Class Summary 9/28/11

Circular Flow& Mercantilism's End


Factor Market: payments between individuals and firms; requires input of machines, labor, effort, etc. to produce goods
Goods Market: people obtain factors (products, services, etc.) from businesses and exchange money for them

Physiocrats

• Believed that allowing children to work on the farm was worthless, when in actuality, their attention to craft and tool innovation increased production
• Thought that craft construction was a leisure activity
• Asserted the idea that people should be able to keep the produce from their own farms
• Believed that the source of wealth was production

Scottish Moral Philosophers

• Thought that people were inherently good --> private choice and social virtue were in harmony
• Believed that good economics were about more than prudence
• Were highly concerned with economic growth
• Hume: One of the most famous SMPs, and most widely read author of the founding fathers
• Asserted that economics weren't (and aren't) a social construct & that economics can survive on its own without the guidance of the king
• Established that the source of wealth is NOT agriculture
• Suggested a specie-flow mechanism: more money chasing the same amount of goods means that prices rise; also governs the law of one price: amount of money vs. goods & services available 
• Determined that the main driver behind economic growth was/is commerce because prices around the world will adjust
• Acknowledged that jealousy of trade could be an issue, but it won't be because:
• Competition forces innovation and improvement of goods and services --> lights a fire under native populations
• Trade promotes learning and education on betterment of products
• Division of labor doesn't exist without trade
• Mass market investments in technology make sense because they cause innovation as well as incentivize people to divide labor to create more products --> economics of scale

Mercantilists

• Believed that all trade was zero-sum and that wealth was fixed --> if one nation becomes rich by trading with another then the latter must be poorer
• Thought that sources of wealth were gold in the treasury, the wealth of kings, and positive balance of trade
• Balance of trade was achieved by allowing the king to control trade so that gold could come into the country, but would never leave it --> restrict imports & promote exports
• It was important for them to produce more gold so that they could fund a war and excel in combat
• Thought that free trade shouldn't exist because individuals have private interests that don't coincide with social interests

Class Summary 9/26/11

Indirect Causes of the Industrial Revolution


We've established that the direct causes of the IR were entrepreneurs, inventors, and innovators. The unanswered question that remains is how did people get richer because of this? The answer is a domino effect. Technology increases worker productivity, thus more products are created, and wages rise. Our ability to produce goods and services always increases faster than the number of workers. This explains why machines didn't, and never will, fully replace human labor.

Indirect reasons of the IR are more difficult to establish, but here are a few of the theories:

• Gradual emergence of political units and a newfound sense of nationalism in England
• Decay of religious mysticism--> new belief that life on earth was as important as life in heaven
• Pure science was not as important to the IR as the top-down collaboration of people who increased technological productivity at the margin.
• Technology of defense outweighed other technology --> it was difficult for England to be conquered or colonized because it's an island without resources of immense value.
• Institutions: consciously formed social arrangements --> Adam Smith suggested that they were the single most important determinants of wealth.
• When people engage in commerce, it promotes the idea that they themselves are of value. Virtue=capitalism
• Shifted perceptions of the Bourgeoisie class --> no longer a threat.
• Better health care allowed for higher life expectancies, which fosters the development and continuation of culture.

Mercantilism: An outdated form of government in which the monarch controls the economy; also referred to as progressive corporatism. It reigned with feudalism until the mid 1700s until it was ended by French physicists and Scottish moral philosophers.

Once this type of government was replaced with a more democratic alternative, all of the downsides of mercantilism disappeared. These included:

• Heavy restraints on people and creativity
• Protectionism
• Formation of craft guilds
• Difficulty of licensing --> monarchs granted monopolies
• Import/export regulation
• Restrictions on the movement of citizens
• Limits on domestic production
• Price and wage controls/maximums
• The idea that the people of a country were property of the king or queen

Francis Quesnay came up with the idea of circular flow, or the constant flow of money and goods between the individual and the firms.

Essentially, this model depicts the interactions of the factor market (money) and the good market (stuff). He also asserted that income=expenditures. Every dollar earned in a particular economy is also spent.

Reading Analysis of 'What Social Science Does--and Doesn't--Know'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
Social sciences, especially economics, seem to get a lot of flack about inconsistencies between predictions and results. Hard sciences, as they are referred to in the article, are regarded for having definitive, concrete outcomes. Although qualitative data can be extremely helpful for predicting social trends, economists are consistently chastised for incorrectly forecasting an event. Physicists, chemists, and biologists can't even say that the results of their experiments are surely indicative of future occurrences, and yet people generally don't argue with 'hard' science. It's true that social sciences are much harder to study because the variables are endless, but the themes are still warranted. As Rizzo explained, economists might not know the outcome of all situations presented to them, but they do understand how things are supposed to work. One would be hard-pressed to find a hard scientist who knew how an experiment should turn out.


Discussion Questions
Hard scientists are often perceived as having more reputable experiments and procedures than social scientists. Which group of scientists has a higher margin of error? Could they possibly be about the same? Why?


Why do people feel they can argue more with data presented by social scientists? Do chemists or biologists really have true controls in their experiments?


Annotation
This article makes an argument for the validity of economists assertions. Although controls are difficult to establish, the outcome of social science studies are still important for future understanding of economic policy. No 'hard' science can be correct 100% of the time, and neither can a social science. The bottom line is that all science has flaws and misrepresented results, but both make valid points.

Class Summary 9/23/11

Happiness


With all of his economic prosperity begs the questions, are we any happier? For one, the world isn't more violent. The only reason it may seem as though there's more conflict is because information is instantaneous today. The news bestows images of death upon us almost constantly, when in actuality less people are dying in wars. Not only are less people involved in conflict, but doctors are better at treating war-related injuries. Concerning modern materialism, all resources are more abundant than they were ten and even forty years ago. Even more amazing: they're cheaper! For all the people obsessing about human consumption of natural resources, it's been proven that social prosperity is good for the environment. This is because nature isn't simply food anymore.

Even with all of the technology, convenience, and health, people aren't necessarily happier. Measuring joy is entirely qualitative, which is perhaps why it's so difficult to gauge.

Easterlin Paradox: He conducted a study in America, and determined that people with higher incomes were happier than poorer people. When he expanded his data collection internationally, however, there was absolutely no correlation between glee and wealth.

Maybe it's not the tangible items that cause happiness, but rather social and political liberation. Freedom for personal beliefs generally insinuates contentment amongst the people.

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Commercial Revolution (IR)


Almost all of human history is plagued by misery, death, conflict, and disease. Because we're much more spoiled now, minor hiccups in economic progress are overemphasized. During the Great Depression, income levels fell to those seen before WWI, while the modern Great Recession caused salaries to fall to numbers around the *terrible* time of the Summer of 2007.

We can think of the Commercial Revolution as a transition from stagnation to growth. Economic success can also be religious liberty, women's rights, and political freedom.

Classical Theory of Production: we "use up" our increased productivity with population growth.
Modern Theory of Production: improvements in technology, knowledge, and capital allow productivity to outpace an increase in the earth's people.

Population studies have actually shown that fertility falls as income rises. This could possibly be because parents are looking for child quality over offspring quantity. Another idea draws from the role of property. Wealthier people have incentives to spread their money amongst their children, while poorer people have nothing to give. Another child isn't seen as competition because each kid has nothing regardless.

EWOT Goggles #3

Haitian Divers Hope to Aid Ailing Reef 

I read the New York Times article linked above about three weeks ago, and it addresses environmental economics very poignantly. Because natural resources are "free", people often overlook their value. Nature provides many services that even the best man-made machines couldn't compete with. For example, it would cost us about fourteen trillion dollars per year to recreate all of the air-cleaning and water-purifying functions that rainforests offer at significantly less productivity levels. By this statistic alone the environment is invaluable, and yet the destruction of our planet continues.

Natural devastation is especially prevalent in poverty-ridden, economically unstable areas. Haiti certainly falls under this description. The coral reefs that surround the island are in awful shape because of overfishing, a direct result of terribly impoverished people trying to make an honest living. These people represent a portion of the 70% of people that are poorer than the bottom 5% of Americans. Their living standards are absolutely on par with those of people living in the early 1800s. To them, the environment has monetary value, but not in the sense of protecting it. They see it as a form of livelihood, as opposed to the functions it provides for society as a whole. In order to help people to see the economic worth of the environment it is necessary to equalize the living standards of people around the world.

Class Summary 9/21/11

Income and Spending (Economic Evolution PowerPoint)


According to the myriad of pie charts constructed about past and current American spending habits, we now spend significantly more on leisure and nonessential items than in 1900. This is attributed to the fact that the employed have two times as more income to spend today. Not only that,  we would spend 6% of our budget on food instead of 14% if it had the same condition as consumables in 1900 because the quality of products is much better nowadays.

Income Elasticity of Demand: occurs when we have an increase in income, we spend a larger percentage of our budget on something else.

This is what happened with the US defense spending, which increased by a factor of 160. If the American defense budget was a country, it would be the 12th largest on Earth. The United States government is also the largest employer in the world. America is so well-off as a country that the poorest 5% in the nation are richer than 70% of other people in the world.

Income understates the extent of our economic growth. This is because commodities don't matter as much as the services provided by the consumption of them. Real economic growth is underestimated by 1.4% per year. 

Measurements of living standards miss:
- availability of goods
- capability of goods
- convenience of goods
- how much time we don't have to spend obtaining said goods

Risk is also lower in today's economy. For example, in 2007, the cost of wheat tripled. No one really noticed. Because wheat is in pretty much everything, this same scenario would have had detrimental effects on people a century ago. If modern people did anything anything, they drank one less Starbucks latte a week. The cutbacks are dramatically different.

Class Summary 9/19/11

Standards of Living (Economic Growth PowerPoint)


American living standards have improved exponentially in the labor market. The average workweek in the early 1900s was sixty hours. It's now thirty-four hours. Also, more of the current workforce take vacations than in the previous century. In fact, the only thing about a job back then that was shorter was the commute. Quality of life after one stops working is much better--the concept of retirement didn't exist in 1900. Those employed today even spend less time on housework. With the development and expansion of household appliances, people nowadays spend three hours a week on things around the house versus twelve hours 100 years ago. This allowed women to increase their presence in the workforce from 18% to about 50% today.

It's possible for people to work less hours because income has increased by a factor of at least seven. The practical measure of income is qualitative: how much effort you have to exert to get what you want. Since the early 1900s, there has been a dramatic decrease in hours worked to obtain the goods and services we want. It takes 1/36th of the time to afford a bicycle than it did in 1900. Not only that, but today's bike is much nicer and is functional for longer. This further illustrates just how much richer we are now. In fact, once you factor in the functionality of products, we're over 25% richer.

Reading Analysis of 'The Economic Revolution'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
It's very interesting to think about globalization's role in the economic revolution. A merchant's frustration about different towns using different units of measure and currency is documented in the piece. Why on earth would anyone aim to expand their business when everything requires immense amounts of conversion? If anything, a businessman would be dis-incentivized to grow wealthier because the cost of adjusting prices and weights for various locations outweighs the benefit of becoming richer. The industrial revolution made connections between people all over the world much more attainable. This insinuated more and more trade between nations. It's very intuitive to correlate the time of the economic and industrial revolutions. Quite frankly, without a widespread circulation of money, economics barely exists. There was no reason for economists in the times where religion and monarchy ruled all. Church leaders and kings weren't wealthy because of a desire to attain wealth, but rather because they took money from poorer people. Once the playing field was leveled a bit, the desire to be rich flourished, and the economic theories we know today were born.

Discussion Questions
Heilbroner writes about man's innate desire to become richer, which is juxtaposed with Rizzo's earlier statement in the course that the natural state of man is poverty. Which idea is correct? Explain the discrepancy.

Many Americans have fears about China "overtaking" the US. China is somewhat of a 'command society', meaning it will be economically stable. Are these people's concerns justifiable or just rubbish?

Annotation
This reading helped to further understanding on the topic of industrialization and the impact it had on the study of economics. Without globalization, economics would be pretty irrelevant. This is because economics is a social science. The interaction between people is crucial. 'The Economic Revolution' also hammers home points that came up in class about the massive increase in global wealth in the last few centuries. The reasons for this up curve lie in the industrial revolution's ability to streamline trade and global exchange of goods.

EWOT Goggles #2

                                   http://waznmentobe.com/uncategorized/really-sad-pictures.html

Along with a large portion of the world's population, I'm anxiously awaiting the release of the iPhone 5. Our society is enamored with cell phones in general, but Apple took the devotion to handheld life devices to a whole 'nother level. If you live in a Westernized portion of the world and the iPhone concept is foreign to you, you clearly live under a rock. Imagine, however, how strange it would have appeared to people in Elizabethan times, for example. Attempting to work through such a conversation in one's head is evidence enough of the immense growth the world has experienced. What's especially amazing about the iPhone is that it's available to people from all socioeconomic backgrounds. Even if you can't afford one, it's likely that you've touched one. This was absolutely not true for luxuries in the past. A peasant would never know what a silk robe of a royal felt like. It's incredible that something as fascinating and complex as an iPhone is available to such a breadth of people.

The iPhone also hammers home the point of intensive growth. People are becoming richer because it's feasible for them to do so. As their individual wealth grows, so does their attachment to material items. This is clear because the market for complicated devices is worth millions if not billions of dollars. We truly only need the call function on a cell phone, but instead our societal and economic growth has allowed for the ability to hurl virtual birds at virtual pigs with the touch of a finger. Even the smartest scientist in the past couldn't have conceived such an idea, and would probably find our reality laughably impossible.

Class Summary 9/16/11

Economic Evolution Continued Continued


What is the right kind of inequality to focus on?
- functional inequality
- height & health
- cross country vs. within country
- intelligence
- entrepreneurial risk-taking

We're so much better off today than we were in the past. Ridiculously wealthy people in history died from illnesses that could have been cured with minor doses of penicillin. Also, those living on a minimum wage salary in modern times have a better lifestyle than peasants in the old world.

Our wealth increases as new technologies are developed. For example, the invention of cars improved infrastructure in NYC in the early 1900s. Horse feces were overwhelming the streets. Once horses were eliminated, there was less pollution and more land was freed up for agricultural purposes, thus improving the economy. Technology continues to advance because a parked car in 1970 polluted more than a car running for 10, 000 miles today.

Broken Window Theory: destruction creates economic growth because we have to spend money in a particular region to boost the economy. Funds and resources are redirected. <--THIS IS FLAWED

Class Summary 9/14/11

Economic Evolution Continued


The Industrial Revolution was a time of immense economic growth, which insinuated the emergence of vast inequality. A true middle class exploded at this time because in 200 years,  growth increased by 4000%.

Rule of 72: how economists measure growth --> put the number 72 over the percent of growth and you'll know how many years it will take to double.

World income doubles every fifteen years. If we continue along this projected function, the world will eventually double in growth every two weeks. This growth is evident in quality of life as the poorest people on earth today are better than the poorer people of the past. In fact, there has been an 80% reduction in poverty in the past forty years. This being said, there is a huge gap between rich and poor in today's world. America is 75% richer than the poorest countries in Africa. 152 million people live on $1 a day.

How do people get rich?
- produce more
- trade for something else

Neither of the above make anyone else poorer!


Extensive growth: if there was growth, resources went to the growing world population; living standards don't improve.


If you want to get richer, you want intensive growth!

Class Summary 9/12/11

Economic Evolution


Invisible Hand - the possibility for people to cooperate without coercion


This occurs because of tacit knowledge, or dispersed knowledge. Each person has the know-how for one step of the process that no one else involved in said progression understands or would understand even if it were articulated to them. And in true social science fashion, individuals react and act on this knowledge differently.

The Invisible Hand idea is much more reliable than central planning because it causes shortages to happen since it eliminates incentive structures. Coupled with this issue is the glaring problem that central planners don't have time to react to changes.

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Market economics - people who are buying and selling have incentives to know what people want; benefits from good decisions & fails from bad ones


Price systems: the perfect indicator of scarcity because no one (seller or consumer) sets prices.

Because of our knowledge of how price systems work, it's possible to measure GDP, which is the value of everything produced. BUT not everything of value is produced, and not everything that's produced is of value. GDP also tells us that America produces over fifty times more than the poorest countries of the world. This is evidence of a staggering inequality.

HOWEVER, it's ridiculous to ask the question of whether or not we're better off than we were ten years ago. Expecting something like that to change is utterly astounding, but it causes a frenzy when the answer isn't 'yes'.

EWOT Goggles #1

I have a question for whomever decided that the above picture was a good marketing tool for a Back to School sale. Why, dear advertiser who makes copious amounts of money, would you write a '2' in place of the word you so awfully represented with a number? A large majority of kids butcher the proper English language when they text and/or write on the internet. I don't have to go to school to do either of those things. In fact, some preteens and adolescents would strongly argue that they would much rather give themselves premature carpal tunnel of the wrist with a myriad of electronic devices than go to classes. You are encouraging this.

In an economic sense, why on Earth would I spend money on school, much less school supplies, when the advertiser behind this sign probably makes more than my college tuition in the span of a few contracts? He is, for the purpose of my argument, a successful businessman. Perhaps more impressively, he was able to become wealthy without proper English. Essentially what this sign is telling me is that I never have to go to a single Language Arts class in my life if I want to be affluent. So no, store with poor choice of advertisement, I will not go to your 'Back 2 School' sale. I'll be on Facebook instead.

Reading Analysis of 'I, Pencil'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain why.
It's almost ridiculous how many people and resources are involved in the creation of something so utterly small. Manufacturing in America seems so streamlined that you almost feel duped when reading about how much it takes to develop a pencil. When you walk into Wegmans in search of a yellow, Number 2 writing utensil you tend to only think about the fact that there is obviously a pencil factory somewhere out there in the world. After all, the product is right there in your hands. It hardly strikes you that there are other factories, worksites, and manufacturing plants--about a half dozen, even--that had a hand in creating something so little. The process seems to lack economical logic, and definitely appears to be counterintuitive. By having such a long process involving so many steps, one would think that the monetary cost would be overwhelming, yet Staples is currently advertising a Back to School Sale where a 6-pack of pencils costs $1. It's quite the phenomenon.


Discussion Questions
Leonard E. Read acknowledges that a pencil seems like a simple product, although "not a single person on the face of this earth knows how to make [a pencil]." What would be the economic impacts of a society where manufacturing processes with numerous steps could be boiled down into one factory? Would this be 'better' or 'worse'? Why?


The author also asserts that humankind is slowly losing its freedom of creation. Where else do you see this occurring in our economic culture? Could there be any economic benefit to streamlining more processes or is the cost of autonomy not worth it?


Annotation
'I, Pencil' is of timeless importance because it describes the manufacturing steps that we tend to overlook or forget about. This affirms the idea that anything out of the ordinary is newsworthy. We may not understand all of the phases a pencil must go through to be a finished product, but a panic would ensue if there were suddenly no more pencils in the world. Today's society is addicted to normalcy. Read's article also illustrates the fact that people know very little about how the products they buy are created, and thus do not understand what they're really paying for. Because of the multitude of people and steps required to make a pencil materialize, Read asserts that the benefit of a free society where the government doesn't run everything is worth the monetary costs. We're paying for creative freedom.

Class Summary 9/9/11

Micro vs. Macroeconomics


Micro - deals with the individual choices of people.
Macro - concerned with the effects of personal choices on a broader spectrum.


Take, for example, the affects of cheap, unhealthy food on the American population. The monetary cost of the Big Mac itself isn't very high, but the cost it has on the health of the consumer is significant. People are incentivized to eat unhealthily by the low price of fast food. Because more costumers are choosing the drive-thru, especially in tougher economic times, healthcare has adjusted. A few centuries ago, a diagnosis of diabetes would have been a death sentence. With so many people contracting the disease later in life due to their eating habits, healthcare has improved, making diabetes entirely treatable.

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Why should we study economics?

• It provides us with a sense of awe.
• It helps us to understand specific concepts.
• And perhaps most importantly, it helps us to truly understand specific facts.

The reason the advice of economists is worthwhile is because they understand how things are supposed to work. This is important because there's so much order in our lives that anything out of the ordinary is newsworthy. We have become so contented in our modern-day lifestyles that we are completely thrown for a loop when things fall out of whack.

Economists study trade-offs within the context of costs and benefits. Intentions ≠ Results!

Class Summary 9/7/11

Scarcity - more claim to resources than are readily available; our needs & wants + availability


Does not mean limits!


Economics is a study of scarcity. In essence, the definition of the term in question is that there's not enough stuff to go around. This provokes people to make choices. Therefore, economics is the study of how people make choices in the presence of scarcity. After all, economics is a social science.

Interestingly, poverty is the natural state of man. Prosperity requires explanation. When we react to scarcity, we make comparisons. We juxtapose expected benefits and expected costs, and make a decision when the former outweighs the latter. All values and costs are subjective, and they're not always monetary! 


The textbook definition of economics: the study of the allocation of scarce resources for competing uses.

The "truer" definition of economics: the study of the emergence of order and wealth creation, and the consequences of the choices made as part of the extended order of human population.

Class Summary 9/2/11

Oil


In 1970, it was projected that there were 531 billion barrels of oil left in the ground, and that humans consumed roughly 16.5 billion barrels of the stuff per year. Someone who is mathematically inclined could determine that meant we had until about 2002, or 32 years, of petroleum expenditure left. Since I regularly fill up my car with what I believe is gasoline, these [likely self-proclaimed] experts were clearly incorrect. In fact, it is doubtful that we'll ever run out of oil. This is true for two reasons:

1) The clichéd adage that time is money absolutely applies to this scenario. As readily accessible oil reserves are depleted, it will take more and more time and effort to locate new, feasible drilling locations.

2) History has proven that humans don't run out of fixed resources, but have extinguished renewable ones. Past uproars about running out of coal sang the same tune as the one-hit-wonder that is currently attributed to oil.


The two points illustrated above boil down to the same concept: people respond to incentives. The rising price of oil, due to the immense effort it takes to find and harvest it, will incentivize people to conceptualize more sustainable forms of energy. For those concerned for the environment, there will be more harm caused to the earth if we don't run out of oil. Take away the pressure of dry oil barrels, and no one has any incentive to discover cleaner fuel.