Objections to trade
(1) We should pay attention to trade deficit because it means that we are in debted to foreign countries.
There's no real deficit as we trade.
Foreign countries buy American treasury bonds is actually a gift to Americans to consume more.
International transactions are not different from domestic ones.
(2)What makes trades with local strangers so much more virtuous than trading with non local strangers.
Other countries, particularly less developed ones,have lower environmental and labor standards to attract investments.
A lot of researches fail to find the correlation between the location decisions of firms and environmental quality of a country.
Nations with highest environmental standards actually attract most investments.
Then why do firms leave pollution heavens?
High costs and poor security.
Trade is good to environment
(1)It leads to more environmental consciousness.
(2)Specialization allows people to end up producing things in places that have lower environmental impacts.
(3)Trade lets us have excessive income and now we pay more attention to our living environment to improve living standard rather than just survive in a bad place.
The empirical evidence on the relationship between income and spending on the environment is probably the most overwhelmingly robust relationship in economics.
(3)Many people believe low-wage exploitive labor. For example, China's cost advantages stem from exploitation of labor in which people are treated as slaves.
Questions:
1. What's slave labor?
2. Is slave really efficient in manufacturing area? If that was the case, why didn't China become the most prosperous country under the control of Mao?
What makes trade beneficial? Two notions.
(1) Smithian notion
1. Specialization saves time switching jobs. The saving of the time which is commonly lost in passing from one species work to another.
2. People have more time to develop knowledge, the increase of deftness in every particular worker and more chance to invent new machines, which facilitate and abridge labor, enabling one man to do the work of many.
3. People can apply capitals to production of goods.
4. Specialization extends market.
(2)Ricardian notion
Trade reduces cost because of comparative advantage.
Supply&Demand
The world is characterized by transactions costs.
Transactions costs: the cost of negotiating contracts and agreements.
Three types of transactions costs:
(1) Physical costs.
For example: before Internet, physical distance is a major barrier to trade.
(2)Ignorance of opportunity
Information is hard to get
(3)Interference
Barriers to prevent exchanging.
10/31/2011
10/30/2011
The economic organisation of a POW camp
This is an interesting story, which shows that a market can spontaneously happen in almost every place where people want to live relatively happier. This story once again tells us that a good market should be free without external excessive intervention.
What's good in this story is that the opinion toward middle man is bad. In the article, author says that middle man's contribution that they gather together sellers, goods, buyers,capital is ignored. Actually, middle man is also contributive to the reduction of cost in transportaion.
A second good point in the article is that price is the guide to trade. Prisoners in this market is separated and thus there needs to be a media to guide the trade and exchange. Who can be objective? Price.
A third point in this article is that intervention may lead to unintended consequences within the market. For example, an injection of "currency": cigarette, can lead to a rise in price of general products (inflation).
There are several variables that affect the market: expectation of the future, shortage of products, etc
There's also a problem about barter. If some trader is a heavy smoker, he will consume the "currency"; cigarette , rather than spend it, which will make him worse off and a lack of currency in the market.
My question is: Does Grahem's law itself an implication of opportunity cost?
What's good in this story is that the opinion toward middle man is bad. In the article, author says that middle man's contribution that they gather together sellers, goods, buyers,capital is ignored. Actually, middle man is also contributive to the reduction of cost in transportaion.
A second good point in the article is that price is the guide to trade. Prisoners in this market is separated and thus there needs to be a media to guide the trade and exchange. Who can be objective? Price.
A third point in this article is that intervention may lead to unintended consequences within the market. For example, an injection of "currency": cigarette, can lead to a rise in price of general products (inflation).
There are several variables that affect the market: expectation of the future, shortage of products, etc
There's also a problem about barter. If some trader is a heavy smoker, he will consume the "currency"; cigarette , rather than spend it, which will make him worse off and a lack of currency in the market.
My question is: Does Grahem's law itself an implication of opportunity cost?
10/28/2011
10/28/2011 Class 24
What matters in the trade is not just wages but how much the work can be produced in an hour.
In prosperous countries such as America, a fallacy that sounds very plausible is that American goods cannot compete with goods produced by low-wage workers in poorer countries,some of whom are paid a fraction of what American workers receive.
Economically, the key flaw in the high-wage argument is that it confuses wage rates, measured per hour of work, and labor costs, measured per unit of output.
Chinese workers American workers
wage $8 per hour $30 per hour
marginal output of labor 4 unit per hour 20 units per hour
ratio $2 per unit 1.5bucks per unit
America has an absolute advantage in labor costs over China, but China has a comparative advantage in producing stuff over America. America has to bear a higher opportunity cost than China does.
The world trend of manufacturing is that there're fewer workers working in this area.
Does trade surplus create jobs?
NO American agriculture has had a surplus since 1976 but the employment has been decreasing. The reason is that productivity enhances, which means that the land use is more and more efficient.
American government now puts a higher tariff on Chinese goods but can this policy spur the domestic manufacturing?
Answer: NO Reasons
(1) Chinese productions consist of only 2.7% of the American market.
(2) Most of the goods made in China are input of production of other goods, which means that a tariff on such goods is an increase the cost of input to produce the stuff that the American people are producing. (Raw material is more expensive)
What affects manufacturing jobs? Regulation
Economic sustainability: Neither trade surplus or deficit will create or cost jobs
Why doesn't trade deficit cost jobs?
People who think that trade deficit destroy jobs ignore dynamic nature of employment in two ways.
(1)When you think about trade, U have to remember the identity: The real reason a country needs exports is to pay for its imports.
(2)When you specialize you will become richer.
You consume excessive income and thus create more jobs.
Conclusion:
Because of specialization, trades allow us to consume more than we otherwise did,raising the number of jobs, and when we import stuff we always have to export, so we are not losing jobs; instead, we are shifting jobs to reach a situation of optimal efficiency.
Even if Korean give Americans cars for free, it won't let the American automobile business disappear because people have different preferences.
What's related to trade deficit?
Balance of payments: an accounting record of all monetary transactions between a country and the rest of the world, including payments for the country's exports and imports of goods and services, financial capitals and transfers.
Two types of balance of payments:
(1)Capital account: a reflection of net change in national ownership of assets
A surplus means that money flows into the country, suggesting that it's lending or selling the assets to other countries.
A deficit means that money is flowing out of the country, suggesting that it's claiming on foreign assets.
(2)Current account: A reflection of the sum of the balance of trade, net factor income(Like interest), and net transfer(Foreign aid, for example)
A surplus increases a country's net foreign assets by the corresponding amount and the deficit does the opposite thing.
Why trade doesn't cost America
Example:
Suppose an American buys a 10 dollar toy from a Chinese and the Chinese pays the American 5 bucks for a bowl.
What will the Chinese do with the excessive 5 bucks?
(1) buy other American stuff
(2) burn the money, but that will enrich the American because the money is a claim on American assets
(3) buy another country's stuff, but the country will make the choice like the Chinese does.
All the three ways ensure that the money will go back to America.
In prosperous countries such as America, a fallacy that sounds very plausible is that American goods cannot compete with goods produced by low-wage workers in poorer countries,some of whom are paid a fraction of what American workers receive.
Economically, the key flaw in the high-wage argument is that it confuses wage rates, measured per hour of work, and labor costs, measured per unit of output.
Chinese workers American workers
wage $8 per hour $30 per hour
marginal output of labor 4 unit per hour 20 units per hour
ratio $2 per unit 1.5bucks per unit
America has an absolute advantage in labor costs over China, but China has a comparative advantage in producing stuff over America. America has to bear a higher opportunity cost than China does.
The world trend of manufacturing is that there're fewer workers working in this area.
Does trade surplus create jobs?
NO American agriculture has had a surplus since 1976 but the employment has been decreasing. The reason is that productivity enhances, which means that the land use is more and more efficient.
American government now puts a higher tariff on Chinese goods but can this policy spur the domestic manufacturing?
Answer: NO Reasons
(1) Chinese productions consist of only 2.7% of the American market.
(2) Most of the goods made in China are input of production of other goods, which means that a tariff on such goods is an increase the cost of input to produce the stuff that the American people are producing. (Raw material is more expensive)
What affects manufacturing jobs? Regulation
Economic sustainability: Neither trade surplus or deficit will create or cost jobs
Why doesn't trade deficit cost jobs?
People who think that trade deficit destroy jobs ignore dynamic nature of employment in two ways.
(1)When you think about trade, U have to remember the identity: The real reason a country needs exports is to pay for its imports.
(2)When you specialize you will become richer.
You consume excessive income and thus create more jobs.
Conclusion:
Because of specialization, trades allow us to consume more than we otherwise did,raising the number of jobs, and when we import stuff we always have to export, so we are not losing jobs; instead, we are shifting jobs to reach a situation of optimal efficiency.
Even if Korean give Americans cars for free, it won't let the American automobile business disappear because people have different preferences.
What's related to trade deficit?
Balance of payments: an accounting record of all monetary transactions between a country and the rest of the world, including payments for the country's exports and imports of goods and services, financial capitals and transfers.
Two types of balance of payments:
(1)Capital account: a reflection of net change in national ownership of assets
A surplus means that money flows into the country, suggesting that it's lending or selling the assets to other countries.
A deficit means that money is flowing out of the country, suggesting that it's claiming on foreign assets.
(2)Current account: A reflection of the sum of the balance of trade, net factor income(Like interest), and net transfer(Foreign aid, for example)
A surplus increases a country's net foreign assets by the corresponding amount and the deficit does the opposite thing.
Why trade doesn't cost America
Example:
Suppose an American buys a 10 dollar toy from a Chinese and the Chinese pays the American 5 bucks for a bowl.
What will the Chinese do with the excessive 5 bucks?
(1) buy other American stuff
(2) burn the money, but that will enrich the American because the money is a claim on American assets
(3) buy another country's stuff, but the country will make the choice like the Chinese does.
All the three ways ensure that the money will go back to America.
10/26/2011
10/26/2011 Class 23
The reason that trade creates wealth is that trades makes people gain more values from what they want to get.
Trade reduces costs
Today's lecture: Evolution of living standard because of trade
（一）Trade doesn't create job losses,
(1)The jobs disappeared are low skill jobs, which are easy to be mechanized
One of the reasons why there's an income increase in America is that lots of new technology developing are only useful and be used by people with high skills.
(2)No one can predict future jobs created
For example, the people in 1900 failed to predict that automobile would become such a prosperous profession in 1930s.
But people have to constantly change what they specialize in so that they won't be squeezed out of the era.
The number of people who lose their jobs directly to trade is totally indistinguishable from 0. New jobs can offset the jobs disappeared.
Self-sufficiency is the road to poverty.
Should we provide job training?
Trade adjustment(job training) six times: 1962,1973,1982,1998, 2 times in 21st century.
Outcome: None provided long-term gains.
(3)Is it sensible for other low workers to give money fro adjustment system?
(4)Don't these workers have choices?
The more risky a job is, the higher the wage is.
Wages compensate the risk that your job may be tossed.
(5)Trade doesn't cost jobs, it just changes the types of jobs in an economy.
Irony: Why do we try hard to prevent trade from harming job opportunities while we accentuate technology, which costs more jobs?
Example: No one refuses to go to an ATM due to the reason that the machine costs a job of worker (technology part), but when it comes to trade, people get fussy and fastidious.
Rebuff: If we care about job loss, why do we just apply to part of the story---trade?
（二）Trade statistics are meaningless
Buy more than sell: deficit Sell more than buy: surplus
America has trade deficit only in goods; it has a surplus in services.
Example: America buys goods from China, China students buy education services from America.
Since 1976 the United States had a trade deficit, but the total employment has a monotone increase whether America has a trade deficit or surplus.
Total deficit doesn't affect the total amount of jobs; it affects the types of jobs that distributed in an economy.
Manufacturing sectors
What's seen is the plummet in manufacturing jobs; what's not seen is the job rise in other fields.
We've been losing manufacturing for 40 years, long before the trade deficit happened, so trade itself is not the cause of job losses.
(三) It's nonsense that America is not making stuff any more.
Manufacturing is actually producing huge amount of stuff but different types from before.
Increased productivity, a combination of better educated, healthier workers; more sophisticated machineary---dominant cause of employment loss in manufacturing.Globalization isn't the cause of job loss; instead, it prevents the loss from becoming larger.
The goal of 21st century elites is to be a creative thinker, figuring out the way to make the market more efficient.
Good economics is sustainable because our ambition to be more efficient creates modern technology, which makes us get stuff with fewer costs.
Technology, equipment, capital and labor are complements in high skill job area; they are substitutes in low jobs areas,which can easily be mechanized.
Trade reduces costs
Today's lecture: Evolution of living standard because of trade
（一）Trade doesn't create job losses,
(1)The jobs disappeared are low skill jobs, which are easy to be mechanized
One of the reasons why there's an income increase in America is that lots of new technology developing are only useful and be used by people with high skills.
(2)No one can predict future jobs created
For example, the people in 1900 failed to predict that automobile would become such a prosperous profession in 1930s.
But people have to constantly change what they specialize in so that they won't be squeezed out of the era.
The number of people who lose their jobs directly to trade is totally indistinguishable from 0. New jobs can offset the jobs disappeared.
Self-sufficiency is the road to poverty.
Should we provide job training?
Trade adjustment(job training) six times: 1962,1973,1982,1998, 2 times in 21st century.
Outcome: None provided long-term gains.
(3)Is it sensible for other low workers to give money fro adjustment system?
(4)Don't these workers have choices?
The more risky a job is, the higher the wage is.
Wages compensate the risk that your job may be tossed.
(5)Trade doesn't cost jobs, it just changes the types of jobs in an economy.
Irony: Why do we try hard to prevent trade from harming job opportunities while we accentuate technology, which costs more jobs?
Example: No one refuses to go to an ATM due to the reason that the machine costs a job of worker (technology part), but when it comes to trade, people get fussy and fastidious.
Rebuff: If we care about job loss, why do we just apply to part of the story---trade?
（二）Trade statistics are meaningless
Buy more than sell: deficit Sell more than buy: surplus
America has trade deficit only in goods; it has a surplus in services.
Example: America buys goods from China, China students buy education services from America.
Since 1976 the United States had a trade deficit, but the total employment has a monotone increase whether America has a trade deficit or surplus.
Total deficit doesn't affect the total amount of jobs; it affects the types of jobs that distributed in an economy.
Manufacturing sectors
What's seen is the plummet in manufacturing jobs; what's not seen is the job rise in other fields.
We've been losing manufacturing for 40 years, long before the trade deficit happened, so trade itself is not the cause of job losses.
(三) It's nonsense that America is not making stuff any more.
Manufacturing is actually producing huge amount of stuff but different types from before.
Increased productivity, a combination of better educated, healthier workers; more sophisticated machineary---dominant cause of employment loss in manufacturing.Globalization isn't the cause of job loss; instead, it prevents the loss from becoming larger.
The goal of 21st century elites is to be a creative thinker, figuring out the way to make the market more efficient.
Good economics is sustainable because our ambition to be more efficient creates modern technology, which makes us get stuff with fewer costs.
Technology, equipment, capital and labor are complements in high skill job area; they are substitutes in low jobs areas,which can easily be mechanized.
10/24/2011
10/24/2011 Class22
Comparative advantage:
Example:
Rochester Cornell
Wine 10 3
Camera 5 4
Rochester has an absolute advantage in producing wine and camera over Cornell
What's efficiency? What's sacrifice?
Price means what's traded off to do something else
Efficiency is who incurs a smaller trade-off when they produce a certain good
Rochester 1 wine----0.5 camera Cornell 1 wine------4/3 camera
1 camera---2 wine 1 camera---- 0.75 wine
Rochester has a comparative advantage in producing wine over Cornell because it bears a less opportunity cost in producing wine than Cornell does.
Now suppose Rochester just produces wine and Cornell produces cameras, and Rochester gives 3 wine to Cornell for 3 cameras, the corollary is that both Rochester and Cornell will be better off.
So trade is based on comparative advantage; there's no producer who can have a comparative advantage in producing everything; trade will be beneficial to both traders as long as the offer fits in the opportunity cost of two traders. (For example: 0.5<1<4/3 so both Rochester and Cornell can benefit)
If domestic price of a good is lower than world price, domestic producer will export the product, when domestic price is higher than world price, domestic producer will import the product and produce something else that can have a comparative advantage.
You pay for imports with exports always
Implications of comparative advantage
(1) Self-sufficiency is road to poverty
1> can you produce all the stuff by yourself?
2> if world population shrinks to 10, will you get what you want most?
(2)What countries end up producing is a function of their relative productivity, not a function of their level of tech, wages, how nasty they treat the workers in the countries.
What matters in not the differences in prices across countries. What matters for trade is the relative price differences within the country.
(3)Policy that restricts trade between individuals make society poor
Application: tax and tariff
The reasons of the loss of manufacturing jobs
(1)Workers have been replaced by modern technology
(2)The types of things we produce today are more technology intensive
(3)Within companies, low skill jobs shrink and high skill jobs thrive
(4)New jobs are safer and more pleasing than the old jobs replaced
Example:
Rochester Cornell
Wine 10 3
Camera 5 4
Rochester has an absolute advantage in producing wine and camera over Cornell
What's efficiency? What's sacrifice?
Price means what's traded off to do something else
Efficiency is who incurs a smaller trade-off when they produce a certain good
Rochester 1 wine----0.5 camera Cornell 1 wine------4/3 camera
1 camera---2 wine 1 camera---- 0.75 wine
Rochester has a comparative advantage in producing wine over Cornell because it bears a less opportunity cost in producing wine than Cornell does.
Now suppose Rochester just produces wine and Cornell produces cameras, and Rochester gives 3 wine to Cornell for 3 cameras, the corollary is that both Rochester and Cornell will be better off.
So trade is based on comparative advantage; there's no producer who can have a comparative advantage in producing everything; trade will be beneficial to both traders as long as the offer fits in the opportunity cost of two traders. (For example: 0.5<1<4/3 so both Rochester and Cornell can benefit)
If domestic price of a good is lower than world price, domestic producer will export the product, when domestic price is higher than world price, domestic producer will import the product and produce something else that can have a comparative advantage.
You pay for imports with exports always
Implications of comparative advantage
(1) Self-sufficiency is road to poverty
1> can you produce all the stuff by yourself?
2> if world population shrinks to 10, will you get what you want most?
(2)What countries end up producing is a function of their relative productivity, not a function of their level of tech, wages, how nasty they treat the workers in the countries.
What matters in not the differences in prices across countries. What matters for trade is the relative price differences within the country.
(3)Policy that restricts trade between individuals make society poor
Application: tax and tariff
The reasons of the loss of manufacturing jobs
(1)Workers have been replaced by modern technology
(2)The types of things we produce today are more technology intensive
(3)Within companies, low skill jobs shrink and high skill jobs thrive
(4)New jobs are safer and more pleasing than the old jobs replaced
10/23/2011
Ricardo's difficult ideas
This is perhaps the best article that I have read so far in this semester.
Many interesting ideas and good advice on people to contemplate things.
Three implications underlie the Ricardian Model
(1)Wages are determined in a national labor market
The model envisages that a single factor, labor, can move freely between industries.
Wages earned in one industry are largely determined by the wages similar workers are earning in other industries.
Question: why does the author say that wages are endogenous?
(2)Constant employment is a reasonable approximation
International trade is a long run issue tendency to return to full employment
Question: Is it possible? Isn't it contradict to Hazlett's idea in Economics in one lesson?
Central banks: stabilize employment
(3)The balance of payment isn't a problem
David Hume: trade imbalances are self-correcting. A surplus country will acquire specie, leading to rising prices that price its goods of world markets while a deficit country will find its goods increasingly comparatively priced.
Ricardian Model is an ideal model, the reason why it's rebuffed is that the world is complex and different countries may adopt mixed economy strategies.
Another interesting part of this article is that it gives us some advice on how to think like an economist. I find it useful because I am now doing my writing assignment and these pieces of advice are really good, which I can use to conclude my essay.
The similarties between capitalism and Ricardian Model is that both of them face a lot of objection and some reasons may be the same:
(1)People blame the problems caused by other kinds of systems on them
(2)There are too many variables that cause the same phenomena, but people just neglect other causes.
(3)Mixed economy stymie the effect of these systems
(4) People are prone to be fooled by fallacies, which are easier to understand
(5) Data are sometimes confusing.
Many interesting ideas and good advice on people to contemplate things.
Three implications underlie the Ricardian Model
(1)Wages are determined in a national labor market
The model envisages that a single factor, labor, can move freely between industries.
Wages earned in one industry are largely determined by the wages similar workers are earning in other industries.
Question: why does the author say that wages are endogenous?
(2)Constant employment is a reasonable approximation
International trade is a long run issue tendency to return to full employment
Question: Is it possible? Isn't it contradict to Hazlett's idea in Economics in one lesson?
Central banks: stabilize employment
(3)The balance of payment isn't a problem
David Hume: trade imbalances are self-correcting. A surplus country will acquire specie, leading to rising prices that price its goods of world markets while a deficit country will find its goods increasingly comparatively priced.
Ricardian Model is an ideal model, the reason why it's rebuffed is that the world is complex and different countries may adopt mixed economy strategies.
Another interesting part of this article is that it gives us some advice on how to think like an economist. I find it useful because I am now doing my writing assignment and these pieces of advice are really good, which I can use to conclude my essay.
The similarties between capitalism and Ricardian Model is that both of them face a lot of objection and some reasons may be the same:
(1)People blame the problems caused by other kinds of systems on them
(2)There are too many variables that cause the same phenomena, but people just neglect other causes.
(3)Mixed economy stymie the effect of these systems
(4) People are prone to be fooled by fallacies, which are easier to understand
(5) Data are sometimes confusing.
A raspberry for free trade
The point of this article is to let readers know that the real complain against developing countries is not that their exports are based on low wages and sweatshops. The complaint is that they export at all.
In the article, the author explains the reason why some scholars tend to be against international trade. For example, these people still think that international trade is a zero-sum game. They just see what's seen: the prevalence of foreign goods squeeze the profit of domestic workers'.But what's not seen is that our purchasing power increase and we can spend more money other things, and as a result the workers can shift to those fields and gain profit.
My question is, I don't quite understand what author mean in the opening paragraph.
In the article, the author explains the reason why some scholars tend to be against international trade. For example, these people still think that international trade is a zero-sum game. They just see what's seen: the prevalence of foreign goods squeeze the profit of domestic workers'.But what's not seen is that our purchasing power increase and we can spend more money other things, and as a result the workers can shift to those fields and gain profit.
My question is, I don't quite understand what author mean in the opening paragraph.
In praise of cheap labor
The reason why professor recommends us the read this article is to let us have a deeper understanding that good intentions may not lead to good consequences; in international trade, both traders are better off, especially the poorer one; some people have a lofty morality, consider capitalism as a vampire and call for a fairer system, but actually they fail to think the matters through and neglect what's not seen.
What's intuitive in this article is the author's analysis of the reasons why it's not ideal to raise the salaries standard of third countries workers in a particular field.
(1)The author thinks that a mandatory increase of wages in a specific field will cause a new group of aristocracy and thus is harmful to workers in other fields. This idea is like Hazlett's opinion that bad policies merely cares about effects in short run and benefits of a small groups of people.
In my opinion, an artificial growth of wage increase will change workers' incentives, making more people to do this job. And according to the law of diminishing return, it will be more costly to produce a marginal product and cause market inefficiency.
(2)The author thinks that once the salaries of workers increase, the employers have to raise the prices to get profits. But since the advantage of third world countries' export lies in the fact that the productions they produce are cheaper, the rise in prices will make them less competitive and the corollary is that workers will lose money.
My question is: why don't the managers adopt the policies to make mass production?
Personally, I think that those who call for the rise in income of the third world countries workers are merely doing this for satisfying their own needs of having a lofty morality over others. They don't see that if they buy less, the workers will earn less and may be worse off. Those advocates, in my opinion, are merely hypocrites.
What's intuitive in this article is the author's analysis of the reasons why it's not ideal to raise the salaries standard of third countries workers in a particular field.
(1)The author thinks that a mandatory increase of wages in a specific field will cause a new group of aristocracy and thus is harmful to workers in other fields. This idea is like Hazlett's opinion that bad policies merely cares about effects in short run and benefits of a small groups of people.
In my opinion, an artificial growth of wage increase will change workers' incentives, making more people to do this job. And according to the law of diminishing return, it will be more costly to produce a marginal product and cause market inefficiency.
(2)The author thinks that once the salaries of workers increase, the employers have to raise the prices to get profits. But since the advantage of third world countries' export lies in the fact that the productions they produce are cheaper, the rise in prices will make them less competitive and the corollary is that workers will lose money.
My question is: why don't the managers adopt the policies to make mass production?
Personally, I think that those who call for the rise in income of the third world countries workers are merely doing this for satisfying their own needs of having a lofty morality over others. They don't see that if they buy less, the workers will earn less and may be worse off. Those advocates, in my opinion, are merely hypocrites.
10/21/2011
Property rights
Socialism totally neglects property rights and thus change people's insentives.
The goal of this note is to remind us that incentive works. Merely pursuing altruism is bad for the economic growth. In economics, a lot of fallacies are actually an outcome of emotion and myopia.
What's interesting in this note is that the author lists three objections against property rights, which are (1) private properties are immoral because it relies on selfishness (2)private properties causes a misallocation of resources (3)private property means that men are not really free
These fallacies are actually based on the opinion that capitalism is zero-sum and pursuing self-interest and getting profit can squeeze other's interest.
But a fact is that in Soviet Union, people had to share a certain shop and they are forced to do what government offered, which at last forced the people to sell goods outside the shop.
My question is: In the note, the author says that people will build houses in more risky areas because the government offers flood insurance. But isn't it another fallacy that destruction is good?
The forth objection is confusing, what's the theory base of Locke to say that human have an inherited right to use natural resources?
The goal of this note is to remind us that incentive works. Merely pursuing altruism is bad for the economic growth. In economics, a lot of fallacies are actually an outcome of emotion and myopia.
What's interesting in this note is that the author lists three objections against property rights, which are (1) private properties are immoral because it relies on selfishness (2)private properties causes a misallocation of resources (3)private property means that men are not really free
These fallacies are actually based on the opinion that capitalism is zero-sum and pursuing self-interest and getting profit can squeeze other's interest.
But a fact is that in Soviet Union, people had to share a certain shop and they are forced to do what government offered, which at last forced the people to sell goods outside the shop.
My question is: In the note, the author says that people will build houses in more risky areas because the government offers flood insurance. But isn't it another fallacy that destruction is good?
The forth objection is confusing, what's the theory base of Locke to say that human have an inherited right to use natural resources?
10/21/2011 Class21
How does trade increase wealth beyond shifting resources?
Example :
Time to do your works
Mike Rich
Weeding 80 minutes 120 minutes
Mowing 40 minutes 120 minutes
Total amount 120 minutes 240 minutes
Now Rich offers to weed 3/4 of Mike's driveway if Mike mows Rich's yard
Mike's working time: 40+40+0.25*80=100 minutes
Rich's working time: 0+120+120*0.75=210 minutes
Both people are better off and the poor people can actually benefit more from the trade.
Production Possibility Frontiers (PPF)
All possible combinations of goods that a person/nation can produce given its resources, knowledge and technology.
Properties of PPFs
(1)All points on and within the curve are achievable.
(2)Comparing PPFs across people tells us who's better at producing a certain stuff
For example: Rizzo can produce 100 dolls in an hour while Rachel can produce 120 in 60 minutes, thus Rachel has absolute advantage in producing dolls over Rizzo.
(3)All points outside the PPFs are not achievable.
(4)Points on PPFs are productively efficient
The difference between productively efficient and economically efficient
Economic efficiency is not just producing things at lowest cost,but producing things that people want most.
So to get economic efficiency, getting to productive efficiency is a necessary condition. Economic efficiency is a certain point on the PPFs, different from person to person, nation to nation.
(5)Slope has meaning: it represents the trade-off if another good.
(6)Change is slope has meaning: it shows the law of diminishing return/increasing opportunity cost. When the slope is greater in absolute value, it means that you have to sacrifice more alternative good to get marginal good you want.
(7)Economic growth can change the curve
three factors: resources, technology and trade
Example :
Time to do your works
Mike Rich
Weeding 80 minutes 120 minutes
Mowing 40 minutes 120 minutes
Total amount 120 minutes 240 minutes
Now Rich offers to weed 3/4 of Mike's driveway if Mike mows Rich's yard
Mike's working time: 40+40+0.25*80=100 minutes
Rich's working time: 0+120+120*0.75=210 minutes
Both people are better off and the poor people can actually benefit more from the trade.
Production Possibility Frontiers (PPF)
All possible combinations of goods that a person/nation can produce given its resources, knowledge and technology.
Properties of PPFs
(1)All points on and within the curve are achievable.
(2)Comparing PPFs across people tells us who's better at producing a certain stuff
For example: Rizzo can produce 100 dolls in an hour while Rachel can produce 120 in 60 minutes, thus Rachel has absolute advantage in producing dolls over Rizzo.
(3)All points outside the PPFs are not achievable.
(4)Points on PPFs are productively efficient
The difference between productively efficient and economically efficient
Economic efficiency is not just producing things at lowest cost,but producing things that people want most.
So to get economic efficiency, getting to productive efficiency is a necessary condition. Economic efficiency is a certain point on the PPFs, different from person to person, nation to nation.
(5)Slope has meaning: it represents the trade-off if another good.
(6)Change is slope has meaning: it shows the law of diminishing return/increasing opportunity cost. When the slope is greater in absolute value, it means that you have to sacrifice more alternative good to get marginal good you want.
(7)Economic growth can change the curve
three factors: resources, technology and trade
10/20/2011
Do we need an incentive?
Should I get some reward by handing in my homework early? What's gonna be the consequences if one day the school announces that: From now on, any student who can hand in their homework 2 days before the due time can get 0.5 extra credit.
It can be inferred that the president of the school thinks that: Give them the incentives. These credit chasers will certainly be more serious about their homework.They will spend more time reviewing courses to finish homework earlier rather than hanging out to do stupid things like dancing or singing. They will get better score and the school will have a better reputation.
Well,maybe the students will really hand in their homework earlier, but will they have a better understanding of the courses? Or will they really spend more time on study?
A possible scenario is that the quality of the homework sucks. Students may hand in the homework so quickly that they don't revise of proofread before submission.Some students may just copy and plagiarize. Some students may even think that: I can get extra credit even though I may not get all the answers right, so what's the point of ruminating the difficult problems?Besides, I can have more time socializing with friends.
Well, the outcome may be that the quality of academic performances decreases, student get more utilitarian and don't try hard in study.
Good intention may not lead to good consequences.
It can be inferred that the president of the school thinks that: Give them the incentives. These credit chasers will certainly be more serious about their homework.They will spend more time reviewing courses to finish homework earlier rather than hanging out to do stupid things like dancing or singing. They will get better score and the school will have a better reputation.
Well,maybe the students will really hand in their homework earlier, but will they have a better understanding of the courses? Or will they really spend more time on study?
A possible scenario is that the quality of the homework sucks. Students may hand in the homework so quickly that they don't revise of proofread before submission.Some students may just copy and plagiarize. Some students may even think that: I can get extra credit even though I may not get all the answers right, so what's the point of ruminating the difficult problems?Besides, I can have more time socializing with friends.
Well, the outcome may be that the quality of academic performances decreases, student get more utilitarian and don't try hard in study.
Good intention may not lead to good consequences.
A defense for foreign students
It seems that foreign students are a special group in the universities. We leave our motherland and come to a different environment. We take a lot of hope while in the mean time have to endure pressure and condemn, among which the most common one is that we spend too much.
Some people claim that:"Your parents have spent a huge amount of money on your tuition, which could have promised them a good life domestically.What's the point of you little bastards buying so many things?" But that's not the truth.
First, the tuition is sunk cost, so even we live like ascetics, we can not get back the money.
Second, since the daily necessity in American is more expensive that that in China, we will certainly be more wary when buying marginal productions. After all there're only a small amount of students who will spend a lot buying unnecessary things.
Third, I work part time and the month salary is over $160, which means that I can cover my living expenditure myself.
Forth, students in China will also spend money of their parents.
So, don't blame foreign students too much. We endure pressure of study and assimilation to the society. We know what to do.
Some people claim that:"Your parents have spent a huge amount of money on your tuition, which could have promised them a good life domestically.What's the point of you little bastards buying so many things?" But that's not the truth.
First, the tuition is sunk cost, so even we live like ascetics, we can not get back the money.
Second, since the daily necessity in American is more expensive that that in China, we will certainly be more wary when buying marginal productions. After all there're only a small amount of students who will spend a lot buying unnecessary things.
Third, I work part time and the month salary is over $160, which means that I can cover my living expenditure myself.
Forth, students in China will also spend money of their parents.
So, don't blame foreign students too much. We endure pressure of study and assimilation to the society. We know what to do.
10/19/2011
10/19/2011 Class 20
Why does Rizzo break the rule and let more students enroll in the class?
There're situations where intimately we actually do have the knowledge to act on the information that we have and improve outcome. Rizzo knows that some students will quit and adds a more student will benefit to the student.Rules set by the school are also not economics ones.
Fed Ex
Why do we have confidence in Fed Ex, not worrying that our privacy would be exposed or packages get lost?
Feedback loops: If Fed Ex fails, it will lose customers and reputation.
Competition is also a part, pushing Fed Ex to maintain a high quality of services.Feedback loops works well when people feel guilty of doing a bad job.
Trade and exchange
1.What to produce
2.How to produce
3.Allocation systems
Production process: Input----"Black box"----Stuff
Inputs: factors of production
(1)Land
any physical object that preexists before we get to the earth
difference between economic resources and natural resources: When people figure the use of a resource, it will become economic resource
(2)Labor
the number of bodies
(3)Capital
something that first must be produced for the purpose of producing something else
Two types of capital:
1> physical
2> human capital: anything human do to augment natural ability
Ways to engage in production process
(1)Self-sufficiency
It's not economic activities. Doing things by yourself reduces economic activities.
(2)Specialization and exchange
Patterns of sustainable specialization and trade
(3)Discovery
technology changes our way of doing things
We need time to adapt to the new technology, in the process there may be economic stagnation.
Reasons why people think bad about trade
(1)Most trade doesn't create new things
(2)People view trade as exploitive
Why do people produce? To get wealth. Then what's wealth?
Wealth is whatever people value
Economic growth derives not from increasing production of things but from increasing production of wealth.
Growth happens when a society gets more with the same amount of input or we use less input to get the same amount of stuff.
Voluntary trades happen only when people can get extra value
Example: I have two Kirby cards, which is worth $200 each. My friend Jeff has a Beyonco card, which only worth $0.02 But in fact I value B more than K, and Jeff values K more than B
Suppose I lose 1000 bucks with a card missing, but when I complete the transaction, I get 8000 bucks of value. So the wealth gained is $7000
The initial wealth of me and Jeff is 1200.02 bucks, after the trade, the wealth is $8200, we create 6999.98 bucks of wealth.
There're situations where intimately we actually do have the knowledge to act on the information that we have and improve outcome. Rizzo knows that some students will quit and adds a more student will benefit to the student.Rules set by the school are also not economics ones.
Fed Ex
Why do we have confidence in Fed Ex, not worrying that our privacy would be exposed or packages get lost?
Feedback loops: If Fed Ex fails, it will lose customers and reputation.
Competition is also a part, pushing Fed Ex to maintain a high quality of services.Feedback loops works well when people feel guilty of doing a bad job.
Trade and exchange
1.What to produce
2.How to produce
3.Allocation systems
Production process: Input----"Black box"----Stuff
Inputs: factors of production
(1)Land
any physical object that preexists before we get to the earth
difference between economic resources and natural resources: When people figure the use of a resource, it will become economic resource
(2)Labor
the number of bodies
(3)Capital
something that first must be produced for the purpose of producing something else
Two types of capital:
1> physical
2> human capital: anything human do to augment natural ability
Ways to engage in production process
(1)Self-sufficiency
It's not economic activities. Doing things by yourself reduces economic activities.
(2)Specialization and exchange
Patterns of sustainable specialization and trade
(3)Discovery
technology changes our way of doing things
We need time to adapt to the new technology, in the process there may be economic stagnation.
Reasons why people think bad about trade
(1)Most trade doesn't create new things
(2)People view trade as exploitive
Why do people produce? To get wealth. Then what's wealth?
Wealth is whatever people value
Economic growth derives not from increasing production of things but from increasing production of wealth.
Growth happens when a society gets more with the same amount of input or we use less input to get the same amount of stuff.
Voluntary trades happen only when people can get extra value
Example: I have two Kirby cards, which is worth $200 each. My friend Jeff has a Beyonco card, which only worth $0.02 But in fact I value B more than K, and Jeff values K more than B
Suppose I lose 1000 bucks with a card missing, but when I complete the transaction, I get 8000 bucks of value. So the wealth gained is $7000
The initial wealth of me and Jeff is 1200.02 bucks, after the trade, the wealth is $8200, we create 6999.98 bucks of wealth.
10/18/2011
An emotional fallacy
Today the administration of railway in China announce that the food served in the trains should not be more expensive than 15 yuan. People cheer for it and think that the railway stations and airports should have gauged their profit and given it back to customers long time ago.
But why are the prices in the airports and railway stations so expensive? This morning I stumbled upon a Chinese journalist's comment and I was shocked to see that in the article he claimed that "It's known to all that the airport is monopolizing the price. They set the prices at will so that they can maximize the profit."
The question is: Is it true that the airport officers set the price? Or the prices are set by others for a certain reason?
In my opinion, it's the market that set the price. The restaurants get into the airport to do business because (1)airports have a lot of customers (2)airports have strict security examination, passengers cannot take liquid, so the demand for food and drink can be great.
Based on these reason, selling food in airports can be profitable. But the reality is that the airports are scarce compared to the amount of restaurants which want to enter and get the money. Now comes the crucial point: How can a restaurant get into the airport and sell the food? It must pay rent to get the land,but since there are so many competitors, a higher rent is needed.
So, the cost of selling food in an airport is already higher than that in other ordinary area, the higher prices aren't so peculiar.
But why are the prices in the airports and railway stations so expensive? This morning I stumbled upon a Chinese journalist's comment and I was shocked to see that in the article he claimed that "It's known to all that the airport is monopolizing the price. They set the prices at will so that they can maximize the profit."
The question is: Is it true that the airport officers set the price? Or the prices are set by others for a certain reason?
In my opinion, it's the market that set the price. The restaurants get into the airport to do business because (1)airports have a lot of customers (2)airports have strict security examination, passengers cannot take liquid, so the demand for food and drink can be great.
Based on these reason, selling food in airports can be profitable. But the reality is that the airports are scarce compared to the amount of restaurants which want to enter and get the money. Now comes the crucial point: How can a restaurant get into the airport and sell the food? It must pay rent to get the land,but since there are so many competitors, a higher rent is needed.
So, the cost of selling food in an airport is already higher than that in other ordinary area, the higher prices aren't so peculiar.
10/17/2011
10/17/2011 Class 19
Virtues and Morality of market economy
Golden rule: do one to others as you will have done to yourself
Golden rule makes sense in small situations where relationships are intimate and you can actually know exactly what people around you want.
Commercial society is very big, complex and impersonal.
Some substitutes are needed for golden rule when you deal with strangers and the reason is that we don't have enough information to apply the golden rule.
The reason why golden rule fails is not because of selfishness but because of a lack of omniscience.
Example: If farmers worked based totally on altruism, they would have to figure out what people want before the cultivation but in this process many people will die because of starvation.
1) Irony: People think that anything in the market is about greed and self-interest while things outside the market has nothing to do with greed.
People actually like the self-interest not happened in the market.
Selfish behavior that is exclusively self-regarded (exercise, lose weight, quit smoking,etc) is usually praised while selfish behavior that requires people to think about somebody else (marker trade, etc) often faces suspect.
2)The nature reciprocal of altruism
Example : Tony gets a kidney from Tina Tony gives Tina 20000 bucks to pay her mortgage.
Taken separately, people will argue that each of those behavior is worthy of praise but when it's a transaction, they are condemned. The truth is that they are the same act.
3)Only firms are viewed as greedy
Irony: When producers sell products, they are accused of setting high prices and impoverish customers but when customers try ways to buy things in a low price, they are praised. The reality is that customers are also self-interested.
Self-interest is not the only motivation that make people do decisions and get what they want.
Other motivations: people's opinions;satisfaction from challenge;avoid of being bored;drugs...
Self-interest: This and only this pursue the project that interest you
Why is the golden rule hard to apply?
Example: Should a bus driver wait for a late passenger?
The driver faces problems:
1) Other passengers will be delayed.(maybe they cannot catch another bus)
2) Driver doesn't whether the late passenger really have important things to do
3) If every driver is late, the countries will suffer from tardiness.
So what should the driver do? Obey the rule set by bus company.
Silver rule: don't do to others what you'll consider unfair if it did to you
Question: Should business take some portion of their profit to donate to the charity?
Possible responses:
1) It's perfectly OK to be charitable with your own money
But we invest money to company to have more money in the future,not expecting the company to give it to the charity.
2)There's no such thing as enough profit.
If the company gives money to the charity, the company loses capital and may have problem managing the business in the future.
The business companies' social responsibility: Earn enough profit to cover the genuine cost of a business. The workers will maintain the jobs and get a good pension. Continuous production and exchange will boost the economics and improve living standard.
3) Running a profitable business requires using soft values.
Treat customers and employees better.
4)Running a business like family will actually destroy it.
Golden rule: do one to others as you will have done to yourself
Golden rule makes sense in small situations where relationships are intimate and you can actually know exactly what people around you want.
Commercial society is very big, complex and impersonal.
Some substitutes are needed for golden rule when you deal with strangers and the reason is that we don't have enough information to apply the golden rule.
The reason why golden rule fails is not because of selfishness but because of a lack of omniscience.
Example: If farmers worked based totally on altruism, they would have to figure out what people want before the cultivation but in this process many people will die because of starvation.
1) Irony: People think that anything in the market is about greed and self-interest while things outside the market has nothing to do with greed.
People actually like the self-interest not happened in the market.
Selfish behavior that is exclusively self-regarded (exercise, lose weight, quit smoking,etc) is usually praised while selfish behavior that requires people to think about somebody else (marker trade, etc) often faces suspect.
2)The nature reciprocal of altruism
Example : Tony gets a kidney from Tina Tony gives Tina 20000 bucks to pay her mortgage.
Taken separately, people will argue that each of those behavior is worthy of praise but when it's a transaction, they are condemned. The truth is that they are the same act.
3)Only firms are viewed as greedy
Irony: When producers sell products, they are accused of setting high prices and impoverish customers but when customers try ways to buy things in a low price, they are praised. The reality is that customers are also self-interested.
Self-interest is not the only motivation that make people do decisions and get what they want.
Other motivations: people's opinions;satisfaction from challenge;avoid of being bored;drugs...
Self-interest: This and only this pursue the project that interest you
Why is the golden rule hard to apply?
Example: Should a bus driver wait for a late passenger?
The driver faces problems:
1) Other passengers will be delayed.(maybe they cannot catch another bus)
2) Driver doesn't whether the late passenger really have important things to do
3) If every driver is late, the countries will suffer from tardiness.
So what should the driver do? Obey the rule set by bus company.
Silver rule: don't do to others what you'll consider unfair if it did to you
Question: Should business take some portion of their profit to donate to the charity?
Possible responses:
1) It's perfectly OK to be charitable with your own money
But we invest money to company to have more money in the future,not expecting the company to give it to the charity.
2)There's no such thing as enough profit.
If the company gives money to the charity, the company loses capital and may have problem managing the business in the future.
The business companies' social responsibility: Earn enough profit to cover the genuine cost of a business. The workers will maintain the jobs and get a good pension. Continuous production and exchange will boost the economics and improve living standard.
3) Running a profitable business requires using soft values.
Treat customers and employees better.
4)Running a business like family will actually destroy it.
10/14/2011
10/14/2011 Class18
Paradox: Marxism
Suppose a worker produces $25 per hour
The worker's wage should be close to how much he produces because if the wage is high, he is not worth it, if the wage is too low, another employer will have a profit opportunity to hire this worker.
Marx thinks that workers don't get paid equally to how much they produce
Irony: The whole entire bases of Marxism is based upon: It proposes the complete abolition of private property.
Problems of markets: they often cannot work well.
(1)Lack of existence (market itself cannot exist or something prevents market from working well)
Implication:
<1> There's a situation that prevents commercial transaction from happening.
<2> Government control: consumers and producers don't have options (Lack of competition)
<3> We don't have perfect information (If one group in a transaction has more information about that transaction, them the market won't work)
Application: Insurance company. Healthy people may think the current cost to get an insurance is so high that they drop while the sick may attend, then the insurance company raise the cost to attend. In the end, the demand decreases because of the rise of price and healthy people are more unwilling to buy the insurance.
Can government fix it? NO. There's an opportunity for someone else to make a profit and government can also face a failure.
Goal of economy: outcome of market is efficient, delivering what people want at lowest possible cost.
(2)Institution: All the formal and informal mechanisms that people stumble upon to live a better life.
Implication:
<1>Institution protects the private property
<2>Good government The rule of law: everybody is treated equally;the law can't be arbitrary;laws should be general and predictable
<3>Different institutions can lead to different economics situation among identical countries.
<4>Some cultural norms may impede economic growth.
Inflation: the general increase in all prices in an economy
Cause of inflation: too much money floating in the market
MONEY IS NEUTRAL
Ethics
People think it morally inferior to pursue self-interest in transaction.
Golden rule: better morally if people produce to satisfy the needs of others first rather than produce to enrich themselves.
Suppose a worker produces $25 per hour
The worker's wage should be close to how much he produces because if the wage is high, he is not worth it, if the wage is too low, another employer will have a profit opportunity to hire this worker.
Marx thinks that workers don't get paid equally to how much they produce
Irony: The whole entire bases of Marxism is based upon: It proposes the complete abolition of private property.
Problems of markets: they often cannot work well.
(1)Lack of existence (market itself cannot exist or something prevents market from working well)
Implication:
<1> There's a situation that prevents commercial transaction from happening.
<2> Government control: consumers and producers don't have options (Lack of competition)
<3> We don't have perfect information (If one group in a transaction has more information about that transaction, them the market won't work)
Application: Insurance company. Healthy people may think the current cost to get an insurance is so high that they drop while the sick may attend, then the insurance company raise the cost to attend. In the end, the demand decreases because of the rise of price and healthy people are more unwilling to buy the insurance.
Can government fix it? NO. There's an opportunity for someone else to make a profit and government can also face a failure.
Goal of economy: outcome of market is efficient, delivering what people want at lowest possible cost.
(2)Institution: All the formal and informal mechanisms that people stumble upon to live a better life.
Implication:
<1>Institution protects the private property
<2>Good government The rule of law: everybody is treated equally;the law can't be arbitrary;laws should be general and predictable
<3>Different institutions can lead to different economics situation among identical countries.
<4>Some cultural norms may impede economic growth.
Inflation: the general increase in all prices in an economy
Cause of inflation: too much money floating in the market
MONEY IS NEUTRAL
Ethics
People think it morally inferior to pursue self-interest in transaction.
Golden rule: better morally if people produce to satisfy the needs of others first rather than produce to enrich themselves.
10/12/2011
10/12/2011 Class17
Simple laws can lead to unintended consequences
Example: minimum wage law intends to improve the workers' well being,but in fact it can exacerbate unemployment.
Employers just don't hire workers.For example,if the minimum wage is 10 bucks an hour, employer won't give the job to a worker who only worth 9bucks an hour.The worker's labor is wasted.It reduces production and exchange.
Government policies sometimes get the incentives wrong.
When you try to regulate a complex system with a simple set of rule, unintended consequences will happen.
Government officials have shortcomings: limited information,retarded response to instant change in market.
Example: Soviet Union has a controlled market,people have to wait a long line to get a loaf of bread while there are too many belts in stock to sell.What a waste.
When regulations push against the incentives,the incentives push back.People respond to the policy differently.
Argument: Capitalism is basically racist and sexist.
Fact: Government change people's incentives.
Example: minimum wage law and law to protect the disabled workers.
Task of economists is to identify who all the interested parties are whose cost will be changed from the rule.
Trade is not zero-sum.(Comparative advantage)
pie-fallacy:some people think that the world has a fixed amount of wealth,so the rich are exploiting the poor.
But imagine: Without Bill Gates,one of the most billionaire ever,will we be richer? Will we be better off without computer and internet?
Consequences of pie-fallacy: stagnation of economics growth; policy to give money from the rich to the poor,(That's disastrous. Poor people will get money without extra work,they will then work less,waiting for money;the rich will respond to the law: now I work and get less, I don't have incentive to work.);a small group of people have great power(think about Cultural Revolution in China)
Rich people actually produce more.
Example: We go to see Justin Timberlake's show and gain pleasure from it.Suppose 4million people each get a dollar of pleasure in one show.That means JT produce 4million bucks in one night. Rich get more because they produce more.
Example: minimum wage law intends to improve the workers' well being,but in fact it can exacerbate unemployment.
Employers just don't hire workers.For example,if the minimum wage is 10 bucks an hour, employer won't give the job to a worker who only worth 9bucks an hour.The worker's labor is wasted.It reduces production and exchange.
Government policies sometimes get the incentives wrong.
When you try to regulate a complex system with a simple set of rule, unintended consequences will happen.
Government officials have shortcomings: limited information,retarded response to instant change in market.
Example: Soviet Union has a controlled market,people have to wait a long line to get a loaf of bread while there are too many belts in stock to sell.What a waste.
When regulations push against the incentives,the incentives push back.People respond to the policy differently.
Argument: Capitalism is basically racist and sexist.
Fact: Government change people's incentives.
Example: minimum wage law and law to protect the disabled workers.
Task of economists is to identify who all the interested parties are whose cost will be changed from the rule.
Trade is not zero-sum.(Comparative advantage)
pie-fallacy:some people think that the world has a fixed amount of wealth,so the rich are exploiting the poor.
But imagine: Without Bill Gates,one of the most billionaire ever,will we be richer? Will we be better off without computer and internet?
Consequences of pie-fallacy: stagnation of economics growth; policy to give money from the rich to the poor,(That's disastrous. Poor people will get money without extra work,they will then work less,waiting for money;the rich will respond to the law: now I work and get less, I don't have incentive to work.);a small group of people have great power(think about Cultural Revolution in China)
Rich people actually produce more.
Example: We go to see Justin Timberlake's show and gain pleasure from it.Suppose 4million people each get a dollar of pleasure in one show.That means JT produce 4million bucks in one night. Rich get more because they produce more.
10/11/2011
The case for contamitation
Question：what's the contradiction in the argument that American mass culture is choking out other countries' tradition?
Capitalism frees women.Why do we complain that capitalism is sexist and radical even we have found out that some other traditions are more extreme?
A very good idea in this article is that globalization produce homogeneity while it's also a threat to homogeneity.As the world develops, we now can have access to good medicine and food.If we don't have it, we will suffer and endure pain.The homogeneity of wealth and equpment is certainly a good thing. Should we accuse that people degrade just because we eat the same food?
Certainly not. We choose to eat food.The reason why McDonald's and Coca Cola are so famous and popular lies in the fact that they represents good taste and high quality.Your tradition meal is noodles,but will you have noodles all in your life?Having the same food is the outcome of our choice,not because of the enforcement of other countries.
The way to maintain the diversity of culture is let people make their own choice. I think it's quite like the ethic of existentialism.
Existentialism is the notion that we human are born to make choice. We first choose what to be, and then we try hard on it and finally we become what we want to be.
In terms of culture.There are 7 billion people in the world and it means there are roughly 7 billion different choices.We cannot predict every single person's choice,nor should we force him. So people will choose tradition,which in fact is the outcome of choices of our ancestor.
Another enlightening point in this article is that the author explains a fallacy successfully. Cultural preservationists claim that the cheap western clothes make more people to buy and thus the traditional clothes face extinction. But the author that it's based on the fact that people don't have enough money to afford the traditional costume.
This article is about to explain the good points of globalization. We don't need to protect the culture intentionally.Instead, just like one of the basic principles of economics says, people respond to incentive.Just let the people make their own choice based on their interest.Certainly there won't be a circumstance in which 7billion people make exactly the same choice.
Capitalism frees women.Why do we complain that capitalism is sexist and radical even we have found out that some other traditions are more extreme?
A very good idea in this article is that globalization produce homogeneity while it's also a threat to homogeneity.As the world develops, we now can have access to good medicine and food.If we don't have it, we will suffer and endure pain.The homogeneity of wealth and equpment is certainly a good thing. Should we accuse that people degrade just because we eat the same food?
Certainly not. We choose to eat food.The reason why McDonald's and Coca Cola are so famous and popular lies in the fact that they represents good taste and high quality.Your tradition meal is noodles,but will you have noodles all in your life?Having the same food is the outcome of our choice,not because of the enforcement of other countries.
The way to maintain the diversity of culture is let people make their own choice. I think it's quite like the ethic of existentialism.
Existentialism is the notion that we human are born to make choice. We first choose what to be, and then we try hard on it and finally we become what we want to be.
In terms of culture.There are 7 billion people in the world and it means there are roughly 7 billion different choices.We cannot predict every single person's choice,nor should we force him. So people will choose tradition,which in fact is the outcome of choices of our ancestor.
Another enlightening point in this article is that the author explains a fallacy successfully. Cultural preservationists claim that the cheap western clothes make more people to buy and thus the traditional clothes face extinction. But the author that it's based on the fact that people don't have enough money to afford the traditional costume.
This article is about to explain the good points of globalization. We don't need to protect the culture intentionally.Instead, just like one of the basic principles of economics says, people respond to incentive.Just let the people make their own choice based on their interest.Certainly there won't be a circumstance in which 7billion people make exactly the same choice.
10/07/2011
10/7/2011 Class16
Marginal vs Total (Water diamond paradox)
We actually concern how many more product we get rather than concern whether we should get that good or not.
Example: Teachers vs Athletes
Given the amount and the skills of teachers, we value the next teacher not nearly as much as we value the next athletes, so the marginal cost of teachers is low. But if we consider the total cost of the teachers combined, it will exceed that of the athletes.
Context can also be an effect. In a laggard village, people long for education, they need teachers, so teachers in that area are more valuable than athletes.
What we care is the services we can get from buying a certain good. For instance, we buy bottles of water because we can get the convenience of taking it with us.So even if the water is free, when we buy a bottle of water, the service isn't free.
Sunk cost
Resources cannot be recoverable when I make the decisions.
Never pay attention to the sunk cost, or you will make bad decisions.
Example: I paid 200 bucks for a ticket of basketball game,but later on I find that I cannot go because of a meeting. Evaluate: I must go to the game because I spent $200 on it. If I don't go, I will lose the money.
False. The decision whether you should go to the game is based on what cost and benefit you recruit when going to the game. If you go to the game, you will miss the meeting, lose time and energy, and since you have skipped the meeting, you are not happy. So I may lose more just for going to the game for the ticket.
Axioms
(1)Scarcity
(2)Human acts with purpose: People respond to incentives
We tend to do things that can lower the ratio of effort to result.
Our behavior will change when incentives change.
Implication: Law of Unintended consequences.
Example: Seat Belt law.
Outcome: We are safer to drive
People respond: drive a little bit faster and carelessly.
Result: More car accidents happen, less drivers die but more get hurt; pedestrains die more.
We are statistical murders:
The money we use to get the seat belts comes from somewhere. If we put it to public health, for example, we could save more people. Seat belts make the people safer in the car, but they actually "kill" people that are not seen.
We actually concern how many more product we get rather than concern whether we should get that good or not.
Example: Teachers vs Athletes
Given the amount and the skills of teachers, we value the next teacher not nearly as much as we value the next athletes, so the marginal cost of teachers is low. But if we consider the total cost of the teachers combined, it will exceed that of the athletes.
Context can also be an effect. In a laggard village, people long for education, they need teachers, so teachers in that area are more valuable than athletes.
What we care is the services we can get from buying a certain good. For instance, we buy bottles of water because we can get the convenience of taking it with us.So even if the water is free, when we buy a bottle of water, the service isn't free.
Sunk cost
Resources cannot be recoverable when I make the decisions.
Never pay attention to the sunk cost, or you will make bad decisions.
Example: I paid 200 bucks for a ticket of basketball game,but later on I find that I cannot go because of a meeting. Evaluate: I must go to the game because I spent $200 on it. If I don't go, I will lose the money.
False. The decision whether you should go to the game is based on what cost and benefit you recruit when going to the game. If you go to the game, you will miss the meeting, lose time and energy, and since you have skipped the meeting, you are not happy. So I may lose more just for going to the game for the ticket.
Axioms
(1)Scarcity
(2)Human acts with purpose: People respond to incentives
We tend to do things that can lower the ratio of effort to result.
Our behavior will change when incentives change.
Implication: Law of Unintended consequences.
Example: Seat Belt law.
Outcome: We are safer to drive
People respond: drive a little bit faster and carelessly.
Result: More car accidents happen, less drivers die but more get hurt; pedestrains die more.
We are statistical murders:
The money we use to get the seat belts comes from somewhere. If we put it to public health, for example, we could save more people. Seat belts make the people safer in the car, but they actually "kill" people that are not seen.
10/05/2011
10/5/2011 Class15
Broken window fallacy: Destruction boosts economy
Three points to argue:
(1)I don't choose the roof to start with
Society is poorer by the amount you would have gotten from what you desire.
You don't want a roof right;instead, you long for a car. But the destruction forces you to buy a new roof rather than a good car. Your preference and pleasure is impaired.
(2)We lose the value of the responses used for repairing. Before the destruction, I had a roof and 1000 bucks of saving, but now I only have a new roof with nothing else left. All the effort to repair would have been used other ways.
(3)"What if the roofer is unemployed"
Yes the roofer has more work and more money, but he is somewhat forced to do the job.He could have spent some time staying with his family.
Three ways the government get money:
(1)Tax. Jobs are created by taxes. But that also means we have less money to spend.
(2)Borrow. In fact this is the tax tomorrow,which means that in the future we will have less money to spend.
(3)Print money. With too much money floating on the market, inflation may happen.
Why banks hoard money:
(1)get capital in case of future crisis.
(2)recapitalize
Creating jobs may actually in the long run paralyze bank business.
Jobs are a cost. We have to work, using our time and energy, and sacrifice our leisure time.
More people were employed to make guns, tanks. But why was the rise of employment not stimulating?
Consumption level of household decrease because all the resources are shifted to the frontier.
Basic principles of economics
(4)Cost is highly subjective
The cost that matter for economy is never seen and the cost used to make decisions are never imposed on you.
(5)Marginal Analysis. Water and diamond paradox.
Marginal cost of water is low because it's plenty, while the marginal cost of a diamond is big due to its scarcity. But the total cost of water and diamond is just the opposite.
We make our decision according to different situations.
Three points to argue:
(1)I don't choose the roof to start with
Society is poorer by the amount you would have gotten from what you desire.
You don't want a roof right;instead, you long for a car. But the destruction forces you to buy a new roof rather than a good car. Your preference and pleasure is impaired.
(2)We lose the value of the responses used for repairing. Before the destruction, I had a roof and 1000 bucks of saving, but now I only have a new roof with nothing else left. All the effort to repair would have been used other ways.
(3)"What if the roofer is unemployed"
Yes the roofer has more work and more money, but he is somewhat forced to do the job.He could have spent some time staying with his family.
Three ways the government get money:
(1)Tax. Jobs are created by taxes. But that also means we have less money to spend.
(2)Borrow. In fact this is the tax tomorrow,which means that in the future we will have less money to spend.
(3)Print money. With too much money floating on the market, inflation may happen.
Why banks hoard money:
(1)get capital in case of future crisis.
(2)recapitalize
Creating jobs may actually in the long run paralyze bank business.
Jobs are a cost. We have to work, using our time and energy, and sacrifice our leisure time.
More people were employed to make guns, tanks. But why was the rise of employment not stimulating?
Consumption level of household decrease because all the resources are shifted to the frontier.
Basic principles of economics
(4)Cost is highly subjective
The cost that matter for economy is never seen and the cost used to make decisions are never imposed on you.
(5)Marginal Analysis. Water and diamond paradox.
Marginal cost of water is low because it's plenty, while the marginal cost of a diamond is big due to its scarcity. But the total cost of water and diamond is just the opposite.
We make our decision according to different situations.
10/03/2011
10/3/2011 Class 14
Basic economic principles (How people make decisions, how people interact and how the economy as a whole works)
(1)People have to face trade-offs.
When resources are scarce, making decisions requires trading one thing off for another. Nothing is free.
When we actually execute trade-offs, they reveal something very much about our value.
Efficiency refers to the size of economic pie and equity refers to how the pie is divided.
The way to give rich people's money to the poor is harmful.
The definition of free is that: if something is truly free,then when we produce or consume it,we don't use any resources whatsoever.
Example:
(1)Is there a free library?
No. We spend time and energy getting to the library and read the books, which are made by workers, and we sit in the library, built by workers who use bricks,stones,etc.
(2)Is health care free?
No. Other people pay for it and the doctors provide us the services.
(3)FDA
Drug lag: the medicine research is long and costly. What's seen is that the test can ensure the medicine is effective and won't cause side-effect.What's not seen is that many people who wait for it could have benefited, but they suffer or die because the test makes the medicine unavailable.
Drug loss: the marginal cost of a new kind of medicine is so big that it leaves fewer profit opportunity for the medicine company so they have no incentive to produce. As a result, people get fewer drugs and suffer.
Incentives of FDA: If they are not prudent, they will end their careers and reputation once the medicine released by them hurt patients; if they do all the things right, no people will say thanks to them but they can get a bigger budget from the government. So FDA would rather prolong the test of medicine.
What is a COST?
cost is anything that consumes resources.
Tax is not a cost because no resources are consumed in the process of getting tax.It's merely a transfer.
If you actually change people's behavior in the way that they consume resources or in the way that doesn't make those resources come into being, then it's costly.
(2)Opportunity cost. The net value of your second best opportunity.
When I buy something, I'm thinking about how much pleasure I can buy from that thing at the current price.
Example:
I win a ticket to see Bruce's show and it is no-resell.My second choice is to see Barry's show. I must pay 40 bucks for the ticket but I can buy 50 bucks of utility.What's the opportunity cost when I go to the Bruce show?
$10. I forgo the chance to see Barry's performance and thus I lose $50 of pleasure, but since I have to pay 40 dollars for the show, I can keep the money in my pocket due to my decision. The net loss is 10 bucks.And since I decide to see Bruce, the value of his show is at least $10, or I won't go for it.
When I buy something, I actually think that it is more worthy than its price.
If I throw the coin to decide which show to watch, I'm actually inclined to see Barry because I have at least to pay for the ticket while at the same time I don't feel excited to see Bruce even if the ticket is free.
Broken window fallacy: Destruction boosts GDP.
(1)No new jobs are created. What's seen is the working people who build the houses, what's not seen is that butcher, car salesmen don't have business.
(2)I have to spend money unwillingly in repairing rather than buying what I desire.
(1)People have to face trade-offs.
When resources are scarce, making decisions requires trading one thing off for another. Nothing is free.
When we actually execute trade-offs, they reveal something very much about our value.
Efficiency refers to the size of economic pie and equity refers to how the pie is divided.
The way to give rich people's money to the poor is harmful.
The definition of free is that: if something is truly free,then when we produce or consume it,we don't use any resources whatsoever.
Example:
(1)Is there a free library?
No. We spend time and energy getting to the library and read the books, which are made by workers, and we sit in the library, built by workers who use bricks,stones,etc.
(2)Is health care free?
No. Other people pay for it and the doctors provide us the services.
(3)FDA
Drug lag: the medicine research is long and costly. What's seen is that the test can ensure the medicine is effective and won't cause side-effect.What's not seen is that many people who wait for it could have benefited, but they suffer or die because the test makes the medicine unavailable.
Drug loss: the marginal cost of a new kind of medicine is so big that it leaves fewer profit opportunity for the medicine company so they have no incentive to produce. As a result, people get fewer drugs and suffer.
Incentives of FDA: If they are not prudent, they will end their careers and reputation once the medicine released by them hurt patients; if they do all the things right, no people will say thanks to them but they can get a bigger budget from the government. So FDA would rather prolong the test of medicine.
What is a COST?
cost is anything that consumes resources.
Tax is not a cost because no resources are consumed in the process of getting tax.It's merely a transfer.
If you actually change people's behavior in the way that they consume resources or in the way that doesn't make those resources come into being, then it's costly.
(2)Opportunity cost. The net value of your second best opportunity.
When I buy something, I'm thinking about how much pleasure I can buy from that thing at the current price.
Example:
I win a ticket to see Bruce's show and it is no-resell.My second choice is to see Barry's show. I must pay 40 bucks for the ticket but I can buy 50 bucks of utility.What's the opportunity cost when I go to the Bruce show?
$10. I forgo the chance to see Barry's performance and thus I lose $50 of pleasure, but since I have to pay 40 dollars for the show, I can keep the money in my pocket due to my decision. The net loss is 10 bucks.And since I decide to see Bruce, the value of his show is at least $10, or I won't go for it.
When I buy something, I actually think that it is more worthy than its price.
If I throw the coin to decide which show to watch, I'm actually inclined to see Barry because I have at least to pay for the ticket while at the same time I don't feel excited to see Bruce even if the ticket is free.
Broken window fallacy: Destruction boosts GDP.
(1)No new jobs are created. What's seen is the working people who build the houses, what's not seen is that butcher, car salesmen don't have business.
(2)I have to spend money unwillingly in repairing rather than buying what I desire.
10/02/2011
What's seen and not seen Theater and fine arts
In this article, Bastiat once again claims that government should make sure that the market show its magic without intervention. The important part is that government should show its efficiency and usefulness in spending taxes.
Theaters and fine arts are actually people's mental desire for satisfaction, its marginal benefit is greater than basic necessities'.
I agree that the government shouldn't control the market at most of the time, but since in the free market, people trade and do business based on their self interest rather than mercy, they may abandon valuable while unprofitable things, which are common especially in the field of art. And according to one of the ten basic principles of economics, free market alone sometimes will also make mistake in allocating resources. What I doubt is the claim that all the vital forces of society should develop harmoniously under the influence of liberty.
An counterexample is that one of the most traditional art in China,Kunqu opera, once faced extinction during and immediately after the war against Japan. No artists would perform and teach the opera at the risk of starvation and slaughter and business men couldn't sponsor. At last, the Kunqu opera was subsidized by Chinese government after 1949. Artists and business men themselves sometimes cannot develop the art due to riots, the support of government can help a lot.
My question, if a traditional form of art is about to face extinction, should the government intervene or at least call for people to pay attention to it?
Theaters and fine arts are actually people's mental desire for satisfaction, its marginal benefit is greater than basic necessities'.
I agree that the government shouldn't control the market at most of the time, but since in the free market, people trade and do business based on their self interest rather than mercy, they may abandon valuable while unprofitable things, which are common especially in the field of art. And according to one of the ten basic principles of economics, free market alone sometimes will also make mistake in allocating resources. What I doubt is the claim that all the vital forces of society should develop harmoniously under the influence of liberty.
An counterexample is that one of the most traditional art in China,Kunqu opera, once faced extinction during and immediately after the war against Japan. No artists would perform and teach the opera at the risk of starvation and slaughter and business men couldn't sponsor. At last, the Kunqu opera was subsidized by Chinese government after 1949. Artists and business men themselves sometimes cannot develop the art due to riots, the support of government can help a lot.
My question, if a traditional form of art is about to face extinction, should the government intervene or at least call for people to pay attention to it?
10/01/2011
Economics and happiness
Easterlin paradox
1) Within a society, rich people tend to be much happier than poor people.
2) But, rich societies tend not to be happier than poor societies (or not by much).
3) As countries get richer, they do not get happier.
Easterlin argued that life satisfaction does rise with average incomes but only up to a point. Beyond that the marginal gain in happiness declines.
Relative income hypothesis:
Individual's attitude to consumption and saving is dictated more by his income in relation to others than by abstract standard of living. So people really care about how their living standard is compared to their neighbor's.
Justin is against Easterlin paradox:
1) Rich people are happier than poor people
2) Richer countries are happier than poorer countries
3) As countries get richer, they tend to get happier.
In the long run, GDP and happiness tend to move together.
Happiness is measured by survey, but the question is its accuracy and reliability.
What's interesting is that Justin looks differently at the graph which shows that American people are not happier although the increase of GDP is remarkable.
(1)The survey excludes rich people.
(2)The GDP growth is not equal to every American, so most people don't have increase of wealth, and thus they are not happier.
My question is : Are countries happier because they are richer or maybe happier countries become richer because of more optimism in making decisions about investments or something else?
I also think it a good point made by Bob Frank that adaption of context can make us happy. He combines biology with economics, which is very novel to me.
I think it plausible to consider Charles Darwin as the pioneer of economics. Darwin's opinion is natural selection, which emphasizes competition, and it is exactly the essence of free market. But personally I still regard Adam Smith as the first full time economist ever.
1) Within a society, rich people tend to be much happier than poor people.
2) But, rich societies tend not to be happier than poor societies (or not by much).
3) As countries get richer, they do not get happier.
Easterlin argued that life satisfaction does rise with average incomes but only up to a point. Beyond that the marginal gain in happiness declines.
Relative income hypothesis:
Individual's attitude to consumption and saving is dictated more by his income in relation to others than by abstract standard of living. So people really care about how their living standard is compared to their neighbor's.
Justin is against Easterlin paradox:
1) Rich people are happier than poor people
2) Richer countries are happier than poorer countries
3) As countries get richer, they tend to get happier.
In the long run, GDP and happiness tend to move together.
Happiness is measured by survey, but the question is its accuracy and reliability.
What's interesting is that Justin looks differently at the graph which shows that American people are not happier although the increase of GDP is remarkable.
(1)The survey excludes rich people.
(2)The GDP growth is not equal to every American, so most people don't have increase of wealth, and thus they are not happier.
My question is : Are countries happier because they are richer or maybe happier countries become richer because of more optimism in making decisions about investments or something else?
I also think it a good point made by Bob Frank that adaption of context can make us happy. He combines biology with economics, which is very novel to me.
I think it plausible to consider Charles Darwin as the pioneer of economics. Darwin's opinion is natural selection, which emphasizes competition, and it is exactly the essence of free market. But personally I still regard Adam Smith as the first full time economist ever.
Subscribe to:
Posts (Atom)