated to the left-overs. Freshman who didn't know any better may also sell their room due to the offer of money and then later regret it, another issue the administration probably feared. An interesting question arises: are there situations where trade is immoral? Though the temptation is to say yes, I would argue that in this case and in most room trades, there has been nothing immoral. Take the example that large sums of money overly-coercive and therefore immoral in room trading. If I was the student selling the room, I would love the extra money, especially if I did not have too much preference for which room I was in. The money could be spent on books, food, and other needs. It would be great! Ironically, the more money I get, which is to my benefit, the stronger the argument gets that the money traded is overly coercive. I would not complain if somebody tomorrow offered me $15,000 for my room. It's a lot of money, and like most college students, I could certainly use it! On the side of the supplier, is it immoral for them to offer it? No. If the student with the room does not want to sell their room, they may say no. A room, in my opinion, is not such a key good as to validate the overly-coercive argument. Even in extreme examples where massive sums were offered, I can see no reason why that would be to the detriment of the seller. Surely one college dorm cannot be that different from the next.

And here is the kicker. The only way one college dorm can be that different in value from another is if one group truly values it highly or really does not like where they are at currently. In this example, the frat in the quiet part of campus would have a strong interest in moving. And here is where markets succeed. By offering money, the frat would be able to acquire a better place to live, and the seller would be compensated for the inconvenience of moving their room. Everybody benefits: the frat has the location they want, and the seller has more money. If money wasn't offered formally, a black market would likely develop anyway, since the frat would have a large incentive to acquire a different dorm. Side payments would inevitably be made and then hidden. An even worse outcome could also be overly coercive, and could come in the form of bullying, harassing, or using other means to virtually force people out of their room. A money currency is certainly more desirable.

If they do not object to a voluntary trade system, there is no valid reason why the Duke administration should prevent money from playing a part.

The Thanksgiving Holiday

Thanksgiving is here again, and I was lucky enough to see my family and friends after traveling home for the first time in months for a much needed break. To get home, I flew out from the Rochester airport to LaGuardia and from there took a shuttle home. The flight was delayed for four hours, and a little turbulent, especially when landing, but it was great to be home. Flying above NYC is an amazing experience, seeing the sheer size of the city and how complex it must have been to build is not a sight that I hope to ever take for granted. It is truly a testament to human ability. Seeing random lights from cars or houses in the darkness is always welcome and gives me a sort of vicarious experience as I try to place myself in the position of whomever I am observing from way above, and wonder what it must be like to be where they are. I would comment on the shuttle ride too, but traffic isn't quite as appealing. Still, I made it home, and I was glad to be there. 

Now, over the break my parents gave me a curfew (which in my mind was absolutely ridiculous, and embarrassing I might add), and thinking economically, I decided to counter with the argument that they were only incentivizing me to drive faster, and that if I really wanted to stay out I would anyway. Of course, this argument was entirely bogus, but I thought it would be funny to make. Well, as you would expect, it got a chuckle but no sympathy. Their argument for a curfew was that if I stayed out late,  I tended to sleep in during the day. Aha! To this, I can make a much better economic argument. So I did. I explained how I valued staying out late more than I valued waking up early, since my evening hours are often more productive than my morning hours. At night, I can stay up late hanging out with friends, and on Thanksgiving I even stayed up late to do work. How responsible! On the flip side, in the mornings I am usually at a loss for what to do: my friends are asleep, plans always occur in the afternoon, and I usually do not have the drive to work. So of course I want to sleep in! I get more sleep and get to use the time I value more in the evening. Who are they to tell me what time to get home? 

Well, unfortunately, it didn't take long for them to counter that too. I wake them up when I come home late, and typically my dog starts barking, which potentially wakes up the whole house. And they also worry more when I am out late, finding it difficult to sleep if they know that I am not home. Oh well, it appears that they have a point. Still, I thought my argument was good.

Class Notes 11/23

1. Change in prices DOES NOT change demand, it only changes quantity demanded
2. Prices demanders who cannot afford the good and suppliers who cannot produce it cheaply enough are forced out of the market
3. Changing this equilibrium arbitrarily leaves money on the table, incentivizing black market deals and other corrupt transactions

Equilibrium and The Price System 11/21

1. Money reduces exchange/transaction costs and helps facilitate trade by encompassing the value of goods
2. Surplus - At that price, quantity supplied is higher than quantity demanded
3. Shortage - At that price, quantity demanded is higher than quantity supplied
4. Double-Coincidence of Wants - Have to find someone with good you want who is willing to trade for what you have

Rationing Continued 11/18

Two Major Things to Consider

1. How will rationing determine competition?
• Constructive?
• Destructive?
2. Long-term consequences of rationing?
• How does rationing alter incentives?

• "Need" system incentivizes need, not production
• People can cheat "need" system by hiding income, assets, etc...
• Will moral people claim "need"?
• Price system allows for Consumer Choice
• Other systems claim to be better for poor but are often worse
• Needs no policing, since consumers determine distribution and price organically
• Other policing systems often fail and are cheated because there are no true incentives, only negative threats
• If a shortage is threatening, people's consumption will increase to prepare
• worsens shortage by immediately decreasing supply
• EXPECTATIONS
• Price system raises price in a shortage, decreasing consumption and forcing efficiency
• Forces Cost-Benefit analysis
• Consumers have to find out best way to use good
• Automatically makes consumer consider value of water to others, conveying needs honestly and organically
• Allows mobilization of goods to areas that need it
• Saying "You Must" does not work nearly as effectively
• Markets allow for long-term planning, an advantage no other system has

Posters and Propaganda

Each of these posters deals with the rationing that occurred to World War II. At the time, supplies for the average domestic citizen were very limited, as much was sent overseas for the soldiers. To encourage the citizenry and boost morale, the government attempted to portray frugality as a sign of patriotism. Conserving resources made one patriotic, since it helped keep demand down and increased supply, and consuming resources in excess was unpatriotic, as it increased demand and limited the supply available for other citizens and the soldiers who were fighting for liberty. By simply shifting the connotation of rationalization, associating it with patriotism and glory rather than limitation, the government's stream of propaganda sought to encourage thrift and discourage waste during the national supply crisis that was World War II.

Due to the limited supplies and need to conserve resources, this seems like a viable marketing campaign. In most cases, self-sufficiency is the road to poverty, but due to the short term nature of the crisis, conserving the readily available resources was a necessary step. In the long-term, more resources may be discovered, but until then, the US had to work with what it had. In terms of supply and demand, the lesson here is simple: diminished supply with a constant demand leads to rationing. This is the raison d'être of economics. What this did to the market is probably more interesting. Prices were probably very high, due  to the disparity between demand and supply. Market inefficiencies were probably huge, as nobody was well-off enough to predict into the future. People had to live by the moment and had much less expendable income. Trade likely became much less frequent, which would have depressed the economy. Generally, the posters were right in the need to conserve, but the effects of rationing were certainly not a sign of increased economic growth.

On this note, Keynesians like to say that war spending boosted GDP. A large portion of the population stood in lines waiting for food and other needs, due to high backlogs and limited quantities. Imagine all the cumulative time spent in lines. What else could the time have been used for? Imagine how much of it was spent idle in line, rather than producing, or at the very least doing something. How it could be argued that this boosts economic activity is beyond me. High unemployment, rationed supplies, soldiers fighting and dying overseas, where is the prosperity? Where is the greater economic activity? Any production that went into GDP was likely formed from the concessions of the citizenry, as these posters clearly illuminate. Arguing that WWII ended the Great Depression by boosting the economy is one of the most heinous of all applications of the broken-window fallacy. These posters clearly show the damage to the wealth of each and every citizen, who were forced to make sacrifices for the greater good. May these posters serve as a reminder of that which is not seen.

Rationing 11/16

• Need for rationing arises when you have too few goods for too many people
• Examples of rationing mechanisms
• Need
• Queues
• Lottery system
• Equal shares
• "Kickin' Ass!"
• Merit -> "beauty", "smarts"?
• etc...
• How much other people are willing to pay impacts price
• Not taking higher offer is a real opportunity cost for the business, which raises prices
• Lower supply = Higher Prices; scarcity increases
• Businesses respond rationally to demand and expected willingness of consumers to pay
• If one tries the "need" metric, which is hard to define in itself, Rizzo claims that neither the neediest nor the people who want the good the most will receive it
• This is why you need prices
• Lottery system may be "fair", but it does not guarantee that the neediest or those who value the good the most and can use it best will get the good
• Inefficient in outcome
• May be rigged
• Equal shares mechanism dilutes value to the point of worthlessness
• Some goods can't divide well
• "Kickin' Ass!" is destructive competition and does not allow for planning
• We compete because of scarcity, not "capitalism"
• Capitalism doesn't create competition, it deals with it; competition is inevitable

Theory of Supply 11/14

TODAY IS MY BIRTHDAY!

Theory of Supply

• What changes supply?
• Own Price ("Quantity Supplied")
• Something else ("Supply shifts")
• Supply Elasticities
• = % change in quantity supplied / % change in price
• < 1 = "inelastic"
• > 1 = "elastic"
• Supply cost is the opportunity cost of not using the materials for a different good
• Leads to differences in prices
• Low Wages may be caused by a lack of other potential or real employers
• Lack of competition among employers
• Lack of demand for workers
• Lack of choice among employees to find other work
• Supply and demand are very similar in their trends and analysis
• "Law" of Supply, NOT "Law of Supply" -> first is indefinite, second is definite; supply is not truly a law
• As the price a consumer is willing to pay increases, supply increases
• If a future price increase is expected, short-term supply will decrease since suppliers will pull back in expectation of greater future profits
• The opposite occurs if price in the future is expected to drop
• Each point on a supply curve represents the marginal opportunity cost of making the product
• Other things to learn from a supply curve
• Total Revenues = Price sold x Quantity (P x Q)
• Consumer surplus / producer surplus
• If there is a supply curve in any factor market, attached goods will have a supply curve, even when they are otherwise "perfectly inelastic", though this is impossible
• Change in input (factor) price will change supply
• When input prices fall, supply increases
• When input prices rise, supply decreases
• Technology can shift supply curves out (increase supply)
• Substitutes can shift supply curves in (decrease supply)
• Expectations matter a great deal in shifting supply curves

Keystone XL Pipeline

There recently has been a lot of controversy over a proposed oil pipeline running from Canada to Texas. Coverage of the movements against the pipeline have been smothered by Occupy Wall Street, which is a seemingly indomitable media force. Regardless, the resistance has been fierce - at one point protestors circled the White House, demanding that the project be scrapped - and the White House and Obama recently caved, calling for the State Department to further investigate the proposed pipeline before approving it. It is a controversial issue, and one that features two typical combatants in today's economy: environmentalists vs. businessmen. Which side are you on?

At first, I was skeptical of the public outrage, fearing that it was a product of misplaced passion which lacked full knowledge of the details of the pipeline. The clear benefits of the pipeline also made it difficult for me to comprehend why anyone would fight its development. For an opening point, the pipeline would help provide a significant and consistent source of oil from a friendly, neighboring country, rather than the often semi-hostile Mid-Eastern countries. Valid theories abound that our wars in the Middle-East are motivated at least in part by oil interests. Building a pipeline would help the US withdraw from foreign oil investments, disentangling us from messy middle-eastern governments and insurgency groups. And what about high oil prices? Gas is very expensive, and its rising prices are oft-quoted as a rising problem for middle to low income families, who cannot afford to spend more at the pump. In addition, high oil prices have been cited as an element which could damage our economy and dampen the already slow, if not non-existent, recovery. (On a side note, maybe environmentalists should desire high oil prices. This would shift consumers towards more eco-friendly and environmentally sustainable resources, and away from dirty fossil fuels.) This spike in price has been caused by a spike in demand and a constant supply curve. In short, the scarcity of oil has increased, due to an increased disparity between demand and supply. If all goes well, the Keystone XL pipeline would drastically increase our oil supply, and in doing so would drop the price of gas. As an added perk, a pipeline is one of the more effecient and cheap ways to transport oil.  The last benefit is the most over-used term in all of economics: "job-creation". So in short, allowing the pipeline to continue would increase our supply of oil, drop oil prices by increasing supply, increase our energy security, saving lives by decreasing our foreign interests, and create American, yes, American, jobs while simultaneously boosting Canada's export economy and providing them jobs. 

Now for the counter-argument. The company running the pipeline has a terrible spill record, with something around 12 spills attributed to them over the past year. This is inexcusable, especially given that the pipeline will run directly underneath one of the main fresh-water reservoirs in the United States. In the event of a spill, adding more chemicals to neutralize other chemicals and clean the water is unappealing at best. But didn't an independent third-party company review the project and its safety merits, and approve it? Unfortunately, a little research into this statement and you will find that the company hired by the US government to assess the project is basically a subsidiary of the company building the Keystone pipeline. The conflict of interest is immense, almost entirely discrediting the "objective" analysis which legitimized this project. The final point is that tar sands extraction releases 19 percent more carbon emissions into the air than Mid-Eastern crude oil, contributing to global climate change. To be honest, this side has a more compelling argument than I would have expected. The risk of contaminating a major US aquifer is the most worrying aspect to consider. 

Should we build it? 

Despite the draw-backs, which are both legitimate and great, the Keystone XL pipeline should be allowed to continue, though only after further investigation and effective regulation to mitigate dangers. I support its final construction, but currently find it hard to support because of the compromised analysis of its safety and the company's record of spills. I support the pipeline, but the protestors have a valid point. Let's wait for a more comprehensive analysis, then build. 

The Theory of the Leisure Class

As the title would suggest, this article is an exploration of the culture of the leisure class. In the first excerpt, the author examines how the existence of a leisure class affects working attitudes. In the second excerpt, the author theorizes on how the members of the leisure class distinguish themselves through their dietary preferences. And finally, the third excerpt the author dissects the relationship between classes and employment. 

First, does the existence of a leisure class encourage effort in the lower classes? If the first excerpt is to be trusted, that answer is yes. However, the author is quick to qualify that the incentive only applies to the lower half of the middle class, since this is how they acquire status and move up The upper half actually absorbs more of the attitudes of leisure, and as a result is incentivized to work less, for to work is to associate with inferiority. This victimization of work especially impacts the "dirty jobs", as Mike Rowe explored in his Ted Talk. To do these jobs is repugnant, for the enlightened do not deal with that which is unclean or "unenlightened. Therefore, the dichotomy created by the leisure class is both beneficial and detrimental. Some are inspired to work more, others to work less. I agree with the author's assessment in this case. There is little to dispute.

Moving on to the second excerpt, a new question arises: How do the leisure class distinguish themselves through their dietary choices? The author's hypothesis here was that in the base classes, women are more likely to prepare, and men more likely to consume. Even states like drunkenness have become associated with being "manly" and indicative of class, since it shows that the drunk person has the ability to afford alcohol. Women, on the other hand, are more likely to show restraint in these areas. Personally, I think this a valid hypothesis, but am skeptical of how influential class is on consumption. I suspect it is less than what the author would suppose. There are probably other factors, primarily those that are biological, evolutionary, or cultural imbedded by elements other than wealth. Proving causation here would be extraordinarily difficult. Freudian theories about consumption are hard to assess without objective data, and the author does not offer any. 

Now, does the existence of a leisure class lead to the victimization of blue-collar labor? This is the truest of the author's hypotheses.  Our American culture is a prime example of this. Watching the Mike Rowe talk on this exact topic made it clear that we have shifted towards a culture of idealism and dreaming rather than what is practical. Instead of being instructed to "make a living", kids are told to follow the vague, amorphous concept that is their "dreams". This is admirable, but often is mis-interpreted, especially if the dream becomes unattainable. At this point, people often refuse to fall back to Earth and find pleasure in more simple living. Instead of approaching work with a top-down approach of dreams first, employment later, we should approach it with the mentality that through hard-work we should create our dreams. In short, we should let our means build our end, rather than our end build our means.

Risk-Taking with my Math Homework

Every Sunday night, I have webwork due for my math class. Typically, I am done with the homework with a comfortable amount of time left-over. This week was different. Between three midterms and other work, I did not have the time or energy to make a solid crack at the homework. Instead of forcing it, I decided to take a risk, and give myself a break to recover. Waiting until Sunday was a good idea, right? I thought so. So, there I found myself, Sunday afternoon in the lounge, working on my webwork. By four, I had finished 5 of the 14 problems. Not bad, but at 4:30 I was going to celebrate my birthday and the birthday of someone else on the hall. We were going to "The Cheesecake Factory" and I was not about to miss it. And besides, I needed a break, right? I went, planning on getting back with at least two hours left to complete my work. Then, on the way over, I found out that we were taking the 7:29 bus back, placing us back on campus around 8:05. That would give me 55 minutes. By then, I was on the bus and it was too late. Regardless, I threw regret aside and had a good time at dinner with my hall mates.

Then I returned to the dorm, with 55 minutes and around 10 problems left. Doing the math, that gave me 5 and a half minutes per problem. Not a great time cushion, especially considering it had taken me an hour to do 5 problems before I left. Uh-oh. I grabbed my computer, rushed to the lounge, and started frantically working away. Minute by minute, I got closer and closer to finishing. In fact, by 8:40, I had one problem left. And at 8:59, I kid you not, I finished the last problem, one minute before it was due. 

Was it worth it to wait? In most cases, probably not. But in this case? Yes, it definitely was. I went out, celebrated and had a phenomenal dinner at "The Cheesecake Factory", and still completed my webwork. I don't know what the economic term is for "stress-induced efficiency", but I would be interested in finding out, because it worked for me. 

However, for all those seeking to emulate my gargantuan accomplishment, I offer a disclaimer: I do not know how to replicate any of the problems and would not say with confidence that I truly learned how to do any of them. I moved too quickly to absorb what I was doing, and often times would get it correct through a combination of luck, guessing, and yes, mathematical intuition. This was the cost of rushing through the homework at the last minute. I also may have a stress-induced headache.

To mitigate this cost, I intend to look back at all the problems an go over how to do them. Except now, I will be able to review with a 100% grade on the webwork assignment. In this case, the risk paid off, but it will not be one I continue to make.

Elasticity and Total Revenues 11/11/11

• Higher prices do not necessarily lead to higher total revenue
• "Perfectly inelastic" - No change in Quantity Demanded regardless of price (impossible)
• No alternatives?
• No opportunity costs?
• "Income Elasticity of Demand" - % change in Quantity Demanded / % Change in income
• > 0 means the good is normal (as income increases, the quantity demanded of the good goes up)
• < 0 means the good is inferior (as income increases, the quantity demanded of the good goes down)
• How does income affect consumption?
• Quantity of goods
• Type of goods
• Cost - Something that consumes resources
• Must be an action
• To whom?

Elasticity 11/9/11

• Elasticity - % change in quantity demanded / % change in whatever you are interested in
• > 1 means demand at that point is "elastic" (quantity demanded is sensitive to price changes)
• = 1 means demand at the point is "unit elastic"
• < 1 means demand at that point is "inelastic" (quantity demanded is insensitive to price changes)
• What impacts Elasticity?
• Time
• Budgets
• Substitutes
• Elasticity of 2: Change in quantity demanded is double the change in prices
• Changes in the market may take time to occur and become apparent
• Elasticity is not constant along a demand curve

Market Demand 11/7/11

• The more aggregated we get, the flatter the demand curve gets
• If prices go up with wages at a similar rate, the change in demand will be minimal
• What changes consumption?
• Income
• Substitutes and relative convenience
• Expectations
• Tastes, individual preferences
• # of individuals in the market
• INCOME NOT PRICES IN ANALYZING ECONOMIC GROWTH
• What affects demand
• Income
• "Normal" - When income goes up, quantity demanded goes up
• "Inferior" - When incomes goes up, quantity demanded goes down
• Normal and inferior goods are subjective and relative

"Job Creation" in New Jersey

I had almost forgotten this ridiculous law, but it was recently brought back to my attention. In New Jersey, you are not allowed to pump your own gas. Why not? Because it creates jobs of course! What kind of crazy economist would criticize this law? It creates jobs, which must be a good thing, right? Don't you care about the jobs?

Let me begin by explaining the mentality that leads to the belief that this is good for the economy. Self-sufficiency is bad for the economy (only when it prevents specialization of labor, comparative advantages, etc...but let's ignore those for now). Jobs are good for the economy (again there are constraints to this and this overgeneralizes and assumes a contextual vacuum, but again let's move on). Therefore, we should prevent people from being self-sufficient to then create jobs, which are good for the economy.

This is entirely backwards, and I cannot believe this law hasn't been repealed. If I pull up to a gas station, get out of the car and pump my own gas (imagine!), I will be fined. Implicit here is the concept that pumping your own gas is damaging to the economy. Really? Does this make any sense? Think about it. If this were true, why should we do anything ourselves? Here's an illustrative challenge: Take everything you do during the day, and break it into its smallest components. Now imagine you had to pay someone else to do each individual job, one person per component. Would this help or hurt the economy? More specifically, would this make you better or worse off? Now imagine everyone had to do this. Would we have time to do anything? Or any money left to spend? NO! The cost of doing anything would rise significantly, since the costs would be spread over a larger population. Efficiency would become non-existent.

Here's another illustration. When I go to Danforth, I should sit down at a table and have people serve me. If I want water, I pay someone to do it for me. If I want to get food, I don't have to leave my chair, I just pay someone to do that too. Voila! I have created two jobs. Forget the fact that the jobs are useless, isn't this good for the economy? As Rizzo mentioned, jobs are a cost, not a benefit! It is now harder for me to acquire water and food. Where there was previously minimal cost for getting my own food and water, there is now a real, tangible cost. I have to pay people to walk for me. Water and food are now less available to me.  I have just wasted money paying someone to do something I could easily do myself without paying anything. Instead of spending the money on a more useful endeavor, I have just put it towards having a servant.  What an awful concept. There is no benefit here.

Markets in Prison

This article explored the spontaneous formation of a market within a criminal system, in the absence of any planning. A new money system evolved, centered around cigarettes.

What is Demand? 11/2

1. Demand is NOT an all or nothing concept, it is a Marginal Concept


2. Demand - The relationship between the amount of something you wish to obtain and the sacrifices required to get it

3. "Quantity Demanded" - Amount of a good that buyers are willing and able to purchase at a particular price


Willing - Subjective Preferences
Able - Concept of whether you have enough income to purchase the things you want

4. "Law of Demand" - Given other factors held constant ("ceteris paribus"), the quantity demanded of a good falls when the price ("cost") rises; essentially, that cost and demand are inversely related

5. "Law of Demand" describes human nature and applies to any trade-off we must face; not just a theoretical economic concept

6. Be wary of "helium balloon" paradoxes which seem to violate the "Law of Demand"; instead, ask "How can this be reconciled with what we know about the 'Law of Demand'?"

7. Money prices in trade-off analysis and demand curves stand in for the goods given up due to opportunity costs

8. $0 does not equal infinite demand, due to other costs and varying preferences among the population

Theory of Supply and Demand 11/4

1. Transaction Costs - The cost of arranging and negotiating contracts and agreements, may include:

• time
• physical costs
• "ignorance" or a knowledge problem
• interference (social norms, religious values, cultural institutions)

2. Transaction costs are essentially limiting factors that inhibit trade

3. Great entrepreneurs know how to minimize transaction costs

4. Middleman - Anyone who gets buyer and seller together by removing transaction costs

5. There can be comparative advantages in reducing transaction costs

6. Small groups have less of a knowledge problem and can more easily overcome them, in addition to having more responsive feedback loops and less of an incentive problem.

7. Prices - Allow each of us to act on information, acquire knowledge about value, and make informed decisions about goods

8. High price signals value and scarcity (high demand and low supply); you can't have scarcity without demand

What is a market?

• Collection of (potential) buyers and sellers 
• Can be a physical market or a virtual market
• Any decentralized, unorganized interaction between potential buyers and sellers

Order - "Stuff's there"; equilibrium between demand and supply

Class Notes 10/31

1. There is no such thing as a positive or negative trade balance -> the balance is always 0.

2. Trade deficits often lead to an increase in economic growth and employment, or at least there is a correlation

3. Buying "local" leads to significantly higher costs in both money and time by preventing specialization

4. Economics does not change across geographical or political borders

5. Definition of "local" is often arbitrary

6. Why do we care about American poor, yet ignore world poor?

7. Often we only see who is hurt by outsourcing and job displacement, and ignore who it benefits

8. Concentrated damages and spread benefits are no excuse for preventing economic change

9. The concept of "Race to the Bottom" is laughable when you look at the data

10. FDI (Foreign Direct Investment) often flocks to more environmental, humanitarian, etc... countries

Are We In a "War against Work"?

For my analysis this week, I have decided to comment on the three media pieces Rizzo offered. The first video is the Mike Rowe discussing of how we belittle necessary jobs, the second is on the inherent injustice of tariffs, and the third is actually a brief audio clip describing how old-time Cigar makers were actually better educated and informed than the general population due to the hiring of "lectors", men or women who were hired to read newspapers or political pieces to the workers. The general theme is how our prideful American attitudes toward work unfairly victimize necessary but unglamorous occupations. Underlying themes are how American arrogance increases unemployment, and how bureaucrats try to control jobs they know nothing about, preaching their "moral superiority" onto the uncivilized masses.

First, the Rowe Ted Talk on his experience working on a pig farm.  I think he is absolutely correct about how our sense of pride and focus on "living the dream" inhibits us from taking jobs that need to be done. Pursuing our passions is a noble endeavor, but it keeps us from taking hard-labor jobs that we see ourselves as above. Worse is when cultural values are portrayed as superior to another, and forced upon the "morally inferior", as in the case of the pig farmers who were told by PETA and the other environmental groups which informed Rowe about the "humanitarian way" to castrate the pigs. This well-intentioned guideline is actually more painful for the pigs. And this is the problem with bureaucratically defined morality.

In a way, this talk is a cut on Higher Education, but I think the issue at hand is more cultural and reflects the increasing urbanization of the United States population. Perhaps it is because Urbanites tend to think of themselves as culturally savvy cosmopolitans and our stereotypes of more rural folk portray them as less classy, less educated, and less intellectual. Think of the archetypal "hick". The city parallel would probably be closer to a "hipster". Now, I could never, ever imagine a "hipster" going anywhere near a farm. And I think this is what Mike Rowe is trying to illustrate about the problems with our attitudes. The plumber stereotype Rowe describes is dead-on accurate. So perhaps Higher Education is over-rated, but I do not think this is the main reason behind "enlightened" attitudes towards manual labor. People with a college degree are much more likely to find work, and that is why so many pursue degrees beyond high school. The other problem is simply geographical. Most of the jobs Rowe describes are rural, and people who are born in the city often like to stay there. But yes, we are in a "war against work".

The second video is much less complex. It reminded me of an article in "The Economist" I read a few months ago discussing over-regulation of the dairy industry (http://www.economist.com/node/18712862). The idea of this video was that tariffs force decisions on customers and sellers and are orthogonal to our pursuit of liberty. Tariffs hurt our nation and restrict our ability to choose, yet the government uses them as political and economical leverage. This is both economically damaging to both parties and inherently unjust. Yet out-moded Mercantilist models of trade continue to influence economic models. The government should not be able to restrict choice in this way and promote certain goods while demonizing others. Free-markets should be free.

NPR's audio clip and quick blurb about the Cigar makers illustrated that we unfairly portray the working class as under-educated and victimize their jobs in the pursuit of "enlightenment". It's true, most parents would shudder if they were told their child would grow up to be a cigar roller. Same idea as the Mike Rowe talk.

Overall, I find one issue at the heart of this mentality, which I think each of these talks overlooked. Manual labor jobs are less exclusive. More people are able to do them. Therefore, the pursuit of higher education and higher-level jobs is the pursuit of distinction, and with it job security. There is nothing wrong with this attitude. The dissonance here is actually more subtle. It is not a problem with the pursuit of one's passion, it is a problem with the inability to adapt to failure and let go of the idealistic self-image. What we need to remove is our reluctance to perform manual labor, rather than our inclination to seek white-collar jobs.

Random Recitation Notes I Just Found 10/20

Interpersonal Transactions
1. Communal sharing
2. Authority ranking
3. Equality matching
4. Market pricing

Common Law - What society deems is fair or just

What to Consider in Making Decisions
1. What do we want to change?
2. Why?
3. Can we change it?
4. What are the pros and cons of the current system?
5. Whom does it affect?
6. What will be the outcome?

All voluntary transactions are at least marginally effecient

Equality does not equal equity

Vertical Equity - Burden on those most able to bear it

Horizontal Equity - Burden equally distributed

GDP - Gross Domestic Product; the value of FINAL goods and services produced within a country within a given period of time (final to avoid double-counting)

Class Notes 10/28

1. Productivity and employment are generally inversely related, though this is not an effective argument against productivity or technology that promotes productivity.

2. More ATMs does not equal fewer jobs. In fact, it may mean the opposite.

3. Complements vs. Substitutes - Most technology is complementary to labor rather than a labor substitution.

4. Wages in China are increasing at a very rapid rate, NOT DECREASING

5. What is important is the ratio of wages over the Marginal Product of Labor. By decreasing this ratio, technology may actually save jobs by making the workers of more advanced countries more efficient. It is not necessarily cheaper to export jobs to countries with lower wages.

6. We have larger deficits with Germany and Japan than with China. China may even run a trade deficit in the near-future.

7. Statistics are meaningless without context.

8. If trade deficits kill jobs, trade surpluses must create jobs, right? NO


9. Roundabout Production

10. Due to diversity of tastes and interests, it is hard to completely eradicate any industry by providing free goods. For instance, even if on Jan 1 every year Korea sent us enough free cars for every person in the nation, the car industry would still survive since not everyone would prefer the Korean car.

11. NAFTA is good. Since it has passed, jobs have continued to increase.

AND FINALLY:

"You can always profit by doing something." - Rizzo on a gourmet chip company which sells burnt chips profitably.

"I think I understand how the world works. I really do. You should write that down. OMG my Econ professor just mentioned belief!" - Professor Rizzo.

Class Notes 10/26

1. Poor quality jobs replaced by machines are offset by the creation of higher quality jobs. New jobs created by technology > Old jobs lost to technology, in both quantity and quality (and safety, for that matter)

2. Trade is often used as a scapegoat for the world's problems.

3. Trade does create a more volatile job market, but it does not destroy jobs. It simply changes the composition of the job market.

4. There is an abundance of jobs, and if you have a strong (and relevant) skill-set, people will find a way to utilize it.

5. Jobs are a cost, not a benefit

6. Exports - Imports = "Trade Balance" of Goods and Services

7. Even with the trade deficit, jobs have continued to increase consistently. On any employment graph, it is impossible to note when the trade deficit began, because there is no significant change in any trend.

8. The societal determination of which skills and skill sets are valuable is the cause of inequality and its fluctuations.

Class Notes 10/24

1. Trading is equivalent to discovering new resources, inventing new technologies, better education, etc...Trading is a non-technical source of production.

2. The goal of economics is to do more with the same pool of resources.

3. Imports are traded for with exports and vice-versa

4. When dealing with imports and exports, think on a micro, individual level, rather than a macro, state/country level.

The Winter and Partying

It seems the Rochester winter is finally beginning to descend upon us, bringing with it biting winds, a gray winter sky, and precipitation which is neither rain nor snow, but something in between. Without a doubt, the winter will be cold and snowy. It always is. So, my question is: how will the change in season affect campus, and specifically the party scene?

Campus first. Let's begin with the obvious. There will be more warm clothes, more people in the tunnels, fewer people walking around outside at any given moment, and many more people in the dorms. This last change may result in higher grades. I wonder if there is any noticeable correlation between the weather and average GPAs on campus. My hypothesis is that as the temperature goes down, grades go up. The off-setting factor may be lower morale and energy brought about by the cold, but I still think the extra incentive to stay inside and study will increase grades slightly. More subtle changes will be a shift in attendance at the dining halls. Most people on the academic quad will probably go to Douglass more, and perhaps the Pit will see some higher revenues. Sue B people will probably forego the walk to Douglass and eat at Danforth. Starbucks too will probably see some more profits due to an increased demand for warm drinks. And the libraries will probably be less crowded. Extracurriculars might slow down as well. Maybe people are used to it and none of this will really change.

Now on to the party scene. Off-campus parties? Fuhgeddaboudit. Not happening. Only the really dedicated party goers will make the trek over the bridge, so I fully expect that the off-campus parties will really slow down. This would be a big boost to the Frat Quad. Unfortunately, one major issue here is that there are only 4 open frats on campus (is it 3?). The rest are on probation. So every weekend, anyone trying to get into a party will probably have to wait outside in line. Imagine that! People will inevitably be under-dressed for the weather, and will have to stand outside! Sounds awful. I'm pretty sure most people would wait for maybe five minutes and then leave. Or they just won't go. One or the other. And even those who wait in line will probably be rewarded with some of the most crowded parties you will see during the year. However, I expect this to level off. At first, there will be long lines and crowding, but after people discover these difficulties, they may just choose to stay in the dorm. The true party-goers will be revealed, and the less dedicated ones will be weeded out. The question is, will the drinking just shift to the dorm? I would bet that there will be a slightly higher rate of incidents in the dorms due to people drinking in their rooms or the like. Instead of going out, people will stay in. Simple.

A more subtle effect may be more lost jackets and warm clothes. If people do dress warmly for the frats, they will have to offload their jackets and other warmer clothes when they get inside. Then they go inside, dance,  drink, and then leave, forgetting the winter coats and gloves! On second thought, I think it would be too cold to completely forgot, so let me remedy my prediction. There will probably be more people who leave and then have to come back. Even then, this number will probably be low, but there might be a slight increase in lost clothing.

We'll see in the coming months how many of my predictions turn out to be right.

The Honor System

Panera Bread in St. Louis has come up with a new pricing model. Though the concept is not entirely new - Radiohead used the same idea when it digitally released its album "In Rainbows" - it is somewhat novel as a business model. The new pricing scheme is to have customers pay as much or as little as they want for their food: "Take what you need, leave your fair share". Under this new model, there are no set prices. What was the inspiration behind this change? The article quotes Panera owner and founder Ron Schaich as saying "he's trying to find out what human nature is all about...There's no pressure on anyone to leave anything, but if no one left anything, we wouldn't be around long." Customers who do not pay are encouraged to volunteer at the restaurant, but there is no official or binding requirement of payment. 

So, what will be the outcome of this? Will philanthropy succeed and keep the business alive, or will the business go bankrupt after watching revenue fall below profitability? 

My hypothesis is that the business will, unfortunately, go bankrupt or have to revert back to traditional pricing. Here's why. At first, the business may actually make more money. Customers with a sense of social justice or social responsibility will give more as a symbol of admiration to the cause. It will be their way of "paying" the business for its humanitarianism. As Rizzo talked about in class, the official term for this theory would be "reciprocal altrusim". And I believe that it would apply here, and would work...in the short term. In the long-term, let's look at incentives. People who can't afford the food have just been informed that price is no object. I've been to Panera, it's good food. If I couldn't afford to eat at restaurants, and a place as good as Panera offered me free food, I would go there as often as I could stand it. This increased demand would offset any philanthropy. Even if the company brought in more money through this method, I believe there would be too much demand. Demand would counteract philanthropy and the net effect would be a loss. In addition, those who already eat there have no incentive to eat there more often, unless they don't want to pay. Incentives have only changed for those who wouldn't otherwise eat there because of the cost. Without new paying customers or old customers paying more, Panera could not handle the increased traffic.

In a way, this situation is similar to that of the unlimited meal plan. There are no new costs for going to the unlimited dining halls. Essentially, since I have paid the one-time fee, they are now "free" dining halls. Now there are other places to eat on campus, but since I know that the unlimited dining halls do not cost me anything new, I find myself eating exclusively at Douglass or Danforth. Even if I am hungry and neither is open, I will wait until they open so that I do not have to spend declining. The same thing would happen at Panera. Non-paying customers will flock there. 

The only way this could survive would be if customers who didn't pay did volunteer their time to the company. However, time is a highly valuable commodity, and I do not believe people would give up time to save one branch of Panera, especially if there are others available though those aren't free. 

I hope I am wrong, but that is my prediction of the fate of this Panera bread and their humanistic experiment.

Individualism and Altruism

This collection of excerpts from Hayek's "Fatal Conceit" combined with Rizzo's notes on the subject discusses the contradictions of philosophy in the views of those who believe "from each according to his ability, to each according to his need". Forced altruism should be the enemy of any individual who values their liberty, and Rizzo makes the case that it is the opposite of individualism. Giving is not an immoral action, but forcing others to give is. All philanthropy should be voluntary. Now, individualists are not against giving. They just recognize that even when they are charitable, it is generally in self-interest. For instance, helping a friend may seem charitable, but in truth one may just value the friendship over the monetary cost of helping them out. This is an individualistic rather than altruistic form of charity, and is the correct form of charity. Individualists are not selfish. Rizzo goes on to explain how moral intimidation is not a sustainable incentive and can derail a society, and that altruism is not a morally sound belief, though it appeals greatly to our human sense of empathy. In small societies and actions, altruism functions vibrantly, but on a broad-scale it can not and should be implemented.

I think Rizzo and Hayek have it right. People generally only think of altruism in terms of money. This is where all the confusion begins. If someone gives money, they are altruistic. If they don't, they are selfish.  But what is neglected is the non-monetary value being traded. As in Rizzo's friend example, what is being valued and traded is friendship against money, not money for money. So Rizzo's decision to bail out his friend is a selfish transaction, pure and simple. He values the friendship over the money. This is a truly hopeful concept. Yet, ironically enough, altruists see this as unselfish because all they follow is the money, regardless of more subtle values. Altruism is also indiscriminate in giving, deeming any selectivity in charity as morally depraved. This is a flaw ideology. If I only have a certain amount of money to give, and give it to anybody and everybody who asks for it, I am being inexcusably lazy. Instead, I should determine who could do the most with it, or I believe I could truly help. Which would be the best investment? If I gave all my money away to scoundrels, and then came across someone who deserved the money, I would be at a loss. In a nutshell, the money you give to toxic investments is money taken away from good investments. Instead of saving the virtuous, you are sacrificing them over the altar of the non-virtuous. This is where individualists have it right and altruists trip up.

That all being said, I think that there are some failures of individualism in explaining people's charity. Just because something can be explained in terms of self-interest does not mean that it is in self-interest. Today I saw Bill Clinton speak, and he talked about his charity work in Haiti rebuilding after the terrible destruction. I could explain this in terms of selfish investment, but I do not think that argument would hit the mark. There is some charitable impulse which drives non-selfish actions, like stopping to help someone pick up books they've dropped or holding the door for someone. Often there is little to gain from these actions, yet good samaritans still exist and lend a hand on a regular basis. How would individualism explain these exceptions?

Main Ideas:
1. Altruism is not an inherently sound moral philosophy.
2. Individualism is not inherently selfish
3. When examining altruistic actions, look for "soft" values being exchanged. Then determine if the action is altruistic.

Class Notes 10/21

1. Value is relative to the people in the trade and is subject to value in other trades. For instance, if I trade a baseball card worth $20 for another worth $0.02, I may seem to have incurred a huge loss and acted irrationally. However, with my newly acquired $0.02 card, I now have a complete set of baseball cards, which is worth $760, at least $20 more than the set would have been minus the one card I didn't have. Therefore everybody gained from the trade and I acted rationally! This is why it is hard to objectively evaluate the value of trades.

2. Trade gets goods to those who value it most and can do the most with it, which increases production and allows for specialization of labor. Ultimately, we are creating time.

3. In a Production Possibilities Frontier (PPF), quality decreases as you near the intercept of the axis for the approached commodity, and average quality increases for the other commodity though the quantity decreases. This is because the first to go are often the least effective, and the last to go often the most.

4. "Absolute Advantages" in production have no meaning in terms of real economics.

Class Notes 10/19

1. Do not conflate ethical values with market transactions.

2. What gives us confidence in companies like FedEx? FEEDBACK LOOPS


3. Feedback loops allow for improvement by revealing flaws and allowing for the reward of good behaviors. Most frustrations derive from a lack of feedback.

4. Factors of Production:

• Land
• Labor
• Capital - What is produced to produce more. Physical and Human capital. Human capital is any increase in ability over one's lifetime.

5. Economic Activity - Action undertaken which deals with someone else. More self-sufficiency -> less economic activity

Class Notes 10/17

1. Large, complex markets need impersonal transactions

2. Every country centered around the "Golden Rule" has failed

3. "Golden Rule" doesn't work because of a knowledge problem, not because of a people problem. Even if the society consisted of morally perfect individuals, a "Golden Rule" blueprint of economics would still fail. It is impossible to predict what people want, which is accomplished organically by feedback loops. Removing competition removes the feedback loop.

4. Production for profit is production for people

5. Person who jogs is virtuous, yet person who sells shoes so one can jog is immoral?

6. Reciprocal Altruism - Altruistic actions are rewarded by further altruism, creating a positive feedback loop. This is essentially a market transaction, spread out over a greater period of time. Most examples of reciprocal altruism would become a market transaction if the action and reaction occurred at the same time, place, etc...

7. People ignore consumer greed, though it is a mirror of corporate greed, which is round criticized. People do what corporations do and vice versa.

8. Self-Interest - Pursuance of what interests you

9. Making Right Decisions - What is the motive of the person being helped? Who does it affect? What are the rules? This is why you need a non-arbitrary "Rule of Law". Generally there is an information problem, which the "Rule of Law" mitigates.

10. "Silver Rule" - Do not do to others what you would consider unfair or unjust if they did it to you.

11. Permissible to be charitable with your own money, but impermissible to be charitable with another's money.

12. Running a good business requires "soft" values

13. It is always someone else who is corrupt

14. Can't run a business like a family or a family like a business

The Story of Seguira

This week's reading assignment relays the story of Seguira, the newly appointed rector of a South American university. Upon inheriting his new office, Seguira surprised the locals by quickly turning into a serious reformer. Through the institution of a merit system, Seguira allows for competition between Professors and Graduate Students at the university. Yet in this system are a few kinks, which Seguira addresses with new regulations. Yet again, even in this new system, there are some kinks. So again, he institutes new regulations and new sets of rules. This back and forth game continues until the entire system falls apart.

To be honest, I am not quite sure what to make of this story. At first, I thought it was a specific instance of a free-market failure. The free-market system is not universally beneficial, especially in arenas which do not have the proper institutions. Rizzo explained this in class this week, citing the fact that Russia is poorer today than 30 years ago, despite the introduction of a market system. This could be an illustration of that point. Universities should focus on teaching, rather than competition, and are therefore not conducive to a market system. Forcing one on them is destined to lead to failure. So, as Pinzio warned, most solutions to the dilemma of higher education would have disastrous consequences. 

However, then I realized that Seguira was playing the role of a central planner. Therefore this was not a true market system. In addition, the consistent shifting of rules is an indication of the importance of the "Rule of Law" in allowing for economic growth. And there is the "Law of Unintended Consequences". Each regulation Seguira instituted was well-intentioned, but failed due to unintended consequences. Excuse the quick term binge, but the three of these came to mind after I re-thought the story. So perhaps calling this a "free-market" is a misnomer. The problem is that it was a forced market, not one that developed naturally due to the proper conditions. In my opinion, this is the correct interpretation. Looking at it this way, everything makes more sense. 

Main Ideas:

1. The free-market system does not work in any situation. There must be proper conditions.

2. A free-market cannot be forced.

3. Every decision has unintended consequences.

4. There must be a consistent and non-discriminatory "Rule of Law" for economic growth. 

Questions:

1. What were the unique conditions that doomed the University's merit system?
2. What incentives could improve the fact that universities are "run in reverse"?
3. What is the meaning of the end, where Seguira leaves after receiving an offer from another university?  Is there an indictment in the relaying of this action?

Class Notes 10/14

1. Markets are often wrong due to:

• "Lack of Markets" (monopolies) -> Information problems, market power, and externalities
• Institutions matter -> social norms inhibit normal market transactions in certain situations, though both involved parties could benefit from a transaction

2. Efficiency - More with the same pot of resources. Efficiency is what people want at the lowest feasible cost. 

3. Trial and error in the market leads to great waste.

4. Without enabling institutions, nations cannot have functioning markets. In fact, establishing a market system in a country with poor institutions will often have a negative effect, as we have seen with Russia. The good news is that institutions done right can spark massive economic growth.

5. "Rule of Law":

• Laws have to apply equally to everyone
• Laws should not be arbitrary in execution or enforcement
• Laws should be general

6. There can be no economic growth without savings and investment.

7. Inflation - When all prices increase; a general rise in prices; "too much money" and same amount of goods

Class Notes 10/12

1. Markets are not like a UFC death match between producers and consumers. The majority of trades are positive sum.

2. Good commerce leads to good government which leads to good commerce --> Positive Feedback Loop

3. Entrepreneurs, even the filthy rich ones, only capture a fraction of the monetary and immaterial benefits they create.

The Most Unusual Day

How can government incentives change the natural cycle of births?

A proof of the Law of Incentives and Unintended Consequences, this casual exploration shows how the most basic monetary incentive can alter even the biologically fundamental cycle of birth. In what may have been regarded as a failure of foresight, on May 11th the Australian government introduced a new policy of consolidating different maternal payments into one lump sum of $3000, to begin on July 1st, 2011. Now, this policy was certainly well-intentioned. But as any good economist will quickly point out to you, intentions are no indication of results. Knowing this, the economist who wrote this piece immediately did two things: first, his wife pregnant, he double-checked his baby's due date, and second, he formulated a hypothesis. In hindsight, it seems rather obvious. The hypothesis was that no babies would be born on June 31st. Now, this is an exaggeration of course, but the general idea was that, relatively, many more babies would be born on July 1st, and many less in the days close before it. And he was correct! July 1st and the few days after saw a spike in birth rates. The disturbing element was that the natural birth rate remained constant, while the number of C-sections and induced births jumped. People weren't forging birth certificates, they were actually altering the delivery date. So he was right!

Before I begin my analysis, I have one question. Wouldn't the cost of a C-section, induced labor, or other artificial birth cost more than the $3000 payment? At least for a C-section, this would seem to be the case. Maybe it is because insurance covers the birth.

Moving on, I think the lesson here is simple. People respond to incentives. When it comes to incentives, almost no behavior is sacred. If money can convince people to artificially change the birth date of their baby, there is no doubt it has a strong influence over the actions in a society. Furthermore, this brief article illustrates the "Law of Unintended Consequences". The law was well-intentioned, did benefit families, and was well-thought out in almost every aspect. But because of one logical mistake, there was an unintended and perverse incentive to manipulate birth dates. This is the "Law of Unintended Consequences".

Main Ideas:
1. Incentives, incentives, incentives
2. Even the most well-intentioned laws can have unintended consequences.
3. No behavior is sacred.

Subsidizing the Fine Arts

In his essay, "That Which is Seen and That Which is Not Seen", Bastiat in part argues against the subsidizing of the fine arts. Using a classic "broken window" fallacy argument, he states that the government is not "creating" any weath by holding the arts intact. True, the industry may need the subsidies, but at best the government is re-locating capital that could have been spent elsewhere. The government cannot, in his opinion, create. It can only shift. Now, is this shifting ethical? Advocates of subsidies argue that the fine arts deserve subsidies because they are at least as good as other professions, and contribute equally to society. Yet to give them a subsidy requires taking money from a different private industry. Does this not mean inherently that the arts are being placed in a standing not equal to, but above, the other industries which it receives from?

The novel insight from this piece is that an argument for the abolishment of subsidies is actually a more humanistic argument than an argument for the continuation of subsidies. The first is predicated on the belief that human nature will determine the best way to keep theater and the fine arts alive, and will do so accordingly with no need for government intervention. The second is founded on the idea that the fine arts is an eternally sick patient, constantly needing life support from the government to survive since no private venture may survive in that particular field. Is this not an immediate admission that it cannot be a profitable investment? Worse, this belief relies on a distrust of human faculty, which it believes will never support the arts. This is fundamentally cynical, and even if true, who is to say that the arts deserve artificial support if the public are disinterested? Are they a better industry than others, or should we just save all of them indiscriminately? The failures of logic in the minds of Bastiat's adversaries are large, and so central that their weakness tears down the very fabric of their argument.

Even if the arts do eventually dry out, it is because we have, extremely unfortunately in my opinion, decided that they are not worth it, In this case there would be little point trying to keep the sector afloat. This does not mean that they are forever lost, but it would certainly be a great tragedy. However, this is a subjective opinion, and as such I recognize that I cannot force my values on others. Because of this, and it is a painful decision, I side with Bastiat's opinion that the arts should no longer be subsidized.

Key Points:
1. Being against subsidies does not mean being against the sector being subsidized. In Bastiat's opinion, it instead implies a fundamental belief in the industry and humanity.

2. Subsidies do not create wealth or boost the economy.

3. No industry can be given a standing above any other.

4. Sympathies should not equal subsidies.

5. Ignorance of those who pay for the subsidy does not negate their existence.

Questions:
1. Would the arts survive without subsidies? Bastiat is right to argue that the arts should not receive subsidies, but it is a different argument whether or not they would survive.

2. How can subjective value be turned into objective value? What if the subsidy is low cost, but the cultural value added to society is high?

3. Can a non-material benefit to society be accurately quantified? Should it be?

Class Notes 10/7

1. Adjectives are empty unless a definition or context is provided. Saying "Rizzo is a bad driver" begs the question, by whose standard? Relative to whom? What is a "bad driver"?

2. People act with purpose.

3. Sunk Cost - A cost that cannot be prevented or regained, such as time.

My 1992 Audi

My EWOT this week is in tribute to my first car, a 1992 Audi 100s which lasted for 170,000 miles. It passed away right before I left for college, after reliably running for 18 years.

Through all the breakdowns and expenses as the car slowly started to fail, I fought for it. My mom wanted to scrap the car. In her opinion it was well past due. With each expense, she became more convinced that we should scrap it. However, she clearly misunderstood the economic reasons why the car was a better pick than any new car off the lot. Firstly, my car was so old that it had no insurance. So we saved plenty there. On to of this, even as the expenses started adding up, there was no way it would reach a sum approaching the cost of a new vehicle. Each repair was an economically justifiable investment with a good return. Besides, we all knew I only drove it around town. Any farther and I would begin to see smoke. Come out of the front. Then again, maybe that is why she was worried. But anyway, a local car was really all I needed, so why spring for a brand new one? As Rizzo said in class today, this would only be beneficial if the car was completely shot, which it wasn't.

If only I had known what I had known today, then maybe I could have saved the car for a little bit longer.

Interestingly enough, I stumbled upon an old blog post on Rizzo's site that talked about the "Cash for Clunkers" program. When the car wouldn't sell, or, to be more accurate, would break down every time we had a deal in the works, we thought about trading it in. If the car were eligible, odds are good that it would have been turned in as a clunker. Unfortunately, it was too old and had too many miles. Essentially, it was too much of a clunker. Really?

But for a moment, let's pretend we traded it in. With the $4500 credit and new need for a car, I can guarantee that we would have shopped around and spent on a brand new vehicle almost immediately. So that's money put back into the economy, right? My Audi certainly was doing the economy no good, though it helped me get around. And a brand new car is good for me and the dealer. It's a win-win. Where's the problem?

There are a few. First, you have to follow the resources, as Rizzo told us in class. If we had turned the car in to have it turned to scrap metal, there would be one less car on the road today. Why not just give a $4500 credit and let us keep the car? Trust me, I loved that car. I would have kept it. Maybe we could have even salvaged it. Then, we would have had two cars instead of one, and the same amount of money in our pocket compared to the turn-in program. So there is the first problem. The second is more long term. Within a month of the car actually breaking down, long after we could sell it or turn it in, we went out and bought a brand new one. So in the long-run, either way we would have bought a new car. Had we bought one then, we wouldn't have bought one later. So in the end, the money pumped back into the economy would have been equivalent at best, though I will argue that it would have been less. There was a cap on the price of the car you could buy using the program's credit. It was $45,000. The car we bought later was more expensive. So, even under Keynesian economics, the net contribution to the economy would have been actually less had we taken advantage of "Cash for Clunkers". And the government did not have to pay a $4500 subsidy on our new car, which saved them money. Simply put, "Cash for Clunkers" was not a stimulative program.

For all those who disagree, let's just look at the end results. "Cash for Clunkers" would have taken the car and junked it, maybe recycling the engine. We donated our car to the local fire station so that they could use it for training, training that will help save them learn how to pull living victims from burning or crushed cars. It is training that will help them save the lives of crash victims. Which is the more useful contribution to society?

Class Notes 10/5

1. FOCUS: Don't follow the money, follow the REAL resources.

2. Money spent on destruction could just as easily be spent on construction. So how are wars good for the economy? Why not just give every citizen a check?

3. Value is based on scarcity (the difference between demand and supply)

4. Marginal Cost - Change in cost when you make a decision

Class Notes 10/3

1. Three basic economic principles: One, how people make choices, two, how people interact, and three, how "Economies" work.

2. In a market system there is a constant battle between equity and efficiency, which are generally inversely correlated.

3. "Free" implies no-trade off, which is impossible. (TANSTAAFL)

4. Case study: FDA preventing bad drugs from reaching the market slows good drugs from reaching the market and makes it more expensive to produce new drugs, which is money that could be better spent on development. Which saves more lives, prevention or expediency?

5. Cost (explicit) - Anything that consumes resources

6. Opportunity Cost (implicit) - What you must give up to obtain an item, essentially the net value (benefit minus cost) of the best thing I chose not to do.

Is Fighting Forest Fires Economical?

Is fighting forest fires economical?

The definition of "forest fires" is pretty self-explanatory, but for this analysis I will only look at forest fires that pose no threat to human existence. Though an economic argument could be made that it might be cheaper to relocate people and compensate them for their loss, it is an argument for a different day. So, here I go. We spend around $2 billion dollars annually fighting forest fires. This is a lot of money, though relatively small compared to our current deficit. But we cut NASA, didn't we? Anyway, over time forests develop thick undergrowth and a layer of brush, naturally built up from falling leaves and any dead material that ends up on the forest floor. This creates a highly flammable surface of dry materials. Herein lies the problem. If we artificially suppress forest fires in areas where they naturally occur, this pile of waste builds up. So the fuel builds and builds, until finally it alights. Because of our fire prevention, this new fire has much more to consume than it would naturally, and is therefore much more severe. According to the Wikipedia page, this has led to the replacement of slow, cool-burning fires with fast, blazingly hot fires which are much harder to control and often cause more damage.

Trees are also living entities. As with all living entities, they eventually die and begin to rot. Forest fires clear these dead trees, creating space for new trees to grow. Dead trees are timber waiting to be burned. If we prevent their destruction, as with the undergrowth, we may be setting ourselves up for worse fires later on. We may also be blocking the path for future healthy growth.

Rizzo likes to say that "the path to hell is paved with good intentions". This may be one example where we would be better off leaving nature to do its work.

Disclaimer: I am not a scientist.

The Economics of Happiness

Summing up each side is a disgrace to the argument but I will try to be succinct. In a nutshell, Justin Wolfers argument is that people in wealthier countries are consistently happier in almost every recordable way. They experience more love, less pain, more satisfaction, etc... Additionally, there is no cut off point of wealth beyond which someone is not happier. Robert Frank argues the same point, but disagrees mainly on more micro-focused data. Similar to quantum physics, where natural laws fall apart as smaller molecules are observed, happiness caused by economic growth falls short when measured within societies. His argument is not that the free market is bad or that money does not buy happiness, but that instead there are some inefficiencies which could be streamlined through incentives to unilaterally improve happiness.

I agree fully with Justin Wolfers. So fully that I feel I barely need to go into it. Literally, everything he said was rational, well-justified, and insightful. Let me move on instead to Mr. Frank, with whom I have a few quarrels. Firstly, using an animal parallel to explain the inefficiency of outcome in a free market is understandable, and provides a simple demonstration of the point he is making. But why does it have to be animals? For some reason, this was something that bothered me. It is an overly simplistic metaphor, which lacks any real supporting evidence and is instead only theoretically enticing.  Metaphors seem to always lose something in translation. In addition, his proposal of a "consumption tax" is unfathomable. Spending would be de-incentivized across the board, which would negatively impact the economy. Innovation would be stifled, since people would be less likely to take risks. Enjoyable activities would become victimized hallmarks of guilt and "wasted" income. Mr. Frank makes the mistake of assuming inherent value, a fundamental slip-up! It is essentially social communism. I wish I were lying. The benefits to society in terms of material gains, including better infrastructure, would be far outweighed by the loss of happiness. It is an astoundingly poor argument, almost to the point where I wonder if I am simply misunderstanding his argument. 

Questions:

1. How can we merge niches into one competitive field where the best of the best compete? Should we?

2. At what point will smaller problems such as higher stress and less sleep become destructive, even with net benefits across the board? For instance, even though we are getting happier overall, can smaller externalities such as stress eventually overpower the net benefit?

3. How can we identify and improve inefficiencies in the market?

4. Can we effectively steer markets?

Main Ideas:

1. Wealthier societies = Happier societies

2. People would rather be poor in a rich country than rich in a poor country. Absolute > Relative (according to Wolfers, who I personally agree with)

3. The Easterlin Paradox as an argument for ending economic growth is absolutely untrue.

Class Notes 9/30

1. Hume - Wealth is a country's command of resources and access to goods and services, not the amount of gold they have.

2. Trade is important because:

(a) Competition

(b) Imitation, Learning

(c) Division of Labor

3. For a country to have a chance for success, according to Adam Smith, they needed:

(a) Rights to property

(b) Division of Labor

(c) Exchange is peaceful and mutually agreed

(d) Honesty; no special privilege

4. Adam Smith - Wealth is the ability to produce and exchange goods and services.

Class Notes 9/28

1. The French Physiocrats and Scottish Moral Philosophers were among the first to apply science to understand people, just as it was used to understand Earth, just beginning social science.

2. Mercantilism was responsible for poor economics. Countries which followed it practiced protectionism, allowed monopolies and heavy internal regulations, restricted free movement of people, placed limits on production, instituted price controls and wage controls, and heavily punished anyone who did not follow the law.

3. Because trade was considered zero-sum under mercantilist philosophy, the King would have to protect trade to prevent wealth from leaving the country and protect national interests.

4. Physiocrats believed the source of wealth was production in agriculture, mercantilists in the King's Bank Account, Gold and specie, and a Positive trade balance. The Scottish Moral Philosophers saw wealth in all commerce.

Class Notes 9/26

1. Historically, people have opted for quantity of children rather than quality of children. The rich have historically had fewer kids.

2. Virtuous cycle countries grow with a self-fulfilling growth cycle

3. Tolerance is good for economic growth

4.  Better technology -> improved productivity -> wages increase -> more training -> better technology

The Failures of Social Science

It is true that Social Science cannot accurately control for variables and can therefore never definitively prove a hypothesis. In arguing the very same issue brought up in the article, the failure or success of the stimulus plan, I ran into the same obstacles the author describes. If I argued it didn't work due to the still high unemployment and floundering economy, I was told that things could have been worse. If I took the other side and claimed that it succeeded, I was pointed back to the same argument I used when I said the stimulus didn't work. It became a circular argument, lost in philosophy and miles away from hard science. As the article outlined, when it comes to social policy, this is not a desirable way to debate. Assuming progress, I believe that one day we will have the capability to control social variables and therefore account for "causal density". Until then, perhaps we should just be content to observe and measure until we know we can effect positive change. In the hard sciences, a spaceship would not be sent to outer space without an absolute certainty it would succeed. There is a direct and unambiguous consequence if there is a failure. In social science, the consequence is indirect, interpretable, and long-term, all factors that muddle perception. Humans are naturally biased to worry more about direct consequence, and less about indirect consequence. Long-term consequence is actually the more dangerous, so let's be careful in deciding short-sighted public policy.

Probative Questions:
1. How will we know when we will be able to effectively interfere in society?
2. At what point does the quantity of evidence for one side overrule questions of "causal density"?
3. What remedies would the author suggest for improving the scientific credibility of the social sciences?

Main Ideas:
1. Social Science is yet to be confirmed as a definitive science.
2. The aim of social scientists should be to observe rather than interfere until we can effectively interfere.
3. Admitting how little we know is the key to learning more about our environment.

"The Freshman 15"

What are the causes of the dreaded "Freshman 15"?

Economists like to explain everything in terms of incentives. Well, here is my explanation for the Freshmen 15. First and foremost is the drinking. For many college students, drinking is the caloric equivalent of a 4th meal, after breakfast, lunch, and dinner. Unfortunately, the calories are the nutritionally devoid byproduct of wheat and hops, which, consumed late at night, are converted to fat as the body sleeps.  How is drinking incentivized? Frat parties, social pressures, lack of punishment, the list goes on. Hence the rise of the infamous "beer gut". Of all the reasons for the Freshmen 15, alcohol is probably the most direct cause and the most dramatic lifestyle shift upon coming to college.

Reason number two is the lack of sleep among college students. There have been many studies to show that sleep deprivation disrupts weight-regulating hormones, which directly leads to weight gain. More indirectly, less sleep leads to less energy and lower activity levels during the day, meaning less exercise and more time sedentary. Finally, people who stay up late typically enjoy eating junk food in the middle of the night. Junk food is bad enough during the day, but at least you have time to burn it off before sleeping. Food eaten late in the evening is often unused, and becomes fat as the body sleeps. This compounds the problem. Due to high social and academic pressures, which causes a high demand on time, most college students compensate by elongating their days into the evening, increasing the supply of time. Staying up late is awesome and well worth the sacrifices, but there are consequences.

The increased workload is my final reason, though there are certainly more. College students have more work and therefore spend more time studying. In other words, more time sitting and less time exercising.
Additionally, mental exercise mimics physical exercise in that it makes you feel hungry, or at least it does for me. With mental exercise you haven't burned any calories though, so you are consuming more than you have burned, leading to weight gain.

There are definitely more subtle reasons for the weight gain, but that is my analysis!