Strictly speaking we don’t like to think about our relationships as property rights in other people.  Moreover, thinking in this way will lead to some very real lessons in how distorted expectations can become.  I was talking with a friend today about how jealousy, even if it had evolutionary reasons for existing in the status quo, has nothing much to offer the sophisticated individualist.  This willingness to think of almost any experience through the lens of the economics disipline has been a love affair with frustration.  We know economic models do not arrive at truth, but we still have to place experience within them and see if there is a coherent idea which will parsimoniously render.  The digestion of relationships seems more obviously out of place than most, so it is that much more compelling.

By the term individualist let me first tell you what I mean.  This is the person who is rational in the way that he constrains his self-interest.  It is this expectation which we can impose not only on ourselves, but also on others.  I know that I will not seek to maximize my pleasure without first learning what the costs will be, and I prefer these costs to be foreseeable, ceteris paribus.  In a relationship, monogamy has sprung up to minimize all sort of cost associated with our lives as sexual creatures (expectations, smoothing, aging).  Our expectations of belonging, while very rational, come from a part of our existence which is not individualistic.  I am compelled by the way that humans are born dependant.  No baby can live without the constant attention of other humans.  The mere presence of exposure is enough to kill a newborn.  So, it follows that there is a period of time in which we exist where we are dependant on others.  The individualist perhaps is more likely to tell you that this ends at the age of maturity.  We can think of a hermit, an example of a real case of an individual existing in isolation.

It is this that we mean by individual however, when we use this term we are often speaking of some characteristics of man apart from the group.  In this way individualism is most easily defendable.  There are some small perceived problems with this view.  The benefits which occur to the individual are desired by others because; in some way they are the product of that man’s effort, who is entirely dependant on his fellow-man for moral support.  In this abstract sense communism has spent a great deal of time explaining why private ownership is a violation of this relationship (this seems to be only a first approximation of the problem however).

Between two people jealousy is a similar violation of this relationship.  It is ignoring the investment other people have made in you, by benefiting from people who have not put in the same time, effort, display, or other sunk cost.  The same way that a child no longer depends on a parent, the lover can feel like there is nothing more to be gained from continuing a relationship.  The individualist (in his pejorative worst case) will say that an adult has nothing to owe the parents for the raising of his child-dependant self.  Somehow this lacks a reciprocity which cannot be easily expressed.  It is curious that the reciprocity is more focused on raising your own children, than paying the parents back for what they have given you.  In this way Dawkin’s “Selfish Gene” seems to be taking care of itself very well.  This explanation lacks tractability in fully appreciating the connection we all have to one another.  For example, those that are unable, or unwilling to have kids of their own often seek to repay this investment with raising other people’s children.  This expands our search for the determinants of reciprocity.  Moreover, what how can we begin to understand the compulsion of individuals to one another in monogamous relationships.

We have titles in our culture for people that enter into certain relationships.  There is no clear definition for when one passes from one stage of the relationship to another, but there are some culturally significant processes.  “Girlfriend” comes before “fiancé” which precedes “wife.”  All of these are distinct from the colloquial term “Baby-momma.”  In a way however they express ownership.  The first three in a purely theoretical sense and the last in a tangible sense more justly thought of in terms of property rights (mixing of the person with an outcome – new person).  This relationship also incorporates the continued line of reciprocity needed for the survival of the human race.  There is nothing distinct from the two series of terms aside from this theoretical and tangible paradigm.  A “baby-daddy” does nothing dissimilar from a “Husband.”  But the terms of approximation seek to do something in a more social context.  Calling someone my “girlfriend” imparts a sense of ownership, even if it only does so implicitly.  I would feel justified in feeling aggressive if someone made unappreciated sexual advances towards my “girlfriend” most likely citing this as my justification for feeling protective.  “My fiancé” is traditionally going to wear a ring, which at least attempts to communicate that she is no longer seriously evaluating competitive offers for sexual advances.  Am I then justified in feeling threatened personally when someone violates this signal?  Do I have justifiable reasons for asserting property rights, in this case referred to as jealousy?

The new entity now exhibits its own jealousness.  To not be jealous in the face of threats to the survival of this new entity is akin to that entity failing to be rationally self-interested.  I suspect that thinking of relationships as if they were individuals is problematic, but they have the reciprocity aspect which I have laid out already concerning all human relationships.  They exist in harmony with others.  As a kid I found it difficult to understand my parents as individuals, they always sought to hand down rules from this third party “Parent” perspective, which was a corporate creation of their making.  At some level this assisted them in making hard decisions.  This seems to be a description of some puppet, but I feel it accurately describes the mechanism as the best justification of monogamy.   

As an individualist, I am repulsed by the idea that someone could own part of me.  It strikes me however that this is precisely the case with relationships, which is the willing submission to this ownership.  An economist might say that no one willingly submits to be the slave of a company by accepting a wage, so my analogy is false, but consider how this is different.  I trade limited property rights (exclusion of competition) with another person to be paid in kind.  This attempts to render a third legal identity existing as a partial derivative of the two individuals.  In forming this corporate entity, the property rights now change.

The new entity now exhibits its own jealousness.  To not be jealous in the face of threats to the survival of this new entity is akin to that entity failing to be rationally self-interested.  I suspect that thinking of relationships as if they were individuals is problematic, but they have the reciprocity aspect which I have laid out already concerning all human relationships.  They exist in harmony with others.  As a kid I found it difficult to understand my parents as individuals, they always sought to hand down rules from this third party “Parent” perspective, which was a corporate creation of their making.  At some level this assisted them in making hard decisions.  This seems to be a description of some puppet, but I feel it accurately describes the mechanism as the best justification of monogamy.   

If you were driving along Braddock Road recently you would have seen many signs with people’s names on them.  An insight into this phenomena would be that elections are coming up shortly.  Dr. Williams asks the class:  How many of you vote? and: Why do you vote?  His conclusion is that there are non-trivial costs associated with voting and benefits are close to zero (following from the idea that one would only value voting when their vote decides an election).  There is a distinction to be made between the political sphere and the market in this way.  A vote cast in the political world doesn’t do anything if the election is not decided by one vote (the marginal vote changes nothing, has no understandable marginal impact).  A vote cast in the market (by spending a dollar) not only has a marginal impact, the person casting the vote understands exactly what they are getting out of casting that vote (in terms of whatever is exchanged for the dollar).

A second question posed by Dr. Williams:  Does your reputation belong to you?  There was some real confusion in the class over this one.  There is something in business likened to “goodwill” for a company.  This is accounted as an asset for a business.  Is there something also valuable that is associated with an individual?  Dr. Williams infers from this question that libel and slander should be legal.  In the marketplace for information in the absence of libel and slander laws, the relative price of libel and slander would be reduced and there would be lots of misinformation offered at a price where it would not be noisy, the good information and the bad information would come at the same price.  A person could not be ruined by gossip if there were no cost associated with someone putting their name to a statement.  The value of using slander would fall.  There is a property rights issue associated with this argument.  I do not own the thoughts another person has about me.  I cannot protect my reputation inside another person’s head.  Although it was not said in class, I feel that people have the ability to build up creditability based on experience with another person.  This relationship aspect is very important in considering how we view economic insight into this question.  If I do not have the right to protect you from hearing bad ideas about me, I to some extent am not able to fully “own” my reputation (where own means keep, acquire, and control).

Economics is able to answer questions by looking at the process and the outcome.  If I were to look at the following data:

Poker Players               Percentage of wins

A                                 75

B                                  15

C                                 10

I cannot immediately make implications about the fairness of play involved in the game.  For example, if I were to investigate and conclude that the game was played faithfully following well documented rules (according to hoyle) decided beforehand by all players, I would then conclude that the process was “just and fair.”  This is the economic interpretation of the process, and certifies the outcome through these further insights.

Income distribution is a result; what are the underlying process questions?  Did all people have access to the system?  Did people start with similar endowments?  Was anyone excluded from the market? 

Recall: Demand and Supply have a component of elasticity that increases in the long-run.  People adjust their behavior.  The classic Alchein example is the use of water.  If the price of water rises we don’t immediately expect to see people change all of their water consumption.  If the higher price persists, we expect to see people start to employ water saving devices (though they find out about these from the marketers of these devices who have a profit incentive to market these).  A squeeze nozzle will be employed on the hose, a showerhead will be placed in the bathroom, a rock garden could be substituted in the backyard as opposed to the grass which was there before.

Supply: shows various amounts of a commodity for which a producer will supply at a given price for a given time period.  Quanity supplied is a function of price.

Determinants of supply:

1)      Technology: Invention, Innovations

2)      Number of sellers

3)      Input prices (the wages of labor and capital)

4)      Price of all other goods (if a farmer has a choice of growing corn or wheat on his land and the price of corn rises, he will substitute more land and labor into growing corn than he would have before, he will also move out of wheat due to a change in the relative price)

5)      Expectations (If you grow coffee, and you expect that the price of that coffee will rise next week, you therefore perceive the price for coffee this week is relatively low and you will withhold coffee from the market this week in lue of selling quantities of coffee at the higher price next week.  The converse should also be true, that if you expect coffee prices to fall, the price today is relatively high).

Note:  For the first part of the semester we will be considering property to be certain, for property rights to be fixed and well known, and for all people to understand this (this assumption relaxes after the introduction of Demsetz’s theory on these issues). 

Supply and Demand a review:  Stable equilibriums:  if something happens to upset the static point (change Q* or P* ; forces will act to bring things back to the initial level.  At prices above the market level there is excess demand which forces the market back to equilibrium, at prices below this market clearing level there is excess supply which also works to return to market clearing level.  If you drop a marble into a steel bowl, there is a point in the bowl where the marble will come to rest (stable).  If you turn that bowl upside down and upset the marble on top of the bowl, it will not return to its initial position (unstable). 

If we involve politicians into this theory we have to change the assumptions about equilibrium.  These politicians can look at the market and determine that the equilibrium is in some way unfair.  This leads to things like price floors (a law saying price cannot fall beneath a certain value) and price ceilings (a law saying price cannot rise above a certain value).  An example of this is rent control. If an artificially low price is set the market does not clear.  The market on the short-side always dominates.  Although the intention was to make the housing more affordable for the lowest income persons, there is no way to make the suppliers offer the same quality of housing to the occupants at this lower price.  Since we are in a situation of excess demand, we see that lower quantities of housing are supplied at this new low price.  This is a net flow out of the market (depreciation of current capital stock).  The supply curve starts to shift leftward (over time).  A new higher price is reached which clears the market and eliminates the excess demand.  This new higher price takes into account a difference of the new higher price (PH) minus the price ceiling (PC) at the short side quantity of the market (Quantity supplied).  It is has been observed in the past that this differential (PH – PC) is paid out in non-pecuniary ways, or at least in creative ways like key deposits which never get returned, or in-kind payments (grey market). 

“Short of aerial bombing there is nothing that can destroy a city more efficiently than rent control.”

One of the unintended effects of this change is that there is substitute investment in higher end housing.  The capital that otherwise would have been profitable in the low income housing market will now be used to increase the higher end market, this has the effect of making housing cheaper for the opposite demographic than the one for which the intervention was originally intended. 

We can also apply this analysis to the gas market.  If there is a price ceiling placed on gas at a below market level, then we expect to see long lines at the pump.  The gas stations have no incentive to provide capacity for this excess demand, so that there is less gas supplied at this lower level.  The weighting inceidence is almost entirely on the consumers of the gas, the supplier is under little pressure to respond to this excess demand, so that the gas may be cheaper in money terms, but is now more expensive in total terms, when you include the opportunity costs of the time spent weighting in line at the pump (not to mention the gas used to keep the car running while you are waiting).  Price controls reduce welfare not only by the dead weight loss, but also by the forgone consumer and producer surplus which is lost and no one gains. Side note on the gas question:  Historical costs do not determine price – replacement costs are relevant to the price that is charged for the commodity, not the paid in costs.

Price ceilings lead to allocation by seller preferences.  Assume in Fairfax the max you can now rent a two bedroom apartment is going to be $500 a month.  It pays now for the landlord to be selective on who he allows to rent the property from him.  These preferences can be as subjective as they are arbitrary.  Remember that low-income people can always outbid the higher income people.  Take for example a brownstone building in the city.  One family is renting this building on a lease at $1200 a month.  A group of lower income families (6) offer to move into the building, if the owner will make 6 separate apartments and rent them each at $ 300 a month.  The lower income family will win even in the case of discrimination because the landlord decides that he doesn’t want to indulge his taste for discrimination at that price.  Think of a fat ugly smelly cigar smoking man that runs around town with a young beauty.  You would conclude that this man has a large deal of money.  The competitive differential is the money (the only way a fat ugly man can compete with Dr. Williams). 

A price floor.  If we want to keep the wage artificially high (on the premise that it is a living wage) we will create unemployment (excess supply of labor).  If this state persists for long enough, the labor supply decreaces due to the discouraged worker effect (low-skilled workers without employment options stop looking for a job).  The amount of this excess supply is equal to the displacement of low-skilled workers who were supposed to be the nominal recipients of this legislation.  This also opens the door for discrimination by buyer preference.  The employer can choose any category that he/she wants to discriminate on the workers, the pool of labor is sufficiently skilled to pick from on subjective criterion (pretty people get jobs).  The rational was to help, it ended up hurting the low-skilled workers.  Minimum wage can be though of as helping the unions.  This tool eliminates the low-skilled worker from the labor supply, so that the union workers are safe from competition.  Imagine a fence building industry.  If it takes 3 low-skilled workers to build a fence and they each charge $10 an hour, the most that a high skilled worker can charge is $30 for the same task.  If however the high skilled worker would like to make $40 an hour, he need go no further than convince the union, the preacher, the politician, and the public to change the min. wage (living wage) to $15 an hour.  He can claim to be fighting for the rights of these lower-skilled workers.  In this case he can now charge up to $45 an hour to do the project and be a better deal than the low-skilled workers.   The low-skilled workers are now out of work, however they can sleep better at night waiting for a higher wage job to appear…

Dr. Williams researched this in South Africa during apartied.  The stated goals of the white unions was to set the black min. wage at a high price so that there would be less of an incentive for employers to defect from the entrenched racial status quo.  Controlling anything to do with market prices opens the door for discrimination on non-price terms by either the buyer or the seller.  A market allows less preferred groups or individuals to compete by charging lower prices, or by paying higher prices.

Think of your grocery store:  The cube steak is $4 (basically offering you $5 to take it home and eat it instead of the alternative) and the Filet Migon is $9, regardless of the fact that F.M. is a better cut of meat, the cube steak outsells the F.M. every day.  If the government were to pass an “equal steak law” that set the price at $9 for all cuts of meat, the cube steak would not leave the store.

The incidence of taxation does not fall only on the statutory recipient of the tax.  If you tax suppliers, the consumer pays some of the tax as well. 

Applications in general of the law of demand (married couples with children go to more theatre than single couples, relative to movies).

“When you see someone doing something more than someone else – assume that it is cheaper (always relatively).”

                                    Dinner and the theatre               Movie theatre

Without children           $120                                        $50

With children                $150                                        $80

(including a babysitter)

In the first case there is a thirty dollar difference for the baby-sitter (same comparison in the second).

The relative price  2.4 (12/5) for D& T and  1.88 (15/ of the trade off One dinner and theatre costs the couple without children 2.4 movies, and the couple with children 1.88 movies, you conclude that it is relatively cheaper for the couple with children to go to the theatre and dinner more often than the other couple. We can ignore tastes and get the same result as if we looked carefully at the effect different tastes would have on this example. 

GMU parking; ex, in 1972 daily parking was $4 a day and the fine for parking illegally was $12 with an expected rate of getting caught at 50%.  In 2005 the daily rate of parking is $7.50, and the expected value of getting caught is the same.  Since your expected value of getting caught is $6, then you conclude that rational actors will park legally in 1972, and these same type of people would park illegally in 2005, based solely on the price of each option.  This counters the folks who claim that kids these days are less respectful of traffic law, when they are actually just acting rationally.

Corporations don’t pay taxes, people pay taxes, corporations are legal fictions and have at least these two options in the face of higher taxes:  lower dividends and lower employment.

I feel miserable right now... I am seriously on the verge of minimalism...  do I care if my seriously reduced consumption speding adversely affects the economy?  No.  Why?

Lately I've been feeling extreme content towards consumption in general.  Branding and the manipulative use of imagery in advertising are bringing my perspective on freedom down.  I feel like 90% of personality is dictated by this "infotainment telesector".  What ever happened to culture?  In my opinion, there is really no such thing as "authentic" western culture.  American culture is created by the largest service industry, advertising.  Who is your typical blue-collar, rural living man?  Well, of course, its the guy with the Rangler jeans changing the oil on his Dodge Ram 1500 while drinking a Coors (silver bullet).  

Over half of a two year old's vocabulary consists of disney characters. care bears, and wiggles.

I've had too much to drink.  I will continue this conversation later with more rationality.               

Sweet dreams.

Several Pieces of “Evidence” (This theory became more creditable when all alternatives were exhausted).  No one came to the RBC theory because of real evidence, or because it was overwhelmingly persuasive.  (This is opposed to the accepted validity of Keynesian economics to correct macro downturns). 

First Criteria: Logical stories of rational behavior models should not include systematic mistakes being made on the part of the rational actors (internal consistency).  Keynesian economics had fooling.  Bob Lucas’ model – “Islands model” allowed for people to be tricked by surprises in the movement of the monetary variables. Even he admitted that his model contained inconsistencies, i.e. that people could just look at the wall street journal and know what direction the macro variables were moving, leading logically to no fooling. 

Second Criteria: The unit root test (Long and Plosner first introduced).  To explain the unit root test: Think about unemployment.  If someone told you that the unemployment rate was 14% and asked for your best forecast in 10-15 years a normal reaction would be to posit that the new rate would be somewhere around 4-6% (the possible natural rate), before you would suggest that the rate would stay at 14%.  This is not unit root.  A unit root would be more like stating that the current growth rate is 3.3% and your best estimate for the future is that the growth rate would stay the same.  An example is to flip a coin to create a time series.  (In class we started at a 2% growth rate and each time the coin was flipped heads meant a rise of 1% and tails meant a fall of 1%).  The result was suitably random looking.  At the end of this process the best prediction for the rate 10 coin flips from now would be the last observed rate, it would be absurd to measure a mean of flips and predict that based on past observation.  This is truly a unit root.  The hypothesis of a unit root could not be rejected in the long piece (when null testing you set up a thesis you would like to prove wrong, thereby giving the alternative higher creditability).  The result of this essay was to suggest that the business cycle could be thought of as the equivalent of a random coin flip.  People stopped thinking that every move in the data was a business cycle move which could be explained by high theory.  This is like the equivalent in basketball, that a shooter could have a “hot hand” and should not be taken out of the game.  A shooter is no more likely to hit a basket after hitting 7 in a row than he was when he had missed 7 in a row.  When this theory came out it forced people to think more about the assumption that the error term on the Robert Solow model could be completely explained.  Real Business cycle theory posits a way to look at this problem even in the presence of randomness.  “When this first came out, I was held captive by trying to explain every little movement in the data with an explanatory variable, Now this randomness is taken for granted.” 

3) Litterman and Weiss (1983).  Vector Autoregression (1983) VAR- No structure (in terms of a hypothesis and model) this was a rather large set of vectors, or matrix, of data useful in talking about the macro economy.  A huge correlation matrix was computed on the data.  This was much like data mining for significant relationships.  One of the big insights is that the real interest rate had no statistically significant relationship with the aggregate measure of money (contrary to theory, and suggesting that money doesn’t matter in determining interest rates).  This contrasts with the theories of the Keynesians and the monetarists.  “If we can’t even find a pattern between money and interest, we really don’t understand what is going on in the macroeconomy.”  McCallen suggested that maybe the interest rate moves before money, meaning that the money wouldn’t be as important in describing the changes in interest rate, this was a changed mindset. 

4) Simulations were offered as “Evidence”  The Solow model is a dependant variable of growth rate as a function of (technology shocks or new ideas, labor, and capital).  Solow’s original decomposition said that three-quarters of the growth variable could be explained by the new ideas variable.  (this leaves labor and capital explaining only a quarter and the residual being counted as all tech).  The tech variable is never measured it is only the residual term for the model which measures capital and labor contribution to explaining growth (the revised models which include better measures of capital and labor do a better job of predicting growth). 

The internet is a perfect example of a productivity shock.

Real Business Cycle – says that Solow was right all the time.  Technology was really the driving force; with some randomness.  Growth (trend component) – take this portion out of the data.  Cyclical part is left.  The residual can be described as the “pure cycle” or the randomness.  The RBC theorists would think this is the worst intellectual move, the cycle is caused by some underlying components of the total data, to divorce these would be to loose explanatory potential.    Solow wanted to keep the decomposition and show accept the random part of the cycle. (TC does not like the Solow model).

Long-Plossner:  How much could, would, did, this number technology measurement change and then output vary?  Katrina (was this a negative shock?) we will see what happens in the evidence, if no negative shock then this provides evidence against.

This model IS complete with the error term (for whatever else bad you can say about it, it is one of the more simple and powerful models in explanation).  We can look at Prescott and the others who defend the RBC model and see them posing the questions for additional microeconomic research.  These programs should focus on further developing the productivity, technology components of the error term in the Solow model.  We should continue to tease any other variables out of the residual.  During the 90’s the work on understanding the technology effect of computers on output could be looked at in the broadest sense as promoting the same program of study as these RBC theorists.  Remember that we are useful in explaining much of history with the business cycle model, looking at agricultural society, we can say that rain is the exogenous shock which then helps determine the labor and capital effects on output, similarly this technology exogenity is to be considered. 

RBC helped to reestablish market clearing rationality, rational expectations (the converse was a formula for more government, like the Keynesian framework).   Now it is the most fundamental of the theories, the building block for discussing the macroeconomy and for the last 25 years has been the newest developing theory in macro.  Two ways of thinking about RBC:  1) enough brainpower applied to these models and we will eventually crack the theory (Prescott) 2) useless b/c there are always going to be phantom variables which we cannot predict the effect of on output (black). 

Big Business cycle countries: Tailand and Argentian (recently).  The U.S. and other developed economies seem relatively unaffected by the business cycle factors.  Big questions include things like: why Japan has experienced slow growth.  In a way the RBC model is the best model that we have for understanding the recent history of the science. 

Any good Business cycle model must contain and explain these 3 things:

1)      Persistence (lasts for awhile)

2)      Co-movement (many sectors go up and down together)

3)      Changes in the labor supply (employment)

To be a serious model you should generate these three things.  Only model that does “almost fit” the 3, but really only satisfies the first two.  Needs to prove.  The 1^st assumption – one person (a dramatic assumption since it assumes away problems like coordination failure).  And output = input.  The example: A farmer.  Two animals, ducks and chickens.  They both lay eggs and the farmer can either consume the eggs or let them grow into additional chickens.  A farmer smoothes consumption of eggs over time.  The technology shock in this case is the decreased fertility of the ducks.  Fewer eggs are available, so that the farmer feels poorer, has a lower flow of outputs.  He will then start eating fewer duck eggs, and more chicken eggs (substituting into chicken eggs).  The farmer lowers total consumption due to lower production.  The process of substitution accounts for the business cycle.  A farmer who “takes a bigger lump up front” does not experience the business cycle, but the farmer who substitutes does.  Models are rigged so that the substitution effect is the dominant effect, the labor supply effect (or the weaker the farmer gets with fewer eggs), is going to be small in comparison (except in Long and Plossner where the cancel out). 

Long and Plossner: Define technology shocks that are big enough to match the actual movement in the data from the real economy, then they model this movement.  This mimicked movement looks remarkably like the real world data due to the embedded propagation mechanism between sectors (2/3 of the time).  Model, however, fails to capture movements in the labor supply (the movement is significantly muted).  There is no accounting for intertemporal substitution, and when comes to labor market this is not a side show (it is a central issue of importance in policy).  Working more when you are paid more does not happen in the real world data. 

Few core facts:

1)      Real world changes in the hours worked are much greater than the changes in productivity.

2)      Hours worked and productivity are not correlated

3)      When you have a downturn it is not that people work less, it is that some people get fired.  These people do not work at all, but the people with jobs still are working about the same amount that they always did.

4)      Growth (for example China) is not actually working the way it would in the model.  People do not work less now because they think that productivity (and therefore wage) will rise in the future; in fact they were hard now.

There is a theory of indivisible labor which tacks on a fixed cost associated with supplying labor.  These include the cost of the commute, the baby sitter, or any other number of forgone things that have facilitated your time at work.  This adds a bit of lumpiness to the cost of labor.  Two cases when the MPL falls:

A)    8 hours becomes 7 hours for all employees across the board

B)     Fire 1/8 of all the people employed at the company

In the case of more fixed costs the employer is going to opt more often for the case of B. 

(people could contract for a lower wage)

Keynesians would complain that this model does not explain the labor market.

Katrina, if it is viewed as a capital shock, we could see a unit root effect where the output stays permanently lower.    We could also imagine a case where the MPK rises such that new capital is brought online.  If it were a labor shock, we would see that this has to be recovered in some way.  If we just think of it as a technology shock than we see the same unit root effect.  This feeds the question:  Should we rebuild New Orleans.  This model’s major failure is to leave out social and moral capital.  All the looting has fundamentally changed the way that N.O. people behave.  Will the same mixture of workers return to the city?  The poor?  The middle class?  What would be the effect of a large government subsidy to the city?

A preview for next week:  Optimal clustering (think about a city in these contexts: space and time).  Cities do exist due to some agglomeration, there is clustering in time (this is why the classroom is empty on the nights and the weekends. 

The traditional explanation is that there are lags in the market for wages, for equilibrium aggregate supply and demand (if aggregate demand can even be fully conceptualized), and expectations.

Real business cycles say that even when markets clear there can be changes in the total economy.  The biggest of these changes is that the marginal productivity of labor somehow drops (this can be the removal of complimentary capital investment, or at least slowing in the replacement rate).  Higher than market interest rates could slow the investment in capital, allowing capital stock to depreciate, reducing the absolute total. 

“Many economists find the real-business cycle theory totally unbelievable. No one can observe the technological shocks that are at the heart of this explanation, and it strikes many as simply ridiculous to argue that the unemployment during a recession is voluntary. On the other hand, the economists who have formed these arguments are among the brightest of the profession, and they can show that the patterns that their mathematical models generate are remarkably similar to the patterns that the real world generates.”  -- http://ingrimayne.saintjoe.edu/econ/Connections/Real-Business.html 

From the archive, Tyler’s previous comments:

http://www.marginalrevolution.com/marginalrevolution/2004/10/why_real_busine.html 

Note:  Capital is used to produce consumption goods (or other capital goods whose final end purpose is consumption goods, the production process eventually ends with consumption).  Trade off therefore is necessarily intertemporal, the same with leisure.  In fact there seems to be an intuitive link between higher consumption and higher leisure.

Austrian:

The Austrian Business Cycle Theory (ABCT), by contrast, recognizes that monetary injections alter relative prices as they typically enter the capital market first before spreading to the rest of the economy. By lowering the interest rate and bidding up prices for capital goods relative to those of consumer goods, the additional money in the capital market will change the allocation of resources in favor of capital-constructing investments, which will have to be liquidated when the policy of monetary injections is ended.

Friedman --

Workers will initially interpret [an unexpected rise of prices and wages] as a rise in their real wage—because they still anticipate constant prices—and so will be willing to offer more labor (move up [on] their supply curve), i.e. employment grows and unemployment falls. Employers may have the same anticipations as workers about the general price level, but they are more directly concerned about the price of the products they are producing and far better informed about that. They will initially interpret a rise in the demand for and price of their product as a rise in its relative price and as implying a fall in the real wage rate they must pay measured in terms of their own product. They will therefore be willing to hire more labor (move down [on] their demand curve). -- 1976, p.223

In the Friedman-Lucas Model, there will only be prolonged periods of above and below average growth under the unrealistic assumption that people err systematically— continuously overestimating prices in the boom and continuously underestimating them in the bust (Garrison, 1989, p.1 . Under the far more realistic assumption that workers and producers will try to take inflation into account--let alone the new classical assumption of “rational” (i.e. model consistent) expectations--there will be no periods of booms and recessions but only random deviations from trend growth. In sum, fooling people into supplying more of their products and services does not generate cycles.” -- http://www.mises.org/journals/scholar/maanen.pdf

Two major problems with the theory of representative agents:  Even if we eliminate the tails of a distribution capital and labor still do not functions homogenously.  However, through infection across the many vectors of subcategory, the effects are able to offer somewhat general observations (read Freidman’s defense of positive economics). 

?my question: So can’t we understand people to be rational optimally (the survivors) and irrational in the aggregate?  Differentials will change over time.  I don’t know how one would measure this change, but it should theoretically exist.

You cannot underestimate the problem of central bank involvement, if you are going to posit a business cycle.  The central bank acts to make sure that nominal prices (somehow real prices are effected unequally across sectors, or at least until a lag completes its cycle) do not depreciate, as one of the main goals of a central bank.  In another way, if the nominal prices are changed continually as a matter of policy, but the central bank, does this provide a propagation mechanism?

A look specifically at deflation, despite occasional economic sophistry Salerno is one of my favorite Austrians:  http://www.mises.org/journals/scholar/salerno.pdf

Recall: Consumption is destruction of utility.  How does this work in the public good context?  Consider a piece of artwork.  If I look at the art, that doesn’t destroy the utility that others viewing the product after me would get from the painting.

We need the concepts of public and private goods to explain how this works.  As with many things in theory, there are two pure cases which are relevant and then there are necessarily things which lay between.  A pure private good is a good for which the total of this good is the sum of all of the good that is consumed.  Each person who consumes a portion of this good will reduce the total amount of the good (destroying the ability for someone else to create utility from that same unit of the good).  A pure public good does not have this property.  One person who enjoys a public good leaves as much for the consumption of others which was available before they consumed.  If I decide to view a sunset, then I do not reduce the amount of sunset which is available for all other people to view.  We refer to this property as non-rival in consumption.  The cup of coffee that Dr. Williams consumes is rival in nature because if he enjoys it, then I can no longer enjoy it.  This is also true of national defense, it is non-excludable.  I cannot prevent someone who refuses to pay taxes from being subject to the same protection which national defense provides.  If I have more, you have more, we have the same amount.  It is very seldom for which you can find a pure public good.  My hot rod car is enjoyed by everyone who sees me drive by, I am very unlikely to have the opportunity to collect rents from the people who have benefited from viewing by hot rod.  Dr. William’s neighbor looks at Mrs. Williams garden and all of the pretty flowers that she has planted.  This same neighbor has not contributed to the upkeep costs associated with these flowers. 

Should Blackmail be illegal?  Dr. Williams builds a case which says no, it should be perfectly legal.  In this way we can eliminate people extorting others.  If you promise to withhold information for a certain price, then you have an enforceable contract which would ensure that the person did not break the “gag order.”  Mrs. Williams would be for legal blackmail because this would create many people wishing to monitor Dr. Williams actions to prevent him from doing anything “fishy.”  The cost of bad behavior has now risen because of the increased expected value of getting caught. 

Say there is an auction for steak.  Bill Gates wants steak, and I want steak.  Bill Gates has 40 billion, and I have $11.  I can always outbid Bill Gates for steak.  For example, say Bill Gates offers $20 for the 1 lb of steak.  I can offer $11 for half, thereby beating Gates bid on that section of the meat.  Further, if he raises his price, I can bid all my money for the quarter of the steak.  In this way the market system assures that I can always get some steak, no matter how small that piece turns out to be.  In poor neighborhoods we see the effect of the market.  There are always some nice cars.  There are always some nice booze.  There are seldom nice schools.  The provision of these other consumption goods reflects the way in which the market is efficient at providing them.  The poor school is poor because no one can afford to move to the school district they would otherwise want to send their children.  An implication of these theme is that Emminem always outsells Pavarotti. 

We went over Q12 from A-A: E&P

Specialization is possible with unequal endowments.  It is possible to enjoy higher living standards with specialization than was possible under autarky (people do what they are better at doing and assuming they have a skill others want, their consumption will increase).  A person specializes in something when they have the lowest opportunity costs of specialization in that good.  We can go from a relatively inefficient outcome of autarky and increase everyone’s consumption of one good without lowering the consumption of the other good, than we can assume we are moving toward the Production Possibility Boundary.  In the example from class (A=30W and 20C; B=20W and 10C; 1/3 time and 2/3 time each), One unit of corn costs “Anderson” 3 units of wheat.  The same unit of corn would have cost “Brooks” 4 units of wheat, therefore “Anderson” should specialize in corn.  For specialization to make sense trade opportunity must exist.  Anderson needs 30 W to trade 10 corn; Brooks offers up to 40 W to trade 10 corn.   Assuming equal bargaining power the result will be b 35W for the 10 corn.  Exchange conserves social totals. 

Money Distinct from barter) *Is a good which facilitates exchange* (WW: money is a man-made innovation) Money must pass the test of sellers and buyers, it serves important functions

1)      standard of value – what are commodities worth in this Base or specie

2)      Money acts as a store of value – stores value over time allows people to take advantage of money to consume over time. 

3)      Facilitates Exchange

Good money is useful (cheap) – Gold and Silver emerged as money because of several properties that they contained.

1)      Portability (relative):  This is a high value / weight

2)      Durability (lasts over time): Keeps value during relevant time period

3)      Divisible/ Fusible:  Previous commodity moneys may had a divisibility component, but the fusibility of cattle as a payment methods is limited.

4)      Recognizable/ Assayable: Gold and silver have desirable qualities in being about to pass certain purity tests in a relatively quick fashion.  Experts in gold metallurgy can certify the purity of a metal. 

Gresham’s law is misleading (according to Dr. Williams) in the following way:  A money starts of as “pure monetary gold” A king then devalues the money by recalling and debasing the money as a alloy of lead.  The pure gold coins then become “bad to give away”  the debased alloy becomes “good to use in exchange.”  Since money’s value in Dr. Williams definition derives its usefulness by contributing to exchange this is the correct way to see the Gresham’s law.  A restatement might be “Good money drives out bad.” 

Demand:  A market is any place of institution which enables people to negotiate exchange.  Cities, for example, emerged primarily to facilitate exchange.  This is why the major historical cities were close to ports or along rivers, natural places to set up a market.  Ex: Until relatively recently it was cheaper to ship goods from Philadelphia to London than it would have been to transport goods over land to Lancaster, PA from the same original point. 

The rate of consumption of any good depends on it price.  Any given demand schedule depends on the time period under consideration to derive the change in price and the resulting change in demanded quantities.  Quantity demanded in a time period is a function of price.  At each market price there is a definite amount people choose to demand at this price.  There is an inverse relationship between price and quantity.  The first fundamental law of demand states that a price exists whereby people can be induced to take more (less) of something.

WW: “If I lower my wage enough I can get a job as a quarterback for the Philadelphia eagles.”  This implies that Dr. Williams could come up with a negative wage sufficient to induce the management to hire him as a back-up quarterback (The Philadelphia eagles are a profitable enterprise). 

Economists don’t like to say that people “need” something.  The concept of need is a refutation of the first fundamental law of demand (the word need is useful in tricking someone, but not useful in economics). 

Time component:  If the price of filet mignon fell from $9.25 to $3, how much more would you buy?  This is a meaningless question w/o the time requirement.  A demand graph has to have a time period implicit, or explicit. 

Determinants of Demand:  Things demanded depend on more than price.  These shift the curve “changes in demand” which is distinctive from “a change in the quantity of demand.” 

1)      Income

2)      Taste

3)      Price of all other goods (POAG)

4)      Expectations – This weeks price or plywood prices are low relative to next weeks if we expect a storm.

Speculators buy oil before a storm because they see that prices might rise after the same storm, they increase the price before hand, due to activity, and lower the price afterwards do to activity, which averages the price over time (eliminating extremes), they are doing society a favor strictly as a result of their self-interest. 

We impound the determinants of demand by assuming “Ceteris Paribus,” any time we talk about the demand schedule (curve). 

Elasticity of demand: Consumers are more responsive (in terms of change in quantity demanded) to a change in price with a higher elasticity of demand.  *This is the ratio of the % change in the quantity demand to the % change in price is a measure of the elasticity of demand for a good.

General: ratio of % change in dependant variable to the % change in the independent variable. 

Elasticity of Demand depends on the definition (excluding or not – substitutes) Elasticity depends on substitutes.  It is possible to define the quantity demanded of a the underlying good, where the good is broad enough not to have any substitutes. 

Concept of elasticity is important: It is this reason that we have the second fundamental law of demand.   “The longer any price change exists the greater will be the elasticity of demand (or supply) (greater in the long vs. the short-run).  If WW beats his wife how many additional lashes will it take to reduce her bad behavior one unit?  Another example, how does the effect of one additional year in prison effect the behavior of criminals. 

Adjustments to demand in price are cheaper in long-run than short-run.  Ergo, I could unload my Cadillac tomorrow if I were willing to accept a much lower price than I would if I actually was selective of many buyers.  The 2^nd law – with less haste things approach the median price. 

Friedman Article:  CR of neo-classical economics and the basic underlying assumptions out not or cannot be realistic.  The relevant criteria is predictive power.  **Does not have to be forward looking.  Makes assumptions because there is an infinite amount of information which would be needed otherwise.  The most important and significant theories have the least realistic assumptions, and the most dramatic assumptions.   WW: asked for examples (the gravity, the tree) Falseafiability vs. verifiability – can tentatively be accepted until it is proven wrong.  This follows because there are many theories that are consistent with any set of facts.  How can you get people that are honest w/ no agenda advocating policies that are total opposites?  Friedman seems to posit that the longer research goes on the more positive questions will be answered and the less room for dispute.  This is a theory of progress that will advance the economic science. 

WW: If you and I were in 12^th century Spain and one of us says that the world is flat, it would be valid to conclude that you could not sail to India by sailing west.  Valid but false conclusions are consistent with Friedman’s thesis.  We learn that we test these conclusions with the predictive and explanatory powers of theory in reality.  Reality contradicts that the world was flat, so the premise is no longer known as true, therefore the conclusions based on that premise are no longer made.  Economics would be better served if people were forced to be explicit about their initial premise.  There are different assumptions for different purposes.  We require different models to deal with different circumstances and research problems.

Nagel:  There are two linked spheres – theory and policy.  These are necessarily linked with reality.  Which tool best gives us facilitating ability can be better understood with this essay. 

WW: Assumptions (theory): Should have descriptive as well as predictive capability.  EX: Entrepreneurs should act “As if” they are maximizing profits.   This entrepreneur doesn’t have to know a damn thing, if he acts as if he does.  Nagel gives us the insight to know that Friedman’s essay should have the requirement of survival to understand why actors are assumed to act in a theoretical way, the ones that don’t, cease to exist. 

WW: Friedman did heavy lifting.  If Freidman is defending unrealistic assumptions that the distinction is irrelevant, if they are useful he has to redefine empiricism to render conclusive.  If economics as a profession is going to generalize there is work to be done, to get theory to this useful state. 

It is my prediction that the title of this piece is going to offer the most clear insight into what it is about.  This piece does not exist without the critique it makes on Milton Friedman’s article (detailed yesterday).  Nagel offers the observation that in a strictly logical sense Friedman doesn’t create a system which offers acceptable results.  In difference to this observation we still see that Nagel agrees with the conclusion.  In light of this fact, he points out that in logic, the process is just as important as the result.

Nagel breaks down the terminology: First we have a theory, “A set of statements, organized in a characteristic way, and designed to serve as partial premises for explaining as well as predicting and indeterminately large (and usually varied) class of economic phenomena.”  This will serves as Nagel’s best approximation for how the term is used in Friedman’s outline of positive economics (this is contrasted with a looser version, not characteristic of a single meaning). 

The assumptions have to be broken down into three categories.

1.      basic hypothesis – a premise

2.      Logically deduced theorems – somehow more advanced premise with the benefit of previous deduction

3.      Theoretical terms – gene, group, instantaneous acceleration, perfectly divisible commodity

In this way Nagel outlines the preliminary arrangement in economics which would outline a test for validity of conclusion.  In logic the premise – deduction – conclusion offers the tautology of logic to certify that the conclusion is valid if the premise is true.  Nagel refers to this system as “rules which are instrumental for drawing inferences.” 

Nagel also takes on the concept that different sciences will approach questions with different standards, and with different tools for explanation and description.  If you are asking a economic question, you filter the data through an economic process, and as long as you apply the result to economics you are fine.  This acknowledges that there is a natural limit to the insights provided by a discipline, but rightly so.  As a result, we expect results to have the following characteristics: 

1.      Systems should be simple (parsimonious) – Things should be eliminated which do not contribute significantly to the explanatory power of the model.

2.      The system of Null Hypothesis is a worthwhile pursuit. – It is this procedure which allows us to reject alternatives with a certain degree of confidence and indirectly test our premises.

3.      No economics question can be totally sterilized – The lab conditions for economic questions are limited in the degree of “purified” conditions or “idealized” objects.  This lack of “ideal” conditions does not limit the insights and the taxonomy of the economic discipline.

Rather than view assumptions as unrealistic, Nagel offers a way of viewing these assumptions in a logical context.  This exercise contributes validity to Friedman’s statements. 

1.      Approximations are justified – there is no appreciable loss of meaning and function in approximated models.

2.      Actors behaving markedly different from economic theory do not do so for long.

There still remains a degree of intuition in the science, but a formal structure grants a degree of creditability to the conclusions which is cost beneficial.   

The thrust of this essay is to develop a manner of referring to economics as a positive science.  This simply means that economics will focus on rules which determine testable statements about the economic environment.  To be a positive statement, a thesis must be testable and it must withstand some level of scrutiny over time.  The end result of this exercise is to contribute to the body of knowledge know as economics.

As a method of contrast we are given normative economics which are concerned only with matters of policy.  These can be reduced to the form “should” or “ought to” as indicators that we are speaking only about people’s value judgments about what would be “good” for society.

The “art” of economics takes on a form which is more ambiguous.  We can refer to this instrument as tacit knowledge, or something that is known and not expressible in simple terms.  Positive economics remains in a sequence of flux when the data simply is not available to know for sure which hypothesis is the correct one.  Short of testing (in the absence of reliable data about people’s actions) we are left with the best guess as to the questions we should be asking.  Theoretically over the course of time, the residuals in economics should be reduced, just like they were in any other developing science before data measurement blossomed substantially.  The best example for a case like this is flux as seen in astronomy and other “hard” sciences which are similarly facing measurement problems not yet satisfactory dealt with. 

One advantage to continuing to develop a system of positive economics is to provide a uniform tautology.  This is akin to the algebra and calculus systems of mathematics.  In economics there is no complete formal body of consistent theories which form quite the same tautology, therefore positive economics will have its work cut out for itself. 

Friedman talks about problems of theory on page 8 of this essay:  Supply and Demand are useful concepts in describing the way a market works, however in day to day practice it is hard to see which blade of the scissors is doing the cutting.  With this in mind we know that economics theory is not always relevant, however useful it is in abstracting.  Friedman explains how even formal science uses “assumptions” which can be thought of as approximations.  (Gravity is thought of on page 16, but air pressure – friction and resistance on page 17 – is not introduced until the formal theory fails to work in the case of a feather).  

We have to ask ourselves what is the benefit of thinking in a “laboratory environment?”  No lab is completely controlled and no environment experiences the flux of all possible variables under consideration.  There have to be such a thing as crucial variables which are included.  On Page 32 Friedman offers an example of variables which are not relevant.  He talks about predicting the performance of agricultural factors.  An understanding of the soil content and the management of this factor is going to be important.  Other data which may be available is the color of the farmer’s eyes.  This data can be rejected as relevant because we expect it to have zero power in explaining the performance of the agricultural factors.   

There has to be a balance of assumptions vs. realism (p. 14).  This can be understood as the “art” of economics. 

One of the main thrusts:  “A hypothesis is important if it ‘explains’ much by

 little… it abstracts… and permits valid predictions on the basis of them alone.  To be important, therefore, a hypothesis must be descriptively false in its assumptions; it takes account of and accounts for, none of the many other attendant circumstances, since its very success shows them to be irrelevant for the phenomena to be explained.”

This gives us a full thesis of the parsimony aspect of art in economics.  We want to have the minimum explanatory variables doing the maximum job of accounting for the phenomena that we wish to explain.  All approximation is relative (p. 17) if we are able to get away with assuming something is “sufficiently close” to an ideal type, we can do so.  We are held to the criteria that the model be able to predict as well as to explain the actual events of the world.  On page 24, Friedman spends time showing how we cannot tell what small is in terms of the effect of air pressure on an object.  At some measurements, it makes no difference on a steel ball, but it makes a huge difference on a feather.

The tree example gives us a starting place for understanding how theory and reality are inseparable.  In theory, trees of the northern hemisphere are going to grow leaves on the south side predominately, as opposed to the north side of the tree.  There are various limitations on this basic theory (other trees, hills, etc.) but we do expect ceteris paribus that the lone tree will exhibit these properties.  Leaves on this theoretical tree will grow in places where they are most likely to get sunlight.  The actions of these leaves will seem to follow the same course of action as if the growth process was planned, even though we understand this to take place without coordination.  The leaves will grow where there is sunlight, and they will fulfill the same outcome as if they were acting according to theory.  As a basis for and analogy, the leaves act as if they were atomistic firms and they form a tree like they were a market, creating what many call “spontaneous order.”

We can take this insight further with an appeal to another analogy.  The billiards player is considered an “expert” when he or she does better than a majority of other folks which try to execute moves.  Billiards takes place on a fully determined playing surface.  The person striking the ball can be aware of all the possible outcomes of his or her actions.  To do so does not assume a highly formalized degree of geometric skills; however, the same sorts of skills are implicit in the intuition of any “expert” billiards player.  In order to be successful, the knowledge of this deterministic system has to be near complete, as well as the ability to create concordance of the balls and this tacit knowledge.  By way of analogy: bad businesses do not stay in business just like bad pool players do not win at pool.  Businessmen do not have to fully express their decisions in showy economic formulas; they simply have to act according to the principles which they implicitly understand.  If they behave out of concert with these principles for long, they will cease to “win” in the game of business. 

 On page 27 a logical fallacy is outlined which does not always get clear attention from the casual observer.  To put this in its simplest logical forms I will use letters, the actual example is available in the paper.  If A is true, then B (given assumptions is also true).  There is a C such that it functions much like B (without all the given assumptions) C is conclusively indicative of D which looks like A.   This initially seems to reverse causation between premise and conclusions, but with further effort we see that A sometimes is associated with D, however the leap between B and C is not always the case.  The logical fallacy comes when we assume that B and C are always alike.  Then we directly associate A and D without regard for the different environment implicit in the different description of B and C. 

On p. 31, we see that economic man is often seen as dismal.  Until we are given better models to predict what actually occurs in society we are left with this useful construct to explain the behavior of the economy.  Positive economics is indeed significantly robust in what it seeks to prove.  All aspects of firm and price theory contribute real insight into the way that the economy functions.  It is in this sense – “worthwhile” because it improves the body of knowledge.  We do not then suffer from a strict evidence problem because our findings do not occur in the strict “ideal type” environment of the lab, we cannot overstate that predictive power is coming from the real world.  Assumptions do not have to be strictly representative of all aspects in reality, but we wouldn’t expect this in any experiment. 

Bush received a business degree from Harvard, are you telling me that there are no econ courses in that degree?  Yet he still will make statements like this:

http://money.cnn.com/2005/09/01/news/bush_gas.reut/index.htm?cnn=yes

No Price gouging?  Americans should concerve gas?  Which is it? 

To make sure that gas goes to its highest use we would have to let the price reflect the scarcity of the underlying asset.  The basic concept of supply and demand is ignored in any attempt to keep the price from going up in the wake of a disaster.  This is so predictable that it is hardly worth talking about, but I expect more from someone with a degree in economics.  It is sad really.

 What possible argument could be swaying people to want to keep gas prices low, given they recognize price rationing?  Is it just pure ignorance, or are low gas prices and scarcity more important tenants of some national faith than we give them credit for? 

Another possible benefit of high gas prices: They spread out the costs among a larger pool of people.  Higher transportation costs lead to higher prices on final goods.  These will naturally diffuse the prices to a larger area than initially subject to pains of shortage in the presence of a cap on gas prices.  It seems that even this little bit of diversity of costs would help in the long-run. 

Also, If the major problem was that the levys collapsed, flooding the city, is it accurate to say that this is the worst "natural disaster?"  That reminds me of one of my favorite jokes:  "My friend died of natural causes, he was hit by a train, so NATURALLY he died." (Steven Wright)

There is more on this subject at: http://www.capitalfreedom.blogspot.com/  A great mind, and a fellow PhD student in Economics.

First any good economics class lays the groundwork with definitions.  There will be several definitions offered in this representation of the lecture notes.

Economics defined:  The study of the allocation of scarce resources among competing ends (desires). 

A set of agents who comprise a system and these have an objective function to maximize utility.  These include as part of the function profit, wealth, and other non-pecuniary items.

Scarcity:  Human wants exceed the means to satisfy these wants.  (wants > means)

Five Questions:

Who gets these resources?  What is produced? How will they be produced (are we going to use labor and capital, these both have properties of scarcity)?  When will things be produced?  (Williams gives examples here of repairing after the hurricane.  What time horizon do we anticipate for the rebuilding?  Should we rebuild the sites within a month, a year, or longer?  We certainly have the capability to do it much faster than the solution which will inevitability occur).

These questions all create conflict, this conflict will have to be resolved in some way. 

Conflict resolutions (who is going to get the scarce resources):  Conflict implies conflict resolution, (all conflicts are eventually resolved)?

-         Auction (some market process), the highest bidder.

-         Gift (who would someone give a gift to?  This implies favoritism).

-         Government fiat (Some tribal leader.  A classmate brought up a good point. How are we able to differentiate government fiat from their monopoly on violence.  The answer seemed to have something to do with tradition or rational contract theory.  Maybe something as simple as custom).

-         Violence:  This seems to be the most common and efficient form of conflict resolution.  These are primal solutions which subvert the more “civilized” ones.  The important component of modern society is the monopoly of violence on the part of the state.  The threat of removing liberty of the body is the ultimate removal of personal property rights.  One theory of the origin of law was to preserve property rights without resorting to violence.

Economic theory is non-normative and therefore we are incapable of deciding which is best.  Economics cannot answer the question which is better (anything that can is not a scientific question).  Economic theory deals with positive statements (which concern what IS or what WILL BE.  If there is disagreement about a positive statement then there can be an appeal to the actual facts.  I.e. “the room is 20 by 30.  If there is disagreement over this the room can be measured.  A normative statement is that the room should (or ought to be) 30 by 50.” Normative Statements are a value judgment. 

Economic Models:

The human mind is limited so we need to abstract in order to have Knowledge (incidentally this summarizes most institutions and stereotypes).    We make simplifications to reduce the complexity or to make rough approximations to what is actually going on; or about to happen.  Usefulness cannot be judged based on realism but only on predictability (does this mean that models based on theory should be rejected when competitive with flawed theory models which predict well?  This seems like a justification for the plug and play version of economics rather than the theory, maybe I have this wrong).

Abstraction still applies even when it fails to predict well (the feather and the steel ball).  The law of gravity still is valid even when we don’t exist in a perfect vacuum.  We expect that in many cases the law of gravity predicts well even when conditions are not ideal.  The theory predicts well for the steel ball but not the feather, as long as we recognize this we can apply theory in an imperfect world.  We do the same thing in Economics.  We do not throw away a model when the real world fails to follow the theory, we can remain interested in the predicted changes in the interesting variable. 

The grocery store:

When you go to a grocery store there are always things on the shelves.  This means that markets are not perfectly clearing.  The implicit statement on the part of the customer is:  “I will not tell you when I will come to the store; I will not tell you what I want when I get there; and I will stop coming to your store if you do not have what I am looking for.”  Buffer stock or Inventory ALWAYS implies Information costs are non-zero. 

The fire extinguisher:

Information is not free.  People would not leave fire extinguishers on the wall if they knew when the fire would occur.  The depreciation on the item, and the opportunity costs of the money are useful in the meantime, however it is not uncommon to see buildings stock fire extinguishers.

Economic Behavior:

Production:  is creation of utility (want satisfying capacity)  [I always thought of it as the use of human or physical capital to create either other intermediate or final goods]

      -Can be the use of spatial arbitrage (oranges from California that are desired in Virginia).  This is referred to as the middle man, which is very much a producer by engaging in a distinct type of production.

      -Consumption is the destruction of want satisfying capacity.  (open question for next class, are public goods, specifically their quality of being non-rival in nature, consumed in this way.  Does this case subvert in a principle way this definition of consumption)?  One possible answer was that there are theoretical limits to the consumption of even public goods.

Exchange: The essence of exchange is the transfer of property rights.

      Good – Good exchange:  Seduction – “If you make me feel good than I make you feel good.”  This is also referred to as mutual coincidence of wants.  Menger talks about this principle in detail.  The idea that you could want what I have more than I want it, and I want what you have more than you want what it.  It seems to capture both specialization and the diminishing marginal utility of that product.  Trade is a natural result of both these conditions. 

      Good – Bad exchange: rape – only one person benefits from exchange.  This is explicitly an unwilling exchange on the part of one person.  There are not ways to compare interpersonal utility measures.  This utilitarianism was discredited by the end of the 19^th century.  Pareto criterion ended this experimental analysis, it states that you cannot implement an action that makes one party worse off.  You can however keep one person at the same level of happiness (movement along an indifference curve) and improve the other person, however any exchange which one person enters into which they are worse off afterwards is coercive.

Exchange occurs because of inequalities not equalities.  We do not buy milk because we value milk at the price it is sold at, only because we value milk at some value above the value we place on the money necessary to buy it.  When two people exchange they do so because both parties benefit. 

The water in the desert:

Dr. Williams is driving through the desert with a truck full of water.  This is his water.  He meets someone on the side of the road in the desert whose car has run out of gas on the way back from Las Vegas.  This person has no water.  This person has $10,000 in casino winnings.  If we restrict exchange to voluntary exchange, Dr. Williams knows that the person’s willingness to pay is limited only by their means.  He also notices the $10,000.  He sets the price of water at this price.  The other person facing death gladly consents to pay the stated price and utility is improved through the transaction.  This is not exploitation (there was some confusion in class over this statement.  My best way to handle this is that if someone is bound to give water to the man for free, then this exchange is no longer a voluntary exchange, the property right of the water is not absolute, therefore the transaction is not willing).  Exploitation is only possible in involuntary exchange.  If the person had preferred to die, Dr. Williams would be without the $10,000.

Specialization: said to occur when people produce more of a commodity than they consume OR plan to consume.

      Requires unequal endowment

      Also requires trade (individually, regionally, nationally)

Lowers the cost of production by taking advantage of natural endowments and reduced marginal costs.  I.e. Alaskans are much better at growing king crabs, Floridians are better at making oranges – the cost of trade, including transportation is lower than the cost of either of the two reproducing the environment of the other.  In fact they both exist post hoc in a world where they have as many of the other good as they would if they produced them themselves.

Systems:

Set of interconnected elements (car, ear, scissors) Defining these systems is arbitrary (a break-down of any one element does not make the system not a system, it just may change what system it is.  I.e. Scissors that loose a rivet are still a metallurgical system.  “N” elements and “N(N-1)” relationships.  Systems are the underlying element of economic planning. 

Classification:

Simple deterministic: few components and relationships – billiards – all the results of your actions can be known, the only fun part of billiards is human error, otherwise all is determined in the system.

Complex deterministic: Universe – can be known but is very complex; computers – clearly is determined, but is seldom completely known all at the same time

Simple probalistic: tossing a penny, binary

Complex probalistic: a country’s economy, the human brain – may not be possible to fully determine the probability, if so will be unlikely to remain true to the original probability.

Complex systems do retain some elements of control:  Decision making; communication; Information.  I.e. If Dr. Williams threw the chalk at a student, the student could quickly react and catch the chalk.  To build a machine that could complete these same actions in response to the same stimulus is beyond our understanding (otherwise star wars, missile system, would already be in place).

Homeostatic systems:  Control in a system

I.e. Body temperature or for the following example, man-made thermostat.  Use a thermometer.  The sum of desired temperature minus the sum of actual temperatures can be subjected to the following inequalities:  greater than zero – turn on furnace; less than zero – turn off furnace; equal to zero – do nothing.

The same can be said for the market system.  The present of a perfectly competitive market would be like a thermometer.  If shortage – prices rise; surplus – prices fall; if we remain at equilibrium – prices do not change. 

Parasites and cows.  Parasites thrive on cows, two many parasites, the cow population falls, two few parasites the cow population grows.  If there are excess numbers of cows, parasites, ceteris paribus, will grow in numbers resulting in fewer cows and by extension parasites.  Graphically this is represented by a supply and demand curve with a gradient spiral approximating equilibrium.

As a homeostatic system all systems move from less probalistic to more probalistic.  The tendency to move in the direction is entropy which settles to a uniform distribution.

In economics this tendency is seen with opportunities for arbitrage will disappear, markets clear in the long run.

War is a dirty nasty thing, but in my zero experience opinion, it cannot be the worst thing out there.  Many of my peers in the blogging world have made the claim that we are “at war” with terrorism in general, but I don’t understand this ambivalent definition on their part.  I say it is mutable because they use the term war to justify the actions of our military, but do not allow those that we fight the distinction of soldiers.  For this second part, I agree, but see the situation as infinitely more complicated.  I show my economist side when I start to explain the effect of globalization on the war against terrorism.  In decades past, access for these militants was not a question, it was the furthest thing on our mind that people who hated us in the remote parts of countries we could never located on a map, would want to effect decisive action in order to kill our citizens.  The problem has been that these countries have grown in precisely the things that we would like them to have grown in, they are passing through the same industrial revolution that our own country passed through 150 years ago, but they are doing it much quicker and within one or two generations.  At first it may not seem obvious why this is such a problem, until you think about your own life.  Those of us that are young need only look at the perceptions of our grandparents to understand how world-views change over time, and the resilience they maintain.  If we were to compact the changes in our own families over three generations into the space of our own lives, we would soon see the complication that these changes are making in the developing worlds.  I have given the purely economic example before about someone in a third world country who has had to go to sleep at night with hunger in their belly, this person will never know what it is like to want to accumulate vast amounts of capital.  A person trained to maximize present consumption as a means for survival will not understand the need to invest without dramatic intervention.  How much more true for a society as a whole?  Anyone who has ever had experience with wild animals knows that an animal which has learned to live in the wild can never be woken from sleep without fear of it lashing out against the first animal it sees; this is simply survival. 

I mean to build the idea that these new cultures are violent through no cause of their own inborn genetic traits, but because their culture has developed this ethos as a manner of survival.  Our own Anglo-Saxon heritage shows distant threads of this same capability and we had to learn to cherish the individual rights which allowed us to progress into a democratic republic.  When I make the claim that freedom is not created on the battlefield, I insist that strong armies are neither necessary nor sufficient for a democratic nation.  There have always been strong armies in history; it is true as much as a relative term can be true.  On any given playground there will be the strongest bully.  This I hold is the antithesis of peaceful and effective government, but ironically the source of reliance against those traits in man which will always seek to undermine stability.  I say not that the threats to stability are hard to understand, but that the tendency to have episodes of freedom in history is what should confound us.  The fact that man creates government out of a legitimate hope to achieve something better is what should make us pause. 

This brings us to the outright toppling of freedom, the creation of loopholes by claiming threats of war.  This was anticipated by the first ten federalist papers.  First we have to understand the political capital critique of why an executive would want to act in the present, myopically, for the benefit of his own interests.  This seems very easy, they are worried about their own legacy, they are worried about the growth rate of their party, which has to be ever maximized, and they have no long-term costs to their decisions.  The absolute worst thing that can happen is no reelection.  Look at the presidents who failed to win a second term, there were always extenuating circumstances, the system is meant to apologize for the current president, who is almost infallible with monikers like “the most powerful man on earth.”  Seeing that there is a huge deal of power and self interest in maximizing the exertive force of the entire executive machine (thousands of employees at the will of the president), it becomes very important for the party to control the white house.  This is the training ground for future bureaucrats of the next generation, the leaders of tomorrow.  How much more great if these programs desired by one president, or faction, wants can be put into place with hardly any objection?  Objection during wartime is considered treason.  Bush right now is able to cite the precedents of  John Adams and Lincoln in suspending the rights of political adversaries calling anyone that is against them against the nation at large.  This type of thinking is usually reserved for kings, the personal identifier between nation and leader.  It is a little scary to think of a very large and powerful system backing the personal identity of one man.  This is why the critiques of the Bush family vs. the Saddam family have significant relevance.  The  blind faith we are to have in our leader is similar to the faith Romans supposedly had in Caesar in his campaigns against the Gauls.  Insert Bush and terrorism here into this historical prototype.  I personally believe that there are many ways to solve problems.  I hope that we haven’t miscalculated the costs here, in terms of money, man power, foreign lives, hatred against our country globally, and opportunity costs of solving the problem a different way.  One can hardly imagine that a peaceful solution would be more costly than the enormous expense of the current war.   I know, it seems naive to people that have already been convince of the merit of war, but I don’t know anything else to advocate.  Wars are destructive politically as well as economically.  There are hidden costs which never get figured into the equations of how much gunpowder we are using.  Plus this is not the way that a great democratic country acts.  We don’t create wars to advance agendas at home, and we certainly don’t go around killing people in the mildly justifiable name of insurgency.  I will never understand why we think that a defensive war involves an invasion of a foreign country.  I will never understand why we act independently taking on the large expense of war, when Europe can bow out of the bills that war costs.  I will never understand why we are so committed to a president which has worked every last political advantage out of a war which almost certainly was timed inappropriately. 

Is this association a natural one?  We tell students that are pre-law that a degree in economics will advance them well on the way to success in law school.  One of the principle pieces of evidence for this is the break-down on the LSAT results where Economics consistently scores highest of any other undergraduate major.  OK, so I am an economics instructor, and I am completing a Doctorate in the subject as well, so I have come across the intersection of economics and law before.  So, economists have a way of simplifying issues that is infuriating to most normal people.  Let us start the discussion of law with a simple story.  In a world of plenty a group of people exist, these people can roam the land and take whatever they want from trees, bushes, and other places.  There is abundance.  This primitive state is what Marx referred to as primitive communism.  At this point there was more than enough for everyone around and everyone was happy.  See in this state there is no reason for violence, anything you want you could just take, without diminishing someone else’s quantity by any real amount.  Well, there are some caveats to this story.  According to Hans Herman-Hoppe there are two principles:  The fact that everyone has the right to exclude people from their physical person (no one can touch me without my permission) and the right to exclude people from the place where they are standing (the physical area which one occupies).  Now Hoppe uses these simple assumptions to show that people have the right to their own person and that by extension people begin to mix their person with other things.  I am persuaded that this gives us property rights.  Property rights in turn give us the basis of all other rights it seems.  My right not to be raped results from the fact that I own my own body; this is the 1^st order violation of property rights.  My right to exclude people from my home however is some lower order of property rights. 

Now I want to contrast this view of the origins of law in property rights by the origin of law in violence.  A creditable threat of violence can lend someone strong negotiation rights.  The mafia, nations, and school yard bullies know this too well.  But even the most committed school yard bully cannot persist in an environment where he has to beat everyone up every day, just to get lunch money.  This is achieved at the margin through a creditable threat.  A bully in turn has to reconcile his threat from other more powerful bullies like the principle and his father.  The threat of violence from these people gives the primary victim a response to the threat of violence from the bully.  The primary victim can suggest that they will appeal to a higher authority.  The basis of these rules will be experience.  In our case the basis of our laws is the legal tradition of Anglo-Saxon Britain.   This country was able to take a king at sword point and make him sign a document of rights forming something known afterwards as Magna Carta.  In the school bulie’s case these rules are created at the school board level, in recognition of the community’s principles. 

An important aspect of rules is that they are stated before the game is played.  A bully is first confronted in a lower grade and told that his actions are wrong.  The subsequent actions of this bully are now acknowledged as deviant.  To hold someone to a principle that is unclear is basically unjust, however there are limitations to this concept, however in many cases ambiguity on the part of the law provides a loophole for criminals.   This shows how much we value the a priori aspect of legal institutions.

So how did these institutions get formed?  Well at some point people were fighting one another.  As is often the case more than one side exists in an argument.  However as Sun Tzu stated the enemy of my enemy is my friend.  In order to share certain goals two otherwise disassociated persons may come together to fight the common adversary.  Contracts are written, and the persons who establish a history of keeping their contracts are more likely to gain additional ones.  These people have now got an edge over the outsiders.  The group makes rules that seem fair to them, another group may form somewhere else, and with free association the ones left out of both groups can choose the one they like.  This creates a process whereby one side can prosper without the process of war.  In really productive groups, war is no seen only as defense.  Where war was earlier a form of gaining what other people have, war now exists to maintain order and allow economic activity.  This fundamental change in the status of war was created through the emergence of law.  

Now at the micro level every law causes a problem.  The initial state which was ambiguous allowed partial claims of property and other rights to various people.  In the presence of a law rights have now been clarified.  Even when this is fair, there may be a feeling of loss, or the actual transfer of certain rights from one person to another.  If a law is passed protecting the right to exclude someone from a tract of land, the person that wanted to use that land now has lost something.  The person with the best claim to title in this case of change becomes the permanent owner of that property.  In any case of ambiguity there are potential rents to be gained from establishing the ownership of something.  This is not entirely a bad thing.  The right of Microsoft to own its software inspired them to make great software which improves millions of people’s daily lives.  However there are those that claim loss from the ownership of a large corporation. 

Law is principally conservative in that it benefits those already in power.  When a law is formed it has to be formed by a recognized body, even if this is a king or if it is a parliament.  For example, Douglas McArthur was occupying Japan after WWII.  His staff set Japan’s new constitution up in English and it was adopted by the Japanese.  Currently no change has been made to this, the law of the land is written in a foreign tongue.  This clearly does not benefit the Japanese.  But the violence that caused the Japanese to come under a more lawful society was something that reduced violence in the long-run.  In the current state, violence is curbed by a law regardless of the method in which it was founded.  Stability is no respecter of nation or creed, it benefits everyone.  If you and I disagree over something, say there is a windfall gain of jolly ranchers.  We both like red and blue jolly ranchers and we both insist that all the red and blue jolly ranchers come to each of us individually, there seems like no solution but violence.  If however we divide up the bad equally, at random, we can then trade among the two assortments to get precisely the outcome we would like.  My initial allotment of the desired ranchers may be greater than yours, but there is no way that you are going to end up with no blue or red jolly ranchers at the end of the day. 

I hope I have established a link between Economics and Law, primarily however I read this exercise as little more than a stream-of-conscience on the subject at hand.

Federalist VIII is an extremely relevant and important read.  Hamilton details one of the most persuasive arguments for maintaining union among the former British colonies of America.  In this reasoning, he inadvertently comments on the current geo-political environment as I see it.  I will take the following liberties with his argument to break it up into sections and discuss the concepts as the flow through the article. 

Conflicts are a result of borders

“Safety from external danger is the most powerful director of national conduct.”

He talks about the relationship between separate governments and conflict.  The idea here encompasses a theory that competition among the various entities will always result from different regional economies, different international relationships, different neighboring countries, rather than being focused on an outside enemy, the enemy becomes the state which borders, the paradigm of scarcity has more merit in this environment.

In a peaceful republic the main source of power is the legislature

“It is the nature of war to increase the executive at the expense of the legislative authority.”  “Small states…with… disciplined armies, have often triumphed over large states, or states of greater natural strength…”

In this country we have an executive for precisely the reasons that nations have always allowed certain powers to fall on a small number of people, the menacing predictability of emergency.  In Rome the military leader started of being only called to lead the country in time of war.  As the republic expanded we came to a time of great triumphful military leaders.  In the time of Pompeii and Caesar such leaders were so important to the functions of Rome that they almost had to deny the requests of imperial status.  Recall that Caesar was killed for assuming something like this title.  This lesson is with us when George Washington steps down from the executive for fear that the power of the office would grow too great.  Furthermore, small disciplined forces have always triumphed over larger nations which declined to spend a larger percentage of their economic capability on “defense.”  In a world of many borders, or political and religious affiliation, the motivation of every country to have an “arms race” will weight the economy towards the guns side of the “guns and butter” dichotomy.  This tolerance for a large military force necessarily moves an economy within its production possibilities frontier and reduces the welfare of the total economy.  Peace is necessary for a republic, and peace is contrary to a world with tribal tendencies.

The progress of efficiency can be applied to wars, increasing the appearance of hostility

“The industrious habits of the people…are incompatible with…a nation of soldiers...  The means of revenue…and the science of finance… have produced and entire revolution in the science of war, and… (are) the inseparable companions of frequent hostility.”

This can be taken two ways.  The first is that any nation can now gain forces with the same budget.  Within one country this benefits the commander-in-chief of the nation by a rise in power at his disposal and is its own temptation.  Secondly, the use of force by small groups is now more readily available.  We need look no further than the rocket propelled grenades that are being used to bring down aircraft in areas of conflict.

Instant defense

“The smallness of the army forbids competition with the natural strength of the community.”

Again, Hamilton points to the propagation of peace as having a positive relationship with economic efficiency (meaning here more productive use of natural resources including human capital).   

“But within a country, where the perpetual menacings of danger oblige the government to be always prepared to repel it, her armies must be numerous enough for INSTANT DEFENSE.”

By menacings of danger we see that in dangerous world republics give way to dictatorships.  If this threat is pretended for the growth of executive power, how even greater the harm to a society for this would represent the needless rejection of our vital liberties and institutions determined to protect natural rights.  This instant defense justifies the even larger creation of armies.  This section discusses the difference between militia and standing armies.  When countries have real or pretended conflicts standing armies increase, the executive power increases and the republican protections of individual rights gives way to the concentrated control of the minority in power. 

Legacy of WWII

“If Britain had been situated on this continent, and had been compelled… to make her military establishments at home coextensive with those of the other great powers of Europe, she, like them would in all probability at this day be a victim to the absolute power of one man.”

Hamilton starts to wrap up his argument with the ultimate end of his theoretical slippery slope.  This fear of a dictatorship should and has lasted in the minds of modern man.  In Hamilton’s world this was only recently the aims of a government to justly throw off the ties to a dictatorship, however benign the offence, its aims were to increase the malignancy.  In modern times we see a country which keeps a large stock of capital (bombs and humans) ready to wipe out any threat to the power of the world’s “democracies” (“make the world safe for democracy”) which has lasted to the present day.  It is unclear that without the rise of a dictator of sufficient power both in Berlin and Moscow, with ideas opposed to those we nominally protect, that the US would have had any reason to increase its global domination.  These two powers different in motive are similar in ends.  The current president of the US has more power than either of these two heinous dictators dreamed.  The ascendancy was clearly different, there is no comparison in means, but regardless the concentration of power is specifically the cause of future harms. 

While we learn from Hamilton about the benefit (increased economic efficiency) which comes from decreasing the absolute number of borders, we decide that the cost is sometimes very high.  Imagine a world of one world order.  We would by all reason try to make it a republic, because in theory soldiers would not be needed (they would be called police).  If Hamilton’s theory holds then we would see that republics would be more likely to persist assuming they were formed.  If a democracy would make sense instinctively, consider where the balance of power would be.  A China and India coalition could vote to redistribute wealth to their countries, precipitating a civil war unlikely to be one by the numerical inferior.  The US would play the role of the insurgent, trying to preserve its own status quo.  The efficiency of the modern army would allow us to precipitate enough violence to hinder the progress of the larger collective, but not sufficient to forever dominate it.  The policy implications of this future speculation seem to be:  A) to promote a form of republic which would preserve the US domination of global politics (akin to the UN security council) B) eradicate all threatening cultures and maintain a minority reign on the globe.  It is important for the sake of clarity however to recall that these are not in line with Hamilton’s ideas of what the US union would provide.  If he were drafting a defense of the WTO I find it reasonable that he would suggest to his US (similar to contemporary NY) that its best interest lay in determining a regional specialty in a more broad global context.

“Bracing for the Big One”

This article is the lesser of two very nearly Yellow journalist articles in the St. Louis Post-Dispatch today.  Yellow journalism was coined to describe the ability of Pulitzer and Hearst to stoke up a war with Spain through “Sinking of the Maine” headlines.   

Summary:  There is a fault line that threatens all the central United States.  The nearest recorded epicenter was in southern Missouri, along the Mississippi river.  Earthquakes happen, and they vary in size.  St. Louis is built less sturdy than Los Angeles, which has earthquakes.  Conclusion: St. Louis should build all their buildings up to Los Angeles type codes.

I do take some simplifying liberties with this article, which overall, I thought was a good case study of the argument, even if I don’t understand why this is such a hot topic now.

There were two 4.1 and 4.3 quakes in February and May respectively in Southern Missouri.  Beyond this, it just seems like news is a business of provoking people’s fears.  The main story in today’s paper is about the threat of industrial zones, playing on people’s tendency toward fallacy namely, a propane plant blew up in St. Louis, and therefore all industrial zones have a tendency to blow up.  

The problem with retrofitting and making building codes higher is dealt with in the article.  The section begins with the all too common phrase “There is no such thing as a free lunch.”  Mr. Hand cites the fact that money spent on extra concrete is money that could be spent on Policemen.  He also points out that St. Louis has one-tenth the risk level of Los Angeles, and would in some way be justified to spend less than LA on a per capita basis, building things like 20-year ball clubs up to a 2,500 year international building code.  

Mr. Hand gives us this dichotomy:  “Precautionary or coolly utilitarian”

I, personally, hate dichotomies.  They are simplifications useful in theory, but create terrible results when repeated as fact.  I also react to the use of the word – “coolly” which seems to suggest that utilitarianism is the lesser of the prudent virtues described here.  That somehow planning for a 8-point Richter-scale earthquake is justified in aims of being prudent, while using cost-benefit calculus is the think only a theoretician would do.  Mr. Hand gives us “Developers are fighting it tooth and nail, the almighty dollar is driving everything!” (in the mouth of a construction consultant in St. Louis, Mike Griffen).  My reaction is that the almighty dollar SHOULD drive everything.

Again, Mr. Hand contradicts this without drawing the specific comparison.  He tells us that Budweiser has made the investment to make its building quake proof.  This makes sense only if they think that the risk is sufficient to justify the cost (not to mention they did it without government command).  This reality exists without raising the building code.  I get back to my example from Mr. Hand’s article where he talks about the baseball stadium.  He tells us that the stadium is not built up to the highest letter of the code (he leaves this hanging, so we assume that he suggests it should).  The picture I have in my mind is the whole of St. Louis collapsed around the functioning structure of a baseball stadium, where the construction (rebuilding the city) stops each day for us to watch a baseball game.  What planet does this make economic sense on?  Even in a perfect world, baseball stadiums last 20-40 years, therefore please justify the cost compared to the geological time period calculated risk.  An earthquake of the magnitude to do the damage they speak of is not likely to happen but four times in the last 6,000 years.  Do the quick and dirty cost benefit, and see if the extra money is worth it for that risk.

Like I said, Mr. Hand presents both sides of the story, but in an article meant for Sunday July 3^rd readership, it seems we would have had time to present the economic side of the argument a little more clearly.  The yellow journalistic part of this sells papers, sure, but it leaves the public in general with misinformation about the roles of economic cost benefit analysis in deciding city planning.  Leave these decisions to the private corporations, when the earthquake hits, feel confident in that at least your supply of beer will be safe, even if you don’t have a baseball park to go to.

Alright, I hold a master’s degree in Economics, but I am going to part with a dirty little secret; I don’t feel as if I have mastered the subject completely.  I of course would like to claim, like Socrates that I have just become aware of my own ignorance, but I think to be fair the truth is that I just don’t really know that much.

For instance, what is it about supply-side policies that make them so favored by government, and what problems do these cause?  My gut instinct is to break the subject down into some manageable parts, to abstract and then use Hegelian dichotomies to understand trade-offs and weights.  So, what are the aims?  We can look at history to determine what was available as a policy tool before supply-side (for this modifier almost surely separates new policies from old).  So we go back to Keynes and the stimulation of aggregate demand.  In this world, the problem is animal spirits, which people just want to buy a baseline of goods to satisfy natural urges.  This is some decreasing function of the income that they have so if we can increase the income of the masses then we get more consumption goods, and an economic recovery.  It sounds fairly simple, but the problem is that redistribution has many various and complicated effects which are hard to think about, much less explicitly name.  For instance, the choice to invest in large government works projects carries with it the problems associate with any public good.  We first have to justify the investment of these resources, at this time, and in this particular good.  There might be a reason that the market has not invested in infrastructure, possibly the market is not failing; we just see it this way.  The most common example is an investment in an interstate system to accommodate consumer travel, but years later an airport system is comparatively advantageous, so maybe there is misplaced investment.  A better historical example which I have looked at is the convergence to canal systems for transporting goods, until the invention and the standardization of rail roads supplanted that and showed the mal-investment in canals. 

Regardless, the money that the workers earned is good for the economy, right?  I mean if they are employed by the state then they have more income and then buy more goods, right?  This assumes that there is a baseline of wage.  In an economic downturn, one of the possible concerns is that people value their labor at a higher rate than the market does.  There are many arguments for why a person might choose to stay out of the work-force.  I for example was part of a large movement of working people who returned to college for graduate school.  We figured that since our opportunities were not what we expected, we would “sit out” the economic downturn, and invest in our human capital.  That way when the economy “picked up” we would be able to reach the branches of economic plenty first because of our new-found certificates.  My peers that are looking at the job-market right now are seeing that some level of this is rooted in reality, since there seems to be a shortage of master’s level analytical persons looking for their first job.  My own phone is “blowing up” with job offers, even though I am not on the market.

So we took on debt during a downturn because of projected future gains.  Maybe we were just lucky.  What about those without skills?  It may seem harsh, but sometimes the struggle to survive means that you are willing to accept wages below some “golden” $5.25.  These cheaper labor costs might be the thing that helps a new entrepreneur to finance a great new idea.  So the re-evaluation of the value of an input may in fact encourage growth in a certain industry.  We don’t like to think of labor as an input like machinery, but in an economic sense it is.  The entrepreneur who sees this opportunity will sort the market out.

So I have made a really weak case for leaving the economy alone.  I should spend more time and create a thesis for specific empirical examples in the Great Depression, but hey this blog is called off-the-cuff, the sole intention of it is to make me write each day (and I fail at even that).  So I am left with my original question:  Why does supply-side make sense?  I think I have proven that we need to be wary of government action, but as a society we expect that we can do better through the application of reason, that we can by just doing something.  This is why basketball players have coaches, this is why we submit to managers at work.  Somehow a group needs a head to direct it.

So we look back at the demand-side policies and see inefficiency.  What happens if we force a minimum wage, yet give the employers more money to invest in future exploits?  This way we give a similar incentive to the businessman that cheaper labor would have given.  We can stimulate production of new goods.  This sounds great, we capture the supplier interest, and we “trickle down” more income to the labor class.

I am not sure however that the government bureaucracy is making the same type decisions of the market.  When bad entrepreneurs (hear defined as those unable to read the market) start manufacturing something, they have greater insulation from their mistakes.  The supply increases of goods formally demanded.  The consumer therefore sees increases in inventory.  This subsidy is lowering the relative price of goods being shipped to the market, somehow this makes inferior products compete with better products, and when customers choose on price and this sends a signal back to the manufacturer to continue making the product.

Granted this part of my rant makes little sense, I am working on understanding this argument.  So somehow “supply creates its own demand.”  I would love it if someone could help me understand this argument better.  But in this world, the incentive for the supplier can be seen to undermine the market system and create a world of wealth concentration.   If those already in power gain an advantage from the government, and it has these re-enforcing characteristics, then maybe there is a problem here which the neo-Marxists have uncovered.  It would take someone much more sophisticated than me to figure that out.  The new entry of participants into long-standing and large industries, in this country has the effect of injecting “new blood” into this world.  If we don’t allow this instability to persist, then maybe we become less competitive on the world market.  The dichotomy between macro and micro can teach us the ultimate lesson of this logic, that there will be benefits to stabilizing the global situation, so that international competition is no longer interjects dynamics on this static equilibrium.  This may in-fact explain the war-mongering which is increasingly popular these days. 

Equality is an interesting idea.  This is one of those words that gets thrown around so much, on both sides of any issue, that it is worthy of some time spent thinking about just this concept and what it means for our society.  Whenever we start too look at meanings of words a helpful source is the dictionary.  I want to comment first on the limits of a dictionary.  The definitions are made by frequent citation.  This is fundamentally a different usage of the word definition than how it is used in science.  In science a definition is an equality (in a mathematical sense).  For words definitions are only the history of usage. 

Here is M-W.com’s take on the word equal:

1 a (1) : of the same measure, quantity, amount, or number as another (2) : identical in mathematical value or logical denotation : EQUIVALENT b : like in quality, nature, or status c : like for each member of a group, class, or society <provide equal employment opportunities>
2 : regarding or affecting all objects in the same way : IMPARTIAL
3 : free from extremes: as a : tranquil in mind or mood b : not showing variation in appearance, structure, or proportion
4 a : capable of meeting the requirements of a situation or a task b : SUITABLE <bored with work not equal to his abilities>
synonym see SAME

The same as another.  On one hand we recognize people as unique.  You can tell your lover apart from a stranger.  It is also probably that you would rank your lover higher than a stranger in terms of companionship.  When people take about equality in terms of social planning however, they typically see people as homogeneous units in desires.  Economics looks at this assumption as seeing people as are alike to the extent that they always want more.  This is the no-satiation assumption.  It seems pretty robust.

Egalitarianism takes this idea (almost to the point of reshaping social order).  The kernel of the idea is that there are some natural rights which are universal.  This is the usage of the word in Thomas Jefferson’s modification of the Lockian precepts: “All men are created equal.”

The problem is that when reason is applied to achieve an interpretation of this statement, the most unsophisticated methods are used.  This seems to equate our founding document with a mathematical understanding of the concept of equality.  It is presented almost as if the theoretician’s understanding of homogeneity could be forcibly true for all people.  I hope I am not alone in seeing this as a corruption of the tenent.

Hayek puts it this way: “Formal justice and formal equality before the law.” (CH 6, road to serfdom).  He continues to build to flesh out the corrupt version of equality as that which leads to jealous infighting.  The socialist who wants to create a world of perverted equality will try to redistribute endowments until equality is achieved.

The most penetrating example of the failure of this concept is in the movie “Enemy at the gates.”  I am not suggesting Hollywood is a reference in par with Hayek, but I think it is an accessible example.   All actors in the movie were equal in their poverty.  There were three principles which rose because of special ability.  These include the sniper, the girl, and the jealous official.  The sniper had extra special skills which made him very useful.  The girl was a beauty and the source of conflict.  In a world of no material goods, and in the context of ever-present death these differences in endowment are most clear.  The official, being an intellectual, eventually kills himself because he realizes that inequality (in endowments) exists.  The sniper becomes our hero as we invest ourselves in his story of survival.  The lesson is that regardless of material endowment there are even sexual endowments which the animal aspect of our constitution could recognize, and our rationality could not overcome.

Getting back to Hayek, he talks about privilege.  He states that the traditional understanding of this concept was that certain aristocrats were “privileged” to use the king’s land.  In this way they were able to extract rent.  In the modern world, privilege has come to mean something else entirely which is directly related to our mundane alteration of the word equality.  Privilege in this case relates to any ownership of property.  In a world of markets, any property must earn a rate of return to be justified.  The rate of return for selling land otherwise would be higher than the internal rate of return for its current usage.  It is the market which has made the old version of privilege disappear.  This new version communicates the desire only to redistribute. 
Having built this discussion on equality, I have to interject the presence of the old form of privilege which is worth further inspection.  The birth into a situation of advantage is not reconcilable with what I consider the true social meaning of the term equality.  Access to education, access to opportunity is essential in this concept of equality.  I believe that Jefferson’s ideas on the subject are way ahead of our contemporary understanding.  He created the concept of public schooling, so that a third party would be able to provide these opportunities (only to the most promising candidates).  He saw society as searching for those with merit, which would contribute to society.  This, in practice is the meritocracy which would reinforce itself with new infusions.  I think of Horatio Alger in this context. 

If we truly could construct a society with high reward for those who strive for success we would be close to this meritocracy.  This can be seen in Basketball.  Here is a game which can be played almost anywhere, with the smallest amount of equipment of any sport I can think.  We have people competing fiercely for the top spots.  Some folks work hours a day just to get a college education (or professional contract), some work and fail, but we get a higher level of competition by the potential for large returns.  The market has dictated an environment where the returns to basketball players are high enough for that top tenth of a percent as to justify a large portion of our population competing for these spots regardless of the chance of securing one.  In basketball we all have and equal chance, BUT some of us do not have the endowment to reasonably expect success.

So, equality does not equal homogeneity.  It is a deeper concept which refers to access and position before the legal system.  This deeper meaning, I feel resonates more strongly.  It is fruitful to ponder from time to time on the meaning of words which people throw around so carelessly.

Chapter 5 of road to serfdom opens with an interesting implicit question.

The distinction between a “classically liberal democracy” (a democracy which holds the individual supreme) and all other types of government is the ability to allow “autonomous spheres” to exist.  This seems to be precisely the intuition evident in the writings by the founding fathers of the United States (Madison specifically).  Making government as inefficient as possible will ensure that market conclusions are able to co-exist within a nation.  (I don’t begin to touch the implications in a world with competing forms of government.  It is interesting that I have to make this distinction however.) 

What Hayek (trained like Madison with a classical education, including natural rights) seems to touch on is important to the protections we want to have in place for our society.  If there is something legitimately irreplaceable about the free market for ideas, then we have to have a structure which can withstand those ideas which might otherwise “rock the boat.”  In a world that fears for terrorism, these freedoms seem to be ratcheted back.  I don’t know how to solve the paradox of liberty, which those most determined to hurt others and tear apart a free society, will be able to do so more freely.  It is clear that we would like to maintain an environment for innovation and new ideas, but at what cost?  I am not sure that there is a way to have these two can co-exist.  My theory (in true “off the cuff” fashion) is that there are some unique benefits to self-sustaining nodes of radical subversives.  I guess what I would like to see is a better way to determine the harmful ones from the benign ones.  I mean, isn’t college supposed to be full of radical subversives (ideally both on the left and right).  What do we see during great episodes in history?  The people responsible for the enlightenment ran the risk of being exiled from their professions by writing on certain topics.  These people were not supported openly, but they were able to make a huge contribution.  Maybe these subversives wouldn’t have made such a contribution if there was no fear of being caught.  So I could accept the idea that there needs to be an over arching code for behavior, those that violate it would be subject to the same failure which has always plagued those ahead of their time.  On the other hand, what if new forays into our civil liberties decrease the “sphere” in which innovative thinkers reside?  This seems that it would have a huge impact on the amount of innovation which takes place. 

Like I have begun to think of all things lately, it is a trade-off.  I think that maybe there is an optimum level of terrorist activity.  There have certainly been many papers and projects which show that terrorism behaves like a market.  If this is so, then we have to have a full and open discussion about what the choices are.  Freedom is good, but how good is it?  Before we sacrifice freedom we need to know what we are getting in return.  Historically the sacrifice of freedom was though to be temporary, but it was never to return.  I become then very jealous of any freedoms that I have.  I run the risk of sounding like a baby.  Hell, I run the risk of sounding like a subversive.  I believe so strongly in values which I want everyone to have, I just consider individual liberty one of them, therefore, I assume that people are smart enough to make up their own minds. 

My current rereading of “Road to Serfdom” is paying off in ways that I did not anticipate when I picked the book up this morning.  Within the several prefaces to the book the point is made about the impact this book had on intellectual development after the war.  The general thesis of these arguments seems to lead to something like: Hayek started a conversation among socialist and liberal (point should be made – classical liberal) points of view.  This conversation not initiated from the liberal side, is assumed to be mute in the face of well meaning social reformers. 

I do not want to take anything from Hayek (every time I read or discuss his ideas I am more impressed), but I am taken by the way in which the argument is delivered.   I can only assume that the environment of the time was so socialist as to warrant such a strong case to be given to the socialist side of the debate.  He seems to posit the idea that socialism is one end of a spectrum and that free market is at the other end.  Implicit in the title is the idea that feudalism was something that we rose out of, and that the opportunities to return to this lower echelon of political arrangement is a constant threat.

What credit then do we give Socialism by seeing it as a sustainable state of affairs.  The argument never quite claims that feudalism and socialism are the same, but I am certainly to take from an argument against socialism that some drastic consequence is at hand.  Therefore, it must mean that Socialism is nothing more than a false utopia.  Clearly he gives us fair representation of this tendency in the chapter specifically on Utopian philosophy.  The way that he talks about good and evil seem to speak to a dichotomy which is also a little hard to grasp.  The central point being that if you defect from Capitalism, then you are necessarily bent on a path towards totalitarianism whatever your goals of socialism are. 

The part of his argument that I find instantly compelling is that socialism, reached through some central societal reform is doomed to fail.  The examples are evident, National socialism in Germany, Fascism, and the commitment to reforming man in the French revolution.  The part that I struggle with is that there is only one road, and we must recognize the truer of the paths as we go forward.  This prognosis is difficult to see.  That must be some economic truth in growth that will keep us as free as we can be, limited only by our constraints as human beings.  I am not sure that this idea is elaborate enough to stand the polar opposite of the socialist utopian dream.  So maybe we are doomed to try the utopian experiment as a check on the extent of government in the market.

As with any argument that deals in dichotomy, I am a little wary.  I have to admit that Hayek has done much to make me think more deeply on the matter.  I read this book the first time when I was an undergrad.  I made many notes in the columns trying to understand his argument, which I thought at the time were facetious; as I read them now I recognize them to be tenants which I hold.  Hayek has thus had an effect on the way that I think, and I hope to one day understand his point with deeper appreciation. 

Even Hayek must admit, on rereading the book (as he does in the 1976 edition) that this was the first book in a series of thought.  So I don’t hold it up to the same scrutiny which I would myself (purely a derivative of his insight).  I do hold him up though, trying to see the conflicts in the treatise, herein I find much room for thought.  It is very seldom that you can find a book, both an excellent foray into a subject and a tool for further study.  I find so few authors which write on these multiple levels.  So the truth is that I only have begun to digest the problems that were real and pressing then and almost certainly will remain the bane of any free society as it confronts the moral conflicts of pain and misery among the streets of great commerce.   

It seems important to note the impact that this distinction has made on the profession.  Economists seek to see themselves as scientists.  In a way this is the promise that Friedman offered in limiting his students to “positive” economics.  This also abstracts the necessary consideration of the other two legs in this three legged stool.  While positive economics may have its place in the laboratory atmosphere of a theoretical paper, it cannot be expected to function in the real world of normative evaluation.  In this real world, students will apply the lessons of economics to everything they see around them.  Had they not been taught to reconcile these ideas with the strains the political environment places on them, they are not capable of handling the new insights they have into the economy.  

I join Colander in emphasizing the importance of making the distinctions, and teaching all of the aspects of economics.  He recognizes that telling an empirical tale is an art form.  It is also important to realize that the student is a searcher.  All students have different reasons for entering the pursuit of advanced academic study.  For some they are compelled by real world problems.  What we can realize is that these gaps in their education will be filled in by something.  How much better is it to give the student the proper education from the beginning, rather than forcing them to fill in the gaps with no guidance?  

I don’t speak of a complete doctrine, rather I speak of problem solving that takes into consideration the higher level of complexity which is seen in the real world.  The tools of the positive economist are only as good as the mind behind the wielding of these tools.  The Socratic problem teaches us that we are responsible for the discourse we undertake.  We are responsible for giving the tools of the profession without the insight of countless generations of normative and artistic application to real life.  There are generations of thinkers that have come and gone in the taxonomy of economic thought.  It would be useful for these categories to be recognized for what they bring to the science as a whole.

It seems that Economics has an image problem; it thinks it can grow up into a natural science.  This claim, while also being ambitious, is reckless because it ignores the unique understanding behind what economics studies.  The discipline does not seek to help reelect dictators, or justify bad political regimes.  The discipline focuses on better understanding the action of man, praxelogy.  With deliberate poetry Ludwig von Mises chose this as the title of his English translation “Human Action.”  What better way can we understand what properly falls within the category of economics?  We don’t seek to understand animals which lack reason.  We don’t seek to understand the way in which the earth ages.  We don’t even seek to understand the way that the brain responds to physiological stress and trama.  What we do seek is a theory of how man should be expected to act from interplay between two individuals, to interplay over the whole human inhabitants of the globe.

 Without the insight Dr. Schlisser offers we can seek how economist will continue to be sources of perversion with no feedback check to keep them honest.

"A dead thing can go with the stream, but only a living thing can go against it." - G. K. Chesterton in Everlasting Man, 1925

There is much work linking Darwin to social theory.  This is the contribution of the atheists to the state religion which is called science.  In this way science starts to mean the triumph of pet conclusions about the world, and has less than the pursuit of knowledge.  To understand this fundamental perversion we have to work pretty hard to develop a new understanding of the way knowledge functions in a society.  From the conferences last week I have come to a new understanding of knowledge in society (much of this work as been done by F. A. Hayek).  He talks about how knowledge works.  It seems he understands knowledge as compared to labor.  Hence there is a division of knowledge; there is also a division of labor.  To what extent that we can construct more complex theories of knowledge exchange vs. the study of labor economics which has gone a long way to maturity, begs focus of some very bright minds (here I am glad there are those more endowed than I). 

I first have to figure out what knowledge is.  There are things that we know and things that we think we know.  Certainly there are suppositions that we make which prove to be true regardless of why we believe them.  My favorite irrational explanation is that when you shut the door of the refrigerator a little gnome must turn out the light, since it appears to go off.  Clearly this statement is false, but it transmits the understanding that the light goes off when you shut the door.  This is understood, yet a bad explanation.  Only when we start trying to systematically reconcile this interpretation with schematics of electricity do we have to abandon our childish notion of magic. 

In this way science is very helpful.  There are certain rules of the universe for which we have improved our approximation of understanding.  Newton, more than anyone else, set up a system to link all the various disciplines of science into an organic mass.  Newton may have been one of the first people to see various sciences related in this way.  Therefore we see subfields to understanding where people specialize.  I work to understand my portion of the world, my employment.  I get good at my world view.  Another gains by investing his talents in another pursuit.  I can trade this knowledge with this other at points where benefit is to be gained in trade.  My favorite example of this is the Cobb-Douglass function.  This function is taken for granted in most advanced economics courses.  An economist who had some insights about the world (Cobb) sought out a mathematician (Douglas) to contribute some functional knowledge about math which made his theory quite robust.  This is the trade.  The underlying specialization is the novelty.

So if people specialize in knowledge, there seem to be gains.  This is the same story that the economist will tell you about labor.  In this way we can see a more egalitarian aspect to the use of knowledge in society (to use the Levy-Peart insight).   Like with labor some is deemed dearer by the market, knowledge too can be rewarded. The market exchange is transacted through medium of exchange; there should be something like this with knowledge. 

This knowledge is what separates us from animals.  We can choose to benefit from it, or we can allow it to continue on a random course.  The quote I choose above speaks to the ability for man to counter the prevailing force.  If we recognize this ability as what makes man distinct, than we have a theory of reason.  If we are all similarly not animals, than it follows in some way that we are all equal.  To put it another way, this reason creates membership in the society known as humanity, and we all have certain rights within this context.  It is incredibly interesting to recognize this natural law doctrine in even the most secular of sources.  It is in this way that I feel Darwin’s rejection of Birth Control can be viewed.  He recognizes that eugenics is fundamentally perverse.  That human reason applied to the survival of a species is not evolution.  The above seems to suggest the beauty of reason and its caveats.  In this way, however naive the argument, it has worked toward a more complete understanding of the work on knowledge’s advantages and limits.