How much do parents really matter?
Clearly, bad parenting matters a great deal, but how much can those eager parents actually accomplish for their children's sake?
Judith Harris argued that parents are wrong to think they contribute so mightily to their child's personality. She thinks that the topdown influence of parents is overwhelmed by the grassroots effect of peer pressure, the blunt force applied each day by friends and schoolmates.
The black-white income gap is largely a product of a black-white education gap that could have been observed many years earlier.
Some black students have tremendous disincentives to invest in particular behaviors (education, ballet, etc) due to the fact that they may be deemed a person who is trying to act like a white person.
What are the factors that do and do not affect a child's performance in school?
Black children who perform poorly in school do so not because they are black but because they tend to come from low-income, low-education households. A typical black child and white child from the same socioeconomic background have the same abilities in maths and reading upon entering kindergarten.But gap appears soon when they grow up.
Why are the black school bad? Because these school offer an environment that is simply not conductive to learning.
What is related to kids' performance in school?
Matters: The child has highly educated parents. The parents have high socioeconomic status. Mother was thirty or older at the tine of her first child's birth. The child had low birthweight will do poorly in school. Adoptive children do poorer in the school.
Not matters: The child's family is intact. The child's parents recently moved into a better neighbourhood.
12/13/2011
12/12/2011
government functions
The most basic function of government is to provide a framework of law and order. Government can take account of costs and benefits that market can not do.
The costs of corruption are not limited to the bribes collected, since scarce resources have alternative uses, the real costs are the foregone alternatives---delayed or aborted economic activity, the lost opportunity and wealth.
It is not just corruption but also sheer bureaucracy which can stifle economic activity. A survey by the World Bank found that the number of days required to start a new business ranged from less than 10 in Singapore to 155 days in Congo.
One of the major advantages that enabled Britain to become the first industrialized nation was the dependability the laws.
Framework of dependable laws has encouraged both domestic and foreign investment, as well as attracting immigrants with skills lacking locally.
A dependable law should prevent some people from interfering with other people.
The costs if additional security devices inside and outside of stores as well as security guards in some places, all add to the costs of doing business and are reflected in the high prices of goods and services purchased by people in high-crime areas.
In a country without property rights, there is no given individual with sufficient incentives to ensure the quality and maintenance of the goods.
Property rights crate self-monitoring.
The only animals threatened with extinction are those not owned by anybody.
Some costs are called "external costs" because such costs fall outside the parties to the transaction which creates these costs. There are things that government can do more efficiently than individuals because external costs(pollution), external benefits(mud flap, good old building), or indivisibilities(national defense) make individual decisions, based on individual interests, a less effective way of weighting costs and benefits to the whole society.
But sometimes people will spontaneously organize themselves to deal with external costs or external benefits.
Under popularly elected government, the political incentives are to do what is popular, even if the consequences are worse than the consequences of doing nothing, or doing something that is less popular. Political time horizon tends to be much shorter than economic time horizons.
The costs of corruption are not limited to the bribes collected, since scarce resources have alternative uses, the real costs are the foregone alternatives---delayed or aborted economic activity, the lost opportunity and wealth.
It is not just corruption but also sheer bureaucracy which can stifle economic activity. A survey by the World Bank found that the number of days required to start a new business ranged from less than 10 in Singapore to 155 days in Congo.
One of the major advantages that enabled Britain to become the first industrialized nation was the dependability the laws.
Framework of dependable laws has encouraged both domestic and foreign investment, as well as attracting immigrants with skills lacking locally.
A dependable law should prevent some people from interfering with other people.
The costs if additional security devices inside and outside of stores as well as security guards in some places, all add to the costs of doing business and are reflected in the high prices of goods and services purchased by people in high-crime areas.
In a country without property rights, there is no given individual with sufficient incentives to ensure the quality and maintenance of the goods.
Property rights crate self-monitoring.
The only animals threatened with extinction are those not owned by anybody.
Some costs are called "external costs" because such costs fall outside the parties to the transaction which creates these costs. There are things that government can do more efficiently than individuals because external costs(pollution), external benefits(mud flap, good old building), or indivisibilities(national defense) make individual decisions, based on individual interests, a less effective way of weighting costs and benefits to the whole society.
But sometimes people will spontaneously organize themselves to deal with external costs or external benefits.
Under popularly elected government, the political incentives are to do what is popular, even if the consequences are worse than the consequences of doing nothing, or doing something that is less popular. Political time horizon tends to be much shorter than economic time horizons.
12/12/2011 Class 42
Profit= total revenue - total cost
Why do we get wages and pay rents?
What is a wage and why can we get the wage?
Wage is a contractual agreement between worker and employer that specifies precisely what worker will be doing and what employer will be getting and giving.
Contract lays out what a worker should do and how much he can get; employer knows how much he gets and how much cost he bears to hire the worker.
So the whole essence of wage is to eliminate uncertainty.
Rent also functions to reduce the uncertainty.
Lenders know how much he can get as compensation and borrowers know how much he must produce.
What is interest?
It is the price of using money today rather than future.
Price comes from demand and supply.
People want purchasing power that they don't possess now, so interest is the price of obtaining unearned resources, the price to persuade lenders to give their current purchasing power to the borrowers.
So wages are return of working, rent are return of leasing machinery, interest is return of loaning out purchasing power.
What is the distinction between accounting profit and economic profit?
Application:
Suppose Rachel can earn $30000 per year as a secretary. She owns a building that rents for $6000 per year. She also has a savings account $23000, and the interest rate is 10%.
Now Rachel wants to quit her current job and open a pizza shop. She will use her own building, cash out all 23000 bucks and borrow 20000 dollars from the bank. She estimated that she can have revenue of 85000 dollars.
Question: Is it a good choice for Rachel?
Explicit cost: 23000+20000+20000*10% So account profit is 40000
Implicit cost: foregone wages 30000, normal rate of return 23000*10%, foregone rent 6000
So econ profit is revenue-implicit-explicit= $1700, which means that Rachel will be $1700 richer to be an entrepreneur than if she choose second best option.
When there is a profit, new competitors will come in to get profit they will (1)lower price (2)increase quality, but the consequence is that total revenue will be lower and less efficient producers will be rationed out of the market, leaving the most competent ones to compete.
The prosperity of pizza market will increase demand for raw material and thus the total cost will increase.
So in a perfect market, price will be the marginal cost of good.
Econ profit is the return of entrepreneur ability
Question: why does econ profit exist?
(1)people's wants are unlimited (2)licensure and patent
Losses are key to market because it's the signal whether you are good at what you do.
What's the problem of insulating losses?
(1) Losses destroy resources
(2) U lose feedback, having no idea whether you are good at what you do or not.
(3) people will be more audacious.
The incentives between profit and non-profit organizations are different.
Capitalism is full of uncertainty and it's too dynamic for some people.
Why do we get wages and pay rents?
What is a wage and why can we get the wage?
Wage is a contractual agreement between worker and employer that specifies precisely what worker will be doing and what employer will be getting and giving.
Contract lays out what a worker should do and how much he can get; employer knows how much he gets and how much cost he bears to hire the worker.
So the whole essence of wage is to eliminate uncertainty.
Rent also functions to reduce the uncertainty.
Lenders know how much he can get as compensation and borrowers know how much he must produce.
What is interest?
It is the price of using money today rather than future.
Price comes from demand and supply.
People want purchasing power that they don't possess now, so interest is the price of obtaining unearned resources, the price to persuade lenders to give their current purchasing power to the borrowers.
So wages are return of working, rent are return of leasing machinery, interest is return of loaning out purchasing power.
What is the distinction between accounting profit and economic profit?
Application:
Suppose Rachel can earn $30000 per year as a secretary. She owns a building that rents for $6000 per year. She also has a savings account $23000, and the interest rate is 10%.
Now Rachel wants to quit her current job and open a pizza shop. She will use her own building, cash out all 23000 bucks and borrow 20000 dollars from the bank. She estimated that she can have revenue of 85000 dollars.
Question: Is it a good choice for Rachel?
Explicit cost: 23000+20000+20000*10% So account profit is 40000
Implicit cost: foregone wages 30000, normal rate of return 23000*10%, foregone rent 6000
So econ profit is revenue-implicit-explicit= $1700, which means that Rachel will be $1700 richer to be an entrepreneur than if she choose second best option.
When there is a profit, new competitors will come in to get profit they will (1)lower price (2)increase quality, but the consequence is that total revenue will be lower and less efficient producers will be rationed out of the market, leaving the most competent ones to compete.
The prosperity of pizza market will increase demand for raw material and thus the total cost will increase.
So in a perfect market, price will be the marginal cost of good.
Econ profit is the return of entrepreneur ability
Question: why does econ profit exist?
(1)people's wants are unlimited (2)licensure and patent
Losses are key to market because it's the signal whether you are good at what you do.
What's the problem of insulating losses?
(1) Losses destroy resources
(2) U lose feedback, having no idea whether you are good at what you do or not.
(3) people will be more audacious.
The incentives between profit and non-profit organizations are different.
Capitalism is full of uncertainty and it's too dynamic for some people.
12/11/2011
Perfect market and the "World of Truth"
In a free market, people don't buy things that are worth less to them than the asking price. And people don't sell things that are worth more to them than the asking price.
The value of the product to the customer is equal to or higher than the price; and the cost to the producer equal to or lower than the price.
In a perfectly competitive market, the price of coffee would equal the marginal cost of the coffee. If the price were lower, firms would go out of business until it rose. If the price were higher, new firms would enter or old firms would expand their output until it fell.
Interest rates are just another price: the price of spending today instead of future.
In a perfectly competitive market, companies are producing the right things in right way in the right proportion and productions are given to the right people.
In nonmarket system, the truth about values, costs, and benefits has disappeared.
When economists say the economy is inefficient, they mean that there's a way to make somebody better off without harming anybody else.
Taxes are inefficient because they destroy the information carried by prices in perfectly competitive, efficient markets: price no longer equals cost, so cost no loner equals value.
All efficient outcomes can be achieved using a competitive market, by adjusting the starting position. Instead of interfering with the markets themselves, the trick is to adjust the starting blocks by making lump-sum payments and levying one-time taxes.
The value of the product to the customer is equal to or higher than the price; and the cost to the producer equal to or lower than the price.
In a perfectly competitive market, the price of coffee would equal the marginal cost of the coffee. If the price were lower, firms would go out of business until it rose. If the price were higher, new firms would enter or old firms would expand their output until it fell.
Interest rates are just another price: the price of spending today instead of future.
In a perfectly competitive market, companies are producing the right things in right way in the right proportion and productions are given to the right people.
In nonmarket system, the truth about values, costs, and benefits has disappeared.
When economists say the economy is inefficient, they mean that there's a way to make somebody better off without harming anybody else.
Taxes are inefficient because they destroy the information carried by prices in perfectly competitive, efficient markets: price no longer equals cost, so cost no loner equals value.
All efficient outcomes can be achieved using a competitive market, by adjusting the starting position. Instead of interfering with the markets themselves, the trick is to adjust the starting blocks by making lump-sum payments and levying one-time taxes.
sexual economy and psychology
As an everlasting movie genre, gangster movies have been intriguing audience since the emergence of Progressive Era (1900-1920). In some typical gangster films like Scarface (1983), The Godfather, we are fascinated by Tony Montana’s and Michael Corleone’s masculinity. These specific male characters are physically alive; they totally dominate the screen. But what’s the role of females in these movies? They are obedient and have no status in gangster affairs; they are merely the tools and dolls of male characters. In Godfather, for example, Kay is depicted as a naïve and gullible woman: when Michael deceives her that he doesn’t kill a member of Corleone family, she trusted him without hesitation.
This traditional opinion on the role and characteristics of male and female to some extent influenced Freud when he came up with the idea of gender identity. In Freud’s view, women, who are in a disadvantageous situation, admire men’s power and freedom and thus even may have envy for penis, the symbol of masculinity.
It seems that evolutionary gender theory also back up with this perspective, though indirectly. Having faced various yet similar challenges throughout the history, men and women are alike in many ways, but the difference in reproduction decides the different attitude between men and women towards sex.
Research shows that men are more easily to get sexually aroused than women do. Hardly any women would go to bed with a total stranger while half or even more male would like to try a new face lady. According to sexual economists, this is due to the different trade-offs men and women bear in the process of reproduction.
Men disperse sperm while women have to bear the risk of pregnancy and pain of giving a birth to a child. Men are more likely to boost their sex experience to their friends and receive cheer as heroes, while women may be looked downed upon. Besides, when a man gets bored or afraid of taking responsibility, he may leave but the girl will have to endure other’s tease and may have to raise child herself. So in short, the cost of sex for women is large, leaving women insensitive to the “price” men offer to have sex. So in the past, man usually have to show considerable determination to give commitment so that he can have sex with a girl. That can explain why girls like to marry males who are mature because they don’t want to cost much to get nothing in the end.
But with the legislation of abortion and the invention of contraceptive medicine and condoms, the cost of sex activity for women has dropped significantly, and thus more and more women no longer regard sex as precious resource. (In fact the reality to some extent forces them because men have substitutes, which means that men can hunt another girl more easily even if they are refused by some females)
This big change, in my opinion, greatly challenges evolutionary theory’s explanation of sex activity. Women today actually don’t regard sex merely as means of reproduction. Instead, some very strange and surprising reasons occur.
12/10/2011
Introducing the logic of life
Rational people respond to trade-offs and to incentives. When the costs or benefits of something change, people change their behavior. Rational people think--not always consciously--about the future as well as the present as they try to anticipate likely consequences of their actions in an uncertain world.
So what are the costs, benefits, and likely consequences of a blow job?
Regular sex is more costly than it used to be because of the spread of HIV/AIDS. AIDS is more likely to be spread by regular sex than by oral sex.
Oral sex isn't a symptom of more promiscuous teenagers. In fact, it's a sign that teenagers are behaving more responsibly, in enthusiastically--and rationally--choosing an alternative to riskier sex.
Cost is not just about money. The cost of sex includes the risk of AIDS and the risk of unwanted pregnancy; if that cost rises, you will tend to choose a safer kind of sex. Your total "budget" isn't just the cash in your bank account, it also encompasses your time, energy, talent and attention.
The endowment effect: People suddenly value objects more highly simply because they own them. They won't trade even when logic suggests they should.
The incapacitation effect: When the someone is in prison, he can't rob your house.
Where the adult courts were notably more severe than the juvenile courts, the difference in behavior was sharp: Crime dropped dramatically once kids reached the age of majority. Where the juvenile courts were relatively harsh, the drop didn't happen, because kids were already frightened of contact with the justice system.
So what are the costs, benefits, and likely consequences of a blow job?
Regular sex is more costly than it used to be because of the spread of HIV/AIDS. AIDS is more likely to be spread by regular sex than by oral sex.
Oral sex isn't a symptom of more promiscuous teenagers. In fact, it's a sign that teenagers are behaving more responsibly, in enthusiastically--and rationally--choosing an alternative to riskier sex.
Cost is not just about money. The cost of sex includes the risk of AIDS and the risk of unwanted pregnancy; if that cost rises, you will tend to choose a safer kind of sex. Your total "budget" isn't just the cash in your bank account, it also encompasses your time, energy, talent and attention.
The endowment effect: People suddenly value objects more highly simply because they own them. They won't trade even when logic suggests they should.
The incapacitation effect: When the someone is in prison, he can't rob your house.
Where the adult courts were notably more severe than the juvenile courts, the difference in behavior was sharp: Crime dropped dramatically once kids reached the age of majority. Where the juvenile courts were relatively harsh, the drop didn't happen, because kids were already frightened of contact with the justice system.
12/09/2011
What do schoolteachers and sumo wrestlers have in common?
An incentive is simply a means of urging people to do more of a good thing and less of a bad thing.
A thing worth having is a thing worth cheating for.
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.-------Adam Smith, The Theory of Moral Sentiments
A thing worth having is a thing worth cheating for.
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.-------Adam Smith, The Theory of Moral Sentiments
12/9/2011 Class41
Profits, losses and entrepreneurs
Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward.
Industries and commerce are not static things, but dynamic processes, in which particular products, individual companies and whole industries rise and fall, as a result of relentless competition under changing conditions.
The company which first introduces a product that consumers like may make large profits, but those very profits attract more investments into existing companies and encourage new companies to form, and thus drive down the price.
Losses force business to change with changing conditions and shift to what they are comparatively good at.
Knowledge is one of the scarcest of all resources in any economy and the insight distilled from knowledge is even more scarce.
Factors of production: Land, labor, capital
Explicit cost: rent wage fixed cost
Implicit cost: opp cost foregone wage normal rate of return
Even when I own the land, I still have to pay the rent because I give up the chance to do other things on the land.
Cost includes explicit and implicit costs
What decides whether you should buy or rent something: The equation of profitability
Profitability= rental rate + appreciation rate - interest rate
Rental rate: annual rental payment / price of good
Appreciation rate: change in asset price / price of good (It's the expectation of how much you wanna sell the next year)
Interest rate
Application: Whether to buy or rent a car?
Suppose the lease payment: 12000 dollars per year
Buy a car: $32000 sell it next year: 24000 bucks
Interest rate: 10%
Rental rate= 12000/32000 = 37.5%
Appreciation rate= -8000/32000= -25%
Interest rate: 10%
Profitability= 37.5% + (-25%) - 10% = 2.5%
If the outcome is larger than 0, you should buy the stuff.
What does 2.5% mean?
It shows how much richer you are every year if you own the thing rather than rent the thing.
Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward.
Industries and commerce are not static things, but dynamic processes, in which particular products, individual companies and whole industries rise and fall, as a result of relentless competition under changing conditions.
The company which first introduces a product that consumers like may make large profits, but those very profits attract more investments into existing companies and encourage new companies to form, and thus drive down the price.
Losses force business to change with changing conditions and shift to what they are comparatively good at.
Knowledge is one of the scarcest of all resources in any economy and the insight distilled from knowledge is even more scarce.
Factors of production: Land, labor, capital
Explicit cost: rent wage fixed cost
Implicit cost: opp cost foregone wage normal rate of return
Even when I own the land, I still have to pay the rent because I give up the chance to do other things on the land.
Cost includes explicit and implicit costs
What decides whether you should buy or rent something: The equation of profitability
Profitability= rental rate + appreciation rate - interest rate
Rental rate: annual rental payment / price of good
Appreciation rate: change in asset price / price of good (It's the expectation of how much you wanna sell the next year)
Interest rate
Application: Whether to buy or rent a car?
Suppose the lease payment: 12000 dollars per year
Buy a car: $32000 sell it next year: 24000 bucks
Interest rate: 10%
Rental rate= 12000/32000 = 37.5%
Appreciation rate= -8000/32000= -25%
Interest rate: 10%
Profitability= 37.5% + (-25%) - 10% = 2.5%
If the outcome is larger than 0, you should buy the stuff.
What does 2.5% mean?
It shows how much richer you are every year if you own the thing rather than rent the thing.
12/08/2011
Where have all the criminals gone?
The decline in crime that began in the early 1990s in America was accompanied bu a blistering national economy and a significant drop in unemployment. But though it's true that a stronger job market may make certain crimes relatively less attractive, that is only the case for crimes with a direct financial motivation---burglary, robbery, and auto theft---as opposed to violent crimes like homicide, assault and rape.Data show that an unemployment decline of 1% accounts for a 1% decrease in nonviolent crime. But there is no strong link between strong economy and drop in violent rate.
The evidence linking increased punishment with lower crime rates is very strong. But it is not entirely true.
Reason: A fundamental confusion of correlation and causality. The reason why there are more prisoners in the jail is because more people commit crimes. Besides, jails are not cheap.
The explanation that crime rate drop because of the implement of capital punishment is wrong.
(1) The death execution is rare so that it doesn't deter the crimers too much
(2) Data shows that executing one criminal translate into 7 fewer homicides that the criminal might have committed. Even though the implement can only account for 25% of the drop in homicides in the 1990s.
Does merely increasing the number of police reduce the crime? YES.
Innovative policing strategies: hunt down small crimes because if they are not punished appropriately the criminals will commit larger crimes. But again, this is not the main reason why crime rate dropped so significantly in 1990s.
Reason: the new strategy was implemented in 1994, but the crime rate had already been dropping since 1990; the increase of police offset the contribution of innovative strategy.Also, crime rate went down everywhere, even the place that didn't implement the new strategy.
The most dramatic effect of legalized abortion was its impact on crime. Legalized abortion led to less unwantedness; unwantedness leads to high crimes; legalized abortion, therefore, led to less crime.
The evidence linking increased punishment with lower crime rates is very strong. But it is not entirely true.
Reason: A fundamental confusion of correlation and causality. The reason why there are more prisoners in the jail is because more people commit crimes. Besides, jails are not cheap.
The explanation that crime rate drop because of the implement of capital punishment is wrong.
(1) The death execution is rare so that it doesn't deter the crimers too much
(2) Data shows that executing one criminal translate into 7 fewer homicides that the criminal might have committed. Even though the implement can only account for 25% of the drop in homicides in the 1990s.
Does merely increasing the number of police reduce the crime? YES.
Innovative policing strategies: hunt down small crimes because if they are not punished appropriately the criminals will commit larger crimes. But again, this is not the main reason why crime rate dropped so significantly in 1990s.
Reason: the new strategy was implemented in 1994, but the crime rate had already been dropping since 1990; the increase of police offset the contribution of innovative strategy.Also, crime rate went down everywhere, even the place that didn't implement the new strategy.
The most dramatic effect of legalized abortion was its impact on crime. Legalized abortion led to less unwantedness; unwantedness leads to high crimes; legalized abortion, therefore, led to less crime.
Who pay for you coffee?
Why is coffee price high in certain parts of London?
First: maybe there are not many coffee kiosks around in that place and when people are in such a hurry to work, they won't bother spending a couple more dollar for a cup of coffee(they are price-blinded).
Second, these places are "fertile land" for companies because it can be profitable while the physical land is constant, so the supply exceeds demand and thus coffee kiosk has to bid the highest price to get the land and sell coffee, and thus its cost rises. (rent price speciafically)
Different reasons for high rent:
(1) The best land produces very valuable crops relative to the marginal land.
(2) It's worth paying for good land because the alternatives that should be available are not.
Things are expensive either because of real scarcity (more people want it than it is available) or because of artificial means---legislation, regulation or foul play.
Why would improvement in the quality and price of the commuter train services that bring people into New York's Penn Station from the surrounding suburbs please anyone who rents a property in Manhattan? And why might New York landlords be less enthusiastic about such improvement?
Answer: Improved public transportation increases the alternatives to renting a place in the city.
Rent is the return landlords received from their property; profit is the return company owners earn from their property.
Company profits, like rents, are determined by the alternatives. A company with stiff competition will be less profitable than a company with incompetent rivals.
Because of the similarity between the rents that can be charged on land with few substitutes and the profits enjoyed by a firm with few competitors, economists often call those profits "monopoly rents".
Two reasons why a company has a high profit:
(1) That field lacks truly competitors. Only a few companies can provide high quality goods and services.
(2) New companies are prevented from entering the field. Monopoly happens.
So check whether the marginal new company can enter the area freely or not.
Everyday people all around the world are trying to avoid competition or reap the rewards of others who have succeeded in doing so. Economists call this type of behavior "creating rents" and "rent seeking".
The price of a good is the production cost of its marginal producer. Because if the price is higher than the cost, there will be profit, enticing new producers to come in; if the price is lower than the marginal cost, the lowest efficient producer will be squeezed out.
First: maybe there are not many coffee kiosks around in that place and when people are in such a hurry to work, they won't bother spending a couple more dollar for a cup of coffee(they are price-blinded).
Second, these places are "fertile land" for companies because it can be profitable while the physical land is constant, so the supply exceeds demand and thus coffee kiosk has to bid the highest price to get the land and sell coffee, and thus its cost rises. (rent price speciafically)
Different reasons for high rent:
(1) The best land produces very valuable crops relative to the marginal land.
(2) It's worth paying for good land because the alternatives that should be available are not.
Things are expensive either because of real scarcity (more people want it than it is available) or because of artificial means---legislation, regulation or foul play.
Why would improvement in the quality and price of the commuter train services that bring people into New York's Penn Station from the surrounding suburbs please anyone who rents a property in Manhattan? And why might New York landlords be less enthusiastic about such improvement?
Answer: Improved public transportation increases the alternatives to renting a place in the city.
Rent is the return landlords received from their property; profit is the return company owners earn from their property.
Company profits, like rents, are determined by the alternatives. A company with stiff competition will be less profitable than a company with incompetent rivals.
Because of the similarity between the rents that can be charged on land with few substitutes and the profits enjoyed by a firm with few competitors, economists often call those profits "monopoly rents".
Two reasons why a company has a high profit:
(1) That field lacks truly competitors. Only a few companies can provide high quality goods and services.
(2) New companies are prevented from entering the field. Monopoly happens.
So check whether the marginal new company can enter the area freely or not.
Everyday people all around the world are trying to avoid competition or reap the rewards of others who have succeeded in doing so. Economists call this type of behavior "creating rents" and "rent seeking".
The price of a good is the production cost of its marginal producer. Because if the price is higher than the cost, there will be profit, enticing new producers to come in; if the price is lower than the marginal cost, the lowest efficient producer will be squeezed out.
12/07/2011
Beer, Fries and Globalization
If you would like to be rich, then it is a good idea to forge close links with the rest of the world.
The most visible manifestation of the world's increasing economic interdependence is the availability of foreign products in familiar settings.
Globalization will never homogenize what we have, not while new ideas are always appearing and adding fresh ingredients to the slowly turning blender of economic integration.
Why does Tim Harford write a book about economics when professor Wilson, a much better economists than Tim, could write a better one? The answer is comparative advantage. A person should choose his vocation not with reference to what he does better than another one does, but with reference to what he does best.
Exports pay for imports.
Without minimizing the genuine suffering to those who lost their livelihoods along the way, it's obvious that technological progress and international trade made us far better off.
The solution is to allow progress to continue while help support and retrain those who have been hurt as a result.
Two common complaints about globalization:
(1)Globalization is bad for the planet
(2)Globalization is bad for the world's poor
Foreign investment is widely recognized to be good for economic growth in poor countries: it is an excellent way for them to create jobs, learn cutting-edge（尖端的）knowledge, and do so without having to invest their own scarce money.
The idea that trade is bad for the environment is based on weak thinking and little evidence.
The first worry is that free trade causes environmental problem because goods produced overseas are subject to more lenient environmental standards.
(1) Trade, in most situations, are made between rich countries, which have similar environmental law standards.Besides, environmental regulations are not a major cost, labor is. Companies move abroad seeking for cheap labor rather than pollution haven. Latest manufacturing techniques are often cheaper and less polluting at the same time. Environmental standards are rising in developing countries. Potentially high polluting industries remain in developed countries.
(2)International transportation pollutes more.
In fact, domestic transportation pollution may be more severe. Think about average pollution of a laptop from international trade and one from domestic trade.
(3)Trade makes people richer, and this will damage the environment.
The most deadly and certain environmental problems of today are also those that afflict the very poorest people in the world, such as wood-burning stoves and unsafe drinking water.
Pollutants like airborne particulates emitted from cars, do get worse as people get richer--for a while. At one point people are rich enough to afford improved environmental standards, and they will demand them.
People go to sweatshops voluntarily, which means that whatever their alternatives are, they are worse.
Sweatshops are good news in two ways: they are a step up from the immediate alternatives, and they are also a rung on the ladder to something better.
In most countries, rich and poor, special interest groups with disproportionate influence have reasons to oppose free trade.
The policy of isolation was not designed for the good of the Chinese people but good for its rulers.
The most visible manifestation of the world's increasing economic interdependence is the availability of foreign products in familiar settings.
Globalization will never homogenize what we have, not while new ideas are always appearing and adding fresh ingredients to the slowly turning blender of economic integration.
Why does Tim Harford write a book about economics when professor Wilson, a much better economists than Tim, could write a better one? The answer is comparative advantage. A person should choose his vocation not with reference to what he does better than another one does, but with reference to what he does best.
Exports pay for imports.
Without minimizing the genuine suffering to those who lost their livelihoods along the way, it's obvious that technological progress and international trade made us far better off.
The solution is to allow progress to continue while help support and retrain those who have been hurt as a result.
Two common complaints about globalization:
(1)Globalization is bad for the planet
(2)Globalization is bad for the world's poor
Foreign investment is widely recognized to be good for economic growth in poor countries: it is an excellent way for them to create jobs, learn cutting-edge（尖端的）knowledge, and do so without having to invest their own scarce money.
The idea that trade is bad for the environment is based on weak thinking and little evidence.
The first worry is that free trade causes environmental problem because goods produced overseas are subject to more lenient environmental standards.
(1) Trade, in most situations, are made between rich countries, which have similar environmental law standards.Besides, environmental regulations are not a major cost, labor is. Companies move abroad seeking for cheap labor rather than pollution haven. Latest manufacturing techniques are often cheaper and less polluting at the same time. Environmental standards are rising in developing countries. Potentially high polluting industries remain in developed countries.
(2)International transportation pollutes more.
In fact, domestic transportation pollution may be more severe. Think about average pollution of a laptop from international trade and one from domestic trade.
(3)Trade makes people richer, and this will damage the environment.
The most deadly and certain environmental problems of today are also those that afflict the very poorest people in the world, such as wood-burning stoves and unsafe drinking water.
Pollutants like airborne particulates emitted from cars, do get worse as people get richer--for a while. At one point people are rich enough to afford improved environmental standards, and they will demand them.
People go to sweatshops voluntarily, which means that whatever their alternatives are, they are worse.
Sweatshops are good news in two ways: they are a step up from the immediate alternatives, and they are also a rung on the ladder to something better.
In most countries, rich and poor, special interest groups with disproportionate influence have reasons to oppose free trade.
The policy of isolation was not designed for the good of the Chinese people but good for its rulers.
12/7/2011 Class40
The additional cost of tax (that is, it cannot be seen on the graph)
(1)You need to hire bureaucrats to implement the tax, but these bureaucrats do not produce anything. And the population of such people and the size of bureau is too big.
(2)The time and effort spent doing and preparing the tax is too big, about 400 billion dollars per year. That's a great waste.
(3)Tax can be misused.
Sales tax: the legal liability of tax is upon the consumers.
The effect of sales tax and excise tax is identical.
The government can decide who they wanna tax on, but they cannot decide who burden the tax to what extent.It depends on the relative elasticity of demand curve and supply curve: the more inelastic the curve is, the more burden it has to bear.
So the more elastic the market of certain good is, the more destructive the tax is to the market transactions. Because people are so sensitive to the change of price that they will quit the market more easily.
Would you support that we should put all the tax only on things that the firms take the whole burden?
Answer: NO. Firms consist of share holders and workers. We shift between the identities of consumers and producers, so the argument doesn't make any sense.
Subsidy can benefit both producers and buyers, and the more inelastic the curve is, the more benefit it can get.
But the subsidy doesn't mean the market will be better off.
Reason: Think about how people respond to incentive and opportunity cost of resources.
When there is a subsidy, the cost of the good is artificially lower, so producers shift resources, which have alternative uses, to make this product. But the low cost is merely an artificial phenomenon, so resources(whether land, workers, capital or time) that could have been used more efficiently are now used to make the product with the subsidy. That's a waste.
Besides, a subsidy may lead producers to overproduce (price now lose the role of signal) and deadweight loss will occur.
So subsidy, like tax, is still an intervention of market, which makes the price no longer the truth teller of market transactions.
Subsidy is mere another way of economic fallacy. What's seen is the prosperity of one field, what's not seen is its damage to fields that could have made the resources more efficiently.
(1)You need to hire bureaucrats to implement the tax, but these bureaucrats do not produce anything. And the population of such people and the size of bureau is too big.
(2)The time and effort spent doing and preparing the tax is too big, about 400 billion dollars per year. That's a great waste.
(3)Tax can be misused.
Sales tax: the legal liability of tax is upon the consumers.
The effect of sales tax and excise tax is identical.
The government can decide who they wanna tax on, but they cannot decide who burden the tax to what extent.It depends on the relative elasticity of demand curve and supply curve: the more inelastic the curve is, the more burden it has to bear.
So the more elastic the market of certain good is, the more destructive the tax is to the market transactions. Because people are so sensitive to the change of price that they will quit the market more easily.
Would you support that we should put all the tax only on things that the firms take the whole burden?
Answer: NO. Firms consist of share holders and workers. We shift between the identities of consumers and producers, so the argument doesn't make any sense.
Subsidy can benefit both producers and buyers, and the more inelastic the curve is, the more benefit it can get.
But the subsidy doesn't mean the market will be better off.
Reason: Think about how people respond to incentive and opportunity cost of resources.
When there is a subsidy, the cost of the good is artificially lower, so producers shift resources, which have alternative uses, to make this product. But the low cost is merely an artificial phenomenon, so resources(whether land, workers, capital or time) that could have been used more efficiently are now used to make the product with the subsidy. That's a waste.
Besides, a subsidy may lead producers to overproduce (price now lose the role of signal) and deadweight loss will occur.
So subsidy, like tax, is still an intervention of market, which makes the price no longer the truth teller of market transactions.
Subsidy is mere another way of economic fallacy. What's seen is the prosperity of one field, what's not seen is its damage to fields that could have made the resources more efficiently.
12/06/2011
Why poor countries are poor
The poorer country should catch up quickly because in a country, which has very little in the way of infrastructure or education, new investment have the biggest reward. (The law of diminishing returns)
In a world of diminishing returns, the poorest countries gain the most from new technology, infrastructure, and education.
Government in rich countries usually perform basic bureaucratic tasks---- good law enforcement, protection of private property---quickly and cheaply,whereas governments in poor countries draw out the process in hopes of pocketing some extra cash themselves.
Government banditry, widespread waste and oppressive regulations all are elements of the reasons why poor countries are poor.
If a society cannot provide the right kind of incentives to behave productively, no amount of technical infrastructure can save it from poverty.
Example: Nepal has more efficient irrigation system with high tech dam and canal, but it doesn't make the country better; instead, the efficiency drops.
Reasons:
(1)Things are not designed, built and maintained by the native, who have incentives to keep it.
(2)Farmers don't cooperate. In the past, farmers living near the dam help maintain the quality of dam while farmers living near the canal help maintain the quality of canal, but with the new tech, dam is more durable, so the former trade breaks up.
The reasons why poor countries are poor
(1)Corruption
(2)Lack of incentive or perverse incentive
(3)Twisted rules and bad institutions.
In a world of diminishing returns, the poorest countries gain the most from new technology, infrastructure, and education.
Government in rich countries usually perform basic bureaucratic tasks---- good law enforcement, protection of private property---quickly and cheaply,whereas governments in poor countries draw out the process in hopes of pocketing some extra cash themselves.
Government banditry, widespread waste and oppressive regulations all are elements of the reasons why poor countries are poor.
If a society cannot provide the right kind of incentives to behave productively, no amount of technical infrastructure can save it from poverty.
Example: Nepal has more efficient irrigation system with high tech dam and canal, but it doesn't make the country better; instead, the efficiency drops.
Reasons:
(1)Things are not designed, built and maintained by the native, who have incentives to keep it.
(2)Farmers don't cooperate. In the past, farmers living near the dam help maintain the quality of dam while farmers living near the canal help maintain the quality of canal, but with the new tech, dam is more durable, so the former trade breaks up.
The reasons why poor countries are poor
(1)Corruption
(2)Lack of incentive or perverse incentive
(3)Twisted rules and bad institutions.
Can philosophy major students get jobs?
Ask what undergraduate student major in and I bet most of them will not say philosophy. Once one of my friend asked me what I major in, and I answered, "Well, maths, economics and maybe philosophy..." "What?" He was confused, "I know why you choose maths, because you are smart and I understand your interest in economics, but why philosophy, that's boring and useless."
Well, there are many advantages for a philosophy guy, like a better aptitude in reading, writing, logic thinking and maybe they can get higher GRE and GMAT scores, but in this blog I will try to argue that philosophy students also have advantages in job applications.
It's apparent that employers would like to hire smart, diligent workers but can't tell from an interview who is smart and diligent. Neither can they know who is most capable simply by looking at where they graduate because in my opinion, on average a half of the students even in elite schools are trash. So in short, employers don't have enough information and knowledge to make right decisions.
It's also apparent that everyone has to work hard to obtain a philosophy degree, but lazy and dumb people find it troublesome.
So, smart and diligent people can prove that they are smart and diligent by going to the trouble of getting a philosophy degree. Lazy and dumb people would not enter that field. So the degree of philosophy can be a signal of intelligence and diligence, which can bridge the information gap.
But, I have to admit that the best path for a philosophy major student is graduate school and professor. So in my opinion, philosophy can be a great option for second major or minor.
Well, there are many advantages for a philosophy guy, like a better aptitude in reading, writing, logic thinking and maybe they can get higher GRE and GMAT scores, but in this blog I will try to argue that philosophy students also have advantages in job applications.
It's apparent that employers would like to hire smart, diligent workers but can't tell from an interview who is smart and diligent. Neither can they know who is most capable simply by looking at where they graduate because in my opinion, on average a half of the students even in elite schools are trash. So in short, employers don't have enough information and knowledge to make right decisions.
It's also apparent that everyone has to work hard to obtain a philosophy degree, but lazy and dumb people find it troublesome.
So, smart and diligent people can prove that they are smart and diligent by going to the trouble of getting a philosophy degree. Lazy and dumb people would not enter that field. So the degree of philosophy can be a signal of intelligence and diligence, which can bridge the information gap.
But, I have to admit that the best path for a philosophy major student is graduate school and professor. So in my opinion, philosophy can be a great option for second major or minor.
The inside story
Economists have known for a while that if one party to a deal has inside information and the other does not, then markets may not work as well as we would hope.
Adverse selection: If some people know more than others about the quality of a product, then some high-quality products may not be traded at all, or not be traded very much.
When there is inside information, market doesn't work well because the buyers will not buy without proof and the sellers cannot offer the proof.
Insurance policy depends on mutual ignorance. An insurance company can only insure me against an event like a burglary, a fire, or a medical bill if neither of us has any idea whether it will happen. If we could predict the future, insurance would be meaningless.
One way to bridge the information gap in markets previously hindered by inside information is for trustworthy vendors to find ways to signal their reliability. The other way for insurance company is to reduce the premium（参加保险的入险费） and increase the deductible（免赔额，即投保人自行承担的费用）. They can also make customer have health examinations.
Moral hazard: If you compensate people when bad things happen to them, they may get careless. Paying people to be unemployed encourages unemployment. Yet if a government scrapped unemployment benefit, there would still be jobless people, and supporting the jobless is something that every civilized society should do.
To bridge the information gap, a real signal of quality should be one that sellers with bad quality good cannot make or cannot afford to make.
They can build impressive buildings, which represent the companies are stable and have promise.
Expensive advertisement, great sunk cost (like the magnificent buildings) are all signals of quality and stability.
Two consequences of imperfect information:
(1)Adverse selection
(2)Moral hazard
Adverse selection: If some people know more than others about the quality of a product, then some high-quality products may not be traded at all, or not be traded very much.
When there is inside information, market doesn't work well because the buyers will not buy without proof and the sellers cannot offer the proof.
Insurance policy depends on mutual ignorance. An insurance company can only insure me against an event like a burglary, a fire, or a medical bill if neither of us has any idea whether it will happen. If we could predict the future, insurance would be meaningless.
One way to bridge the information gap in markets previously hindered by inside information is for trustworthy vendors to find ways to signal their reliability. The other way for insurance company is to reduce the premium（参加保险的入险费） and increase the deductible（免赔额，即投保人自行承担的费用）. They can also make customer have health examinations.
Moral hazard: If you compensate people when bad things happen to them, they may get careless. Paying people to be unemployed encourages unemployment. Yet if a government scrapped unemployment benefit, there would still be jobless people, and supporting the jobless is something that every civilized society should do.
To bridge the information gap, a real signal of quality should be one that sellers with bad quality good cannot make or cannot afford to make.
They can build impressive buildings, which represent the companies are stable and have promise.
Expensive advertisement, great sunk cost (like the magnificent buildings) are all signals of quality and stability.
Two consequences of imperfect information:
(1)Adverse selection
(2)Moral hazard
Market failures
Three kinds of market failure
(1) market power--- supplier can set the price
(2) lack of information
(3) externality
The idea of externality charge is not to discourage everyone from doing anything that might inconvenience anybody else; it is to get them take into consideration the effect they cause to others.
Congestion charging not only improves efficiency, it redistribute the money from the rich. Externality charge makes other alternatives more attractive.
Individually, constantly make decisions that put a value on environment, on time and even on our own life. If you pay more for a department that is in a peaceful and quiet neighbourhood, you have already put the value on quiet and peace.
Revealed preference: people's preference is revealed when they make choices as consumers.
The use of externality charges do rely in the shaky knowledge about how much it is really worth to us to reduce externalities like pollution, noise, etc. We also do not know the cheapest way to reduce the externalities.
Nobody knows the cheapest way of solving our traffic problems--yet. But externality pricing brings pollution, congestion, and the rest inside the world of truth, which market creates for us.
The attractive thing about externality pricing is that it attacks the problem but makes no assumption about the solution. The congestion charge gives drivers a signal: by bringing your car into town in rush hour, you are imposing a cost on everyone else. The drivers then have a choice: pay compensation, or find a way to avoid imposing the cost. There are many, many ways to avoid that cost, and the market can produce the ingenuity needed to uncover them. When no externalities are present, markets automatically take account of costs and provide incentives for producers to reduce them. When externalities are present, those costs are invisible to the market, but systems such as externality charging provide the missing signal that the cost exists.
Although externality charge and subsidy seem a great fix for externalities, there may be an unexpected hiccup.
Externalities simply are not externalitoes if people can easily get together and negotiate. Remember that they were called "externalities" because they stood outside market transactions.
With the existence of pseudoexternalities, which can in fact be dealt with very well by the private sector, if the government also steps in with an externality charge, we may find ourselves "solving" the externality twice.
(1) market power--- supplier can set the price
(2) lack of information
(3) externality
The idea of externality charge is not to discourage everyone from doing anything that might inconvenience anybody else; it is to get them take into consideration the effect they cause to others.
Congestion charging not only improves efficiency, it redistribute the money from the rich. Externality charge makes other alternatives more attractive.
Individually, constantly make decisions that put a value on environment, on time and even on our own life. If you pay more for a department that is in a peaceful and quiet neighbourhood, you have already put the value on quiet and peace.
Revealed preference: people's preference is revealed when they make choices as consumers.
The use of externality charges do rely in the shaky knowledge about how much it is really worth to us to reduce externalities like pollution, noise, etc. We also do not know the cheapest way to reduce the externalities.
Nobody knows the cheapest way of solving our traffic problems--yet. But externality pricing brings pollution, congestion, and the rest inside the world of truth, which market creates for us.
The attractive thing about externality pricing is that it attacks the problem but makes no assumption about the solution. The congestion charge gives drivers a signal: by bringing your car into town in rush hour, you are imposing a cost on everyone else. The drivers then have a choice: pay compensation, or find a way to avoid imposing the cost. There are many, many ways to avoid that cost, and the market can produce the ingenuity needed to uncover them. When no externalities are present, markets automatically take account of costs and provide incentives for producers to reduce them. When externalities are present, those costs are invisible to the market, but systems such as externality charging provide the missing signal that the cost exists.
Although externality charge and subsidy seem a great fix for externalities, there may be an unexpected hiccup.
Externalities simply are not externalitoes if people can easily get together and negotiate. Remember that they were called "externalities" because they stood outside market transactions.
With the existence of pseudoexternalities, which can in fact be dealt with very well by the private sector, if the government also steps in with an externality charge, we may find ourselves "solving" the externality twice.
12/05/2011
12/5/2011 Class 39
When you make something illegal, you don't eliminate the want; instead, you raise the opportunity cost of the supply and make the curve steeper.
Additional cost unseen on the graph:
a.Law enforcement
(1) the government have to raise tax to hire bureaucrats, police, courts, prisons to enforce the law
(2) these bureaucrats could have done other things more productive
b. When you make a certain profession illegal, the job participants don't have to pay payroll tax, insurance money. They can get more pure profit, even exceeding the increasing cost.
The fact of making drug illegal:
(1) the price of drugs fall in the long run (technology reason)
(2) the big profit entices more people to join and compete
(3) the crime rate increases in other fields
If we punish severely on some small sins, like smoking in the bathroom, we actually lower the marginal cost for people to commit the severe crimes.
Some people say that one of the benefits when prostitution is legalized is that government can get tax revenue. But this opinion is odd.
(1) Tax is neutral; it is just a transfer of money, so no one gets benefit or hurt
(2) Why is government tax revenue benefit? The signal of wealth is not how much money the government has but how many goods and services people produce
The economic incidence of supply and demand curve
Application: Taxation
1. Excise tax: legal liability for tax is upon suppliers
the result of a tax
(1) customers and suppliers share the burden of tax and the more inelastic, the more loss the group has to suffer
(2) if the tax is $1, price doesn't go up by $1. Reason: both demand curve and supply curve usually have a slope.
(3) the government can not get as much tax revenue as it intended to get because of the second reason.
(4) The market is affected. Deadweight loss occurs.
(5) We have to hire bureaucrats to enforce the law, but they don't produce anything new.
(6) People can cheat on tax
<a> they have to waste resources to avoid the tax
<b> others have to pay for your tax
The economic incidence of supply and demand curve
A way for a free market to get efficiency and equity at the same time
Head Start Theorem (Kenneth Arrow)
An appropriate program of lump-sum taxes or subsidies that puts everyone on equal footing.
Additional cost unseen on the graph:
a.Law enforcement
(1) the government have to raise tax to hire bureaucrats, police, courts, prisons to enforce the law
(2) these bureaucrats could have done other things more productive
b. When you make a certain profession illegal, the job participants don't have to pay payroll tax, insurance money. They can get more pure profit, even exceeding the increasing cost.
The fact of making drug illegal:
(1) the price of drugs fall in the long run (technology reason)
(2) the big profit entices more people to join and compete
(3) the crime rate increases in other fields
If we punish severely on some small sins, like smoking in the bathroom, we actually lower the marginal cost for people to commit the severe crimes.
Some people say that one of the benefits when prostitution is legalized is that government can get tax revenue. But this opinion is odd.
(1) Tax is neutral; it is just a transfer of money, so no one gets benefit or hurt
(2) Why is government tax revenue benefit? The signal of wealth is not how much money the government has but how many goods and services people produce
The economic incidence of supply and demand curve
Application: Taxation
1. Excise tax: legal liability for tax is upon suppliers
the result of a tax
(1) customers and suppliers share the burden of tax and the more inelastic, the more loss the group has to suffer
(2) if the tax is $1, price doesn't go up by $1. Reason: both demand curve and supply curve usually have a slope.
(3) the government can not get as much tax revenue as it intended to get because of the second reason.
(4) The market is affected. Deadweight loss occurs.
(5) We have to hire bureaucrats to enforce the law, but they don't produce anything new.
(6) People can cheat on tax
<a> they have to waste resources to avoid the tax
<b> others have to pay for your tax
The economic incidence of supply and demand curve
A way for a free market to get efficiency and equity at the same time
Head Start Theorem (Kenneth Arrow)
An appropriate program of lump-sum taxes or subsidies that puts everyone on equal footing.
12/04/2011
Social economic organization Frank H.Knight
Many definitions of economics found in text books fall into this error of including virtually all intelligent behavior.
Not only are the objectives of action in fact a practical problem, as well as the means of achievement, but intelligent discussion of the means cannot be separated from the discussion of the ends.
Economics deal with the social organization of economic activity.It's the structure and working of the system of free enterprise which constitutes the principal topic of discussion in a treatise on economics.
The problems of organization arise only when different things are being done, in the furtherance of a common end, and in definite relations to each other, i.e, in coordination.
Organization is more than cooperation; organization means that various "organs" not only perform different functions, they also all act in a substantially continuous manner and in proper adjustment to each other.
Five main function of an economic system
(1) The function of fixing standards; the notion of efficiency
In a social system, people have to decide what to produce. Society finds it necessary or advisable to regulate the individual's regulation of his own want-satisfaction, to enforce a community standard of living. So the question is whose wants and which wants are to be given in preference.
The problem of standards or values occupies a key position in economics. The practical objective of economics is that of improving the social organization and increasing its efficiency. The correct definition of efficiency is the ratio between useful output and total output or input. (The extent to which the society produce what people want at the lowest cost.)
(2) The function of organizing production
The second step is that of actually putting them to use in accordance with the scale of values established. There are 2 processes:
<a> allocate resources to produce
<b> cooperation to reduce the ratio of effort and result.
(3) The function of distribution
When production is socialized, the separate productive contribution of one participant in the process cannot be directly identified or separated. The decision as to what to produce is closely bound up with the decision for whom to produce. Besides, distribution is the chief agency relied upon to control production and stimulate efficiency. (people respond to incentives)
Remuneration matters
(4) Economic maintenance and progress
progress refers to any persistent cumulative change, whether good or bad
<a> growth of population and cumulative change in its composition or education
<b> the accumulation of capitals
<c> technology improvement
Economic organization creates progress at a cost and progress in turn affects and changes the whole economic system.
(5) To adjust consumption to production within very short periods
Over short periods consumption has to be controlled and distributed with references to an existing supply or current rate of production, at the same time that adjustment of production to consumption requirements is being made as rapidly as practicable.
The reasons for organizing activity
Organized effort enables a social group to produce more of the means of want-satisfaction than it could by working as individuals.
The gain from specialization
One of the most interesting facts in regard to human society is the absence of definite structual specialization of individuals. Human organization is an artificial thing. Natural differences exist among human beings, and are taken advantage of in fitting individuals to specialized functions.
So one social problem is to discover such differences and utilize them as far as possible.
No man is omniscient, and every one possesses tacit knowledge, so specialization is a complement of knowledge.
The saving of time and effort in changing from one operation to another is the third gain from specialization.
Also, specialization means that we can undermine the disadvantage brought by the natural "unfair" allocation of natural resources. Territorial specialization.
Perhaps the very largest singe source of gain from the specialization of labor is that it makes possible the development and use of machinery.
The possibility of new jobs and technology and art improvement.
Social cost of specialization
It gives us more products, but in its effects on human beings it means a narrowing of the personality; impersonality.
The technical cost of assembly and distribution
The resulting interdependence of persons and groups.
Types of organization
(1) caste:Such a rigid society cannot get huge progress
(2) militaristic: loss of liberty and knowledge problem
(3) anarchy: externality and public goods and resources problem
(4) the exchange system (Capitalism)
The system of competition, private property, and free exchange. IT is automatic and unconscious; no one plans or ever planned it out, no one assigns the participants their roles or directs their functions. Each person in such a system seeks his own satisfaction without thought of the structure of society or its interests
Modern free enterprise is not like handicraft in medieval time. Nowadays workers produce nothing and own nothing, they can exchange nothing.The individual in fact gets his living, not by selling and buying or exchanging goods, but by selling productive services for money and buying with the money the goods which he uses.
Not only are the objectives of action in fact a practical problem, as well as the means of achievement, but intelligent discussion of the means cannot be separated from the discussion of the ends.
Economics deal with the social organization of economic activity.It's the structure and working of the system of free enterprise which constitutes the principal topic of discussion in a treatise on economics.
The problems of organization arise only when different things are being done, in the furtherance of a common end, and in definite relations to each other, i.e, in coordination.
Organization is more than cooperation; organization means that various "organs" not only perform different functions, they also all act in a substantially continuous manner and in proper adjustment to each other.
Five main function of an economic system
(1) The function of fixing standards; the notion of efficiency
In a social system, people have to decide what to produce. Society finds it necessary or advisable to regulate the individual's regulation of his own want-satisfaction, to enforce a community standard of living. So the question is whose wants and which wants are to be given in preference.
The problem of standards or values occupies a key position in economics. The practical objective of economics is that of improving the social organization and increasing its efficiency. The correct definition of efficiency is the ratio between useful output and total output or input. (The extent to which the society produce what people want at the lowest cost.)
(2) The function of organizing production
The second step is that of actually putting them to use in accordance with the scale of values established. There are 2 processes:
<a> allocate resources to produce
<b> cooperation to reduce the ratio of effort and result.
(3) The function of distribution
When production is socialized, the separate productive contribution of one participant in the process cannot be directly identified or separated. The decision as to what to produce is closely bound up with the decision for whom to produce. Besides, distribution is the chief agency relied upon to control production and stimulate efficiency. (people respond to incentives)
Remuneration matters
(4) Economic maintenance and progress
progress refers to any persistent cumulative change, whether good or bad
<a> growth of population and cumulative change in its composition or education
<b> the accumulation of capitals
<c> technology improvement
Economic organization creates progress at a cost and progress in turn affects and changes the whole economic system.
(5) To adjust consumption to production within very short periods
Over short periods consumption has to be controlled and distributed with references to an existing supply or current rate of production, at the same time that adjustment of production to consumption requirements is being made as rapidly as practicable.
The reasons for organizing activity
Organized effort enables a social group to produce more of the means of want-satisfaction than it could by working as individuals.
The gain from specialization
One of the most interesting facts in regard to human society is the absence of definite structual specialization of individuals. Human organization is an artificial thing. Natural differences exist among human beings, and are taken advantage of in fitting individuals to specialized functions.
So one social problem is to discover such differences and utilize them as far as possible.
No man is omniscient, and every one possesses tacit knowledge, so specialization is a complement of knowledge.
The saving of time and effort in changing from one operation to another is the third gain from specialization.
Also, specialization means that we can undermine the disadvantage brought by the natural "unfair" allocation of natural resources. Territorial specialization.
Perhaps the very largest singe source of gain from the specialization of labor is that it makes possible the development and use of machinery.
The possibility of new jobs and technology and art improvement.
Social cost of specialization
It gives us more products, but in its effects on human beings it means a narrowing of the personality; impersonality.
The technical cost of assembly and distribution
The resulting interdependence of persons and groups.
Types of organization
(1) caste:Such a rigid society cannot get huge progress
(2) militaristic: loss of liberty and knowledge problem
(3) anarchy: externality and public goods and resources problem
(4) the exchange system (Capitalism)
The system of competition, private property, and free exchange. IT is automatic and unconscious; no one plans or ever planned it out, no one assigns the participants their roles or directs their functions. Each person in such a system seeks his own satisfaction without thought of the structure of society or its interests
Modern free enterprise is not like handicraft in medieval time. Nowadays workers produce nothing and own nothing, they can exchange nothing.The individual in fact gets his living, not by selling and buying or exchanging goods, but by selling productive services for money and buying with the money the goods which he uses.
12/03/2011
The division of labor is limited by the extent of the market George J. Stigler
A dilemma of the theorem that the division of labor is limited by the extent of the market: either the division of labor is limited by the extent of the market, and , characteristically, industries are monopolized; or industries are characteristically competitive, and the theorem is false or of little significance.
Why does the firm not in the process become a monopoly? Because the average cost is a U-shape function. The marginal cost of a product in the short will be lower but after a certain point it will increase and so is average cost. So when the company becomes too big, it will turn from economics of scales into diseconomics of scales: that is, the problem of coordination and management of a gigantic company offset the profit of mass production.
Why does the firm not in the process become a monopoly? Because the average cost is a U-shape function. The marginal cost of a product in the short will be lower but after a certain point it will increase and so is average cost. So when the company becomes too big, it will turn from economics of scales into diseconomics of scales: that is, the problem of coordination and management of a gigantic company offset the profit of mass production.
Different kinds of demand
A. Functional
B. Nonfunctional
1. External effects on utility
(a) Bandwagon effect
(b) Snob effect
(c) Veblen effect
2. Speculative
3. Irrational
Functional demand: the demand for a commodity is due to the qualities inherent in the commodity itself.
Nonfunctional demand: the demand for a consumers' good is due to the factors other than the quality inherent in the commodity. May be due to external effects of utility, that is, the utility derived from the commodity is enhanced or decreased owing to the fact that others are purchasing and consuming the same commodity, or owing to the fact that the commodity bears a higher rather than lower tag.
Bandwagon effect: (从众效果)
The extent to which the demand for a commodity is increased due to the fact that others are also consuming the same commodity.
It represents the desire of people to purchase something to conform with the people they wish to be associated with, in order to be fashionable or stylish.
Snob effect: （逆反效果）
The extent to which the demand for a consumers' good is decreased owing to the fact that others are also consuming the same commodity (or that others are increasing their consumption of that commodity). This represents the desire of people to be exclusive.
Veblen effect: （装逼效果）
The phenomenon of conspicuous consumption; to the extent to which the demand for a consumers' good is increased because it bears a higher rather than a lower price.
Difference of snob and veblen effect: the former is a function of the consumption of other buyers; the latter is a function of the price.
Speculative effect refers to the fact that people will often "lay in" / hoard a supply of a commodity because they expect its price to rise.
Irrational effect refers to purchases that are neither planned not calculated but are due to sudden urges, whims, etc, and that serve no rational purpose but that of satisfying sudden whims and desires.
B. Nonfunctional
1. External effects on utility
(a) Bandwagon effect
(b) Snob effect
(c) Veblen effect
2. Speculative
3. Irrational
Functional demand: the demand for a commodity is due to the qualities inherent in the commodity itself.
Nonfunctional demand: the demand for a consumers' good is due to the factors other than the quality inherent in the commodity. May be due to external effects of utility, that is, the utility derived from the commodity is enhanced or decreased owing to the fact that others are purchasing and consuming the same commodity, or owing to the fact that the commodity bears a higher rather than lower tag.
Bandwagon effect: (从众效果)
The extent to which the demand for a commodity is increased due to the fact that others are also consuming the same commodity.
It represents the desire of people to purchase something to conform with the people they wish to be associated with, in order to be fashionable or stylish.
Snob effect: （逆反效果）
The extent to which the demand for a consumers' good is decreased owing to the fact that others are also consuming the same commodity (or that others are increasing their consumption of that commodity). This represents the desire of people to be exclusive.
Veblen effect: （装逼效果）
The phenomenon of conspicuous consumption; to the extent to which the demand for a consumers' good is increased because it bears a higher rather than a lower price.
Difference of snob and veblen effect: the former is a function of the consumption of other buyers; the latter is a function of the price.
Speculative effect refers to the fact that people will often "lay in" / hoard a supply of a commodity because they expect its price to rise.
Irrational effect refers to purchases that are neither planned not calculated but are due to sudden urges, whims, etc, and that serve no rational purpose but that of satisfying sudden whims and desires.
The sumptuary manifesto
The article tends to manifest the idea of peerless leader's argument that: "Freedom is not much concerned with tail fins or even with automobiles. Those who argue that it is identified with the greatest possible range of consumers' goods are only exceedingly confessing their simple-minded and mechanical view of man and his liberties."
First he claims that a sumptuary society is different from Puritanism, which stifle people's psychological and physical desires. Sumptuary society is about social responsibility. With the government intervention, we can live a happier and more altruistic life.
Second, the author claims that some consumption like education, environment protection is innocuous. We shouldn't adopt automobiles or factories, which will bring about negative externalities.
Besides, the author advocates parity price (a kind of price floor), tariff, price ceiling, domestic implicit taxes.
There is no doubt that this is an article full of ignorance and bullshit. The reason why we are about to analyze this article is to use what we have learnt in the class to rebuff the economic fallacy and understand that still there are a bunch of people hating free market notion and thus we have to get prepared to keep economic way of thinking off class and school.
The author claims in the article that a sumptuary society is about social justice and responsibility, which bring people serenity and altruism. This kind of manifesto reminds me of socialism and communism. But as I has written before, the Marxisms like to compare a utopia world non-exist with the free market in a imperfect world. The world is full of scarcity, and the reason of scarcity is that people's want is unlimited compared with the physical limit of any resources.
It's safe to say that no one should consume any resources at any amount as he wishes, but the free market actually does that constraint, with the tool of "price". Because of the law of diminishing utility and the constraint of budget, any buyer cannot consume infinite amount of capital and thus he has to think about what he values most. The combination of willingness and capacity to pay enables him to get maximum utility. But within a sumptuary society, you are not allowed to get things even if you are willing and capable to get just because you have "overconsumed". As a result, the producers and buyers both have to bear considerable deadweight loss. For me, this kind of prohibition is actually a burden of freedom to arrive at a voluntary agreement.
Besides, the author's simultaneous claim that education is innocuous is weird. My question is: since you have already inhibited the production and consumption, how can this lack of division of labor and incentive draw more good teachers? In addition, if we care so much about the pollution that we eliminated cars and railways, how can we take children to a better school far from hometown? The notion "innocuous" suggests that we will bear any cost to get good education, but since now you leader has prohibited the more efficient way of transportation, people are not discouraged to send children to out-of-hometown schools. Isn't it an irony?
Third, this quack advocates price ceiling and floor, tariff, unnecessary taxes. Is not he a scum? These kind of acts prevent people from arriving at a voluntary agreement that could have been reached within a free market, and if this intervention has nothing to do with self freedom and liberty, I wonder how the author defines freedom and liberty.
First he claims that a sumptuary society is different from Puritanism, which stifle people's psychological and physical desires. Sumptuary society is about social responsibility. With the government intervention, we can live a happier and more altruistic life.
Second, the author claims that some consumption like education, environment protection is innocuous. We shouldn't adopt automobiles or factories, which will bring about negative externalities.
Besides, the author advocates parity price (a kind of price floor), tariff, price ceiling, domestic implicit taxes.
There is no doubt that this is an article full of ignorance and bullshit. The reason why we are about to analyze this article is to use what we have learnt in the class to rebuff the economic fallacy and understand that still there are a bunch of people hating free market notion and thus we have to get prepared to keep economic way of thinking off class and school.
The author claims in the article that a sumptuary society is about social justice and responsibility, which bring people serenity and altruism. This kind of manifesto reminds me of socialism and communism. But as I has written before, the Marxisms like to compare a utopia world non-exist with the free market in a imperfect world. The world is full of scarcity, and the reason of scarcity is that people's want is unlimited compared with the physical limit of any resources.
It's safe to say that no one should consume any resources at any amount as he wishes, but the free market actually does that constraint, with the tool of "price". Because of the law of diminishing utility and the constraint of budget, any buyer cannot consume infinite amount of capital and thus he has to think about what he values most. The combination of willingness and capacity to pay enables him to get maximum utility. But within a sumptuary society, you are not allowed to get things even if you are willing and capable to get just because you have "overconsumed". As a result, the producers and buyers both have to bear considerable deadweight loss. For me, this kind of prohibition is actually a burden of freedom to arrive at a voluntary agreement.
Besides, the author's simultaneous claim that education is innocuous is weird. My question is: since you have already inhibited the production and consumption, how can this lack of division of labor and incentive draw more good teachers? In addition, if we care so much about the pollution that we eliminated cars and railways, how can we take children to a better school far from hometown? The notion "innocuous" suggests that we will bear any cost to get good education, but since now you leader has prohibited the more efficient way of transportation, people are not discouraged to send children to out-of-hometown schools. Isn't it an irony?
Third, this quack advocates price ceiling and floor, tariff, unnecessary taxes. Is not he a scum? These kind of acts prevent people from arriving at a voluntary agreement that could have been reached within a free market, and if this intervention has nothing to do with self freedom and liberty, I wonder how the author defines freedom and liberty.
12/02/2011
12/2/2011 Class 38
Recall the rent control.
Since there are now 4000 more demanders, there are gonna be other ways to ration the houses.
If the supply curve is flatter, it will cause more shortage of houses because landlords are so sensitive to the change of price that they are not incentivized to provide houses when the rent is regulated at a lower price. This will also make demanders harder to get the houses, they have to bear more real trade-offs to get the houses.
If the demand curve is flatter (demanders are sensitive to the price so they will want to buy more when the rent fee is artificially lower.) There will be more shortage of houses and worse still, people are not willing to bear a larger trade-off to get the houses.
There is a better to help the poor: give them wage subsidy.
This will not impair the market and people are free to use the money: not all of them will spend all the money in the houses, they may value other things more. So the clothes factories, for instance, may get profit and since now the house demand is really higher in a free market, it gives incentive to landlords to provide more houses with high quality.
Price floor:
What determines wage? Worker's own productivity and the market's value on his work
When there is a binding price floor, like minimum wage law, the quantity demanded (firm employment) will decrease and the quantity supplied (people who want a job) will increase, and thus a surplus is created.
Consequences, facts
(1) The law makes fewer people get the job (besides, the labor market demand is elastic, about 3, which means that a 1% increase of wage rate can result in 3% decrease in the number of workers hired) and make the existing workers harder to keep the job (because of the abundant existence of substitutes)
(2) Some workers just don't worth the new wage, it's a waste of cost.
(3) The cost has to come from somewhere. So may be the health care is gone, the vacations are gone, and the since the cost of productions are now higher, the price of the product can be higher. If you take the whole economy into consideration, a minimum wage law doesn't make any sense.
(4) The impact of minimum wage law is small.
(5) There's a better way other than the law. Give subsidy to producers. They will have freedom to hire workers, do researches or invest.
(6) Only a small portion of people live by minimum wage. So a law intended to benefit only a small amount of people isn't good.
Rarity doesn't mean scarcity.
Scarcity means that people want it more than it is available so the term is a relative notion. People put strong value on oil, which is always abundant, so now oil is scarce despite its physical abundance. Things that are rate may not be scarce because people don't value it so much.
Surplus doesn't mean abundance and free.
Surplus is a price phenomenon. You still have to bear trade-off to get the stuff though the price is wrong.When something is free, it means that you don't have to bear any trade-offs to get it.
Supply curve represents how much opportunity cost the producers bear when they produce marginal good.
When the drugs are made illegal,
(1)the supply curve will become steeper because the cost of production is now higher, including vigilance, risk, force and bribe.
(2) The composition of drug dealers will change because dealers that don't want to break the law quit and those who have a comparative advantage in drug business will step in and keep.
(3) The profit will be considerable. Since the suppliers are fewer with the same (or increasing) number of demanders, drug dealers can earn more, offsetting the increasing cost.
(4) Drug dealers may make more powerful drugs since the probability of getting caught is the same.
Since there are now 4000 more demanders, there are gonna be other ways to ration the houses.
If the supply curve is flatter, it will cause more shortage of houses because landlords are so sensitive to the change of price that they are not incentivized to provide houses when the rent is regulated at a lower price. This will also make demanders harder to get the houses, they have to bear more real trade-offs to get the houses.
If the demand curve is flatter (demanders are sensitive to the price so they will want to buy more when the rent fee is artificially lower.) There will be more shortage of houses and worse still, people are not willing to bear a larger trade-off to get the houses.
There is a better to help the poor: give them wage subsidy.
This will not impair the market and people are free to use the money: not all of them will spend all the money in the houses, they may value other things more. So the clothes factories, for instance, may get profit and since now the house demand is really higher in a free market, it gives incentive to landlords to provide more houses with high quality.
Price floor:
What determines wage? Worker's own productivity and the market's value on his work
When there is a binding price floor, like minimum wage law, the quantity demanded (firm employment) will decrease and the quantity supplied (people who want a job) will increase, and thus a surplus is created.
Consequences, facts
(1) The law makes fewer people get the job (besides, the labor market demand is elastic, about 3, which means that a 1% increase of wage rate can result in 3% decrease in the number of workers hired) and make the existing workers harder to keep the job (because of the abundant existence of substitutes)
(2) Some workers just don't worth the new wage, it's a waste of cost.
(3) The cost has to come from somewhere. So may be the health care is gone, the vacations are gone, and the since the cost of productions are now higher, the price of the product can be higher. If you take the whole economy into consideration, a minimum wage law doesn't make any sense.
(4) The impact of minimum wage law is small.
(5) There's a better way other than the law. Give subsidy to producers. They will have freedom to hire workers, do researches or invest.
(6) Only a small portion of people live by minimum wage. So a law intended to benefit only a small amount of people isn't good.
Rarity doesn't mean scarcity.
Scarcity means that people want it more than it is available so the term is a relative notion. People put strong value on oil, which is always abundant, so now oil is scarce despite its physical abundance. Things that are rate may not be scarce because people don't value it so much.
Surplus doesn't mean abundance and free.
Surplus is a price phenomenon. You still have to bear trade-off to get the stuff though the price is wrong.When something is free, it means that you don't have to bear any trade-offs to get it.
Supply curve represents how much opportunity cost the producers bear when they produce marginal good.
When the drugs are made illegal,
(1)the supply curve will become steeper because the cost of production is now higher, including vigilance, risk, force and bribe.
(2) The composition of drug dealers will change because dealers that don't want to break the law quit and those who have a comparative advantage in drug business will step in and keep.
(3) The profit will be considerable. Since the suppliers are fewer with the same (or increasing) number of demanders, drug dealers can earn more, offsetting the increasing cost.
(4) Drug dealers may make more powerful drugs since the probability of getting caught is the same.
11/30/2011
11/30/2011 class 37
The economics of price controls
Price ceilings---rent controls
Initial market equilibrium of rent: Price=$1000, Quantity=12000
Controlled market "equilibrium" of rent: Price=$800, Quantity demanded=14000, quantity supplied=10000 Shortage occurs when there is a binding price ceiling
Price ceiling is binding when the price is set below free market equilibrium price, which will then create shortage.
What's rent?
(1)a payment for the use for capitals
(2)something that accrues to you that is not a result of your productiviality.
When there is a binding price ceiling, quantity demanded increases and quantity supplied decreases.
Question: Does shortage mean scarcity?
No. Scarcity is permanent and ubiquitous. People's wants are unlimited. Shortage is a price phenomenon. As for price ceiling, in the short run there is no physical scarcity of houses but an artificially low price stimulate more quantity demanded; in the long run suppliers respond to incentives, giving money to some areas that are more profitable. Thus a scarcity of houses may really occur.
Consequences of rent control.
(1) A shortage of houses means the reduction of availability.
Some other ways of rationing will appear.
<1> Queue: but it means that you have to sacrifice your time and energy, which is quite precious to many people.
<2> Favored group: you have to impress the landlord, which may be costly.(bribe, race, gender, sex, size of family,etc)
<3> Blackmarket: I will talk about it later
(2) The deterioration of quality.
When in a free market, landlords have to keep their houses clean and comfortable in order to attract the customers. But with the appearance of binding price ceiling, landlords cannot charge a price higher than the regulated price, so he is now unwilling to spend time and money maintaining the quality of the house; besides, since there are more customers than before, landlords can get satisfaction even though they don't keep the house in a high quality.
Price ceiling means that suppliers no longer have to please the customers.
(3) Other money may be paid by other customers: some people value the house more than the ceiling price, so they wanna pay more. Black market will appear. High prices not only show how people value the house, it also present the risk of selling house illegally, so the price in the black market is often exorbitantly higher than the free market price.
(4) Misallocation
People who value the house more may not get the house.
(5) Impact on other market
Suppose the 4000 people who cannot get the house in this city go to buy house in the countryside, thus the increase of quantity demanded in the countryside will increase the price (the demand curve shifts out because of the increase of number of buyers)
(6)Fairness
First, the binding price ceiling is unfair to landlords, who cannot charge a higher price. Second, the price ceiling law is intended to let poor people get houses, but the fact is that the poor will bear great loss. Price ceiling won't bother rich people because for them they can buy house in black market or become favored group of landlords easily, but the poor have to spend more time and energy looking for houses, and end up with living in bad quality houses.
Finally, the fucking stupid law is unfair to the whole society because it stops people from reaching an agreement in a higher price and quality. The social freedom and liberty will be hurt.
(7) The reduced cost in discrimination.
Free market clearing: there is no customers right there when you refused one, you have to look for another one, advertise more and keep the house vacant longer. So it doesn't mean that there is no discrimination in the free market, but you have to pay for it.
With the binding price ceiling, however, there are more buyers, so landlord can now use discrimination as a tool to choose customers.
But on the other hand, Landlord so social good because they still give the house to some people.
(8) Monitoring/enforce costs
<1> long run rent supply will shift in and becomes flatter
<2> the people and resources spent monitoring are not producing goods and services that people want.If destructive things following the price ceiling law, like riots, never happen, why do we pay for the monitoring. We enforce the law, we create the problems, and now we use resources to quell the problems, isn't it a cost?
<3> The government could have done something else more constructive.
Price ceilings---rent controls
Initial market equilibrium of rent: Price=$1000, Quantity=12000
Controlled market "equilibrium" of rent: Price=$800, Quantity demanded=14000, quantity supplied=10000 Shortage occurs when there is a binding price ceiling
Price ceiling is binding when the price is set below free market equilibrium price, which will then create shortage.
What's rent?
(1)a payment for the use for capitals
(2)something that accrues to you that is not a result of your productiviality.
When there is a binding price ceiling, quantity demanded increases and quantity supplied decreases.
Question: Does shortage mean scarcity?
No. Scarcity is permanent and ubiquitous. People's wants are unlimited. Shortage is a price phenomenon. As for price ceiling, in the short run there is no physical scarcity of houses but an artificially low price stimulate more quantity demanded; in the long run suppliers respond to incentives, giving money to some areas that are more profitable. Thus a scarcity of houses may really occur.
Consequences of rent control.
(1) A shortage of houses means the reduction of availability.
Some other ways of rationing will appear.
<1> Queue: but it means that you have to sacrifice your time and energy, which is quite precious to many people.
<2> Favored group: you have to impress the landlord, which may be costly.(bribe, race, gender, sex, size of family,etc)
<3> Blackmarket: I will talk about it later
(2) The deterioration of quality.
When in a free market, landlords have to keep their houses clean and comfortable in order to attract the customers. But with the appearance of binding price ceiling, landlords cannot charge a price higher than the regulated price, so he is now unwilling to spend time and money maintaining the quality of the house; besides, since there are more customers than before, landlords can get satisfaction even though they don't keep the house in a high quality.
Price ceiling means that suppliers no longer have to please the customers.
(3) Other money may be paid by other customers: some people value the house more than the ceiling price, so they wanna pay more. Black market will appear. High prices not only show how people value the house, it also present the risk of selling house illegally, so the price in the black market is often exorbitantly higher than the free market price.
(4) Misallocation
People who value the house more may not get the house.
(5) Impact on other market
Suppose the 4000 people who cannot get the house in this city go to buy house in the countryside, thus the increase of quantity demanded in the countryside will increase the price (the demand curve shifts out because of the increase of number of buyers)
(6)Fairness
First, the binding price ceiling is unfair to landlords, who cannot charge a higher price. Second, the price ceiling law is intended to let poor people get houses, but the fact is that the poor will bear great loss. Price ceiling won't bother rich people because for them they can buy house in black market or become favored group of landlords easily, but the poor have to spend more time and energy looking for houses, and end up with living in bad quality houses.
Finally, the fucking stupid law is unfair to the whole society because it stops people from reaching an agreement in a higher price and quality. The social freedom and liberty will be hurt.
(7) The reduced cost in discrimination.
Free market clearing: there is no customers right there when you refused one, you have to look for another one, advertise more and keep the house vacant longer. So it doesn't mean that there is no discrimination in the free market, but you have to pay for it.
With the binding price ceiling, however, there are more buyers, so landlord can now use discrimination as a tool to choose customers.
But on the other hand, Landlord so social good because they still give the house to some people.
(8) Monitoring/enforce costs
<1> long run rent supply will shift in and becomes flatter
<2> the people and resources spent monitoring are not producing goods and services that people want.If destructive things following the price ceiling law, like riots, never happen, why do we pay for the monitoring. We enforce the law, we create the problems, and now we use resources to quell the problems, isn't it a cost?
<3> The government could have done something else more constructive.
11/28/2011
Anthropology
Plato's philosophy included the belief that things in the physical world, including social structures, imperfectly reflected ideal forms of those things that exist outside experience. A priori: Philosophical term referring to ideas, propositions, or concepts not derived from direct experience, but from self-evident propositions(主张).
Aristotle's philosophy of nature was inherently teleological (目的论的): that is, his comprehension of living things was fully informed by a belief that all of nature is imbued with a purpose.Form is inseparable from function.
The major impetus for the development of anthropology was European colonial expansion. Two perspectives for interpreting native societies. (1)Native societies somehow represented a pristine and unadulterated condition, free of the burden of civilized life. The native were innocent and ignorant, yet capable of learning. (2) Natives were uncivilized, they lacked Christianity. So it was the mission of Christian Europe to convert them.
The missionary enterprise thus became an integral and paradoxical feature of European colonial expansion. Natives were exploited for economic reasons and at the same time introduced to Christianity for compassionate reasons.
Hobbes claims in his book Leviathan that human are kept in constant motion by the force of the desire for self-preservation. The human state of nature is one of war between individuals. People compete but reason that people born equal, so they enter a social contract and surrender their rights to a sovereign. All the people combine into one single mind. The government is like Leviathan (a monster written in the Bible). It is made by human, run by human but it simultaneously protect and hurt people.
Puferdolf thought that human nature is expressed through the process of becoming social, an end toward which humans strive as a means of escape from an asocial condition. He claimed that Marriage, the basic unit of social organization, as a crucial step toward society.
According to Rousseau, human progress consisted in the acquisition of property and the creation of artificial societies within which individuals lost their equitable status.
Aristotle's philosophy of nature was inherently teleological (目的论的): that is, his comprehension of living things was fully informed by a belief that all of nature is imbued with a purpose.Form is inseparable from function.
The major impetus for the development of anthropology was European colonial expansion. Two perspectives for interpreting native societies. (1)Native societies somehow represented a pristine and unadulterated condition, free of the burden of civilized life. The native were innocent and ignorant, yet capable of learning. (2) Natives were uncivilized, they lacked Christianity. So it was the mission of Christian Europe to convert them.
The missionary enterprise thus became an integral and paradoxical feature of European colonial expansion. Natives were exploited for economic reasons and at the same time introduced to Christianity for compassionate reasons.
Hobbes claims in his book Leviathan that human are kept in constant motion by the force of the desire for self-preservation. The human state of nature is one of war between individuals. People compete but reason that people born equal, so they enter a social contract and surrender their rights to a sovereign. All the people combine into one single mind. The government is like Leviathan (a monster written in the Bible). It is made by human, run by human but it simultaneously protect and hurt people.
Puferdolf thought that human nature is expressed through the process of becoming social, an end toward which humans strive as a means of escape from an asocial condition. He claimed that Marriage, the basic unit of social organization, as a crucial step toward society.
According to Rousseau, human progress consisted in the acquisition of property and the creation of artificial societies within which individuals lost their equitable status.
11/28/2011 Class36
Some properties of equilibrium price
consider a stylized economy with 5 sellers and 5 consumers
A central planner may select the wrong producer (they cannot produce the good with the lowest cost), or may allocate the goods to wrong customers (they value the goods less than their current price).
Giving goods to a wrong customers cause deadweight lost.
A simple supposition:
If the world consists of only two people A and B, and there is only one guitar worth 20 bucks. A values the guitar at $15 while B values it $25. If the guitar is giving to B, B will get a consumer surplus of 5 dollars while A,since he doesn't get what he want, will bear a loss of 15 bucks.(Suppose there is only one good, a guitar, in the world) And the loss of a society is 10 bucks.
But now if the guitar is giving to A, he will gain 5 bucks of consumer surplus but B, who is deprived of the good, will stand a 25 bucks loss. And the net loss of a society is now 20 dollars.
The similar story can be applied to suppliers as well.
So price system forces customers and producers to examine what they want and what they need to produce. Other ways will impoverish the poor.Central planners simply don't have all the information to make every single decision right.
If there is underproduction and overproduction, consumer and producer surplus will be affect and deadweight loss will occur.
What's the difference when government do trial and error and market do trial and error?
My thought is that:
(1) The government officials are not producers, who acquire the tacit knowledge about how to cut the cost as much as possible while maintaining the quality. (Knowledge problem)
(2) There are too many commodities to allocate, so the men in the government are not enough. Even though the government sets up, for example, pork allocation bureau, beef allocation bureau, the bureaus need bureaucrats to work, they need fund, which will be hugely costly.
(3) Suppose the government can solve the problem of fund. But another question is that these bureaucrats have a greater opportunity cost to do these kinds of jobs. In other words, they have a comparative disadvantages in doing searches than other people , i.e middlemen and producers.
(4) With the very existence of self-interest, no one can be sure that the allocation can be equal and fair. Officials may take bribe or give goods to their friends. Even some people complain that they don't get what they want, the officials can simply say that it's the very outcome of "trial and error"---there need to be mistakes and sacrificers.
(5)The role of government is to enforce the law to protect the citizens from being hurt by dictators. Another role is to control the budget. Hayek points out that the law should be objective and predictable, and stable, letting people know what punishment they will get when break the law. If the government does trial and error, there can be constant change in law, confusing people and giving chances to speculators to get illegal profit. (Actually this is one of the problems in Chinese government policy)
(6)In Bureaucracy, Mises points out that government actions, though can be valuable, cannot be valued by money. The task of bureaucrats is to obey the rule unlike the enterprises, whose task is to produce and get profit under the profit motive. The profit motive forces free enterprise to care about customers needs and desires (this is another implication that no man is free: we have property rights but we have to produce things based on others' preferences). But bureaucrats don't have that incentives. They are not using their own capitals, so they don't have to take great economic calculations before making decisions. So they may stumble upon some good allocation, but as I said, it may be fluke.
consider a stylized economy with 5 sellers and 5 consumers
A central planner may select the wrong producer (they cannot produce the good with the lowest cost), or may allocate the goods to wrong customers (they value the goods less than their current price).
Giving goods to a wrong customers cause deadweight lost.
A simple supposition:
If the world consists of only two people A and B, and there is only one guitar worth 20 bucks. A values the guitar at $15 while B values it $25. If the guitar is giving to B, B will get a consumer surplus of 5 dollars while A,since he doesn't get what he want, will bear a loss of 15 bucks.(Suppose there is only one good, a guitar, in the world) And the loss of a society is 10 bucks.
But now if the guitar is giving to A, he will gain 5 bucks of consumer surplus but B, who is deprived of the good, will stand a 25 bucks loss. And the net loss of a society is now 20 dollars.
The similar story can be applied to suppliers as well.
So price system forces customers and producers to examine what they want and what they need to produce. Other ways will impoverish the poor.Central planners simply don't have all the information to make every single decision right.
If there is underproduction and overproduction, consumer and producer surplus will be affect and deadweight loss will occur.
What's the difference when government do trial and error and market do trial and error?
My thought is that:
(1) The government officials are not producers, who acquire the tacit knowledge about how to cut the cost as much as possible while maintaining the quality. (Knowledge problem)
(2) There are too many commodities to allocate, so the men in the government are not enough. Even though the government sets up, for example, pork allocation bureau, beef allocation bureau, the bureaus need bureaucrats to work, they need fund, which will be hugely costly.
(3) Suppose the government can solve the problem of fund. But another question is that these bureaucrats have a greater opportunity cost to do these kinds of jobs. In other words, they have a comparative disadvantages in doing searches than other people , i.e middlemen and producers.
(4) With the very existence of self-interest, no one can be sure that the allocation can be equal and fair. Officials may take bribe or give goods to their friends. Even some people complain that they don't get what they want, the officials can simply say that it's the very outcome of "trial and error"---there need to be mistakes and sacrificers.
(5)The role of government is to enforce the law to protect the citizens from being hurt by dictators. Another role is to control the budget. Hayek points out that the law should be objective and predictable, and stable, letting people know what punishment they will get when break the law. If the government does trial and error, there can be constant change in law, confusing people and giving chances to speculators to get illegal profit. (Actually this is one of the problems in Chinese government policy)
(6)In Bureaucracy, Mises points out that government actions, though can be valuable, cannot be valued by money. The task of bureaucrats is to obey the rule unlike the enterprises, whose task is to produce and get profit under the profit motive. The profit motive forces free enterprise to care about customers needs and desires (this is another implication that no man is free: we have property rights but we have to produce things based on others' preferences). But bureaucrats don't have that incentives. They are not using their own capitals, so they don't have to take great economic calculations before making decisions. So they may stumble upon some good allocation, but as I said, it may be fluke.
11/27/2011
American way of success
It seems that most of the gangster movies put great emphasis on people with low social status: In Goodfellas, Henry Hill starts his career as a child raised in a poor immigrant family; in Scarface, the main character Tony Montana is a political refugee from Cuba; even the majestic Don Vito Corleone in The Godfather gets his business started as an ordinary immigrant worker from Sicily. Some people may reason that, “Well, that’s because The Godfather trilogy is so influential that later gangster movies emulate it.” But I don’t think this opinion proper because back to 1930s, the big three gangster movies---- Little Caesar, Scarface and Public enemy all focused on crime careers of ordinary people. So what makes this movie genre pay significant attention to underdogs? Does it have relationship with America
I do not choose to be a common person. It is my right to be uncommon—if I can. I seek opportunity-not security. I do not wish to be a kept citizen, humbled and dulled by having the state look after me. I want to be the calculated risk, to dream and build, to fail and to succeed. I refuse to barter incentive for a dole; I prefer the challengers of life to the guaranteed existence, the thrill of fulfillment to the state calm of Utopia. I will not trade my freedom for beneficence nor my dignity a handout. I will never cower before any master nor bend to any threat. It is my heritage to stand erect, proud and unafraid, to think and act for myself, to enjoy the benefit of my creations and to face the world boldly and say: This, with God’s help, I have done.
This is the entrepreneur creed in Thomas Paine’s brochure Common Sense. It points out the reason why America , once the colony of Britain America
Rooted in America
The gangsters from rags to respectability are actually a metaphor of American entrepreneurs in real life. Thrown in a free market filled with fierce competition, entrepreneurs, like Steve Jobs and Larry Page, started their careers humbly (It’s interesting that they both used garages as offices), endured skepticism and pressure, and finally gets to the top of the world. What’s amazing about America America
Robin Hood and Robber Barons
The gangsters' origins in industrial America can be found in the actions and attitudes of men like Cornelius Vanderbilt, Jim Fisk, Jay Gould, Andrew Carnegie, John D. Rockefeller and J.P.Morgan---the captain of capital who dominated America's age of enterprise.The Robber Barons, the richest and most powerful men in America, were so named by journalist E.L. Godkin because they behaved like the feudal German noblemen who extorted money from passersby and acted as a law unto themselves.
For a robber baron, as for a gangster, the first step was to organize and centralize the corporation. A climate of secret prevailed. At the same time, Robber Barons who controlled corporations felt no responsibility to the stockholders, whom they regarded as pawns in their financial maneuverings. Robber Barons meant to keep their employees in line by using armed thugs, and like movie gangsters, they would kill when their property was threatened. The Robber Barons saw nothing unusual or extreme in eliminating competition by any means necessary. They despised laws and used politicians as a club for beating down rivals and organized workers.
Robber barons is a pejorative term used to describe businessmen who acquire wealth by questionable means.
This term was used first by Mathew Johnsephson in Depression, but later Allan Nevins claims that though tycoons like Rockefeller may have engaged in some illicit business practices, this should overshadow his bringing order to industrial chaos of the day. The debate about the morality of big businessman was seen useless by Alfred Chandler, who contended that industrializing America was a historical process and not a play of good verses evil..
For a robber baron, as for a gangster, the first step was to organize and centralize the corporation. A climate of secret prevailed. At the same time, Robber Barons who controlled corporations felt no responsibility to the stockholders, whom they regarded as pawns in their financial maneuverings. Robber Barons meant to keep their employees in line by using armed thugs, and like movie gangsters, they would kill when their property was threatened. The Robber Barons saw nothing unusual or extreme in eliminating competition by any means necessary. They despised laws and used politicians as a club for beating down rivals and organized workers.
Robber barons is a pejorative term used to describe businessmen who acquire wealth by questionable means.
This term was used first by Mathew Johnsephson in Depression, but later Allan Nevins claims that though tycoons like Rockefeller may have engaged in some illicit business practices, this should overshadow his bringing order to industrial chaos of the day. The debate about the morality of big businessman was seen useless by Alfred Chandler, who contended that industrializing America was a historical process and not a play of good verses evil..
11/26/2011
"Enough to buy back the product"
Functional prices are those that encourages the largest volume of production and the largest volume of sales. Functional wages are those that tend to bring about the highest volume of employment and the largest real payrolls.
Everyone's income is his purchasing power for buying what others have to sell. Every increase in hourly wages is an increase in costs of production. Besides, if wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly rates.
The national product is neither created nor bought by manufacturing labor alone. It is bought by everyone who contributes toward making the product.
The best wage rates for labor are the wage rates that permit full production, full employment and largest sustained payrolls. The best profits are the one that can encourage most people to become employers or to provide more employment than before.
The function of profits
Corporate profits average less than 6 percent of the national income.Some eminent economists believe that after a long period of time no net profit at all may be left over, and that there may even be a net loss. This is not at all because entrepreneurs are intentional philanthropists, but because their optimism and self-confidence too often lead them into ventures that do not succeed. In any period in which there has been net capital accumulation, however, the presumption is strong that there must also have been overall net profits from previous investment.
(1) profits guide and channel the factors of production so as to allocate / apportion the relative output of commodities in accordance with demand.
(2) put constant and unremitting pressure on the head of every competitive business to introduce further economics and efficiencies.
What to produce and how to produce
The assault on saving
Saving is only another form of spending.
Consumer spend less currently (1)partly because they fear they may lose their jobs and they wish to make sure that their power to consume will be extended over a longer period if they do lose their jobs. (2)Expectation of future price.
Unsettlement will be caused in the capital goods industries by a sudden and substantial decrease in savings. If money that is previously used to invest in the capital goods is now shifted into consumer goods, it will increase the price of goods(decrease of purchasing power) and unemployment in the long run (less capital goods)
Similarly, if a huge amount of money used to invest in the consumer goods is now used in the capital goods, the price of goods will decrease and there will be fewer suppliers. (No incentive to produce)
Everyone's income is his purchasing power for buying what others have to sell. Every increase in hourly wages is an increase in costs of production. Besides, if wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly rates.
The national product is neither created nor bought by manufacturing labor alone. It is bought by everyone who contributes toward making the product.
The best wage rates for labor are the wage rates that permit full production, full employment and largest sustained payrolls. The best profits are the one that can encourage most people to become employers or to provide more employment than before.
The function of profits
Corporate profits average less than 6 percent of the national income.Some eminent economists believe that after a long period of time no net profit at all may be left over, and that there may even be a net loss. This is not at all because entrepreneurs are intentional philanthropists, but because their optimism and self-confidence too often lead them into ventures that do not succeed. In any period in which there has been net capital accumulation, however, the presumption is strong that there must also have been overall net profits from previous investment.
(1) profits guide and channel the factors of production so as to allocate / apportion the relative output of commodities in accordance with demand.
(2) put constant and unremitting pressure on the head of every competitive business to introduce further economics and efficiencies.
What to produce and how to produce
The assault on saving
Saving is only another form of spending.
Consumer spend less currently (1)partly because they fear they may lose their jobs and they wish to make sure that their power to consume will be extended over a longer period if they do lose their jobs. (2)Expectation of future price.
Unsettlement will be caused in the capital goods industries by a sudden and substantial decrease in savings. If money that is previously used to invest in the capital goods is now shifted into consumer goods, it will increase the price of goods(decrease of purchasing power) and unemployment in the long run (less capital goods)
Similarly, if a huge amount of money used to invest in the consumer goods is now used in the capital goods, the price of goods will decrease and there will be fewer suppliers. (No incentive to produce)
The role of government in a free society
A good society requires that its members agree on the general conditions that will govern relations among them, on some means of arbitrating different interpretations of these conditions, and on some device for enforcing compliance with the generally accepted rules. In both games and society also, no set of rules can prevail unless most participants most of the time conform to them without external sanctions; unless that is, there is a broad underlying social consensus.But we cannot rely on custom or on this consensus alone to interpret and to enforce the rules; we need an umpire.
So the basic roles of government in free society: To provide means whereby we can modify the rules, and to enforce compliance with the rules on the part of those few who would otherwise not play the game.
Exchange is truly voluntary only when nearly equivalent alternatives exist. Monopoly implies the absence of alternatives and thereby inhibits effective freedom of exchange.
Externalities should be controlled by government.
Freedom is a tenable objective only for responsible individuals.
So the basic roles of government in free society: To provide means whereby we can modify the rules, and to enforce compliance with the rules on the part of those few who would otherwise not play the game.
Exchange is truly voluntary only when nearly equivalent alternatives exist. Monopoly implies the absence of alternatives and thereby inhibits effective freedom of exchange.
Externalities should be controlled by government.
Freedom is a tenable objective only for responsible individuals.
Milton Friedman The relation between economic freedom and political freedom
The paternalistic "what your country can do for you" implies that government is the patron, the citizen the ward, a view that is at odds with the free man's belief in his own responsibility for his own destiny. The organismic, "what you can do for your country" implies that government is the master or the deity, the citizen, the servant or the votary. Free man recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.
The free man will ask "What can I and my compatriots do through government". The great threat to freedom is the concentration of power.
How can we benefit from the promise of government while avoiding the threat of freedom?
(1) The scope of government must be limited. It's function is to preserve law and order, to enforce private contracts, to foster competitive free markets. It may enable us to accomplish jointly what we would find it more difficult or expensive to accomplish severally, but we should be cautious before we do that.
(2)Government power must be dispersed.
Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.
The possibility of co-ordination through voluntary co-operation rests on the elementary--yet frequently denied---proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed.
What makes specialization of function and division of labor go further?
Middlemen(lower the transactions costs) and money(neutral instrument).
The consumer is protected form the coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected form coercion by the buyer because of the presence of other buyers with whom he can sell.
Government is essential both as a forum for determining "rules of game" and as an umpire to interpret and enforce the rules decided on.
The free man will ask "What can I and my compatriots do through government". The great threat to freedom is the concentration of power.
How can we benefit from the promise of government while avoiding the threat of freedom?
(1) The scope of government must be limited. It's function is to preserve law and order, to enforce private contracts, to foster competitive free markets. It may enable us to accomplish jointly what we would find it more difficult or expensive to accomplish severally, but we should be cautious before we do that.
(2)Government power must be dispersed.
Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.
The possibility of co-ordination through voluntary co-operation rests on the elementary--yet frequently denied---proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed.
What makes specialization of function and division of labor go further?
Middlemen(lower the transactions costs) and money(neutral instrument).
The consumer is protected form the coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected form coercion by the buyer because of the presence of other buyers with whom he can sell.
Government is essential both as a forum for determining "rules of game" and as an umpire to interpret and enforce the rules decided on.
11/25/2011
The fetish of full employment
The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor. Translated into national terms, this means that our real objective is to maximize productions.
Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself.
The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs.
Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself.
The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs.
Disbandiing troops and bureaucrats
It's true that, when millions of men are suddenly released, it may require time for private industry to reabsorb them. But the fears of unemployment arise because people look at only one side of the process.
The soldiers previously supported by civilians will not become merely civilians supported by other civilians. They will become self-supporting civilians.
If excessive bureaucrats are not retained in office, the taxpayers will be permitted to keep the money that was formerly taken form them for the support of the bureaucrats. The officeholders must now seek private jobs or set up private business and the added purchasing power of the taxpayers will encourage this.
The soldiers previously supported by civilians will not become merely civilians supported by other civilians. They will become self-supporting civilians.
If excessive bureaucrats are not retained in office, the taxpayers will be permitted to keep the money that was formerly taken form them for the support of the bureaucrats. The officeholders must now seek private jobs or set up private business and the added purchasing power of the taxpayers will encourage this.
The use of knowledge in society
The article tells us that in a free market we don't have to possess all the information; instead, we just have to understand what we are comparatively good at and pursue maximum profit. For a central-planning country leader, however, he must be omniscient, which is simply impossible.
What's intuitive in this article is that Hayek points out: Knowledge which all separate individuals possess is dispersed while incomplete and frequently contradicted.
As the technology and science are becoming more and more complex, it's impossible to appear encyclopedia scholar or leader. Even in economics there are polarized views on the same phenomenon.
Important point: The problem of a society is how to secure the best use of resources known to any of the members of society for ends whose relative importance only those individuals know. (Tacit Knowledge)
Any dictator who wants to do the planning should be impersonal. But is that possible? Even if there really exists philosophers as Plato described, they simply are not god who can make response quick enough to adjust any tiny change within the market. (Besides, God is dead. There is no fucking god who can save me. The only way is to evolve into overman.)
What's great:
Scientific knowledge is not the sum of knowledge. Too much pursuit of scientific knowledge separates intellectuals and businessmen, making the former lofty and cynical, which is really fucking ridiculous. Wisdom and rumination cannot occur without necessary food and products, which are produced by producers and gathered together by middlemen.
Those who advocate altruism is quack. People do things for themselves.(Please refer to John List's economic experiments) Those who condemn capitalism immoral are freaks. People do things based on self-interest.
A doubt: If people are really that altruist, why is there shortage of kidney donations?
A man doesn't have to know all the information. All that's significant for him is how much more or less difficult to produce they have become compared with other things with which he's also concerned, or how much more or less urgently wanted are the alternative things he uses or produces.
Whitehead: Civilization advances by extending the number of important operations which we can perform without thinking about them.
The price system is just one of those formations which man has learned to use after he had stumbled upon it without fully understanding.
What's intuitive in this article is that Hayek points out: Knowledge which all separate individuals possess is dispersed while incomplete and frequently contradicted.
As the technology and science are becoming more and more complex, it's impossible to appear encyclopedia scholar or leader. Even in economics there are polarized views on the same phenomenon.
Important point: The problem of a society is how to secure the best use of resources known to any of the members of society for ends whose relative importance only those individuals know. (Tacit Knowledge)
Any dictator who wants to do the planning should be impersonal. But is that possible? Even if there really exists philosophers as Plato described, they simply are not god who can make response quick enough to adjust any tiny change within the market. (Besides, God is dead. There is no fucking god who can save me. The only way is to evolve into overman.)
What's great:
Scientific knowledge is not the sum of knowledge. Too much pursuit of scientific knowledge separates intellectuals and businessmen, making the former lofty and cynical, which is really fucking ridiculous. Wisdom and rumination cannot occur without necessary food and products, which are produced by producers and gathered together by middlemen.
Those who advocate altruism is quack. People do things for themselves.(Please refer to John List's economic experiments) Those who condemn capitalism immoral are freaks. People do things based on self-interest.
A doubt: If people are really that altruist, why is there shortage of kidney donations?
A man doesn't have to know all the information. All that's significant for him is how much more or less difficult to produce they have become compared with other things with which he's also concerned, or how much more or less urgently wanted are the alternative things he uses or produces.
Whitehead: Civilization advances by extending the number of important operations which we can perform without thinking about them.
The price system is just one of those formations which man has learned to use after he had stumbled upon it without fully understanding.
11/24/2011
The rise and fall of businesses
Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward.
Industries and commerce are not static things, but dynamic processes, in which particular products, individual companies and whole industries rise and fall, as a result of relentless competition under changing conditions.
The company which first introduces a product that consumers like may make large profits, but those very profits attract more investments into existing companies and encourage new companies to form, and thus drive down the price.
Losses force business to change with changing conditions and shift to what they are comparatively good at.
Knowledge is one of the scarcest of all resources in any economy and the insight distilled from knowledge is even more scarce.
Industries and commerce are not static things, but dynamic processes, in which particular products, individual companies and whole industries rise and fall, as a result of relentless competition under changing conditions.
The company which first introduces a product that consumers like may make large profits, but those very profits attract more investments into existing companies and encourage new companies to form, and thus drive down the price.
Losses force business to change with changing conditions and shift to what they are comparatively good at.
Knowledge is one of the scarcest of all resources in any economy and the insight distilled from knowledge is even more scarce.
Is there any remedy available?
It's useless to blame bureaucrats' slowness and slackness; it is vain to lament over the fact that the assiduity, carefulness, and painstaking work or the average bureau clerks are below those of the average worker in private business. In the absence of an unquestionable yardstick if success and failure it is almost impossible for the vast majority of men to find that incentive to utmost exertion that the money calculation of profit-seeking business easily provides.
The psychological consequences of bureaucratization
It's evident that youth is the first victim of the trend toward bureaucratization. The young men are deprived of any opportunity to shape their own fate.They are in fact "lost generation" because they lack the most precious right of every rising generation, the right to contribute something new to the old inventory of civilization.
In the communist manifesto the instances used for the exemplification of class struggles are taken from the conflict between castes. Then Marx adds that the modern bourgeois society has established new classes. But he never said what a class is and what he had in mind in speaking of classes and class antagonisms and in coordinating classes to castes. Neither Marx nor any one of the host of Marxian writers could tell us what a social class is, much less whether such social classes really play in the social structure the role assigned to them in the doctrine.
The characteristic feature of a caste is its rigidity. The social classes, as Marx exemplified them in calling the capitalists, the entrepreneurs, and the wage earners distinct classes, are characterized by their flexibility.
Though a socialist country may be classless, but there will be other differences in social functions which we can call classes with surely no less justification than that of Marx.
The only thing that counts is the fact that under capitalism everybody is the architect of his own fortune. Work well done and services well rendered are the only means to succeed. Under socialism, the beginner must please those already settled. The rising generation is at the mercy of the aged. Mankind is doomed when the youths are deprived of the opportunity to remodel society according to their own fashion.
Plato's ideal and perfect state is to be ruled by unselfish philosopher. The characteristic mark of Plato's philosophy: it doesn't pay any attention to the evolution of social and economic conditions and to the changes in human ideas concerning ends and means. Any deviation of the actual conditions from the ideal model cannot be anything else than corruption and degradation.
In the communist manifesto the instances used for the exemplification of class struggles are taken from the conflict between castes. Then Marx adds that the modern bourgeois society has established new classes. But he never said what a class is and what he had in mind in speaking of classes and class antagonisms and in coordinating classes to castes. Neither Marx nor any one of the host of Marxian writers could tell us what a social class is, much less whether such social classes really play in the social structure the role assigned to them in the doctrine.
The characteristic feature of a caste is its rigidity. The social classes, as Marx exemplified them in calling the capitalists, the entrepreneurs, and the wage earners distinct classes, are characterized by their flexibility.
Though a socialist country may be classless, but there will be other differences in social functions which we can call classes with surely no less justification than that of Marx.
The only thing that counts is the fact that under capitalism everybody is the architect of his own fortune. Work well done and services well rendered are the only means to succeed. Under socialism, the beginner must please those already settled. The rising generation is at the mercy of the aged. Mankind is doomed when the youths are deprived of the opportunity to remodel society according to their own fashion.
Plato's ideal and perfect state is to be ruled by unselfish philosopher. The characteristic mark of Plato's philosophy: it doesn't pay any attention to the evolution of social and economic conditions and to the changes in human ideas concerning ends and means. Any deviation of the actual conditions from the ideal model cannot be anything else than corruption and degradation.
The social and political implication of bureaucratization
The essence of the philosophy bureaucratism.
The written laws are in the eyes of the officials barriers erected for the protection of scoundrels against the fair claims of society. It would be fine for the society if the government can be beyond the law and execute the people at will. Bureaucrats must break human laws lest they violate a divine law.
The main difference between a policeman and a kidnapper and between a tax collector and a robber is that the policeman and the tax collector obey and enforce the law, while the kidnapper and robber violate it.
Within the framework of social cooperation every citizen depends on the services rendered by all his fellow citizens. For, under the division of labor, the structure of society rests on the shoulder of all men and women.
It's not in the power of the government to make everybody more prosperous.
The written laws are in the eyes of the officials barriers erected for the protection of scoundrels against the fair claims of society. It would be fine for the society if the government can be beyond the law and execute the people at will. Bureaucrats must break human laws lest they violate a divine law.
The main difference between a policeman and a kidnapper and between a tax collector and a robber is that the policeman and the tax collector obey and enforce the law, while the kidnapper and robber violate it.
Within the framework of social cooperation every citizen depends on the services rendered by all his fellow citizens. For, under the division of labor, the structure of society rests on the shoulder of all men and women.
It's not in the power of the government to make everybody more prosperous.
Bureaucratic management of private enterprises
The general tendency of our times is to let the government interfere with private business, and this interference in many instances forces upon the private enterprise bureaucratic management.
No progress and reform can be expected in a state of affairs where the first step is to obtain the consent of the old men.
To say to the entrepreneur of an enterprise with limited profit chance, "Behave as the conscientious bureaucrats do" is tantamount to telling him to shun any reform. Progress is precisely that which the rules and regulations did not foresee; it is necessarily outside the field of bureaucratic activities.
Both industrial inefficiency and corruption are the consequences of methods of government interference with business as applied in Southern and Eastern European countries.
No progress and reform can be expected in a state of affairs where the first step is to obtain the consent of the old men.
To say to the entrepreneur of an enterprise with limited profit chance, "Behave as the conscientious bureaucrats do" is tantamount to telling him to shun any reform. Progress is precisely that which the rules and regulations did not foresee; it is necessarily outside the field of bureaucratic activities.
Both industrial inefficiency and corruption are the consequences of methods of government interference with business as applied in Southern and Eastern European countries.
Bureaucratic management of publicity owned enterprises
Socialism, that is, full government control of all economic activities, is impracticable because a socialist community would lack the indispensable intellectual instrument of economic planning and designing: economic calculation.
As soon as an undertaking is no longer operated under the profit motive, other principles must be adopted fro the conduct of its affairs. It's naive of the champions of nationalized and municipalized enterprise to say say that the public enterprise's duty is to render useful services to the community. Because every undertaking's sole task is to render useful services.
The question should be: How do we find out whether the scarce resources are used in their most appropriate way?
With private profit-seeking enterprise this problem is solved by the attitude of the public.
As the account of profit and loss is not to be considered the criterion of the management's success or failure, the only means to make the manager responsible to the boss, the treasury, is to limit his discretion by rules and regulations.
As soon as an undertaking is no longer operated under the profit motive, other principles must be adopted fro the conduct of its affairs. It's naive of the champions of nationalized and municipalized enterprise to say say that the public enterprise's duty is to render useful services to the community. Because every undertaking's sole task is to render useful services.
The question should be: How do we find out whether the scarce resources are used in their most appropriate way?
With private profit-seeking enterprise this problem is solved by the attitude of the public.
As the account of profit and loss is not to be considered the criterion of the management's success or failure, the only means to make the manager responsible to the boss, the treasury, is to limit his discretion by rules and regulations.
bureaucratic management
In order to avoid the outcome that the deputy becomes an arbitrary in the province, the king tries to limit the deputy's powers by issuing directives and instructions. So the deputy's free discretion is now limited; their first duty is now to comply with the regulation. The deputy is no longer eager to deal with each case to the best of their abilities. The first virtue of an administrator is to abide by the codes and decrees. He becomes an bureaucrat. (Bureaucracy under despotic management)
It's a fallacy that bureaucratic management is incompatible with democratic government and institutions. The two pillars of democratic government are the primacy of the law and the budget. The definition of democratic government: A system of government under which those ruled are in a position to determine, directly by plebiscite or indirectly bu election, the exercise of the legislative and execute power and the selection of the supreme executives.
Primacy of the law means that no judge or officeholder has the right to interfere with any individual's affairs or conditions unless a valid law requires or empowers him to do so. Democratic control is budgetary control.
Bureaucracy itself is neither bad nor good. What we blame is the expansion of the sphere in which the government interferes with business and with many other items of the citizenry's affairs, and this results in a substitution of bureaucratic management for profit management.
The main function of the law is to limit the power of the authorities and the courts to inflict evils upon the individual citizen and to restrict his freedom. The law protects the people against the arbitrariness of those in office.
Bureaucracy management is management bound to comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. The objective of business management is to make a profit.
The definition of bureaucratic management: Bureaucratic management is the method applied in the conduct of administrative affairs the result of which has no cash value on the market. We do not say that a successful handling of public affairs has no value, but that it has no price on market, that its value cannot be realized in a market transaction and consequently cannot be expressed in terms of money.
It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors.
It's a fallacy that bureaucratic management is incompatible with democratic government and institutions. The two pillars of democratic government are the primacy of the law and the budget. The definition of democratic government: A system of government under which those ruled are in a position to determine, directly by plebiscite or indirectly bu election, the exercise of the legislative and execute power and the selection of the supreme executives.
Primacy of the law means that no judge or officeholder has the right to interfere with any individual's affairs or conditions unless a valid law requires or empowers him to do so. Democratic control is budgetary control.
Bureaucracy itself is neither bad nor good. What we blame is the expansion of the sphere in which the government interferes with business and with many other items of the citizenry's affairs, and this results in a substitution of bureaucratic management for profit management.
The main function of the law is to limit the power of the authorities and the courts to inflict evils upon the individual citizen and to restrict his freedom. The law protects the people against the arbitrariness of those in office.
Bureaucracy management is management bound to comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. The objective of business management is to make a profit.
The definition of bureaucratic management: Bureaucratic management is the method applied in the conduct of administrative affairs the result of which has no cash value on the market. We do not say that a successful handling of public affairs has no value, but that it has no price on market, that its value cannot be realized in a market transaction and consequently cannot be expressed in terms of money.
It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors.
11/23/2011
11/23/2011 Class 35
How markets use knowledge
The quality of substitutes for consumers and the cost of substitutes determine the shape of demand curve as I move away from the equilibrium point. The cost of production determines the shape of supply curve.
Titanium market: the equilibrium point is 10 billion pounds at 20 dollars each pound.
Now new demander seeks 6 billion pounds of Titanium at $20. So now the demand for titanium is 16 billion pounds at 20 bucks each pound.
Scenario #1
The supply curve and demand curve are both unit elastic.
When the equilibrium price rises to 25 dollars
Initial pounds Final pounds Change(absolute)
Old consumers 10 8 2
Suppliers 10 12 2
New consumers 6 4 2
The market rations the extra demand of titanium
Scenario #2
The demand curve is more elastic
When the equilibrium price is 25 bucks
Initial pounds Final pounds Change(absolute)
Old customers 10 6 4
Suppliers 10 11 1
New customers 6 5 1
Old customers behave strongly because they are very sensitive to the change of price, and they "contribute" more to the new buyers. Supplier don't change significantly because the price doesn't change so much.
Scenario #3
The supply curve is more elastic
When the equilibrium price is 25 dollars
Initial pounds Final pounds Change(Absolute)
Old customers 10 9 1
Suppliers 10 14 4
New customers 6 5 1
Supplier change behavior strongly because they are sensitive to the change of price. Customers are not because the change of price doesn't change a lot.
If a central planner wants to ration goods, he must be omnipotent and omniscient, knowing every single detail in the market, which is simply impossible.
With the self interest, not every one working in the public interest is actually thinking about public interest.
The quality of substitutes for consumers and the cost of substitutes determine the shape of demand curve as I move away from the equilibrium point. The cost of production determines the shape of supply curve.
Titanium market: the equilibrium point is 10 billion pounds at 20 dollars each pound.
Now new demander seeks 6 billion pounds of Titanium at $20. So now the demand for titanium is 16 billion pounds at 20 bucks each pound.
Scenario #1
The supply curve and demand curve are both unit elastic.
When the equilibrium price rises to 25 dollars
Initial pounds Final pounds Change(absolute)
Old consumers 10 8 2
Suppliers 10 12 2
New consumers 6 4 2
The market rations the extra demand of titanium
Scenario #2
The demand curve is more elastic
When the equilibrium price is 25 bucks
Initial pounds Final pounds Change(absolute)
Old customers 10 6 4
Suppliers 10 11 1
New customers 6 5 1
Old customers behave strongly because they are very sensitive to the change of price, and they "contribute" more to the new buyers. Supplier don't change significantly because the price doesn't change so much.
Scenario #3
The supply curve is more elastic
When the equilibrium price is 25 dollars
Initial pounds Final pounds Change(Absolute)
Old customers 10 9 1
Suppliers 10 14 4
New customers 6 5 1
Supplier change behavior strongly because they are sensitive to the change of price. Customers are not because the change of price doesn't change a lot.
If a central planner wants to ration goods, he must be omnipotent and omniscient, knowing every single detail in the market, which is simply impossible.
With the self interest, not every one working in the public interest is actually thinking about public interest.
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