The economics of price controls
Price ceilings---rent controls
Initial market equilibrium of rent: Price=$1000, Quantity=12000
Controlled market "equilibrium" of rent: Price=$800, Quantity demanded=14000, quantity supplied=10000 Shortage occurs when there is a binding price ceiling
Price ceiling is binding when the price is set below free market equilibrium price, which will then create shortage.
What's rent?
(1)a payment for the use for capitals
(2)something that accrues to you that is not a result of your productiviality.
When there is a binding price ceiling, quantity demanded increases and quantity supplied decreases.
Question: Does shortage mean scarcity?
No. Scarcity is permanent and ubiquitous. People's wants are unlimited. Shortage is a price phenomenon. As for price ceiling, in the short run there is no physical scarcity of houses but an artificially low price stimulate more quantity demanded; in the long run suppliers respond to incentives, giving money to some areas that are more profitable. Thus a scarcity of houses may really occur.
Consequences of rent control.
(1) A shortage of houses means the reduction of availability.
Some other ways of rationing will appear.
<1> Queue: but it means that you have to sacrifice your time and energy, which is quite precious to many people.
<2> Favored group: you have to impress the landlord, which may be costly.(bribe, race, gender, sex, size of family,etc)
<3> Blackmarket: I will talk about it later
(2) The deterioration of quality.
When in a free market, landlords have to keep their houses clean and comfortable in order to attract the customers. But with the appearance of binding price ceiling, landlords cannot charge a price higher than the regulated price, so he is now unwilling to spend time and money maintaining the quality of the house; besides, since there are more customers than before, landlords can get satisfaction even though they don't keep the house in a high quality.
Price ceiling means that suppliers no longer have to please the customers.
(3) Other money may be paid by other customers: some people value the house more than the ceiling price, so they wanna pay more. Black market will appear. High prices not only show how people value the house, it also present the risk of selling house illegally, so the price in the black market is often exorbitantly higher than the free market price.
(4) Misallocation
People who value the house more may not get the house.
(5) Impact on other market
Suppose the 4000 people who cannot get the house in this city go to buy house in the countryside, thus the increase of quantity demanded in the countryside will increase the price (the demand curve shifts out because of the increase of number of buyers)
(6)Fairness
First, the binding price ceiling is unfair to landlords, who cannot charge a higher price. Second, the price ceiling law is intended to let poor people get houses, but the fact is that the poor will bear great loss. Price ceiling won't bother rich people because for them they can buy house in black market or become favored group of landlords easily, but the poor have to spend more time and energy looking for houses, and end up with living in bad quality houses.
Finally, the fucking stupid law is unfair to the whole society because it stops people from reaching an agreement in a higher price and quality. The social freedom and liberty will be hurt.
(7) The reduced cost in discrimination.
Free market clearing: there is no customers right there when you refused one, you have to look for another one, advertise more and keep the house vacant longer. So it doesn't mean that there is no discrimination in the free market, but you have to pay for it.
With the binding price ceiling, however, there are more buyers, so landlord can now use discrimination as a tool to choose customers.
But on the other hand, Landlord so social good because they still give the house to some people.
(8) Monitoring/enforce costs
<1> long run rent supply will shift in and becomes flatter
<2> the people and resources spent monitoring are not producing goods and services that people want.If destructive things following the price ceiling law, like riots, never happen, why do we pay for the monitoring. We enforce the law, we create the problems, and now we use resources to quell the problems, isn't it a cost?
<3> The government could have done something else more constructive.
11/30/2011
11/28/2011
Anthropology
Plato's philosophy included the belief that things in the physical world, including social structures, imperfectly reflected ideal forms of those things that exist outside experience. A priori: Philosophical term referring to ideas, propositions, or concepts not derived from direct experience, but from self-evident propositions(主张).
Aristotle's philosophy of nature was inherently teleological (目的论的): that is, his comprehension of living things was fully informed by a belief that all of nature is imbued with a purpose.Form is inseparable from function.
The major impetus for the development of anthropology was European colonial expansion. Two perspectives for interpreting native societies. (1)Native societies somehow represented a pristine and unadulterated condition, free of the burden of civilized life. The native were innocent and ignorant, yet capable of learning. (2) Natives were uncivilized, they lacked Christianity. So it was the mission of Christian Europe to convert them.
The missionary enterprise thus became an integral and paradoxical feature of European colonial expansion. Natives were exploited for economic reasons and at the same time introduced to Christianity for compassionate reasons.
Hobbes claims in his book Leviathan that human are kept in constant motion by the force of the desire for self-preservation. The human state of nature is one of war between individuals. People compete but reason that people born equal, so they enter a social contract and surrender their rights to a sovereign. All the people combine into one single mind. The government is like Leviathan (a monster written in the Bible). It is made by human, run by human but it simultaneously protect and hurt people.
Puferdolf thought that human nature is expressed through the process of becoming social, an end toward which humans strive as a means of escape from an asocial condition. He claimed that Marriage, the basic unit of social organization, as a crucial step toward society.
According to Rousseau, human progress consisted in the acquisition of property and the creation of artificial societies within which individuals lost their equitable status.
Aristotle's philosophy of nature was inherently teleological (目的论的): that is, his comprehension of living things was fully informed by a belief that all of nature is imbued with a purpose.Form is inseparable from function.
The major impetus for the development of anthropology was European colonial expansion. Two perspectives for interpreting native societies. (1)Native societies somehow represented a pristine and unadulterated condition, free of the burden of civilized life. The native were innocent and ignorant, yet capable of learning. (2) Natives were uncivilized, they lacked Christianity. So it was the mission of Christian Europe to convert them.
The missionary enterprise thus became an integral and paradoxical feature of European colonial expansion. Natives were exploited for economic reasons and at the same time introduced to Christianity for compassionate reasons.
Hobbes claims in his book Leviathan that human are kept in constant motion by the force of the desire for self-preservation. The human state of nature is one of war between individuals. People compete but reason that people born equal, so they enter a social contract and surrender their rights to a sovereign. All the people combine into one single mind. The government is like Leviathan (a monster written in the Bible). It is made by human, run by human but it simultaneously protect and hurt people.
Puferdolf thought that human nature is expressed through the process of becoming social, an end toward which humans strive as a means of escape from an asocial condition. He claimed that Marriage, the basic unit of social organization, as a crucial step toward society.
According to Rousseau, human progress consisted in the acquisition of property and the creation of artificial societies within which individuals lost their equitable status.
11/28/2011 Class36
Some properties of equilibrium price
consider a stylized economy with 5 sellers and 5 consumers
A central planner may select the wrong producer (they cannot produce the good with the lowest cost), or may allocate the goods to wrong customers (they value the goods less than their current price).
Giving goods to a wrong customers cause deadweight lost.
A simple supposition:
If the world consists of only two people A and B, and there is only one guitar worth 20 bucks. A values the guitar at $15 while B values it $25. If the guitar is giving to B, B will get a consumer surplus of 5 dollars while A,since he doesn't get what he want, will bear a loss of 15 bucks.(Suppose there is only one good, a guitar, in the world) And the loss of a society is 10 bucks.
But now if the guitar is giving to A, he will gain 5 bucks of consumer surplus but B, who is deprived of the good, will stand a 25 bucks loss. And the net loss of a society is now 20 dollars.
The similar story can be applied to suppliers as well.
So price system forces customers and producers to examine what they want and what they need to produce. Other ways will impoverish the poor.Central planners simply don't have all the information to make every single decision right.
If there is underproduction and overproduction, consumer and producer surplus will be affect and deadweight loss will occur.
What's the difference when government do trial and error and market do trial and error?
My thought is that:
(1) The government officials are not producers, who acquire the tacit knowledge about how to cut the cost as much as possible while maintaining the quality. (Knowledge problem)
(2) There are too many commodities to allocate, so the men in the government are not enough. Even though the government sets up, for example, pork allocation bureau, beef allocation bureau, the bureaus need bureaucrats to work, they need fund, which will be hugely costly.
(3) Suppose the government can solve the problem of fund. But another question is that these bureaucrats have a greater opportunity cost to do these kinds of jobs. In other words, they have a comparative disadvantages in doing searches than other people , i.e middlemen and producers.
(4) With the very existence of self-interest, no one can be sure that the allocation can be equal and fair. Officials may take bribe or give goods to their friends. Even some people complain that they don't get what they want, the officials can simply say that it's the very outcome of "trial and error"---there need to be mistakes and sacrificers.
(5)The role of government is to enforce the law to protect the citizens from being hurt by dictators. Another role is to control the budget. Hayek points out that the law should be objective and predictable, and stable, letting people know what punishment they will get when break the law. If the government does trial and error, there can be constant change in law, confusing people and giving chances to speculators to get illegal profit. (Actually this is one of the problems in Chinese government policy)
(6)In Bureaucracy, Mises points out that government actions, though can be valuable, cannot be valued by money. The task of bureaucrats is to obey the rule unlike the enterprises, whose task is to produce and get profit under the profit motive. The profit motive forces free enterprise to care about customers needs and desires (this is another implication that no man is free: we have property rights but we have to produce things based on others' preferences). But bureaucrats don't have that incentives. They are not using their own capitals, so they don't have to take great economic calculations before making decisions. So they may stumble upon some good allocation, but as I said, it may be fluke.
consider a stylized economy with 5 sellers and 5 consumers
A central planner may select the wrong producer (they cannot produce the good with the lowest cost), or may allocate the goods to wrong customers (they value the goods less than their current price).
Giving goods to a wrong customers cause deadweight lost.
A simple supposition:
If the world consists of only two people A and B, and there is only one guitar worth 20 bucks. A values the guitar at $15 while B values it $25. If the guitar is giving to B, B will get a consumer surplus of 5 dollars while A,since he doesn't get what he want, will bear a loss of 15 bucks.(Suppose there is only one good, a guitar, in the world) And the loss of a society is 10 bucks.
But now if the guitar is giving to A, he will gain 5 bucks of consumer surplus but B, who is deprived of the good, will stand a 25 bucks loss. And the net loss of a society is now 20 dollars.
The similar story can be applied to suppliers as well.
So price system forces customers and producers to examine what they want and what they need to produce. Other ways will impoverish the poor.Central planners simply don't have all the information to make every single decision right.
If there is underproduction and overproduction, consumer and producer surplus will be affect and deadweight loss will occur.
What's the difference when government do trial and error and market do trial and error?
My thought is that:
(1) The government officials are not producers, who acquire the tacit knowledge about how to cut the cost as much as possible while maintaining the quality. (Knowledge problem)
(2) There are too many commodities to allocate, so the men in the government are not enough. Even though the government sets up, for example, pork allocation bureau, beef allocation bureau, the bureaus need bureaucrats to work, they need fund, which will be hugely costly.
(3) Suppose the government can solve the problem of fund. But another question is that these bureaucrats have a greater opportunity cost to do these kinds of jobs. In other words, they have a comparative disadvantages in doing searches than other people , i.e middlemen and producers.
(4) With the very existence of self-interest, no one can be sure that the allocation can be equal and fair. Officials may take bribe or give goods to their friends. Even some people complain that they don't get what they want, the officials can simply say that it's the very outcome of "trial and error"---there need to be mistakes and sacrificers.
(5)The role of government is to enforce the law to protect the citizens from being hurt by dictators. Another role is to control the budget. Hayek points out that the law should be objective and predictable, and stable, letting people know what punishment they will get when break the law. If the government does trial and error, there can be constant change in law, confusing people and giving chances to speculators to get illegal profit. (Actually this is one of the problems in Chinese government policy)
(6)In Bureaucracy, Mises points out that government actions, though can be valuable, cannot be valued by money. The task of bureaucrats is to obey the rule unlike the enterprises, whose task is to produce and get profit under the profit motive. The profit motive forces free enterprise to care about customers needs and desires (this is another implication that no man is free: we have property rights but we have to produce things based on others' preferences). But bureaucrats don't have that incentives. They are not using their own capitals, so they don't have to take great economic calculations before making decisions. So they may stumble upon some good allocation, but as I said, it may be fluke.
11/27/2011
American way of success
It seems that most of the gangster movies put great emphasis on people with low social status: In Goodfellas, Henry Hill starts his career as a child raised in a poor immigrant family; in Scarface, the main character Tony Montana is a political refugee from Cuba; even the majestic Don Vito Corleone in The Godfather gets his business started as an ordinary immigrant worker from Sicily. Some people may reason that, “Well, that’s because The Godfather trilogy is so influential that later gangster movies emulate it.” But I don’t think this opinion proper because back to 1930s, the big three gangster movies---- Little Caesar, Scarface and Public enemy all focused on crime careers of ordinary people. So what makes this movie genre pay significant attention to underdogs? Does it have relationship with America
I do not choose to be a common person. It is my right to be uncommon—if I can. I seek opportunity-not security. I do not wish to be a kept citizen, humbled and dulled by having the state look after me. I want to be the calculated risk, to dream and build, to fail and to succeed. I refuse to barter incentive for a dole; I prefer the challengers of life to the guaranteed existence, the thrill of fulfillment to the state calm of Utopia. I will not trade my freedom for beneficence nor my dignity a handout. I will never cower before any master nor bend to any threat. It is my heritage to stand erect, proud and unafraid, to think and act for myself, to enjoy the benefit of my creations and to face the world boldly and say: This, with God’s help, I have done.
This is the entrepreneur creed in Thomas Paine’s brochure Common Sense. It points out the reason why America , once the colony of Britain America
Rooted in America
The gangsters from rags to respectability are actually a metaphor of American entrepreneurs in real life. Thrown in a free market filled with fierce competition, entrepreneurs, like Steve Jobs and Larry Page, started their careers humbly (It’s interesting that they both used garages as offices), endured skepticism and pressure, and finally gets to the top of the world. What’s amazing about America America
Robin Hood and Robber Barons
The gangsters' origins in industrial America can be found in the actions and attitudes of men like Cornelius Vanderbilt, Jim Fisk, Jay Gould, Andrew Carnegie, John D. Rockefeller and J.P.Morgan---the captain of capital who dominated America's age of enterprise.The Robber Barons, the richest and most powerful men in America, were so named by journalist E.L. Godkin because they behaved like the feudal German noblemen who extorted money from passersby and acted as a law unto themselves.
For a robber baron, as for a gangster, the first step was to organize and centralize the corporation. A climate of secret prevailed. At the same time, Robber Barons who controlled corporations felt no responsibility to the stockholders, whom they regarded as pawns in their financial maneuverings. Robber Barons meant to keep their employees in line by using armed thugs, and like movie gangsters, they would kill when their property was threatened. The Robber Barons saw nothing unusual or extreme in eliminating competition by any means necessary. They despised laws and used politicians as a club for beating down rivals and organized workers.
Robber barons is a pejorative term used to describe businessmen who acquire wealth by questionable means.
This term was used first by Mathew Johnsephson in Depression, but later Allan Nevins claims that though tycoons like Rockefeller may have engaged in some illicit business practices, this should overshadow his bringing order to industrial chaos of the day. The debate about the morality of big businessman was seen useless by Alfred Chandler, who contended that industrializing America was a historical process and not a play of good verses evil..
For a robber baron, as for a gangster, the first step was to organize and centralize the corporation. A climate of secret prevailed. At the same time, Robber Barons who controlled corporations felt no responsibility to the stockholders, whom they regarded as pawns in their financial maneuverings. Robber Barons meant to keep their employees in line by using armed thugs, and like movie gangsters, they would kill when their property was threatened. The Robber Barons saw nothing unusual or extreme in eliminating competition by any means necessary. They despised laws and used politicians as a club for beating down rivals and organized workers.
Robber barons is a pejorative term used to describe businessmen who acquire wealth by questionable means.
This term was used first by Mathew Johnsephson in Depression, but later Allan Nevins claims that though tycoons like Rockefeller may have engaged in some illicit business practices, this should overshadow his bringing order to industrial chaos of the day. The debate about the morality of big businessman was seen useless by Alfred Chandler, who contended that industrializing America was a historical process and not a play of good verses evil..
11/26/2011
"Enough to buy back the product"
Functional prices are those that encourages the largest volume of production and the largest volume of sales. Functional wages are those that tend to bring about the highest volume of employment and the largest real payrolls.
Everyone's income is his purchasing power for buying what others have to sell. Every increase in hourly wages is an increase in costs of production. Besides, if wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly rates.
The national product is neither created nor bought by manufacturing labor alone. It is bought by everyone who contributes toward making the product.
The best wage rates for labor are the wage rates that permit full production, full employment and largest sustained payrolls. The best profits are the one that can encourage most people to become employers or to provide more employment than before.
The function of profits
Corporate profits average less than 6 percent of the national income.Some eminent economists believe that after a long period of time no net profit at all may be left over, and that there may even be a net loss. This is not at all because entrepreneurs are intentional philanthropists, but because their optimism and self-confidence too often lead them into ventures that do not succeed. In any period in which there has been net capital accumulation, however, the presumption is strong that there must also have been overall net profits from previous investment.
(1) profits guide and channel the factors of production so as to allocate / apportion the relative output of commodities in accordance with demand.
(2) put constant and unremitting pressure on the head of every competitive business to introduce further economics and efficiencies.
What to produce and how to produce
The assault on saving
Saving is only another form of spending.
Consumer spend less currently (1)partly because they fear they may lose their jobs and they wish to make sure that their power to consume will be extended over a longer period if they do lose their jobs. (2)Expectation of future price.
Unsettlement will be caused in the capital goods industries by a sudden and substantial decrease in savings. If money that is previously used to invest in the capital goods is now shifted into consumer goods, it will increase the price of goods(decrease of purchasing power) and unemployment in the long run (less capital goods)
Similarly, if a huge amount of money used to invest in the consumer goods is now used in the capital goods, the price of goods will decrease and there will be fewer suppliers. (No incentive to produce)
Everyone's income is his purchasing power for buying what others have to sell. Every increase in hourly wages is an increase in costs of production. Besides, if wages are pushed up above the point of marginal productivity, the decrease in employment would normally be from three to four times as great as the increase in hourly rates.
The national product is neither created nor bought by manufacturing labor alone. It is bought by everyone who contributes toward making the product.
The best wage rates for labor are the wage rates that permit full production, full employment and largest sustained payrolls. The best profits are the one that can encourage most people to become employers or to provide more employment than before.
The function of profits
Corporate profits average less than 6 percent of the national income.Some eminent economists believe that after a long period of time no net profit at all may be left over, and that there may even be a net loss. This is not at all because entrepreneurs are intentional philanthropists, but because their optimism and self-confidence too often lead them into ventures that do not succeed. In any period in which there has been net capital accumulation, however, the presumption is strong that there must also have been overall net profits from previous investment.
(1) profits guide and channel the factors of production so as to allocate / apportion the relative output of commodities in accordance with demand.
(2) put constant and unremitting pressure on the head of every competitive business to introduce further economics and efficiencies.
What to produce and how to produce
The assault on saving
Saving is only another form of spending.
Consumer spend less currently (1)partly because they fear they may lose their jobs and they wish to make sure that their power to consume will be extended over a longer period if they do lose their jobs. (2)Expectation of future price.
Unsettlement will be caused in the capital goods industries by a sudden and substantial decrease in savings. If money that is previously used to invest in the capital goods is now shifted into consumer goods, it will increase the price of goods(decrease of purchasing power) and unemployment in the long run (less capital goods)
Similarly, if a huge amount of money used to invest in the consumer goods is now used in the capital goods, the price of goods will decrease and there will be fewer suppliers. (No incentive to produce)
The role of government in a free society
A good society requires that its members agree on the general conditions that will govern relations among them, on some means of arbitrating different interpretations of these conditions, and on some device for enforcing compliance with the generally accepted rules. In both games and society also, no set of rules can prevail unless most participants most of the time conform to them without external sanctions; unless that is, there is a broad underlying social consensus.But we cannot rely on custom or on this consensus alone to interpret and to enforce the rules; we need an umpire.
So the basic roles of government in free society: To provide means whereby we can modify the rules, and to enforce compliance with the rules on the part of those few who would otherwise not play the game.
Exchange is truly voluntary only when nearly equivalent alternatives exist. Monopoly implies the absence of alternatives and thereby inhibits effective freedom of exchange.
Externalities should be controlled by government.
Freedom is a tenable objective only for responsible individuals.
So the basic roles of government in free society: To provide means whereby we can modify the rules, and to enforce compliance with the rules on the part of those few who would otherwise not play the game.
Exchange is truly voluntary only when nearly equivalent alternatives exist. Monopoly implies the absence of alternatives and thereby inhibits effective freedom of exchange.
Externalities should be controlled by government.
Freedom is a tenable objective only for responsible individuals.
Milton Friedman The relation between economic freedom and political freedom
The paternalistic "what your country can do for you" implies that government is the patron, the citizen the ward, a view that is at odds with the free man's belief in his own responsibility for his own destiny. The organismic, "what you can do for your country" implies that government is the master or the deity, the citizen, the servant or the votary. Free man recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.
The free man will ask "What can I and my compatriots do through government". The great threat to freedom is the concentration of power.
How can we benefit from the promise of government while avoiding the threat of freedom?
(1) The scope of government must be limited. It's function is to preserve law and order, to enforce private contracts, to foster competitive free markets. It may enable us to accomplish jointly what we would find it more difficult or expensive to accomplish severally, but we should be cautious before we do that.
(2)Government power must be dispersed.
Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.
The possibility of co-ordination through voluntary co-operation rests on the elementary--yet frequently denied---proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed.
What makes specialization of function and division of labor go further?
Middlemen(lower the transactions costs) and money(neutral instrument).
The consumer is protected form the coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected form coercion by the buyer because of the presence of other buyers with whom he can sell.
Government is essential both as a forum for determining "rules of game" and as an umpire to interpret and enforce the rules decided on.
The free man will ask "What can I and my compatriots do through government". The great threat to freedom is the concentration of power.
How can we benefit from the promise of government while avoiding the threat of freedom?
(1) The scope of government must be limited. It's function is to preserve law and order, to enforce private contracts, to foster competitive free markets. It may enable us to accomplish jointly what we would find it more difficult or expensive to accomplish severally, but we should be cautious before we do that.
(2)Government power must be dispersed.
Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.
The possibility of co-ordination through voluntary co-operation rests on the elementary--yet frequently denied---proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed.
What makes specialization of function and division of labor go further?
Middlemen(lower the transactions costs) and money(neutral instrument).
The consumer is protected form the coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected form coercion by the buyer because of the presence of other buyers with whom he can sell.
Government is essential both as a forum for determining "rules of game" and as an umpire to interpret and enforce the rules decided on.
11/25/2011
The fetish of full employment
The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor. Translated into national terms, this means that our real objective is to maximize productions.
Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself.
The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs.
Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself.
The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs.
Disbandiing troops and bureaucrats
It's true that, when millions of men are suddenly released, it may require time for private industry to reabsorb them. But the fears of unemployment arise because people look at only one side of the process.
The soldiers previously supported by civilians will not become merely civilians supported by other civilians. They will become self-supporting civilians.
If excessive bureaucrats are not retained in office, the taxpayers will be permitted to keep the money that was formerly taken form them for the support of the bureaucrats. The officeholders must now seek private jobs or set up private business and the added purchasing power of the taxpayers will encourage this.
The soldiers previously supported by civilians will not become merely civilians supported by other civilians. They will become self-supporting civilians.
If excessive bureaucrats are not retained in office, the taxpayers will be permitted to keep the money that was formerly taken form them for the support of the bureaucrats. The officeholders must now seek private jobs or set up private business and the added purchasing power of the taxpayers will encourage this.
The use of knowledge in society
The article tells us that in a free market we don't have to possess all the information; instead, we just have to understand what we are comparatively good at and pursue maximum profit. For a central-planning country leader, however, he must be omniscient, which is simply impossible.
What's intuitive in this article is that Hayek points out: Knowledge which all separate individuals possess is dispersed while incomplete and frequently contradicted.
As the technology and science are becoming more and more complex, it's impossible to appear encyclopedia scholar or leader. Even in economics there are polarized views on the same phenomenon.
Important point: The problem of a society is how to secure the best use of resources known to any of the members of society for ends whose relative importance only those individuals know. (Tacit Knowledge)
Any dictator who wants to do the planning should be impersonal. But is that possible? Even if there really exists philosophers as Plato described, they simply are not god who can make response quick enough to adjust any tiny change within the market. (Besides, God is dead. There is no fucking god who can save me. The only way is to evolve into overman.)
What's great:
Scientific knowledge is not the sum of knowledge. Too much pursuit of scientific knowledge separates intellectuals and businessmen, making the former lofty and cynical, which is really fucking ridiculous. Wisdom and rumination cannot occur without necessary food and products, which are produced by producers and gathered together by middlemen.
Those who advocate altruism is quack. People do things for themselves.(Please refer to John List's economic experiments) Those who condemn capitalism immoral are freaks. People do things based on self-interest.
A doubt: If people are really that altruist, why is there shortage of kidney donations?
A man doesn't have to know all the information. All that's significant for him is how much more or less difficult to produce they have become compared with other things with which he's also concerned, or how much more or less urgently wanted are the alternative things he uses or produces.
Whitehead: Civilization advances by extending the number of important operations which we can perform without thinking about them.
The price system is just one of those formations which man has learned to use after he had stumbled upon it without fully understanding.
What's intuitive in this article is that Hayek points out: Knowledge which all separate individuals possess is dispersed while incomplete and frequently contradicted.
As the technology and science are becoming more and more complex, it's impossible to appear encyclopedia scholar or leader. Even in economics there are polarized views on the same phenomenon.
Important point: The problem of a society is how to secure the best use of resources known to any of the members of society for ends whose relative importance only those individuals know. (Tacit Knowledge)
Any dictator who wants to do the planning should be impersonal. But is that possible? Even if there really exists philosophers as Plato described, they simply are not god who can make response quick enough to adjust any tiny change within the market. (Besides, God is dead. There is no fucking god who can save me. The only way is to evolve into overman.)
What's great:
Scientific knowledge is not the sum of knowledge. Too much pursuit of scientific knowledge separates intellectuals and businessmen, making the former lofty and cynical, which is really fucking ridiculous. Wisdom and rumination cannot occur without necessary food and products, which are produced by producers and gathered together by middlemen.
Those who advocate altruism is quack. People do things for themselves.(Please refer to John List's economic experiments) Those who condemn capitalism immoral are freaks. People do things based on self-interest.
A doubt: If people are really that altruist, why is there shortage of kidney donations?
A man doesn't have to know all the information. All that's significant for him is how much more or less difficult to produce they have become compared with other things with which he's also concerned, or how much more or less urgently wanted are the alternative things he uses or produces.
Whitehead: Civilization advances by extending the number of important operations which we can perform without thinking about them.
The price system is just one of those formations which man has learned to use after he had stumbled upon it without fully understanding.
11/24/2011
The rise and fall of businesses
Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward.
Industries and commerce are not static things, but dynamic processes, in which particular products, individual companies and whole industries rise and fall, as a result of relentless competition under changing conditions.
The company which first introduces a product that consumers like may make large profits, but those very profits attract more investments into existing companies and encourage new companies to form, and thus drive down the price.
Losses force business to change with changing conditions and shift to what they are comparatively good at.
Knowledge is one of the scarcest of all resources in any economy and the insight distilled from knowledge is even more scarce.
Industries and commerce are not static things, but dynamic processes, in which particular products, individual companies and whole industries rise and fall, as a result of relentless competition under changing conditions.
The company which first introduces a product that consumers like may make large profits, but those very profits attract more investments into existing companies and encourage new companies to form, and thus drive down the price.
Losses force business to change with changing conditions and shift to what they are comparatively good at.
Knowledge is one of the scarcest of all resources in any economy and the insight distilled from knowledge is even more scarce.
Is there any remedy available?
It's useless to blame bureaucrats' slowness and slackness; it is vain to lament over the fact that the assiduity, carefulness, and painstaking work or the average bureau clerks are below those of the average worker in private business. In the absence of an unquestionable yardstick if success and failure it is almost impossible for the vast majority of men to find that incentive to utmost exertion that the money calculation of profit-seeking business easily provides.
The psychological consequences of bureaucratization
It's evident that youth is the first victim of the trend toward bureaucratization. The young men are deprived of any opportunity to shape their own fate.They are in fact "lost generation" because they lack the most precious right of every rising generation, the right to contribute something new to the old inventory of civilization.
In the communist manifesto the instances used for the exemplification of class struggles are taken from the conflict between castes. Then Marx adds that the modern bourgeois society has established new classes. But he never said what a class is and what he had in mind in speaking of classes and class antagonisms and in coordinating classes to castes. Neither Marx nor any one of the host of Marxian writers could tell us what a social class is, much less whether such social classes really play in the social structure the role assigned to them in the doctrine.
The characteristic feature of a caste is its rigidity. The social classes, as Marx exemplified them in calling the capitalists, the entrepreneurs, and the wage earners distinct classes, are characterized by their flexibility.
Though a socialist country may be classless, but there will be other differences in social functions which we can call classes with surely no less justification than that of Marx.
The only thing that counts is the fact that under capitalism everybody is the architect of his own fortune. Work well done and services well rendered are the only means to succeed. Under socialism, the beginner must please those already settled. The rising generation is at the mercy of the aged. Mankind is doomed when the youths are deprived of the opportunity to remodel society according to their own fashion.
Plato's ideal and perfect state is to be ruled by unselfish philosopher. The characteristic mark of Plato's philosophy: it doesn't pay any attention to the evolution of social and economic conditions and to the changes in human ideas concerning ends and means. Any deviation of the actual conditions from the ideal model cannot be anything else than corruption and degradation.
In the communist manifesto the instances used for the exemplification of class struggles are taken from the conflict between castes. Then Marx adds that the modern bourgeois society has established new classes. But he never said what a class is and what he had in mind in speaking of classes and class antagonisms and in coordinating classes to castes. Neither Marx nor any one of the host of Marxian writers could tell us what a social class is, much less whether such social classes really play in the social structure the role assigned to them in the doctrine.
The characteristic feature of a caste is its rigidity. The social classes, as Marx exemplified them in calling the capitalists, the entrepreneurs, and the wage earners distinct classes, are characterized by their flexibility.
Though a socialist country may be classless, but there will be other differences in social functions which we can call classes with surely no less justification than that of Marx.
The only thing that counts is the fact that under capitalism everybody is the architect of his own fortune. Work well done and services well rendered are the only means to succeed. Under socialism, the beginner must please those already settled. The rising generation is at the mercy of the aged. Mankind is doomed when the youths are deprived of the opportunity to remodel society according to their own fashion.
Plato's ideal and perfect state is to be ruled by unselfish philosopher. The characteristic mark of Plato's philosophy: it doesn't pay any attention to the evolution of social and economic conditions and to the changes in human ideas concerning ends and means. Any deviation of the actual conditions from the ideal model cannot be anything else than corruption and degradation.
The social and political implication of bureaucratization
The essence of the philosophy bureaucratism.
The written laws are in the eyes of the officials barriers erected for the protection of scoundrels against the fair claims of society. It would be fine for the society if the government can be beyond the law and execute the people at will. Bureaucrats must break human laws lest they violate a divine law.
The main difference between a policeman and a kidnapper and between a tax collector and a robber is that the policeman and the tax collector obey and enforce the law, while the kidnapper and robber violate it.
Within the framework of social cooperation every citizen depends on the services rendered by all his fellow citizens. For, under the division of labor, the structure of society rests on the shoulder of all men and women.
It's not in the power of the government to make everybody more prosperous.
The written laws are in the eyes of the officials barriers erected for the protection of scoundrels against the fair claims of society. It would be fine for the society if the government can be beyond the law and execute the people at will. Bureaucrats must break human laws lest they violate a divine law.
The main difference between a policeman and a kidnapper and between a tax collector and a robber is that the policeman and the tax collector obey and enforce the law, while the kidnapper and robber violate it.
Within the framework of social cooperation every citizen depends on the services rendered by all his fellow citizens. For, under the division of labor, the structure of society rests on the shoulder of all men and women.
It's not in the power of the government to make everybody more prosperous.
Bureaucratic management of private enterprises
The general tendency of our times is to let the government interfere with private business, and this interference in many instances forces upon the private enterprise bureaucratic management.
No progress and reform can be expected in a state of affairs where the first step is to obtain the consent of the old men.
To say to the entrepreneur of an enterprise with limited profit chance, "Behave as the conscientious bureaucrats do" is tantamount to telling him to shun any reform. Progress is precisely that which the rules and regulations did not foresee; it is necessarily outside the field of bureaucratic activities.
Both industrial inefficiency and corruption are the consequences of methods of government interference with business as applied in Southern and Eastern European countries.
No progress and reform can be expected in a state of affairs where the first step is to obtain the consent of the old men.
To say to the entrepreneur of an enterprise with limited profit chance, "Behave as the conscientious bureaucrats do" is tantamount to telling him to shun any reform. Progress is precisely that which the rules and regulations did not foresee; it is necessarily outside the field of bureaucratic activities.
Both industrial inefficiency and corruption are the consequences of methods of government interference with business as applied in Southern and Eastern European countries.
Bureaucratic management of publicity owned enterprises
Socialism, that is, full government control of all economic activities, is impracticable because a socialist community would lack the indispensable intellectual instrument of economic planning and designing: economic calculation.
As soon as an undertaking is no longer operated under the profit motive, other principles must be adopted fro the conduct of its affairs. It's naive of the champions of nationalized and municipalized enterprise to say say that the public enterprise's duty is to render useful services to the community. Because every undertaking's sole task is to render useful services.
The question should be: How do we find out whether the scarce resources are used in their most appropriate way?
With private profit-seeking enterprise this problem is solved by the attitude of the public.
As the account of profit and loss is not to be considered the criterion of the management's success or failure, the only means to make the manager responsible to the boss, the treasury, is to limit his discretion by rules and regulations.
As soon as an undertaking is no longer operated under the profit motive, other principles must be adopted fro the conduct of its affairs. It's naive of the champions of nationalized and municipalized enterprise to say say that the public enterprise's duty is to render useful services to the community. Because every undertaking's sole task is to render useful services.
The question should be: How do we find out whether the scarce resources are used in their most appropriate way?
With private profit-seeking enterprise this problem is solved by the attitude of the public.
As the account of profit and loss is not to be considered the criterion of the management's success or failure, the only means to make the manager responsible to the boss, the treasury, is to limit his discretion by rules and regulations.
bureaucratic management
In order to avoid the outcome that the deputy becomes an arbitrary in the province, the king tries to limit the deputy's powers by issuing directives and instructions. So the deputy's free discretion is now limited; their first duty is now to comply with the regulation. The deputy is no longer eager to deal with each case to the best of their abilities. The first virtue of an administrator is to abide by the codes and decrees. He becomes an bureaucrat. (Bureaucracy under despotic management)
It's a fallacy that bureaucratic management is incompatible with democratic government and institutions. The two pillars of democratic government are the primacy of the law and the budget. The definition of democratic government: A system of government under which those ruled are in a position to determine, directly by plebiscite or indirectly bu election, the exercise of the legislative and execute power and the selection of the supreme executives.
Primacy of the law means that no judge or officeholder has the right to interfere with any individual's affairs or conditions unless a valid law requires or empowers him to do so. Democratic control is budgetary control.
Bureaucracy itself is neither bad nor good. What we blame is the expansion of the sphere in which the government interferes with business and with many other items of the citizenry's affairs, and this results in a substitution of bureaucratic management for profit management.
The main function of the law is to limit the power of the authorities and the courts to inflict evils upon the individual citizen and to restrict his freedom. The law protects the people against the arbitrariness of those in office.
Bureaucracy management is management bound to comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. The objective of business management is to make a profit.
The definition of bureaucratic management: Bureaucratic management is the method applied in the conduct of administrative affairs the result of which has no cash value on the market. We do not say that a successful handling of public affairs has no value, but that it has no price on market, that its value cannot be realized in a market transaction and consequently cannot be expressed in terms of money.
It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors.
It's a fallacy that bureaucratic management is incompatible with democratic government and institutions. The two pillars of democratic government are the primacy of the law and the budget. The definition of democratic government: A system of government under which those ruled are in a position to determine, directly by plebiscite or indirectly bu election, the exercise of the legislative and execute power and the selection of the supreme executives.
Primacy of the law means that no judge or officeholder has the right to interfere with any individual's affairs or conditions unless a valid law requires or empowers him to do so. Democratic control is budgetary control.
Bureaucracy itself is neither bad nor good. What we blame is the expansion of the sphere in which the government interferes with business and with many other items of the citizenry's affairs, and this results in a substitution of bureaucratic management for profit management.
The main function of the law is to limit the power of the authorities and the courts to inflict evils upon the individual citizen and to restrict his freedom. The law protects the people against the arbitrariness of those in office.
Bureaucracy management is management bound to comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. The objective of business management is to make a profit.
The definition of bureaucratic management: Bureaucratic management is the method applied in the conduct of administrative affairs the result of which has no cash value on the market. We do not say that a successful handling of public affairs has no value, but that it has no price on market, that its value cannot be realized in a market transaction and consequently cannot be expressed in terms of money.
It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors.
11/23/2011
11/23/2011 Class 35
How markets use knowledge
The quality of substitutes for consumers and the cost of substitutes determine the shape of demand curve as I move away from the equilibrium point. The cost of production determines the shape of supply curve.
Titanium market: the equilibrium point is 10 billion pounds at 20 dollars each pound.
Now new demander seeks 6 billion pounds of Titanium at $20. So now the demand for titanium is 16 billion pounds at 20 bucks each pound.
Scenario #1
The supply curve and demand curve are both unit elastic.
When the equilibrium price rises to 25 dollars
Initial pounds Final pounds Change(absolute)
Old consumers 10 8 2
Suppliers 10 12 2
New consumers 6 4 2
The market rations the extra demand of titanium
Scenario #2
The demand curve is more elastic
When the equilibrium price is 25 bucks
Initial pounds Final pounds Change(absolute)
Old customers 10 6 4
Suppliers 10 11 1
New customers 6 5 1
Old customers behave strongly because they are very sensitive to the change of price, and they "contribute" more to the new buyers. Supplier don't change significantly because the price doesn't change so much.
Scenario #3
The supply curve is more elastic
When the equilibrium price is 25 dollars
Initial pounds Final pounds Change(Absolute)
Old customers 10 9 1
Suppliers 10 14 4
New customers 6 5 1
Supplier change behavior strongly because they are sensitive to the change of price. Customers are not because the change of price doesn't change a lot.
If a central planner wants to ration goods, he must be omnipotent and omniscient, knowing every single detail in the market, which is simply impossible.
With the self interest, not every one working in the public interest is actually thinking about public interest.
The quality of substitutes for consumers and the cost of substitutes determine the shape of demand curve as I move away from the equilibrium point. The cost of production determines the shape of supply curve.
Titanium market: the equilibrium point is 10 billion pounds at 20 dollars each pound.
Now new demander seeks 6 billion pounds of Titanium at $20. So now the demand for titanium is 16 billion pounds at 20 bucks each pound.
Scenario #1
The supply curve and demand curve are both unit elastic.
When the equilibrium price rises to 25 dollars
Initial pounds Final pounds Change(absolute)
Old consumers 10 8 2
Suppliers 10 12 2
New consumers 6 4 2
The market rations the extra demand of titanium
Scenario #2
The demand curve is more elastic
When the equilibrium price is 25 bucks
Initial pounds Final pounds Change(absolute)
Old customers 10 6 4
Suppliers 10 11 1
New customers 6 5 1
Old customers behave strongly because they are very sensitive to the change of price, and they "contribute" more to the new buyers. Supplier don't change significantly because the price doesn't change so much.
Scenario #3
The supply curve is more elastic
When the equilibrium price is 25 dollars
Initial pounds Final pounds Change(Absolute)
Old customers 10 9 1
Suppliers 10 14 4
New customers 6 5 1
Supplier change behavior strongly because they are sensitive to the change of price. Customers are not because the change of price doesn't change a lot.
If a central planner wants to ration goods, he must be omnipotent and omniscient, knowing every single detail in the market, which is simply impossible.
With the self interest, not every one working in the public interest is actually thinking about public interest.
11/22/2011
The relationship between history of science and science
One of the first serious histories of science was written by Johannes Kepler (1571-1630) in 1600, called A defense of Tycho against Ursus, containing a history of world systems and cosmological models form the time of Pythagoras to Kepler's own time. He intended to use the historical record to help him understand what kinds of features make a theory powerful and fertile and to discredit the claims to originality by his astronomical contemporary, Ursus.
During the seventeenth and eighteenth centuries many scientists turned to the historical record to establish their own approaches. They wrote history as a way of testing, confirming, and ultimately legitimating their own scientific perspectives and as an answer to skepticism from their own professional colleagues concerning their value about what kinds of scientific theories were desirable.
So what could science learn from its past?
Narrative history tends to treat every episode, every part of the past, as unique rather than as a local instance of some larger pattern of behaviors.
One can also conceive of history of science as a collection of case studies, each or all designed to answer one or a set of general questions about how science works.
History may not only remind us of what we have, but may teach us how to improve and increase our store and afford us some indication of the most promising mode of directing our future efforts to add to its extent and completeness. (Whewell 1837)
Whig theory of history: If our intent is to use the historical record to draw morals about what makes for "good science", the historian ceases to be a disinterested observer of the past and becomes rather a partisan, and advocate for one vision of science over another.
During the seventeenth and eighteenth centuries many scientists turned to the historical record to establish their own approaches. They wrote history as a way of testing, confirming, and ultimately legitimating their own scientific perspectives and as an answer to skepticism from their own professional colleagues concerning their value about what kinds of scientific theories were desirable.
So what could science learn from its past?
Narrative history tends to treat every episode, every part of the past, as unique rather than as a local instance of some larger pattern of behaviors.
One can also conceive of history of science as a collection of case studies, each or all designed to answer one or a set of general questions about how science works.
History may not only remind us of what we have, but may teach us how to improve and increase our store and afford us some indication of the most promising mode of directing our future efforts to add to its extent and completeness. (Whewell 1837)
Whig theory of history: If our intent is to use the historical record to draw morals about what makes for "good science", the historian ceases to be a disinterested observer of the past and becomes rather a partisan, and advocate for one vision of science over another.
Bureaucracy Ludwig von Mises
Introduction:
The terms bureaucrat, bureaucratic, and bureaucracy are applied with an opprobrious connotation. The abusive implication of the terms in question is not limited to some countries, it is universal phenomenon. The word bureaucracy is used loosely.
So what does this word mean?
The characteristic feature of present-day policies is the trend toward a substitution of government control for free enterprise. Many people think that state control is a panacea for all ill.
The delegation of power is the main instrument of modern dictatorship.
Bureaucracy is an organization of non-elected officials who implement the rules, laws and functions of their institutions.
Bureaucracy, its merit and its demerits, its working and its operation, can be understood only by contrasting it with the operation of the profit motive as it functions in the capitalistic market society.
Profit Management
Capitalism or market economy is that system of social cooperation and division of labor that is based on private ownership if the means if production. Free enterprise is the characteristic feature of capitalism. The objective of every enterpriser is to make profit.
Neither the capitalists nor the entrepreneurs nor the farmers determine what has to be produced. The consumers do that. The real bosses in the capitalist system of market economy are the customers.The profit motive is precisely the factor that forces the businessman to provide in the most efficient way those commodities the consumers want to use.
In the capitalist system all designing and planning is based on the market prices.
Neither governments nor businessmen are the guardians of customers. If a man fails in his endeavors to convince other people of the soundness of his ideas, he should blame his own disabilities.
Within a market society organized on the basis of free enterprise and private ownership of the means of production the prices of consumers' goods are faithfully and closely reflected in the price of the various factors required for their production.
The world is changing everyday and there is a need for a continuous adjustment of the production to the change of the conditions. This is where the entrepreneur comes in.
Responsiblity to the consumer is the lifeblood of business and enterprise in an unhampered market society.
The terms bureaucrat, bureaucratic, and bureaucracy are applied with an opprobrious connotation. The abusive implication of the terms in question is not limited to some countries, it is universal phenomenon. The word bureaucracy is used loosely.
So what does this word mean?
The characteristic feature of present-day policies is the trend toward a substitution of government control for free enterprise. Many people think that state control is a panacea for all ill.
The delegation of power is the main instrument of modern dictatorship.
Bureaucracy is an organization of non-elected officials who implement the rules, laws and functions of their institutions.
Bureaucracy, its merit and its demerits, its working and its operation, can be understood only by contrasting it with the operation of the profit motive as it functions in the capitalistic market society.
Profit Management
Capitalism or market economy is that system of social cooperation and division of labor that is based on private ownership if the means if production. Free enterprise is the characteristic feature of capitalism. The objective of every enterpriser is to make profit.
Neither the capitalists nor the entrepreneurs nor the farmers determine what has to be produced. The consumers do that. The real bosses in the capitalist system of market economy are the customers.The profit motive is precisely the factor that forces the businessman to provide in the most efficient way those commodities the consumers want to use.
In the capitalist system all designing and planning is based on the market prices.
Neither governments nor businessmen are the guardians of customers. If a man fails in his endeavors to convince other people of the soundness of his ideas, he should blame his own disabilities.
Within a market society organized on the basis of free enterprise and private ownership of the means of production the prices of consumers' goods are faithfully and closely reflected in the price of the various factors required for their production.
The world is changing everyday and there is a need for a continuous adjustment of the production to the change of the conditions. This is where the entrepreneur comes in.
Responsiblity to the consumer is the lifeblood of business and enterprise in an unhampered market society.
Spread-the-work schemes
A fallacy: a more efficient way of doing a thing destroys jobs, and its necessary corollary that a less efficient way of doing it creates jobs. There is just a fixed amount of work to be done in the world. If we cannot add to this work by thinking up more cumbersome ways of doing it, at least we can think of devices for spreading it around among as large a number of people as possible.
Analysis of arbitrary subdivision of labor
The householder who is forced to employ two men to do the work of one has, it is true, given employment to one extra man. But he has just that much less money left over to spend on something that would employ somebody else. By doing that, the labor market is not better off but the householder is worse off because he has to spend extra money on one stuff but has to sacrifice something else he treasures.
Analysis of the proposal of shortening the working week by law
(1)A reduction in the standard working week from 40 to 30 without any change within the hourly rate of pay.
There will be no increase in production because there is no net increase in man-hours. The workers previously employed is subsidizing the workers previously unemployed.
(2)A reduction in the working week from 40 to 30 hours, hut with a sufficient increase in hourly wage rates to maintain the same weekly pay for the individual workers already employed.
The consequence is to raise the cost of production. The least efficient firms will be thrown out of the market, least efficient workers will lose the job; the rise of cost and decrease of supply makes the price rise
Analysis of arbitrary subdivision of labor
The householder who is forced to employ two men to do the work of one has, it is true, given employment to one extra man. But he has just that much less money left over to spend on something that would employ somebody else. By doing that, the labor market is not better off but the householder is worse off because he has to spend extra money on one stuff but has to sacrifice something else he treasures.
Analysis of the proposal of shortening the working week by law
(1)A reduction in the standard working week from 40 to 30 without any change within the hourly rate of pay.
There will be no increase in production because there is no net increase in man-hours. The workers previously employed is subsidizing the workers previously unemployed.
(2)A reduction in the working week from 40 to 30 hours, hut with a sufficient increase in hourly wage rates to maintain the same weekly pay for the individual workers already employed.
The consequence is to raise the cost of production. The least efficient firms will be thrown out of the market, least efficient workers will lose the job; the rise of cost and decrease of supply makes the price rise
The curse of machinary
A fallacy: Machine creates unemployment
Generalization: Technology creates unemployment
Santayana's aphorism: Those who cannot remember the past are condemned to repeat it. If it were indeed true that the introduction of labor saving machinery is a cause of constantly mounting unemployment and misery, we should dismiss all the technological improvement since primitive time periods. People's effort to reduce the ratio of labor and production should be condemned rather than eulogized.
The machine itself needs construction and repair.
The manufacturer has excessive profit to use.
Competition will make the cost of a product lower.
If the good is elastic, it will attract more people to buy.
People spend less money on certain product----the increase of purchasing power.
Technology shifts the composition of jobs in the short run; it may cause panic in the short time period,but in the mean time it releases people to pursue more opportunities of job and creates new kinds of jobs. So in the long run it will make everybody better off.
Generalization: Technology creates unemployment
Santayana's aphorism: Those who cannot remember the past are condemned to repeat it. If it were indeed true that the introduction of labor saving machinery is a cause of constantly mounting unemployment and misery, we should dismiss all the technological improvement since primitive time periods. People's effort to reduce the ratio of labor and production should be condemned rather than eulogized.
The machine itself needs construction and repair.
The manufacturer has excessive profit to use.
Competition will make the cost of a product lower.
If the good is elastic, it will attract more people to buy.
People spend less money on certain product----the increase of purchasing power.
Technology shifts the composition of jobs in the short run; it may cause panic in the short time period,but in the mean time it releases people to pursue more opportunities of job and creates new kinds of jobs. So in the long run it will make everybody better off.
Credit diverts production
The congress want to give more credit to farmers, who cannot have enough "intermediate" credit; or the interest is too high; or the complaint is that private loans are made only to rich and well-established farmers.
But this kind of action stems form two acts of shortsightedness. (1)It only looks at the matter from the standpoint of the farmers that borrow. (2)It only thinks of the first of the transaction.
All credit is debt.
Analysis of the government loan to provide capital to farmers, which enables the farmers to buy a farm, produce food, pay off his loan by what he produce, and thus make contribution to the society.
There is a decisive difference between the loans supplied by the private lenders and the loans supplied by the government.
When people risk their own funds to invest something, they have to find the best one who can contribute and pay back their money. But government lenders will take risk with other people's money that private lenders will not take with their own money. What's lent is not money, but capital. When a capital is lent to A, for example, it cannot be lent to B. (Scarcity is everywhere.)
Credit, is something that a person already has. The bank gives you loan because it's confident that you can pay back the money. In general the people selected by the government is less likely to pay back than those selected by the private lenders. When government give a farm to A, a candidate who is more capable and has more credit B will be deprived of the chance to produce more. What's seen is that A is producing, what's not seen is what B could have produce.(more efficient)
Government loan may lead to favoritism: to the making of friends or someone who makes a bribe. It will also lead to the decrease of production and the increase of waste. The private money will be invested only where repayment with interest or profit is definitely expected. Besides, private lenders have more information and knowledge in who to lend because they have the comparative advantage of doing that after the cruel market test while government lacks that kind of knowledge.
When the government makes loans or subsidies to business, what it does is to tax successful private business in order to support unsuccessful private business. Under certain emergency circumstances there may be a plausible argument for this, the merit of which we need not examine here. But in the long run it does not sound like a pay proposition from the standpoint of the country as a whole.
But this kind of action stems form two acts of shortsightedness. (1)It only looks at the matter from the standpoint of the farmers that borrow. (2)It only thinks of the first of the transaction.
All credit is debt.
Analysis of the government loan to provide capital to farmers, which enables the farmers to buy a farm, produce food, pay off his loan by what he produce, and thus make contribution to the society.
There is a decisive difference between the loans supplied by the private lenders and the loans supplied by the government.
When people risk their own funds to invest something, they have to find the best one who can contribute and pay back their money. But government lenders will take risk with other people's money that private lenders will not take with their own money. What's lent is not money, but capital. When a capital is lent to A, for example, it cannot be lent to B. (Scarcity is everywhere.)
Credit, is something that a person already has. The bank gives you loan because it's confident that you can pay back the money. In general the people selected by the government is less likely to pay back than those selected by the private lenders. When government give a farm to A, a candidate who is more capable and has more credit B will be deprived of the chance to produce more. What's seen is that A is producing, what's not seen is what B could have produce.(more efficient)
Government loan may lead to favoritism: to the making of friends or someone who makes a bribe. It will also lead to the decrease of production and the increase of waste. The private money will be invested only where repayment with interest or profit is definitely expected. Besides, private lenders have more information and knowledge in who to lend because they have the comparative advantage of doing that after the cruel market test while government lacks that kind of knowledge.
When the government makes loans or subsidies to business, what it does is to tax successful private business in order to support unsuccessful private business. Under certain emergency circumstances there may be a plausible argument for this, the merit of which we need not examine here. But in the long run it does not sound like a pay proposition from the standpoint of the country as a whole.
Taxes discourage production
In our modern world there is never the same percentage of taxation of income levied on every person. The taxes inevitably affect the incentive of people who are forced to pay the tax.
For example, if a company has to pay a large amount of money to government for tax while has to bear potential losses in investments, people may be deterred to start a new enterprise or the corporations may only invest in the area that is least risky. There may be fewer employers. Producers are not incentivized to make more productions or try to explore, which is risky. In the long run, customers cannot get better or cheaper goods, and the purchasing power will decrease.
Similarly, if a person's income is largely deprived of to pay the tax, employees may be discouraged. Besides, people are not incentivized to make relatively risky investments. The capital for risk-taking investments shrinks because it's taxed before it creates new capital. Capital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises. So don't tax too much!!!
For example, if a company has to pay a large amount of money to government for tax while has to bear potential losses in investments, people may be deterred to start a new enterprise or the corporations may only invest in the area that is least risky. There may be fewer employers. Producers are not incentivized to make more productions or try to explore, which is risky. In the long run, customers cannot get better or cheaper goods, and the purchasing power will decrease.
Similarly, if a person's income is largely deprived of to pay the tax, employees may be discouraged. Besides, people are not incentivized to make relatively risky investments. The capital for risk-taking investments shrinks because it's taxed before it creates new capital. Capital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises. So don't tax too much!!!
11/21/2011
Public works mean taxes
Everything we get, outside of the free gift of nature, must in some way be paid for.
Taxation for public housing destroys as many jobs in other lines as it creates in housing. It also results in unbuilt private homes, in unmade washing machines and fridges, and in lack of innumerable other commodities and services.
Taxation for public housing destroys as many jobs in other lines as it creates in housing. It also results in unbuilt private homes, in unmade washing machines and fridges, and in lack of innumerable other commodities and services.
The blessings of destruction
Need is not demand. Effective economic demand requires not merely need but corresponding purchasing power. The inability to produce automobiles, radios, and refrigerators during the war did bring about a cumulative postwar demand for those particular products. But wherever business was increased in one direction, it was correspondingly reduced another.
The war changed the postwar direction of effort; it changed the balance of industries; it changed the structure of industry.
NO man burns down his own house on the theory that the need to rebuild it will stimulate his energies.
Many of the most frequent fallacies in economics reasoning come form the propensity to think in terms of an abstraction and to forget and ignore the individuals who make it up and give it meaning.
Supply creates demand because at bottom it is demand.
There is an optimum rate of replacement of equipment and machine, a best time for replacement. It is never an advantage to have one's plants destroyed by shells or bombs unless those plants have already become valueless or acquired a negative value by depreciation and obsolescence.
The destruction of anything of real value is always a net loss.
Price control
When there is a “shortage” of a product, there is not necessarily any less of it, either absolutely or relative to the number of consumers.
Just as price fluctuation allocate scarce resources which have alternative uses, price controls which limit those fluctuations reduce the incentives for individuals to limit their own use of scarce resources desired by others.
Rent control reduces the rate of housing turnovers.
Shortages are a price phenomenon. Typically, the rental housing stock is relatively fixed in the short run, so that a shortage occurs first because more people want more housing at the artificial low price. Later, there may be a real increase in scarcity as well, as rental units deteriorate more rapidly with reduced maintenance.
One of the crucial distinctions to keep in mind is the distinction between an increased scarcity---- where fewer goods are available relative to the population--- and a shortage as a price phenomenon. There can be a growing shortage without an increased scarcity or a growing scarcity without a shortage.
Shortage means that suppliers no longer have to please the buyers.
Hoarding: individuals keep a larger inventory of the price-controlled goods than they would ordinarily under free market conditions, because of the uncertainty of being able to find it in the future. Hoarding increases the severity of the shortage because resources cannot be shifted efficiently.
More people make more claims on doctors’ time under price control, leaving less time for other people with more serious, or even urgent, medical problems. (Quality deterioration)
When there is a surplus, it means that people don’t have enough money to buy them.
The role of prices
In a market economy, there is no one at the top of to issue orders to control or coordinate activities throughout the economy.
Prices play a crucial role in determining how much of each resource gets used where and how the resulting products get transferred to millions of people.
Some people see prices as simply obstacles to their getting the things they want, but in fact it is not the prices that cause the scarcity, which could exist under whatever other kind of economic system or social arrangement might be used instead of prices.
Prices are not just ways of transferring money; their primary role is to provide incentives to affect behavior in the use of resources and their resulting products.
Although a free market economic system is sometimes called a profit system, it is in reality a profit-and-loss system--- because losses tell producer what to stop doing.
Price-coordinated markets enable people to signal to other people how much they want and how much they are willing to offer for it, while other people signal what they are willing to supply in exchange for what compensation.
The fundamental problem with central planning is that planner don't have enough information to control all the economic affairs and they are not quick enough to make the adjustment.
Price are not arbitrary. Competition matters.
The price which one producer is willing to pay for any given ingredient becomes the price that other producers are forced to pay for that same ingredient.
The resources tend to flow to their most valued uses when there is price competition in the marketplace.
Prices coordinate the use of resources, so that only that amount is used for the one thing which is equal in value to what it is worth to others in other uses.
Seldom is there a fixed quantity demanded or quantity supplied.
The quantity supplied varies directly with the price, just as the quantity demanded varies inversely with the price.
The competition of numerous buyers and sellers results in prices that leave each individual buyer and seller with very little leeway.
Competition is the key to the operation of a price-coordinated economy.
The most fundamental reason why there is no such thing as an objective or "real" value is that there would be no rational basis for economic transactions if there were. VALUE IS SUBJECTIVE!!!
Prices play a crucial role in determining how much of each resource gets used where and how the resulting products get transferred to millions of people.
Some people see prices as simply obstacles to their getting the things they want, but in fact it is not the prices that cause the scarcity, which could exist under whatever other kind of economic system or social arrangement might be used instead of prices.
Prices are not just ways of transferring money; their primary role is to provide incentives to affect behavior in the use of resources and their resulting products.
Although a free market economic system is sometimes called a profit system, it is in reality a profit-and-loss system--- because losses tell producer what to stop doing.
Price-coordinated markets enable people to signal to other people how much they want and how much they are willing to offer for it, while other people signal what they are willing to supply in exchange for what compensation.
The fundamental problem with central planning is that planner don't have enough information to control all the economic affairs and they are not quick enough to make the adjustment.
Price are not arbitrary. Competition matters.
The price which one producer is willing to pay for any given ingredient becomes the price that other producers are forced to pay for that same ingredient.
The resources tend to flow to their most valued uses when there is price competition in the marketplace.
Prices coordinate the use of resources, so that only that amount is used for the one thing which is equal in value to what it is worth to others in other uses.
Seldom is there a fixed quantity demanded or quantity supplied.
The quantity supplied varies directly with the price, just as the quantity demanded varies inversely with the price.
The competition of numerous buyers and sellers results in prices that leave each individual buyer and seller with very little leeway.
Competition is the key to the operation of a price-coordinated economy.
The most fundamental reason why there is no such thing as an objective or "real" value is that there would be no rational basis for economic transactions if there were. VALUE IS SUBJECTIVE!!!
What's economics
Economic's fundamental concern is with the material standard of living of society as a whole and how that is affected by particular decisions made by individuals and institutions.
Consequences matter more than intentions.
Without scarcity, there is no need to economize.
The definition of economics by Lionel Robbins: Economics is the study of the use of scarce resources which have alternative uses.
What does "scarcity" means? It means that what everybody wants adds up to more than there is.
The real constraint and scarcity: People's wants are unlimited and there has never been enough to satisfy everyone completely.
Not only scarcity but also alternative uses are heart of economics.
It is not money but the volume of goods and services which determines whether a country is poverty stricken or prosperous.
Consequences matter more than intentions.
Without scarcity, there is no need to economize.
The definition of economics by Lionel Robbins: Economics is the study of the use of scarce resources which have alternative uses.
What does "scarcity" means? It means that what everybody wants adds up to more than there is.
The real constraint and scarcity: People's wants are unlimited and there has never been enough to satisfy everyone completely.
Not only scarcity but also alternative uses are heart of economics.
It is not money but the volume of goods and services which determines whether a country is poverty stricken or prosperous.
11/21/2011 Class 34
Market for acoustics
When quantity demanded equals quantity supplied, we say it achieves equilibrium price, in which buyers and sellers are coordinated.
Surplus: At a particular price when quantity supplied exceeds quantity demanded.
When the price is higher than the equilibrium price, how do buyers and suppliers respond respectively?
Quantity supplied goes up and quantity demanded goes down.
Whose plans are satisfied?
What does "plan" mean: If you have a certain goal, given the rules that you face, can you meet the goal?
Suppliers are not satisfied because they cannot sell all their goods.
Buyers are satisfied because at that price there are more goods than number of buyers, which means that the buyers can get what they want.
What does "satisfied" mean: given the particular price you don't have incentives to change your behavior.
What will suppliers do: they cut the price.
Shortage: At a particular price, quantity demanded exceeds quantity supplied
Whose plans are satisfied? Suppliers are satisfied because at that price they can sell all what the quantity that they want to sell.
Consumers are not satisfied because there are not enough goods.
When price goes up it means something is relatively scarce and the shortage is alleviating. When price drops it means something is relatively abundant and the surplus is being narrowed.
Equilibrium: At a certain price consumers and suppliers have no incentive to alter their behavior.
Two kinds of equilibrium
(1)Market clearing:
Quantity demanded = Quantity supplied
Good
(2)Non-market clearing
not good
When quantity demanded equals quantity supplied, we say it achieves equilibrium price, in which buyers and sellers are coordinated.
Surplus: At a particular price when quantity supplied exceeds quantity demanded.
When the price is higher than the equilibrium price, how do buyers and suppliers respond respectively?
Quantity supplied goes up and quantity demanded goes down.
Whose plans are satisfied?
What does "plan" mean: If you have a certain goal, given the rules that you face, can you meet the goal?
Suppliers are not satisfied because they cannot sell all their goods.
Buyers are satisfied because at that price there are more goods than number of buyers, which means that the buyers can get what they want.
What does "satisfied" mean: given the particular price you don't have incentives to change your behavior.
What will suppliers do: they cut the price.
Shortage: At a particular price, quantity demanded exceeds quantity supplied
Whose plans are satisfied? Suppliers are satisfied because at that price they can sell all what the quantity that they want to sell.
Consumers are not satisfied because there are not enough goods.
When price goes up it means something is relatively scarce and the shortage is alleviating. When price drops it means something is relatively abundant and the surplus is being narrowed.
Equilibrium: At a certain price consumers and suppliers have no incentive to alter their behavior.
Two kinds of equilibrium
(1)Market clearing:
Quantity demanded = Quantity supplied
Good
(2)Non-market clearing
not good
11/20/2011
The role of economics
The whole point of studying equilibrium is to understand what happens when things are not in equilibrium, in one particular way or another.
Philips Curve: a historical inverse relationship between rate of unemployment and rate of inflation. The lower the unemployment rate, the higher the rate of inflation.
Economics is scientific only in the sense of having some of the procedures of science. In principle, economics is much like meteorology. Economics is ultimately about systemic results, not personal intentions.
There are personal bias in economics.
Philips Curve: a historical inverse relationship between rate of unemployment and rate of inflation. The lower the unemployment rate, the higher the rate of inflation.
Economics is scientific only in the sense of having some of the procedures of science. In principle, economics is much like meteorology. Economics is ultimately about systemic results, not personal intentions.
There are personal bias in economics.
11/18/2011
The problem with price gouging laws
This article discusses the price ceiling and it's damage to economics. We can learn that price rationing is the best way to allocate alternative resources to their most efficient use.
Interesting points:
In the article, the author raises three puzzles against price gouging laws:
(1)The laws put the force of government behind efforts to prevent people from entering into agreement or transactions that law makes find objectable. In other words, the price gouging laws confiscate people's freedom to agree at a higher price.
(2)Price gouging laws become more expansive in scope and more frequently invoked.
The author also in this article points out that some people claim that price gouging is immoral is driven by the emotional responses to the price increases.
arguments for and against
Price gouging laws revolved around three ideas: maximizing welfare, respecting freedom, and promoting virtue.
(1) Issues about economic welfare: price gouging laws prevent resources from being used in their most efficient way.(People are not incentivized to supply.)
(2)freedom: the laws stop people from agreeing on prices higher than the price ceiling
(3)virtue issues: the laws hurt a certain group of people in society. Besides, since merchants now have little incentive to provide goods, at a certain point people cannot get what they want even at a price higher than the price set under the law, thus exacerbating the virtue issue.
Question:
Government can do other things rather than price ceiling to make the situation better. For example, subsidize merchants so that they can lower the prices?
Interesting points:
In the article, the author raises three puzzles against price gouging laws:
(1)The laws put the force of government behind efforts to prevent people from entering into agreement or transactions that law makes find objectable. In other words, the price gouging laws confiscate people's freedom to agree at a higher price.
(2)Price gouging laws become more expansive in scope and more frequently invoked.
The author also in this article points out that some people claim that price gouging is immoral is driven by the emotional responses to the price increases.
arguments for and against
Price gouging laws revolved around three ideas: maximizing welfare, respecting freedom, and promoting virtue.
(1) Issues about economic welfare: price gouging laws prevent resources from being used in their most efficient way.(People are not incentivized to supply.)
(2)freedom: the laws stop people from agreeing on prices higher than the price ceiling
(3)virtue issues: the laws hurt a certain group of people in society. Besides, since merchants now have little incentive to provide goods, at a certain point people cannot get what they want even at a price higher than the price set under the law, thus exacerbating the virtue issue.
Question:
Government can do other things rather than price ceiling to make the situation better. For example, subsidize merchants so that they can lower the prices?
short-run costs and output decisions
In the short run, all firms have costs that they must bear regardless of their output. Fixed cost: any cost that does not depend on the firm's level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run.
Variable costs: a cost that depends on the level of production chosen
Total cost=fixed costs+variable costs
Total fixed cost/overhead: The total of all costs that do not change with output, even if output is zero.
Firms have no control over fixed costs in the short run. For this reason, fixed costs are sometimes called sunk costs.
Average fixed cost: total fixed cost/ number of units of output
So sunk cost is constant while average fixed cost can decline as more outputs are produced. This is called spreading overhead
Total variable cost: the total of all costs that vary with output in the short run.
It depends on (1)the techniques of production that are available (2)the prices of the inputs required by each technology. To produce more products, a firm uses more inputs. The cost of additional output depends directly on the additional inputs that are required and how much they cost.
Marginal costs reflect changes in variable costs because they vary when output changes. Fixed costs do not change when output changes.
Marginal cost is the cost of the added inputs, or resources, needed to produce one additional unit of output. In the short run, marginal cost eventually rises with output. (Diminishing returns set in)
Diminishing returns (decreasing marginal product) implies that increasing marginal cost.
IN she short run, every firm is constrained by some fixed input that (1)leads to diminishing returns to variable inputs and (2)limits its capacity to produce. As a firm approaches that capacity, it becomes increasingly costly to produce successively higher levels of output. Marginal costs ultimately increase with output in the short run.
Different types of costs:
1. accounting cost: Out-of-pocket costs or costs as an accountant would define them. Sometimes referred to as explicit costs.
2. economic costs( accounting cost+ normal rate of return+ opp cost of factors in the production process ): Costs that include the full opp costs of all inputs. Implicit costs.
3. sunk cost/ fixed cost
4. total variable cost: cost that vary with the level of output.
5. marginal cost: the increase in total cost that results from producing one additional unit of output.
Variable costs: a cost that depends on the level of production chosen
Total cost=fixed costs+variable costs
Total fixed cost/overhead: The total of all costs that do not change with output, even if output is zero.
Firms have no control over fixed costs in the short run. For this reason, fixed costs are sometimes called sunk costs.
Average fixed cost: total fixed cost/ number of units of output
So sunk cost is constant while average fixed cost can decline as more outputs are produced. This is called spreading overhead
Total variable cost: the total of all costs that vary with output in the short run.
It depends on (1)the techniques of production that are available (2)the prices of the inputs required by each technology. To produce more products, a firm uses more inputs. The cost of additional output depends directly on the additional inputs that are required and how much they cost.
Marginal costs reflect changes in variable costs because they vary when output changes. Fixed costs do not change when output changes.
Marginal cost is the cost of the added inputs, or resources, needed to produce one additional unit of output. In the short run, marginal cost eventually rises with output. (Diminishing returns set in)
Diminishing returns (decreasing marginal product) implies that increasing marginal cost.
IN she short run, every firm is constrained by some fixed input that (1)leads to diminishing returns to variable inputs and (2)limits its capacity to produce. As a firm approaches that capacity, it becomes increasingly costly to produce successively higher levels of output. Marginal costs ultimately increase with output in the short run.
Different types of costs:
1. accounting cost: Out-of-pocket costs or costs as an accountant would define them. Sometimes referred to as explicit costs.
2. economic costs( accounting cost+ normal rate of return+ opp cost of factors in the production process ): Costs that include the full opp costs of all inputs. Implicit costs.
3. sunk cost/ fixed cost
4. total variable cost: cost that vary with the level of output.
5. marginal cost: the increase in total cost that results from producing one additional unit of output.
11/18/2011 Class33
When you assert some positive economic rights, what you are also assuming is that some one's gonna be around to provide that.
Rights cannot exist separately from duties and obligations.
Once an efficient beuarocracy isn't collecting money, it will become incapable of doing things better.
Some people do need medical care more desperately than others, so jumping line is desirable.
Private payments to doctors actually call for more medical care and short line.
When you allow ration by price, what you actually do is set people free to make their own choices.
The beauty of market in the price system is that you don't have to ask folks whether they need certain stuff.(If goods are rationed rather than price, people may cheat or waste supply)
Price forces us to (1)evaluate cost trade-offs of buying a certain good (2)consider values that others place on the goods.
Is it possible or principal to make health care access independent of income, wealth, social status, and other characteristics?
No, because wealthy people can get into better hospital and get better service.
Even it's possible, is it desirable?
No, it's disgusting. You have to waste other resources (time, energy) to get free medical care.
Rights cannot exist separately from duties and obligations.
Once an efficient beuarocracy isn't collecting money, it will become incapable of doing things better.
Some people do need medical care more desperately than others, so jumping line is desirable.
Private payments to doctors actually call for more medical care and short line.
When you allow ration by price, what you actually do is set people free to make their own choices.
The beauty of market in the price system is that you don't have to ask folks whether they need certain stuff.(If goods are rationed rather than price, people may cheat or waste supply)
Price forces us to (1)evaluate cost trade-offs of buying a certain good (2)consider values that others place on the goods.
Is it possible or principal to make health care access independent of income, wealth, social status, and other characteristics?
No, because wealthy people can get into better hospital and get better service.
Even it's possible, is it desirable?
No, it's disgusting. You have to waste other resources (time, energy) to get free medical care.
11/17/2011
The behavior of profit-maximizing firms
total cost: the total of out-of-pocket costs; normal rate of return; and opportunity cost of each factor of production.
rate of return: the annual flow of net income generated by an investment expressed as a percentage of the total investment.For example, if someone makes a $100000 investment in capital to start a small restaurant and the restaurant produces a flow of profit of $15000 every year, then the project has a rate of return of %15.
Profit/total investment
A normal rate of return: a rate of return on capital that is sufficient to keep owners and investors satisfied.When a firm earns exactly a normal rate of return, it is earning a zero profit as we have defined profit. If the level of profit is positive, the firm is earning an above-normal rate of return on capital.
Calculating Total revenue, Total cost, and Profit
Initial investment $20000
Market interest rate available (the rate of interest that they could have gotten by purchasing corporate bonds) 10%
Total revenue $30000 (3000 belts and 10 dollars each)
Costs
Belts from suppliers $15000
Labor cost $14000
Normal return/opportunity cost of capital $20000 * 10%= $2000
Total cost $2000
profit (total revenue-total cost) -$1000
(Investment is sunk cost)
The available production techniques and the prices of inputs determines costs.
production technology: the quantitative relationship between inputs and outputs
Marginal product: the additional output that can be produced by adding one more unit of a specific input
the law of diminishing returns:When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.
rate of return: the annual flow of net income generated by an investment expressed as a percentage of the total investment.For example, if someone makes a $100000 investment in capital to start a small restaurant and the restaurant produces a flow of profit of $15000 every year, then the project has a rate of return of %15.
Profit/total investment
A normal rate of return: a rate of return on capital that is sufficient to keep owners and investors satisfied.When a firm earns exactly a normal rate of return, it is earning a zero profit as we have defined profit. If the level of profit is positive, the firm is earning an above-normal rate of return on capital.
Calculating Total revenue, Total cost, and Profit
Initial investment $20000
Market interest rate available (the rate of interest that they could have gotten by purchasing corporate bonds) 10%
Total revenue $30000 (3000 belts and 10 dollars each)
Costs
Belts from suppliers $15000
Labor cost $14000
Normal return/opportunity cost of capital $20000 * 10%= $2000
Total cost $2000
profit (total revenue-total cost) -$1000
(Investment is sunk cost)
The available production techniques and the prices of inputs determines costs.
production technology: the quantitative relationship between inputs and outputs
Marginal product: the additional output that can be produced by adding one more unit of a specific input
the law of diminishing returns:When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.
11/16/2011
Household behavior and consumer choice
As long as a household faces a limited budget---and all households ultimately do---the real cost of any good or service is the value of the other goods and services that could have been purchased with the same amount of money. The real cost of a good or service is its opportunity cost, and opportunity cost is determined by relative prices.
The budget constraint is affected by income, wealth and price. Within those limits, consumers are free to choose (capacity) and their ultimate choice is based on preferences (willingness)
How price change affects household behavior:
(1)The change in consumption of X due to the improvement of well-being is call the income effect of a price change.
(2)When a product's prices fall, it's cheaper and relatively more attractive than its substitutes. Thus consumers may shift from substitutes to this specific product. This shift is called substitute effect of a price change.
Suppose the trip from A to B is reduced from $400 to $200, but at the same time my income is reduced by $800, but it's still likely that I will take more trip to B because the opportunity cost of a trip from A to B is now lower. I may substitute away from other goods toward the trip from A to B.
Income and substitution effects if a wage change
(1)If leisure is a normal good, an increase in income will lead to a higher demand for leisure and a lower labor supply, which is the income effect of a wage change.
(2)A higher wage rate means that leisure is more expensive. If you think of the wage rate as the price of leisure, each individual hour of leisure consumed at a higher wage costs more in forgone wages. As a result, we would expect households to substitute other goods for leisure. This means working more, or a lower quantity demanded if leisure and a higher quantity supplied of labor.
The budget constraint is affected by income, wealth and price. Within those limits, consumers are free to choose (capacity) and their ultimate choice is based on preferences (willingness)
How price change affects household behavior:
(1)The change in consumption of X due to the improvement of well-being is call the income effect of a price change.
(2)When a product's prices fall, it's cheaper and relatively more attractive than its substitutes. Thus consumers may shift from substitutes to this specific product. This shift is called substitute effect of a price change.
Suppose the trip from A to B is reduced from $400 to $200, but at the same time my income is reduced by $800, but it's still likely that I will take more trip to B because the opportunity cost of a trip from A to B is now lower. I may substitute away from other goods toward the trip from A to B.
Income and substitution effects if a wage change
(1)If leisure is a normal good, an increase in income will lead to a higher demand for leisure and a lower labor supply, which is the income effect of a wage change.
(2)A higher wage rate means that leisure is more expensive. If you think of the wage rate as the price of leisure, each individual hour of leisure consumed at a higher wage costs more in forgone wages. As a result, we would expect households to substitute other goods for leisure. This means working more, or a lower quantity demanded if leisure and a higher quantity supplied of labor.
11/16/2011 Class32
What other customers are willing to pay for your products is very much the opportunity cost to you. (Price is trade-off)
Price forces you to think about others; high price encourages more supply.
Possible ways to ration rather than price rationing
(1)Need
Question: Who determines who is needy? What's needy? How do you convey information to producers to make more of some goods or less of another based on change in perceived need?
This ration is costly, invasive, no way to ensure people who are needy to get the stuff.
(2)Queue
You spend time and energy, which is the opportunity cost
(3)Lottery
It may stimulates conspiracy
(4)Equal shares
Question 1. What if the good cannot be cut off? 2. What if the people who want the stuff are too many?
(5)Fight and force
Question: 1. too costly (you need to exercise to make sure you can win the fight; you need to see doctors) 2. hard to plan
(6)Merit
Problem: 1. you need a judgment 2. you may not trust him
Competition derives from scarcity
Every ration mechanism imposes a set of rules on people and then people compete according to rules but you compete because things are scarce and you want them.
The rules that we come up with to deal that competition aren't themselves the cost of competition. We should focus on whether the rules we come up with promote competition for the goods that is destructive or constructive.
Willingness to pay a money price is the best way indicator of the value of a good to someone, and allocating goods via the price system and relying on willingness to pay is the only just way to ration scarce goods.When you fail to bid what you want, you are still left with the goods and services you had to create before and you can still consume other goods.
Price forces you to think about others; high price encourages more supply.
Possible ways to ration rather than price rationing
(1)Need
Question: Who determines who is needy? What's needy? How do you convey information to producers to make more of some goods or less of another based on change in perceived need?
This ration is costly, invasive, no way to ensure people who are needy to get the stuff.
(2)Queue
You spend time and energy, which is the opportunity cost
(3)Lottery
It may stimulates conspiracy
(4)Equal shares
Question 1. What if the good cannot be cut off? 2. What if the people who want the stuff are too many?
(5)Fight and force
Question: 1. too costly (you need to exercise to make sure you can win the fight; you need to see doctors) 2. hard to plan
(6)Merit
Problem: 1. you need a judgment 2. you may not trust him
Competition derives from scarcity
Every ration mechanism imposes a set of rules on people and then people compete according to rules but you compete because things are scarce and you want them.
The rules that we come up with to deal that competition aren't themselves the cost of competition. We should focus on whether the rules we come up with promote competition for the goods that is destructive or constructive.
Willingness to pay a money price is the best way indicator of the value of a good to someone, and allocating goods via the price system and relying on willingness to pay is the only just way to ration scarce goods.When you fail to bid what you want, you are still left with the goods and services you had to create before and you can still consume other goods.
11/15/2011
entrepreneurship and gangster movies
It seems that most of the gangster movies put great emphasis on people with low social status: In Goodfellas, Henry Hill starts his career as a child raised in a poor immigrant family; in Scarface, the main character Tony Montana is a political refugee from Cuba; even the majestic Don Vito Corleone in The Godfather gets his business started as an ordinary immigrant worker from Sicily. Some people may reason that, “Well, that’s because The Godfather trilogy is so influential that later gangster movies emulate it.” But I don’t think this opinion proper because back to 1930s, the big three gangster movies---- Little Caesar, Scarface and Public enemy all focused on crime careers of ordinary people. So what makes this movie genre pay significant attention to underdogs? Does it have relationship with America
“I do not choose to be a common person. It is my right to be uncommon—if I can. I seek opportunity-not security. I do not wish to be a kept citizen, humbled and dulled by having the state look after me. I want to be the calculated risk, to dream and built, to fail and to succeed. I refuse to barter incentive for a dole; I prefer the challengers of life to the guaranteed existence, the thrill of fulfillment to the state calm of Utopia. I will not trade my freedom for beneficence nor my dignity a handout. I will never cower before any master nor bend to any threat. It is my heritage to stand erect, proud and unafraid, to think and act for myself, to enjoy the benefit of my creations and to face the world boldly and say: This, with God’s help, I have done.” This is the entrepreneur creed in Thomas Paine’s brochure Common Sense. It points out the reason why America , once the colony of Britain America learned rules of management from Britain , but the fortune that America America
Rooted in America Eugene
The gangsters from rags to respectability are actually a metaphor of American entrepreneurs in real life. Thrown in a free market filled with competition, entrepreneurs, like Steve Jobs and Larry Page, started their careers humbly (It’s interesting that they both used garages as offices), endured skepticism and pressure, and finally gets to the top of the world. What’s amazing about America
We are in an imperfect world
Though there are a lot of criticism on entrepreneurs and free market system, I want to claim that thanks to capitalism and entrepreneurs, lots of goods that were luxuries decades before have now been our daily necessities, such as TVs and cars. Once I was sitting in my father’s Audi SUV and my dad suddenly turned to me, “When I was about your age, I had never thought of having a car because at that time only government officials could have a car.” Now, we are several times richer than before. But if we just pay attention to the service we get, (for example, we can take public transportation rather than own a private car), we will be infinitely richer. Just as Johan Norberg concludes in his book In defense of global capitalism: During 1000 years of absolute monarchy, feudalism and slavery, mankind’s average income increased by about 50 percent. In the 180 years since 1820, mankind’s average income has increased by almost 1000 percent.
Sometimes people make judgments based on what they have seen and take it for granted that what they call for will have a good consequence, but sometimes good intentions lead to unintended consequences. Some people with a high morality refuse to buy clothes produced by workers in third-world countries because these workers have a miserable wage. The customers thus call for improvement in these workers’ living standard. What’s seen is the improvement of this particular group of people but what’s not seen is that: a higher cost of production leads to a higher price, which makes the clothes produced by third-world countries no loner competitive; resources that could have been used more efficiently in other fields are shifted to make clothes, etc. People who make judgments based on immediacy and immediacy will fail to see the long-run effect of the policies they call for. But unfortunately, we often make decisions without scrutiny. The public is easily misinformed because of the meaningless data and call for poison which made them sick in the first place.
Finally, we should admit that we are living in a world full of scarcity. Life is not a video game, in which we can cheat and get infinite resources. Marxists like to compare a perfect socialism in utopia with an imperfect capitalism in real world. It’s safe to say that capitalism is not a panacea to every country, and free market itself has many problems like externalities, but it’s still the best choice for officials to adopt compared with other kinds of systems in a world with scarce resources because capitalism respects human nature and protects property rights: all the trades are voluntary and no people have to sacrifice their nature rights like freedom.
An objection to capitalism
Capitalism is innately disgusting
Still there’re some scholars who claim that capitalism is disgusting and entrepreneurs are vampires who just get capital from workers. Many people are reluctant to let themselves be captured by the economic way of thinking because they see economic theory as at bottom an elaborate justification for an immoral society. (Moral misunderstanding and the justification of markets Heyne) Some people call for golden rule. But in the free market, we cannot apply it because it assumes a condition of personal information and immediacy of action, which is impossible in the market due to the fact that we don’t have enough knowledge to make every single decision right. For example, the Soviet Union government officials set the prices but the fact was that they failed to make instant and constant response to the change of people’s preference, which made it common for citizens to wait a long line to get a small amount of goods they desired.
Some people may think that a system which is based on self-interest is evil and degraded, but in fact all human action is based on self-interest.
Another fallacy of capitalsim
Capitalism is prone to monopoly
The third objection to capitalism is that it is prone to monopoly. The representative of this opinion, Karl Marx propagates that: In a society of laizzez-faire capitalism, what would prevent the formation of powerful monopolies able to gain control over the entire economy. The opponents of capitalism don’t regard competition, the essence of capitalism, as a stimulation of production and exchange; instead, they argue that competition squeezes out small companies and makes big ones setting prices at will: “In capitalism, there’re certainly some big and powerful companies, who will lower their prices and eliminate their competitors. At last, this company will become the only seller in the market and thus can set prices at will. Capitalism is certainly the best soil for these bastards because capitalism merely cares about profit. ” Finally they conclude, “We need socialism, in which a strong government will punish these big companies and we will be better off.”
If capitalism was really the heaven of monopoly, then the top 500 companies should remain unchanged in a long time. But the truth is that between 2001 and 2002, 36 businesses dropped off the list of the Fortune 500 largest companies. (Thomas Sowell, Basic Economics page 96) In theory, a company which wants to monopolize in certain area should lower their prices and squeeze the profit of its competitors. But it’s actually hard to apply in reality. First, the company has to endure a short term loss, and the more competitors it has, the more loss it has to suffer. Second, even if it has almost forced all the competitors out of the market, there maybe a buyer using a low price to buy the company and competes again. Besides, the change of technology and customers’ preference can also hamper the existence of monopoly. Just as Fortune magazine concludes: Failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward. Capitalism actually eliminates the existence of monopoly and it’s socialism that will cause monopoly.
In the book, Capitalism: the unknown ideal, author Ayn Rand says that the government grants a company a franchise for exclusive territory. In World War Two, for example, two telegraph companies, Western Union and Postal Telegraph were ordered into one monopoly. (Page 74) So we can see that a necessary condition for monopoly is the support of government, which is not quite possible in capitalism.
In a free market, a company, however big and powerful it is, cannot monopolize because any field is open to any one who wants to enter and compete. The reason why big corporations get huge profit lies in the fact that they try hard not to be replaced by their competitors. For example, McDonald’s succeeds globally because it spends millions of dollars doing researches on how to make better potatoes, produce more delicious hamburgers and be more efficient. No government protects McDonald’s, the reason it keeps profitable is that it keeps vigilant in case being caught up by competitors. Just as Alan Greenspan summarizes in his article “The assault on integrity”, “Reputation, in an unregulated economy, is thus a major competitive tool.” (Capitalism, an unknown ideal page 127) With no subsidy from government, companies have to maintain a high quality, whether in hard values, such as good products, or soft ones like friendliness to employers and customers. In contrast, the only airplane company in Soviet Union , Aeroflot, treated customers badly because with the support of government, there’s no competitor at all. When the market is regulated by the government, there’s no cost for a company to lose customers.
Fallacy of capitalism
A second curse against capitalism is that: Capitalism exploits the poor. Some people believe that every benefit under capitalism has to come at someone else’s expense because the system only has limited opportunities available to its citizens. This zero-sum opinion on market economy can be easily rebuked in the textbook but the reason why it is so popular is that the explanation seems to fit the reality well. The opponents stare at the graph of Gini coefficient and data of unemployment and shout, “Don’t you see that the wealth gap is shocking? Don’t you know that there’re too many people who even cannot get a job to feed themselves? That’s ridiculous and should be changed.” Once again they call for socialism, but this time they find a famous partner, Albert Einstein. In his article “Why socialism”, Einstein says that “A planned economy, which adjusts production to the needs of the community, would distribute the work to be done among all those able to work and would guarantee a livelihood to every man, woman and child.” Einstein is a famous scientist and humanist, but it doesn’t mean that his comment on economics is axiom. Generally people make judgment based on data, but what if the data doesn’t reflect the truth?
Some of the data are conducted by cross-sectional experiments. That is, people of various ages and background are assessed at the same time and their incomes are compared. Researchers are easy to get a mass of information by this kind of experiments but in fact, a lot of factors influencing income are omitted. For example, it’s not surprising in life that when an old business man can earn much more than a novice because the former is more experienced and has more business partners. But this difference isn’t shown in data. In addition, it’s generally accepted that different education levels lead to different jobs and pays, (or we won’t go to college), but not many data mark the difference of education, especially the ones concerning salaries nationwide. So the data collected without a differentiation of age, education and aptitude bracket are not convincing. But unfortunately, people don’t want to know how to conduct surveys in social science and some researchers just don’t do work seriously.
“Maybe you are right, but you can’t deny the fact that capitalists are exploiting the African people now.” Some of the scholars may fight back. Well, it’s safe that Africa remains the poorest continent in earth, but is it really the capitalism that causes the low living standard of African people? If that’s the case, why is my motherland China Africa ?
“Anyway, capitalism is not fair in distribution of incomes. We need some organizations to ask for rights.” Social activists may stand out at this moment, “We must redistribute the incomes and set up labor unions to fight for our rights.” Well, like I said before, incomes are determined by age, education and aptitude. Redistributing the incomes actually means making inequity and changing people’s incentives, which can push back and hurt the economy. “Are you kidding me? That’s impossible.” Activists may treat my argument with contempt. Well, I will use a story to illustrate my point.
Imagine one day a poor guy, Alex, wakes up and finds that he is given 100 bucks by wealth redistribution administration, “We’ve forced the rich man, Bob, to promise that he will give you the surplus income everyday.” An official shakes Alex’s hand warmly, wishes him good luck and leaves. “Oh, great I got money. Maybe I can go for a drink rather than go to do the tiring job.” Alex is exhilarated and drinks for a whole day. At night, he gets drunk and thus his friend escorts him to go home. “Don’t you work tomorrow?” “No, that stupid Bob will have to give me 100 bucks everyday, why the heck do I have to do the job just for 50 bucks?” Thus, Alex no longer goes to job.
Another protagonist, Bob, thinks, “I studied in the college for four years to get this job. I work hard to earn the income. Why the hell do I have to give the money to that lazy poor man?” Bob, once a diligent businessman, loses incentive to work hard as before.
The result of the redistribution of income is that the country loses two workers. If the program is generalized, the country may have to face a stagnation of economic growth. Maybe the story is somewhat exaggerated, but my point is that policies with good intentions may cause bad consequences: emphasizing redistribution without scrutiny may lead to problem within the society.
Strikes can be detrimental to the whole society. For example, the
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