This is the archive for Economics.
Institutions, Institutional Change and Economic Performance by Doug North. Read it; it will likely change the way you think about why some nations manage to become rich and others stay poor, despite the billions of dollars being thrown at them annually.
More France photos will come soon, I promise. I am through 1.5/2 papers, so I still have half a paper and a take-home probability exam to finish in the next day and a half, then finals start immediately. I’m just a little busy…
(One paper is over the above book, so this post is entirely justified!)
- Day 354 – Shopping as a Discovery Process
While I was out finishing my Christmas shopping on Saturday, I couldn’t help but think a little bit about economics. I know I am strange, but it is what I am majoring in and what I’ve been studying these past three semesters at Hillsdale, and I am not very successful at turning my mind off (not that I’d ever want to…) More specifically, the work of Israel Kirzner. I read quite a bit of Kirzner in Austrian Economics I with Dr. Steele this past semester, so I thought I’d look at the world immediately around me through the lens of his work. The result? Shopping as a learning and discovery process.
Kirzner’s best work, in my opinion, is in characterizing the role and actions of the entrepreneur in the marketplace, a place which he viewed as in a constant state of disequilibrium. Entrepreneurs, by staying alert, learning, and discovering profit opportunities, tend to systematically move the market closer to equilibrium and erode ignorance that exists.
How does this relate to shopping?
I went shopping on Saturday not knowing what I was going to buy. I didn’t even have an idea. I was sheerly ignorant of all of the potential profit opportunities around me. All I needed was to stay alert to those opportunities the best I could and hope to stumble upon a profit opportunity and take advantage of it. I was, at least in my mind, a Kirznerian shopping entrepreneur, stumbling upon unexploited gains, reap the benefits, and add value to them as Christmas gifts to my loved ones. While shopping, I experienced first-hand the inherent “surprise element” (as Kirzner calls it) in the discovery process. I never knew the specific items I purchased existed, and there was no way I could search for them. I was in a state of sheer ignorance regarding their existence. Yet, due to the awareness of my cousin and me, I noticed the “$20 bills on the sidewalk” and “picked them up.” In the process, I was not only able to clear up a fraction of my ignorance and learn about shopping profit opportunities, but I had a good time engaging in it. If you aren’t all that keen on shopping and you are economically inclined, try thinking about it like this. It made my day a lot more enjoyable. (Okay, I know I am a little odd, but whatever works, you know?)
I am glad the market is in disequilibrium and that individuals do not have perfect knowledge of all possible trade opportunities. It allows for all sorts of interesting things to happen.
I encourage you to read a paper by Kirzner on entrepreneurial discovery and competition. You won’t regret it.
- Day 325 – Two Types of Fair Trade
I realized tonight that there are two different, commonly accepted meanings of “Fair Trade,” and only one meaning I support.
The first type focuses on paying producers a higher price for goods, typically raw materials, raw food, etc. (This is the meaning I am against.)
The second type is against products that use slavery anywhere along the production line.
I am against the first meaning and the first meaning only. The reason I am against the it is because even though it sounds like a noble idea, it actually does more harm than good. First of all, it is based on bad ideas. What is a “fair price”? In the absence of using force in a trade, the notion of a “fair price” does not mean anything. Surely, if someone was using force to make someone accept a low price, that would be wrong and unfair. That is not happening here, though. “Fair Trade” proponents advocate paying producers a higher price when the producers are willing to accept a lower price. Now, before you leave nasty comments calling me a terrible person, let me explain briefly why this is harmful. Prices send signals to both producers and consumers. Artificially bidding up prices sends distorted signals to both groups; essentially telling producers to supply more, and telling consumers to buy less. Also, it encourages other producers to enter the market, which further encourages excess supply. While this might benefit a small group of producers in the short run, in the long run it hurts both them and the entire economy, slowing growth and long-run development. Typically, harmful protectionist (redundancy, I know) legislation is used to encourage “fair trade practices.”
I obviously am in full support of the second type, though, as I believe slavery is always and everywhere wrong.
The only trade I support is free trade: trade without coercion, whether for or against the trade. (The second definition of fair trade falls into this category, the first does not.) I believe you should not be forced to buy or sell anything, nor should you be forced not to buy or sell anything, given that the seller has ownership over the given item.
If you want to help people in developing countries, the best thing to do it get rid of protectionist policies and trade with them. Trade without coercion is always mutually beneficial. Also, check out microlending. This can do a great deal more to help developing countries than the “fair trade” movement can.
(Note: Don’t quote me as being a proponent of “Fair Trade” unless you clarify what meaning of the phrase you are using. It is best to say that I support trade without coercion.)
If you want to discuss fair trade with me, please email me at: firstname.lastname@example.org
- Day 282 – Economizing on Brain Power
I had an interesting concept brought up to me today while I was discussing the difference between rationality and reason with Professor Lea. To try to understand the difference, we did a thought experiment about making choices. When a person makes a choice, he or she weighs the expected utility (broadly defined) of each unit, ranks the units by preference, then chooses the one with the highest utility. This happens whether or not a person is conscious of it, and it is a systematic way of making choices and rationally fulfilling ends. Professor Lea and I both understood this.
How, then, do we account for people who are stuck in a routine (i.e. walk the same way to class every day, go through the motions, eat the same thing almost daily, etc)? Is that routine irrational because it is not a systematic way of making choices, and one does it without thinking? At what point does a decision become a routine? Why is it rational one day because it is based on a systematic choice, and irrational the next day because it is part of a routine and not thought about?
After much thought, Professor Lea remembered an answer Hayek had to a similar question: individuals economize on brain power. This means that people go through a routine because it requires less brain power. Scarcity is a reality for brain power, too, so whenever individuals can economize on it, they do. This manifests itself frequently when individuals are involved in projects that take a lot of thinking.
I recognized it about myself when I am writing papers–I don’t think about small details like where I am going to eat for dinner. I just pick somewhere close and eat something on the menu that I frequently eat. When I am writing a paper, I try not to devote a lot of power to deciding on small details like where to eat, what to wear, where to study, etc. I just pick the first available option (within reason) in those cases.
Individuals aren’t being irrational, for the most part, when they follow habits or routines. Yes, those individuals are not making active choices and weighing the costs and expected benefits, but they are economizing on brain power and falling back on choices they previously made. This has huge implications which I will cover another time.
- Day 279 – Aggregates
Today’s post is short.
After a meeting of the Classical Liberal Organization tonight in which a few people confused this, I feel the need to say something about this:
Aggregates don’t act. Aggregates don’t make choices, laws, invade other countries, or have rights. Only individuals which make up those aggregates make choices, act, have rights, and the other things that follow. Groups don’t do things. Individuals inside groups do things.
This has all kinds of implications which I will leave you to ponder. I am open to any questions, just email me or post a comment.
Oh, and here is something else which is also commonly misunderstood: a change in price does not change demand, only quantity demanded. Raising the price of ice cream will not change an individual’s demand of ice cream, only the quantity he or she demands. Think about it.
- Day 272 – Happy Birthday, Mises!
Unfortunately, I didn’t have time to make a celebratory visit to the Mises Room in Hillsdale College’s Mossey Library, which is home to Mises’ personal library. I will have to do that tomorrow. I did read a part of Human Action today, though!
- Day 176 – Aesop’s Fables
I came across a PDF version of Aesop’s Fables today, and I spent a while reading them. While reading them, I was struck by the economic principles his fables contained! Though the principles were not named until long after his time, some of his fables definitely contained some ideas that modern economics uses. I suspect that this is because Aesop, much like economists, tried to understand human action. Obviously the two differ immensely, I think the same foundation is there for both. By the way, don’t fall into the trap of thinking economics is all about numbers and money; it is, at its core, trying to understand human action.
The first two show the Subjective Theory of Value:
The Cock and the Jewel
A COCK, scratching for food for himself and his hens, found a precious stone and exclaimed: “If your owner had found thee, and not I, he would have taken thee up, and have set thee in thy first estate; but I have found thee for no purpose. I would rather have one barleycorn than all the jewels in the world.”
A CONTROVERSY prevailed among the beasts of the field as to which of the animals deserved the most credit for producing the greatest number of whelps at a birth. They rushed clamorously into the presence of the Lioness and demanded of her the settlement of the dispute. “And you,” they said, “how many sons have you at a birth?’ The Lioness laughed at them, and said: “Why! I have only one; but that one is altogether a thoroughbred Lion.”
The value is in the worth, not in the number.
This one shows the Prisoner’s Dilemma:
The Ass, the Fox, and the Lion
THE ASS and the Fox, having entered into partnership together for their mutual protection, went out into the forest to hunt. They had not proceeded far when they met a Lion. The Fox, seeing imminent danger, approached the Lion and promised to contrive for him the capture of the Ass if the Lion would pledge his word not to harm the Fox. Then, upon assuring the Ass that he would not be injured, the Fox led him to a deep pit and arranged that he should fall into it. The Lion, seeing that the Ass was secured, immediately clutched the Fox, and attacked the Ass at his leisure.
Here are some more of the fables that I like:
The Goat and the Goatherd
A GOATHERD had sought to bring back a stray goat to his flock. He whistled and sounded his horn in vain; the straggler paid no attention to the summons. At last the Goatherd threw a stone, and breaking its horn, begged the Goat not to tell his master. The Goat replied, “Why, you silly fellow, the horn will speak though I be silent.”
Do not attempt to hide things which cannot be hid.
Hercules and the Wagoner
A CARTER was driving a wagon along a country lane, when the wheels sank down deep into a rut. The rustic driver, stupefied and aghast, stood looking at the wagon, and did nothing but utter loud cries to Hercules to come and help him. Hercules, it is said, appeared and thus addressed him: “Put your shoulders to the wheels, my man. Goad on your bullocks, and never more pray to me for help, until you have done your best to help yourself, or depend upon it you will henceforth pray in vain.”
Self-help is the best help.
The Raven and the Swan
A RAVEN saw a Swan and desired to secure for himself the same beautiful plumage. Supposing that the Swan’s splendid white color arose from his washing in the water in which he swam, the Raven left the altars in the neighborhood where he picked up his living, and took up residence in the lakes and pools. But cleansing his feathers as often as he would, he could not change their color, while through want of food he perished.
Change of habit cannot alter Nature.
The Wolf and the Lamb
WOLF, meeting with a Lamb astray from the fold, resolved not to lay violent hands on him, but to find some plea to justify to the Lamb the Wolf’s right to eat him. He thus addressed him: “Sirrah, last year you grossly insulted me.” “Indeed,” bleated the
Lamb in a mournful tone of voice, “I was not then born.” Then said the Wolf, “You feed in my pasture.” “No, good sir,” replied the Lamb, “I have not yet tasted grass.” Again said the Wolf, “You drink of my well.” “No,” exclaimed the Lamb, “I never yet drank
water, for as yet my mother’s milk is both food and drink to me.” Upon which the Wolf seized him and ate him up, saying, “Well! I won’t remain supperless, even though you refute every one of my imputations.”
The tyrant will always find a pretext for his tyranny.
Aside from reading fables, I had a nice day today. I got up and ran on the track at the high school (and ran a few sets of bleachers) this morning. Amanda brightened up my day by surprising me with bringing me lunch at work! Later, I helped my Dad and uncle pick up something in North Olmsted. Then, I spent the rest of the evening getting some web work finished that I have been putting off.
- Day 76 – Entrepreneurship in Charleston/Take 3
Above is a photo of the downtown waterfront Charleston area from a boat. Click the photo to view it large. Also, check out the link to the photo gallery at the bottom of the first part of this post.
Today, Tuesday, March 17, was the third full day of being in Charleston. Today we got up early and visited Fort Moultrie and then took a boat into the bay to Fort Sumpter and spent little over an hour there. Both forts have a history relating back to the revolutionary war and are filled with interesting stories. My photos do not do these spectacular structures justice; you really have to be there to experience it fully. Later in the day, we drove back into downtown, yet again, to explore more. We split up and went out separate ways. I was first with Richard and David, but we met up with Barbara, Antonina, and Anna for dinner, then met up with six other people right afterwards. Even though the downtown area is pretty large, it was really strange to me that we ran into the people we knew multiple times around the city.
Other highlights of the day: At Patriot’s Point, where we caught the boat to Sumpter, the USS Yorktown aircraft carrier is docked. It is a very neat ship. We are touring it on Friday. Also, on King St., there is a wonderful cupcake shop! I went in and bought a Black Forest cupcake that had cherries inside. It was delicious! Check out the photos in the photo gallery (linked below).
Here is a thought from Sunday: I am very inspired by the entrepreneurial spirit of some of the town’s residents. They make different baskets, flowers, and other decorations from seagrass and palms. What I enjoyed so much was that the ambitious teenagers seemed to follow profit signals to a ‘T’. As you know from your introductory econ studies, profit acts as a signal to entrepreneurs to move resources into that market to move prices towards an equilibrium price. These teenagers were selling flowers made out of palm leaves. They were at different points along the street and pier selling these flowers. If any of them saw an area that was making more sales then theirs, they automatically moved there, even if someone else was standing there. No barriers to entry here. They even interrupted other sellers when they had customers by offering lower prices. They would only go down to a certain level, seemingly the opportunity cost of making the flowers. I witnessed a bidding war between 3 sellers and a buyer and the buyer got them down as low as they would go–$2 a flower. At this price, the customer was happy and the sellers also made money on their handiwork. This little example really shows the benefit of free markets and the importance of the free movement of resources and capital, as well as the importance of entrepreneurship. Markets work.