Transcript Economics in a nutshell - Wright State University

Does good writing matter?
• "I am a motivated, self-igniting person who greatly
entertains the challenges of bettering myself and the
performance of work that I do."
• "I expect the position to pay commissary to that of its
value, as well as to the performance completed."
• “Objective: To work in a challenging environment that
allows me to use my imaginatiation…. Education:
______ Collage.”
• “Who’s better to spew out incite, than a college senior?”
• “I also have a degree English which serves me well in
editing text for poor grammer or typos.”
• See more in “Cover Letters from Hell,”
http://www.killianbranding.com/cover-letters-from-hell
How does success happen?
• “Our society has created a cult of selfesteem in which we make it hard for
(people) to fail. But there are great
advantages to failing. That is how we
learn to correct our weaknesses. And
that, in turn, is one of the first steps to
success.”
- Robert Sternberg, professor of
psychology, Yale University.
Economics in a nutshell
• Motives: “There’s one thing you can
always count on. You can always count
on the other fellow to look after his own
interests more than he looks after yours.”
• The nature of the world: things that are
valued are scarce, i.e. finite.
How economists think about “cost”
• Things don’t have costs; actions do. And the
cost of an action is its opportunity cost, i.e. the
value of the most desired alternative that must
be foregone to take the action.
• The only costs that matter are marginal costs,
those over which the decision-maker has control
because they involve actions that haven’t been
taken yet. Sunk costs, i.e. costs already
incurred, are irrelevant to current decisions.
“The Population Reference Bureau estimates that
raising a child costs nearly $140,000. But that’s for a
first child. The good news is that the second doesn’t
tax the wallet quite so heavily, since food and other
items can be purchased more economically, rooms can
be shared, and clothes can be handed down. Child
number two costs about half as much as the first,
studies have found. Typically, less than 15 percent of
family income is spent on a second child, compared
with 30 percent for the first, says Joan Solomon Weiss,
author of Your Second Child (Simon & Schuster,
1981).”
-- Parents magazine, Feb. 2000, p. 114
The Law of Demand
• As the sacrifice required to take an action
(i.e., the “price” of that action) increases,
any individual, and hence all individuals
collectively (i.e., “the market”) will demand
less of it.
And demand comes from value by demanders
(consumers), which is completely context-dependent.
Many people sincerely believe that the value of anything is determined by the labor used in
producing it; that its price ought to reflect quite objectively the amount of labor put into it. The belief in
this labor theory of value, however, is founded in myth, not fact. Day-to-day experiences reveal its
error. For a far-fetched example, the same labor could be used to make mud pies as to make mince
pies, yet the value in the market place would differ.
A service or a product of little value at one time or in one place may be highly valued at
another time and place. For instance, an artist may produce hundreds of paintings considered freakish
by others and be rewarded with starvation for his labors. But, let his style become the fad, and for less
labor than before, he can revel in luxury.
Lost and adrift on a raft for days, a man might offer his fortune in exchange for a
hamburger. Yet, the same person, following a lusty meal, might not offer a penny in exchange, though
the hamburger had changed not at all.
Individuals have varying value judgments. Value in the market sense, therefore, is a
subjective rather than an objective determination. In a way, it is like beauty. What is beauty? It is what
you or I or other individuals think is beautiful. It depends on subjective or personal value judgments,
judgments characterized by constant variation.
- Leonard Read, “The Rap Against Unearned Riches,” http://mises.org/daily/5681/.
Prices are a way of making people take
account of the consequences for everyone
else of their choices. If they are not allowed
to freely move up or down, bad things
happen because people do not have to face
all of these consequences.
When prices are allowed to react freely to changed circumstances, the
adjustment will take the form of equilibrating quantity supplied and
demanded. This result, which occurs without any guiding hand but is
instead the outcome of the interplay of all buyers and sellers freely choosing
to use the resources they own as they see best, is called the spontaneous
order.
The fallacy of volition
• The belief that prices are an outcome of
an individual seller’s or moral rectitude (or
lack thereof), rather than the interplay
between many buyers and sellers – prices
are what they are because someone is
“greedy,” e.g.
“You see those are the people who have been
overcharging us, and they sold out and moved to
Florida. I think they’ve ripped off our communities
enough. First it was Jews, then it was Koreans and
now it’s Arabs.”
- Former Atlanta mayor (and UN ambassador)
Andrew Young
Gas lines, Nigeria
Gas lines, Nigeria
"After the many oppressions which he [the Roman emperor Diocletian] put into
practice had brought a general dearth upon the empire, he then set himself to
regulate the prices of all vendible things. There was much bloodshed upon very
slight and trifling accounts, and the people brought provisions no more to market,
since they could not get a reasonable price for them; and this increased the
dearth so much that at last after many had died by it, the law itself was laid
aside."
Roman historian Lactantius, writing in De Mortibus Persecutorum (“On
the Death of the Persecutors”)
Because information/knowledge
is costly…
•
•
•
•
People often seek to acquire it, if they are allowed to profit by doing so.
People often have an incentive to try to credibly convey it, in order to make
money.
Prices are the information boxes that tell people what to do – they contain
information on the costs and value of different choices. (This idea covered
earlier.)
Thus, the spontaneous order assures that we take advantage of costly,
dispersed knowledge by giving people reasons to go out and get it, and act
on it. Markets allow society to take advantage of knowledge scattered
across many individuals. Markets do this by allowing individuals to make
decisions based on the prices they see. But competition is the critical
ingredient. It enables people with (what they think is) valuable knowledge to
put that knowledge into play in the market, and thus cause resources to be
moved from less to more valuable uses.
• “I can’t think of one major financial fraud in the United
States in the last 10 years by a major brokerage house
analyst or an outside accounting firm. Almost every such
fraud ultimately was unmasked by short sellers and/or
financial journalists.”
• Jim Chanos, Wall Street trader and “short seller,”
http://www.theglobeandmail.com/report-on-business/robmagazine/chanos-calls-chinasyndrome/article2183539/page3/
The indifference principle
• When entry is easy, prices will quickly
adjust to ensure that no one can earn
above-normal returns.
• But when entry is difficult, people can
capitalize on the scarcity of what they are
selling and earn very high returns.
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Rethinking “Monopoly”
• Government possesses a unique power to limit
the ability of people to dictate the terms of
competition.
• On the one hand, in theory it may keep large
businesses from exploiting their “monopoly
power.”
• But private businesses may also use
government to prevent others from competing
against them.
The economics of public and private decisionmaking
• The people who make political decisions are no better
(or worse!) than those they govern.
• Thus, they seek to maximize income, prestige, political
goals, and a host of other things. They have goals, and
they have constraints, including political ones.
• However, they are different from private decision-makers
in having the power to make rules under penalty of legal
punishment.
Problem 1 – Regulatory capture
•
•
•
•
•
•
It is generally assumed government agencies are set up to regulate business and
protect consumers. But non-consumer special interest-groups, often including
regulated businesses themselves, often wield disproportionate influence, so rules
may actually hurt those they are supposed to help.
Another form of regulatory capture is when some competitors use lawmaking to limit
or even destroy competition, including future competition.
Why? Consumers are a large group with little at stake per person. Because they
have a lot at stake per unit, businesses have an incentive to collect knowledge about
how to influence the political system.
In addition it is often less costly to buy political influence than it is to compete for
business on the grounds of quality and price.
One often-effective way to capture the government, and get it to limit competition for
your benefit, is simply bribery.
One (but far from the only) example of capture is credentialing, the imposition of
licenses or other artificial requirements to enable someone to compete in an industry.
The Mississippi Black Code
Section 5. Every freedman, free negro and mulatto shall, on the second Monday of
January, one thousand eight hundred and sixty-six, and annually thereafter, have a
lawful home or employment, and shall have written evidence thereof as follows, to wit:
if living in any incorporated city, town, or village, a license from that mayor thereof;
and if living outside of an incorporated city, town, or village, from the member of the
board of police of his beat, authorizing him or her to do irregular and job work; or a
written contract, as provided in Section 6 in this act; which license may be revoked for
cause at any time by the authority granting the same.
Section 6. All contracts for labor made with freedmen, free negroes and mulattoes for
a longer period than one month shall be in writing, and a duplicate, attested and read
to said freedman, free negro or mulatto by a beat, city or county officer, or two
disinterested white persons of the county in which the labor is to performed, of which
each party shall have one: and said contracts shall be taken and held as entire
contracts, and if the laborer shall quit the service of the employer before the expiration
of his term of service, without good cause, he shall forfeit his wages for that year up to
the time of quitting.
Problem 2: The incentive to accumulate
knowledge
•
•
•
Private actors will keep accumulating knowledge as long as the marginal benefit, in
terms of profit, is greater than the marginal cost.
Bureaucrats and politicians will keep amassing knowledge as long as the marginal
benefit, in terms of whatever goals they have, exceeds the marginal cost.
But precisely because they will have less knowledge in equilibrium than private actors
would, their decisions are poorer. Results are bad, and politicians and bureaucrats
seek to point fingers and/or impose more rules to undo the problems caused by the
last bout of rulemaking.
“You can’t make gasoline in a bathtub.”
- Harold Ickes, Franklin Roosevelt
administration official, on why he was sure a
black market for gasoline would not arise
with gasoline rationing during World War II.
The NRA was discovering it could not enforce its rules. Black markets grew
up. Only the most violent police methods could procure enforcement. In
Sidney Hillman’s garment industry the code authority employed enforcement
police. They roamed through the garment district like storm troopers. They
could enter a man’s factory, send him out, line up his employees, subject
them to minute interrogation, take over his books on the instant. Night work
was forbidden. Flying squadrons of these private coat-and-suit police went
through the district at night, battering down doors with axes looking for men
who were committing the crime of sewing together a pair of pants at night.
But without these harsh methods many code authorities said there could be
no compliance because the public was not back of it.
- Historian John T. Flynn, in The Roosevelt Myth, on the abusive tactics of
the National Recovery Administration
Problem 3 – The democracy problem
• When issues are relatively simple to
frame, politicians seeking to win elections
will be willing to take from the few who
have a lot of resources available to
provide benefits to the many.
Problem 4 – the abuse-of-power problem.
•
•
•
•
•
Many people wish to control others, sometimes for decent reasons (achieving their
conception of a better society), and sometimes not.
For reasons mentioned above, power exercised over the spontaneous order causes
unexpected problems.
Those with power then may target perceived wrongdoers, leading to abuses of
power.
In addition, the fact that government can, by limiting competition or taxing some
people and giving the proceeds to others, make some people better off, may have an
incentive to write rules simply to extract bribes from those who will benefit if the rules
are passed, and even from those will lose, to prevent them from being passed.
If one accepts this view, corruption becomes a way to get around rules that are
imposed, and the rules can be imposed solely to provide income and jobs to
government officials.
Corruption and the reach of government
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-1.398
18
79
Total number of procedures
Vertical axis: how effectively corruption is controlled; horizontal axis: number of
procedures needed (combined) to start a business, register a contract, gain title to
property.
The common face of totalitarianism is not, as cinema often depicts,
that of uber-Nazis marching in satanic rows, or of cultured madmen
planning the extinction of millions with violin music softly seething in
the background. Its quotidian face is one of petty, arbitrary,
unappealable abuse. For the average man life under tyranny consists
of being precisely zero in a society that can do anything — anything
at all — to him.
Richard Fernandez, “An Event Foretold,”
http://pajamasmedia.com/richardfernandez/2011/04/20/an-eventforetold/
10
France
Germany
Spain
Belgium
8
Finland
Italy Sweden
6
Canada
US
Austria
Australia
UK
4
ireland
Denmark Netherlands
Japan
0
1
2
Job Protection
3
High and Low Income Families, 2001
Education of householder
Percent with less than high school
Percent with college degree or more
Age of householder (percent distribution)
under 35
35 - 64
65 and over
Family status
Married-couple family (% of total)
Single-parent family (% of total)
Persons per family
Earners per family
% of married couple families
in which wife works full-time
% of total hours worked
supplied by group
Bottom 20%
of income
recipients
Top 20%
of income
recipients
34.0
9.0
3.0
58.0
32.0
44.0
24.0
13.0
79.0
8.0
51.0
49.0
93.0
7.0
2.9
3.4
0.8
2.2
13.0
63.0
10.0
25.0
Source: U.S. Dept. of Commerce, Money Income in the United States: 2001 (Washington, D.C.: Government Printing Office 2002)
Income Mobility
Percentage Distribution by Income Status of Family in 1998
Income Status of
Family in 1988
Highest quintile
Next-highest-quintile
Middle-quintile
Next-lowest-paid quintile
Lowest-paid quintile
Top paid
quintile
Next highest
quintile
53.2
25.8
12.6
4.3
4.3
23.2
31.1
27.5
11.0
6.4
Middle Next lowest Lowest paid
quintile
quintile paid quintile
14.9
23.7
28.3
22.6
12.4
5.7
12.9
20.7
36.3
23.6
3.0
6.5
10.9
25.7
53.3
Source: Katherine Bradbury and Jane Katz, “Women’s Labor Market Involvement and Family Income Mobility When Marriages
End,” New England Review, Fourth Quarter 2002, pages 41-74.
• The table above allows for us to see how families
in each income bracket in the U.S. fared 10 years later.
•
Changing Composition of the Poor
Number of poor families (millions)
Percent of poor families headed by a:
Female
Black
Elderly person (aged 65+)
Person who worked at least
some during the year
Poverty rate (%)
All families
Married-couple families
Female-headed families
All individuals
Whites
Blacks
Children (under age 18)
1959
1976
2003
8.3
5.3
7.6
23
26
22
70
48
30
14
55
51
27
10
48
18.5
15.8
42.6
10.1
7.2
32.5
10.0
5.4
28.0
22.4
18.1
55.1
27.3
11.7
9.1
31.1
16.0
12.5
10.5
24.4
17.6
Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Line: 1982, Table 5; and Poverty in
the United States: 2003, (P60-226).
Poverty Rate, 1947-2003
32.0
Poverty
rate
18.5
13.9
10.0
9.7
10.3
10.7
8.7
10.0
1947 1959 1965 1968 1975 1980 1990 2000 2003
Sources: U.S. Dept. of Commerce, Characteristics of the Population Below the Poverty Level: 1982, Table 5; and Poverty
in the United States: 2000, p. 60-241.
From 1987-2005:
• Real non-Hispanic white male earnings
increased 10.78%.
• Real non-Hispanic white female earnings
increased 38.50%.
• Real black male earnings increased 25.22%.
• Real black female earnings increased 35.81%.
• Real Hispanic male earnings increased 10.00%.
• Real Hispanic female earnings increased
18.78%.
Earning relative to Non-Hispanic White Males, 1987-2005
1.2
1
0.8
White females
Black males
Asian males
0.6
Hispanic males
0.4
0.2
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
19
87
0
Wage/salary earnings relative to non-Hispanic white females, 1987-2005
1.2
1
0.8
Non-Hispanic Black Females
Hispanic Females
Asian Females
0.6
0.4
0.2
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Relative female/male earnings for racial groups and Hispanics
0.9
0.8
0.7
0.6
Blacks
0.5
Hispanics
Asians
0.4
Non-Hispanic w
0.3
0.2
0.1
0
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
Median M/F earnings among
“Asian” groups, 1999
•
•
•
•
•
•
•
•
•
•
All workers: 37,057 (M), 27,194 (F)
All “Asians”: 40,650 (M), 31,049 (F)
Indians: 51904 (M), 31258 (F)
Japanese: 50,876 (M), 35,998 (F)
Chinese: 44,381 (M), 34,689 (F)
Pakistani: 40,277 (M), 28,315 (F)
Korean: 38,776 (M), 28,403 (F)
Vietnamese: 31,258 (M), 24,028 (F)
Thai: 32,879 (M), 25,402 (F)
Cambodian: 28,706 (M), 21,911 (F)
Educational differences among groups over time – percent
of all college degrees awarded to various groups; bold and
italic denote significant over- and under-representation
NHW
males
Black
males
Hispanic
males
Asian
males
NHW
females
Black
females
Hispanic
females
Asian
females
1976-7
.477 .027 .011 .010 .403 .036 .009 .007
1988-9
.460 .022 .012 .019 .445 .035 .016 .018
1996-7
.344 .029 .022 .028 .424 .052 .031 .031
2003-4
.318 .031 .027 .030 .415 .062 .041 .036
Source: National Center for Educational Statistics
Source: Bane (2004).
“One sure way to save money on
groceries is to eliminate the middleman
by buying directly from farmers and other
suppliers. This is what a group of socially
motivated and normally hungry people
have decided to do by forming a grocery
cooperative.”
The economic function of the middleman
is to match buyers and sellers. For
buyers to find sellers and sell directly,
and for sellers to find buyers and buy
directly, is too costly because of lack of
knowledge by each side about the other.
The middleman is compensated for his
knowledge.
“If the same Goods are bought by Ten Persons one after another, each of
those Ten Persons aims at Gain in passing thro' his hands, . . . yet the
Province or Publick is not enrich'd one Farthing by their Labour. . . . Their
meer handing of Goods one to another, no more increases any Wealth in
the Province, than Persons at a Fire increase the Water in a Pail, by
passing it thro' Twenty or Forty hands.”
- THE PRESENT MELANCHOLY CIRCUMSTANCES OF THE PROVINCE
CONSIDER'D, AND METHODS FOR REDRESS HUMBLY PROPOSED 67 (Boston, B. Gray & J. Edwards 1719).
The middleman or trading minority
specializes in retail activities, and is paid for
the ability to know, often after a lot of costly
searching, where buyers and sellers are, and
for the effort required to knit them together
through buying from one party, marking the
good up and selling to the other.
Taken as a whole, opinion was hostile to the
middleman. His function, and his hard work in bringing
buyer and seller together, were ignored; profits were not
regarded as a reward for labor, but as the result of
sharp practices. Despite the fact that his very existence
was proof to the contrary, the middleman was held to be
redundant.
- R.A. Radford, “The Economic Organization of a
P.O.W. Camp,” Economica, Nov. 1945, p. 199.
Chinatowns around the world
San Francisco
Yokohama, Japan
Bangkok, Thailand
London
Sydney, Australia
Toronto
Vancouver
The Milesians were not only familiar with the Greek culture
of the mainland, but were also conversant with the Near
Eastern cultures of Lydia, Cappadocia, of Phrygia, of the
Phoenician lands, of Egypt, of the whole Levantine world.
Traders they were, wandering about, speaking with great
facility this, that, or the other tongue that they found
necessary to transact their business.
- Howard Becker, Man in Reciprocity: Introductory
Lectures on Culture, Society and Personality (New York:
Praeger, 1956), p. 227.
School-age children, when not in school, were at their
parents’ elbows, waiting on customers, making change,
stocking shelves, and imbibing the shrewdness of
operating an independent business on meager
resources. They were inculcated with the parents’ work
and thrift ethics and the lesson that family unity and selfdenial was essential to the family’s goals…With all of
their attraction to America, Lebanese parents, however,
disapproved of their children growing up “like American
children” without the restraints of Lebanese values.
- Alixa Naff, “Lebanese Immigration into the
United States: 1880 to the Present,” The Lebanese in
the World, Albert Hourani and Nadim Shehadi (eds.), p.
157.
"We will not stand by and allow them to
move this brother so that some white
interloper can expand his business."
- Rev. Al Sharpton, 1995
Burned market, Koreatown, Los Angeles, 1992
Two Korean men stand on the roof of a grocery store with rifles to prevent
looters from entering the store, April 30, 1992, in Los Angeles. The worst riots
in modern U.S. history began when outnumbered police were faced by a crowd
angered by the acquittals of four white police officers accused in the videotaped
beating of black motorist Rodney King. Few lives in the city were untouched by
the riots, but some were nearly destroyed. (AP)
Jae Yul Kim greets longtime customer McKinley Gipson in his market
in South Central Los Angeles, April 10, 1997. Five years earlier, Kim
watched helplessly as a man put a gun to his ribs while a mob
ransacked and burned his small market. Kim and his family rebuilt their
store and relations with the community around it.
Turkish rule...meant unutterable contempt...The Armenians
(and the Greeks) were dogs and pigs...to be spat upon, if
their shadow darkened a Turk, to be outraged, to be the
mats on which he wiped the mud from his feet. Conceive
the inevitable result of centuries of slavery, of subjection to
insult and scorn, centuries in which nothing that belonged
to the Armenian, neither his property, his house, his life, his
person, nor his family, was sacred or safe from violence—
capricious, unprovoked violence—to resist which by
violence meant death.
- Ramsay, William M. Impressions of Turkey During
Twelve Years' Wanderings. New York: G. P. Putnam's
Sons, 1897. pp. 206-207
The Turks have embarked upon the total extermination of the
Armenians in Transcaucasia...The aim of Turkish policy is, as
I have reiterated, the taking of possession of Armenian
districts and the extermination of the Armenians. Talaat's
government wants to destroy all Armenians, not just in
Turkey but also outside Turkey. On the basis of all the reports
and news coming to me here in Tiflis there hardly can be any
doubt that the Turks systematically are aiming at the
extermination of the few hundred thousand Armenians whom
they left alive until now.
- Major General Otto von Lossow, acting German
military attaché in Turkey, 1918
The battalion left Aleppo on 3 February and reached Ras
al-Ain in twelve hours....some 12,000 Armenians were
concentrated under the guardianship of some hundred
Kurds…These Kurds were called gendarmes, but in reality
mere butchers; bands of them were publicly ordered to
take parties of Armenians, of both sexes, to various
destinations, but had secret instructions to destroy the
males, children and old women...One of these gendarmes
confessed to killing 100 Armenian men himself...the empty
desert cisterns and caves were also filled with corpses.
- Gertrude Bell, British diplomat in Turkey
We intend to harm, maim, cause them a lot of suffering, even killing them in
the most despicable way ever…if they don’t leave our land and country
immediately.
- Uganda Africa Trade Movement, statement on Indian middleman
in that country, 1992.
“We are tired of Asians!“
"They should go back to their land!“
- Slogan chanted by rioters on April 12, 2007 against plans by
company founded by Ugandans of Indian origin to grow sugar cane
in a national forest (with permission of government).
So the middleman joins buyers and sellers
who would otherwise have no opportunity to
trade. More generally, the entrepreneur (of
which the middleman is an example) is the
person who decides to acquire resources
and use them for some new, uncertain
purpose in the hope of earning more
revenue than the opportunity cost of those
resources.
Two functions of the entrepreneur
• As residual claimant: the person who is paid what is left
over after resource costs have been paid, in exchange
for control over how the resources are used. This
requires a high tolerance of risk relative to his workers.
• As social reorganizer: the person who rearranges
resources, changing how they are used, in hopes of
making money. Society pays the cost of those
resources not being available for their best alternative
use, but earns the potential (not sure) gain of greater
value when they are used the way the entrepreneur
wants to use them.
Question: How many lives have snow
blowers, invented in 1978, saved?
World per capita GDP (1990 $US)
7000
6000
5000
4000
3000
2000
1000
0
1
1000
1500
1600
1700
1820
1900
2000
Since 1780…
• Every generation lives 50% better than the one before it.
• Since 1965, average American man has 6-8 hours more leisure per
week, average woman 4-6. This is equivalent to extra 5 weeks of
vacation. Less-educated adults have seen the biggest increase in
leisure time.
• Since 1900, workweek has declined from 60 hours to 40.
• In 1900, most 15-year olds were working. Now, few do, and those
who do do so mostly for leisure income.
• In 1900, only 26% could retire at 65; now, 80% do, and most who
don’t keep working because they simply want to.
• In 1900, the average woman spent 12 hours a day on household
chores. Now, men and woman combined spend fewer than four.
• Life expectancy since 1900 has gone up from 48 to 77.
Average Household Size in the US, 19002000
Source: http://www.flatworldknowledge.com/node/29498#web-29498
Proportion of households by type, 19472002
Expenditure on food as pct. of income, expenditure on dining out as pct. of
Food expenditure, 1929-2003
An Osborne Executive portable computer, from 1982, and an iPhone, released 2007. The
Executive weighs 100 times as much, is nearly 500 times as large by volume, costs 10 times as
much, and has 1/100th the clock frequency of the iPhone.
Our ancestors… were infested with lice and parasites and lived above
cellars heaped with their own feces. Food was bland, monotonous, and
intermittent. Health care consisted of the doctor’s saw and the dentist’s pliers.
Both sexes labored from sunrise to sundown, whereupon they were plunged
into darkness. Winter meant months of hunger, boredom, and gnawing
loneliness in snowbound farmhouses.
Source: Steven Pinker, The Better Angels of Our Nature, Why Violence
Has Declined (2011)
But it was not just a mundane physical comforts that our recent
ancestors did without. It was also the higher and nobler things in life, such as
knowledge, beauty and human connection. Until recently most people never
traveled more than a few miles from their place of birth. Everyone was ignorant
of the vastness of the cosmos, the prehistory of civilization, the genealogy of
living things, the genetic code, the microscopic world, and the constituents of
matter and light. Musical recordings, affordable books, instant news of the world,
reproductions of great art, and filmed dramas were inconceivable, let alone
available in a tool that can fit in a shirt pocket. When children emigrated, their
parents might never see them again, or hear their voices, or meet their
grandchildren. And then there are modernity’s gifts of life itself: the additional
decades of existence, the mothers who live to see their newborns, the children
who survived their first years on earth. When I stroll through old New England
graveyards, I am always struck by the abundance of tiny plots and poignant
epitaphs. “Elvina Maria, died July 12, 1845; aged four years, and nine months.
Forgive this tear, a parent weeps. ‘Tis here, the faded floweret sleeps.
- Source: same.
For almost a millennium and a half the Judeo-Christian prohibition against
infanticide coexisted with massive infanticide in practice. According to one
historian, exposure of infants during the Middle Ages “was practiced on a
gigantic scale with absolute impunity, noticed by writers with most frigid
indifference.”145 Milner cites birth records showing an average of 5.1 births
among wealthy families, 2.9 among the middle class, and 1.8 among the poor,
adding, “There was no evidence that the number of pregnancies followed similar
lines.”146 In 1527 a French priest wrote that “the latrines resound with the cries
of children who have been plunged into them.”147
Pinker, Steven (2011-10-04). The Better Angels of Our Nature: Why Violence
Has Declined (Kindle Locations 9368-9373). Penguin Group. Kindle Edition.
A Brief History of Doomsday Philosophy
• Thomas Malthus: Humanity alternates between booms and
population growth, followed by catastrophic overpopulation
and famine. Millions die off, and the cycle begins all over
again.
• Luddite doom (early 1800s, Britain): Technology (machines)
will throw so many people out of work that our only future is
one in which a few industrialists are obscenely wealthy and
everyone else is unemployed or on the edge of survival.
• Marxism: Capitalists organize the world to benefit them.
Eventually, the masses will overthrow the capitalist order and
replace it with the workers’ state.
• Overpopulation, 1960s style: First proposed by Paul Erlich,
who suggested that human population, especially in poor
nations, was growing out of control. By 1985, 20 percent (or
more) of the world’s population would be dying of famine.
Doomsday philosophy (continued)
• Resource exhaustion: In the 1970s, we learned that the
world’s supply of most resources, especially oil, would
be gone within a few years. By the year 2000, oil would
be over $100 a barrel and almost exhausted.
•
“The U.S. has enough petroleum to keep its
kerosene pumps burning for only four years.”
- Pennsylvania’s chief geologist, in 1874.
• Overcapacity/“Sustainable development”: Industrial
activity is fatally toxic to the planet. We destroy the
climate and the ozone layer and are running out of
cropland and parkland and land of all sorts, and are thus
sowing the seeds of humanity’s doom.
Source: Civil Society Coalition on Climate Change, “Civil Society Report on
Climate Change,” Nov. 27, 2007, http://www.csccc.info/reports/report_20.pdf.
Source: Same.
Source: Same
Predictions of imminent catastrophic depletion are almost as old as the
oil industry. An 1855 advertisement for Kier’s Rock Oil, a patent medicine
whose key ingredient was petroleum bubbling up from salt wells near
Pittsburgh, urged customers to buy soon before “this wonderful product is
depleted from Nature’s laboratory.” The ad appeared four years before
Pennsylvania’s first oil well was drilled. In 1919 David White of the U.S.
Geological Survey (USGS) predicted that world oil production would peak
in nine years. And in 1943 the Standard Oil geologist Wallace Pratt
calculated that the world would ultimately produce 600 billion barrels of
oil. (In fact, more than 1 trillion barrels of oil had been pumped by 2006.)
During the 1970s, the Club of Rome report The Limits to Growth
projected that, assuming consumption remained flat, all known oil
reserves would be entirely consumed in just 31 years. With exponential
growth in consumption, it added, all the known oil reserves would be
consumed in 20 years.
- Ronald Bailey, “Peak Oil Panic,” Reason, May 2006,
http://www.reason.com/0605/fe.rb.peak.shtml.
•
•
•
“As a result of our population size, consumption patterns, and technology choices, we
have surpassed the planet’s carrying capacity. This is plainly evident by the extent to
which we are depleting natural capital. The earth’s environmental assets are now
insufficient to sustain both out present patterns of economic activity and the life-support
systems we depend on. If current trends in resource use continue and if world population
grows as projected, by 2010 per capita availability of rangeland will drop by 22 percent and
the fish catch by ten percent. Together, these provide much of the world’s animal protein.
The per capita area of irrigated land, which now yields about a third of the global food
harvest, will drop by 12 percent. And cropland area and forestland per person will shrink
by 21 percent and 30 percent, respectively.”
- Sandra Postel, vice president for research, The Worldwatch Institute (1994).
“Inventions reached their limit long ago, and I see no hope for further improvement.”
- Julius Frontinus, Roman engineer, in the 1st century A.D.
"The whole aim of practical politics is to keep the populace alarmed (and hence clamorous
to be led to safety) by menacing it with an endless series of hobgoblins, all of them
imaginary."
- H.L. Mencken.
“The urge to save humanity is almost always only a false-face for the urge to rule it.”
- Mencken again
The grandeur of war lies in the utter annihilation of puny man in the great
conception of the State, and it brings out the full magnificence of the sacrifice of
fellow-countrymen for one another . . . the love, the friendliness, and the strength
of that mutual sentiment. —Heinrich von Treitschke
Pinker, Steven (2011-10-04). The Better Angels of Our Nature: Why Violence
Has Declined (Kindle Locations 5361-5363). Penguin Group. Kindle Edition.
“The complexities of the interactions of
billions of human participants with
countless billions of wants and needs, but
limitless variations of the unknowable and
endless individual limited resources that
can be brought to bear to secure those
wants and needs is beyond intelligent
management or control. Free markets
allocate scarce capital and resources in a
world of unlimited desire better than any
mind or system devised by human minds.
And only free markets can cope with the
changes, expected or unexpected that
occur constantly and unendingly.” Anonymous
Some things that were supposed to
happen, but didn’t
• Esperanto
• Human-like robots
• Easy space flight, even vacations in
space.
• Extremely powerful but isolated
computers (Star Trek, 2001: A Space
Odyssey)
Some things that happened out of
the blue
•
•
•
•
•
The Web
Antibiotics
America
Laser surgery for the eye.
Networked computing (the WWW).
Money and liquidity
• Money is defined as a sufficiently widely
accepted medium of exchange.
• Money is defined around liquidity, the ease with
which an asset can be converted into the
universally accepted medium of exchange.
• (Currency is very liquid. Microsoft stock is much
less liquid, even though having it makes you
wealthier than not having it. A house is even
less liquid.)
Aug 17, 2005, 19:00 GMT
YAOUNDE, Cameroon (UPI) -- Beer bottle caps with prizes on the inside are
replacing currency in parts of Cameroon, gripped in a fierce promotional battle
between competing breweries.
Almost every $1 bottle of beer has a winning cap, with the smallest prize being
another bottle, and larger prizes including mobile phones and luxury cars, the
BBC reported.
Journalist Martin Etonge said using the winning caps in place of cash is most
visible in the taxi business, where five beer caps would be enough to cover
someone`s taxi expenses for a day.
"Taxi drivers are also using the caps in their fishy deals with the traffic police,"
Etonge said. "So they can get off by giving one or two caps to the officers."
The promotional battle has seen about 20 million bottles of beer given away
since the start of the year, the report said.
Copyright 2005 by United Press International
Different definitions of money
• M1 = currency + demand deposits
• M2 = M1 + savings accounts, CDs, etc.
• Banks create most of the money supply
every time they lend money. They are
able to do this because of fractional
reserve banking.
• Inflation is often referred to as “too much money chasing too few
goods.” It often occurs because money is growing faster than the
underlying productive capacity of the economy.
• The inflation rate is the average rise in prices of a variety of goods
chosen by the government as representative of what the typical
consumer purchases over some period of time. An example is the
Consumer Price Index; if it increased 3.8 percent last year, then the
average rate of increase in the prices in that index last year was 3.8
percent.
• While inflation can be small but positive in normal circumstances (or
even negative, when it is called deflation), when it is very high it is
called hyperinflation, and is caused by the government printing
money, at far too high a rate, in order to cover its spending
obligations.
Highest Monthly Inflation Rates in History
Country
Time
Month with Highest
Equivalent
required for
highest
monthly
daily
prices to
inflation rate inflation rate inflation rate
double
Hungary
July 1946
195%
15.6 hours
Zimbabwe
MidNovember 79,600,000,
98.0%
2008 (latest 000%
measurable)
24.7 hours
Yugoslavia
January
1994
313,000,000
64.6%
%
1.4 days
Germany
October
1923
29,500%
20.9%
3.7 days
Greece
November
1944
11,300%
17.1%
4.5 days
China
May 1949
4,210%
13.4%
5.6 days
1.30 x
1016%
Source: http://www.cato.org/zimbabwe
Governments may choose to inflate
the currency because:
• They can gain short-term political benefits
from money illusion.
• They may desperately need to print money
to cover urgent short-term obligations.
Inflation is costly for an economy
because:
• It is a tax on saving, discouraging people from putting
money away and encouraging them to spend it right
now. (Deflation has the opposite effect.)
• It creates noise in the price system, making it harder for
prices to promote efficient use of scarce resources.
Buyers and sellers cannot tell whether a price change is
due to inflation or a real supply or demand effect.
• There are opportunity costs of coping with inflation.
• It destroys long-term planning and entrepreneurship by
destroying the borrowing markets on which they depend.
• People generally run to the government for protection
from inflation, which increases the government role in
the economy.
Recessions, depressions,
expansions
• On average over a long period of time the natural state of the
economy is to grow. While it is growing it is said to be in an
expansion; if it is growing very fast it is in a boom.
• But over a short period it may shrink, because some unexpected
event has confounded many expectations and left people with many
economic mistakes in need of liquidation. Sometimes these events
are obvious (rapid oil price increases, a significant decline in the
stock market), sometimes they are not. These events are called
recessions.
• When the economy shrinks substantially over a longer period of time
it is a depression. These are very rare in the modern US, although
particular regions may suffer from them.
• Recessions are painful, depressions extremely painful for many
people. Thus, governments attempt to prevent recessions and, if
they happen, try to attempt to stop them from becoming depressions
through aggregate demand management. ADM is also used to
prevent the economy from growing too fast.
Aggregate demand management – how the
government tries to regulate macroeconomic
performance
• Monetary policy is attempts by the
government to influence the rate of money
creation by private banks.
• Fiscal policy is the use of the
government’s taxing and spending
powers.
The Federal Reserve (“the Fed”):
• Founded in 1914, it conducts monetary
policy as the U.S central bank.
• It is largely an independent agency from
the rest of the federal government.
The Federal Reserve’s three tools of
monetary policy
• 1. Control over two interest rates, which
are established by vote during Fed
meetings, and which affect how much
banks have to pay to borrow from one
another or from the Fed itself on a very
short-term basis.
The Federal Reserve’s three tools of
monetary policy (continued)
•
•
Open-market operations: the buying or
selling of government bonds issued by
the regular federal government.
The reserve requirement: the percentage
of deposits that banks must hold onto
rather than lend out.
Monetary policy during a recession
• When the economy is struggling, lowering
interest rates will encourage consumer
and producer borrowing, expanding
business activity and restoring the
economy to its normal growth path.
Monetary policy during a boom -overheating and the wage-price spiral
• Why should interest rates be raised when the economy is growing
too fast (i.e., faster than justified by the growth of productivity)?
• Because, allegedly, wage negotiation provides a feedback
mechanism whereby higher wages because of a fast-growing
economy cause firms to raise prices, which cause workers to
demand and get higher wages, ad infinitum.
• To prevent this, the Federal Reserve typically raises interest rates
when the economy is growing faster than what it is allegedly
capable of (which depends on how fast its productivity is growing).
It does this by raising interest rates to slow down business and
consumer borrowing.
• But entrepreneurs may respond to higher wages with labor-saving
innovations rather than higher prices, thus breaking the spiral and
making the original rate increases, and the resulting economic
slowdown, unnecessary.
Fiscal policy
• Fiscal policy has its roots in the Great Depression and
the book by John Maynard Keynes, The General Theory
of Employment, Interest, and Money.
• He diagnosed the Depression as a situation in which
people were so pessimistic that no interest rate was low
enough to get people borrowing money again to
purchase products or invest in entrepreneurial activities.
• When interest rates reached a sufficiently low level, that
was an opportunity for the government to borrow money
at very low opp. cost and spend it putting people back to
work. They would begin spending their paychecks, and
confidence would be restored. This use of government
borrowing to revive a collapsed economy was the first
use of fiscal policy.
Keynesian economics and modern
fiscal policy
• Modern Keynesian economics is different
because it suggests using fiscal policy to prevent
a recession from happening, or to prevent one
that has started from becoming a severe
depression.
• When the economy is struggling, use
expansionary fiscal policy (cutting taxes or
increasing spending) to get the economy moving
again.
• When the economy is overheating use
contractionary fiscal policy (raise taxes or cut
spending) to slow it down.
Problems with Keynesian fiscal policy
• Crowding out: Unless the economy is in a severe
depression, the opportunity cost of public borrowing
is not small. Funds that would otherwise be lent to
people who want to engage in entrepreneurial
activity are lent to the government, i.e. invested in
newly issued government bonds, instead.
• Fiscal policy mechanics: Actual government budget
process is too crude and too political to allow
precise fiscal policy to be used.
• Rational expectations: People eventually learn to
anticipate fiscal policy, so that when it actually
happens it has little impact.
Maybe Too Little, Always Too Late
Supply-side economics
• Supply-side economics focuses not on the
short-term incentive to spend on
consumption and invest in productive
activity, but on the long-term relation
between economic growth and
government interference with economic
activity via taxes and regulation. It claims
that taxes and regulations destroy too
much wealth and should be lowered.
US federal government spending to GDP (2011-2016 projected)
US federal government deficit to GDP
http://www.youtube.com/watch?v=hwWGzQ_FUtQ&feature=share