Don Boudreux has another great post over at Cafe Hayek. He points out that markets set value while people set price. Economists almost universally agree that things work best when the two are the same monetary value. I’m going to have to think about this, it really is a simple statement that has many ramifications…
Isaac
I’m really digging this mix CD. How’s this for a lineup…
I’m experiencing a gradual weight loss and it has to be because of how
I’m eating since I haven’t done a damn bit of exercising in recent
memory. It’s a pretty good feeling to have control for at least a
little while. Had a setback or two this weekend, but I think that in
general I’m paying attention and doing the right thing. I threw out my
cheese and crackers and refused to get anything bad at the store. Lack
of temptation is half the battle…:-)
Isaac
Put together a new mix for the car.. I have got to get myself an ipod, this 1 cd at a time thing sucks… There is the usual mishmash of stuff. I did put “Beverly Hills” on there, hope there’s no more speeding tickets in my future:-) There’s also New Model Army’s song “Spirit of the Falklands” on there as well. If you haven’t heard this yet, you must.
Got my very first speeding ticket tonight. I was truly enjoying “Beverly Hills” by Wheezer on the radio when I noticed the flashing lights. Here’s how the conversation went:
“Do you know how fast you were going?”
“Umm, no”
“72 in a 55 zone, didn’t you see me?”
“No I guess I didn’t”
“Yeah, you pulled up behind me, went into the next lane and blew past me.”
“Wow, that wasn’t very smart, was it? Guess I was in my own little world.”
“I think you were… ”
He was pretty cool about it, I think that if I hadn’t been such a dumbass he probably would have let me off, but I agree that he couldn’t really let that slide, stupidity is always a good justification for a ticket. Luckily it was only a $30 fine instead of the stiffer one he could have doled out. The trouble is that the administrative court fee is almost twice the fine itself! The court fee is $57! This will put a bit of a crimp in my gift buying plans, guess I’ll have to be a little more creative in what I get for people. Oh, and I gotta stop listening to Wheezer:-)
Isaac
… what the third leading cause of death of black men is, behind pork
chops and FEMA? Watch Boondocks and you’ll find out. I don’t know the
last time I laughed so hard…
Isaac
My last post was a little rambling, a little loose and I don’t think that I really said what I wanted to say. Economics is a science. It studies what happens when incentives (usually in the form of prices) change. The key here is that it looks at what actually happens, not what we want to happen. There is no agenda behind microeconomics, no politics. I DO have an agenda of course (that’s what blogs are for, right?), but I like to think that when I make some of my statements, I can back them up with the full force of logic and science backing me. Most of microeconomics is open and shut, there is no room for debate when it comes to the effects of trade, competition for wages and consumers, price controls (including wage controls, rent control, and minimum wage laws), subsidies, and supply and demand issues. It has been proven, it is repeatable every time and microeconomic theory is about as airtight as you can get.
The big trouble (as I see it) is that when people want to help someone else, say through high wages, all anybody looks at is the immediate, obvious results. Usually what is deemed as “helpful” or “nice” usually has terrible consequences. Think of mandatory union hiring, minimum wage laws, price ceilings, rent control. All of these ideas had the best intentions, but ended up hurting more than they helped. Micro econ can point those things out. Not only that, but you can use econ to figure out how to achieve the results that you want. You want to help countries get out of poverty? Send them lots of relief aid and open some schools, right? Wrong. Let them work and trade and give them the freedom to choose where to work and be sure that they can keep what they earn. Loosing jobs due to automation or outsourcing s a terrible thing. Perhaps in the short run to the particular people affected, but long term it helps them and their children out immensely. This is why only 4% of us work on farms as opposed to 40% in 1900. Who actually wishes they worked on a farm and “enjoyed” the standard of living that a farm-worker would have in 1900? We’ll say the same thing about the people that worked in paper clip factories, canneries, etc. before long.
I do wish that when somebody lambastes my position, that they could tell me why what I have put forth is wrong. Usually all I get is “I can’t believe you think that..” Think beyond the immediate and you’ll see that I’m usually on the right track. The alternatives that many people put forth, like getting rid of walmart or preventing companies to hire people in other countries for less than what you’d have to pay someone in the US smacks of ignorance or of simply not thinking things through. Both of those ideas would harm workers far more, why people think that denying them jobs is good for them I’ll never understand. WIth a couple of semester of micro econ, much more would actually get accomplished as opposed to grandstanding and wondering why things didn’t work out.
Isaac
Yes, the folks at Cafe Hayek do it again. It’s another one about Walmart, but this one’s a thinker. Forget Walmart for a second and just think about the employees… It’s a great read, see it here Even if you hate Walmart, especially if you hate Walmart, give it a quick read, it’ll take all of 45 seconds. It involves the mental exercise of wondering what would happen if we put a tip jar at the registers of Walmart. To me, this is micro econ at its finest. Quick, pithy, easy to read, and thought provoking. Some of the comments on that post are worth reading too.
Isaac
Many many people regard microeconomics as just another way of looking at a situation. What they fail to understand is that microeconomic theory is the distillation of what actually happens, not of some sort of agenda. Microeconomics is often called “rational choice theory”. The only assumption that it really makes is that people, when faced with a decision about allocating scarce resources (time, money, etc.) will do what is best for them. That’s it, nothing else. From this one assumption, many consequences can be mapped out. Not all decisions are monetary in nature by the way. How to allocate time is a major one for all of us. Do I spend time with my kids or get the oil changed? Is my job satisfying? DO I volunteer my free time or dedicate myself to a hobby? In any case, there are some basic, intuitive results of this assumption. When costs rise, people don’t consume as much. When prices rise, suppliers rush to provide more (this happens with labor as well). When there is too much supply and not enough buyers, prices come down until the price is low enough to clear inventories. These concepts are not open to debate, they happen all the time and are infinitely repeatable.
Yet people still act as if this was just an economist’s viewpoint. It would be like denying the role of Chlorophyl in plants. “We all need Oxygen, it’s silly to think that plants need Co2, they’d die, they’d suffocate!” For some reason many people refuse to see the good that comes out of competition for goods and wages, they refuse to see the problems created by protectionism, and they insist that people in the economy are actually victims of some sort. There is a popular myth revolving around greedy corporations “running” the economy and taking advantage of us. People are not victims of the economy, they are the economy! Unfortunately, the real secret is that those corporations revolve around us…
Misconceptions about economics in the general population are widespread. What this really means is that misconceptions about how people make decisions are widespread. People assume that things work in a manner that could not be. Many policies that have the best intentions end up only harming us. A few examples off the top of my head are minimum wage laws, price controls, farm subsidies, mandatory union hiring, and tariffs on imports. If everyone in the world, or at least the policy makers, could firmly grasp the equivalent of two semesters of micro econ, the world would be a much more stable and wealthy place. SIGH, I know, just another type of utopian ideal…
Isaac
A recent reply I wrote to a friend of mine brought this question up in my mind. Whenever outsourcing is brought up, all that is ever discussed is how an American looses his job. What about the jobs that Indians, Chinese, or South Americans are gaining? What is it with this “Us vs. Them” mentality? People worry and fret over the possible lowering of the standard of living of the displaced worker. I find it odd than no one ever talks about the number of opportunities available to the American worker. I feel certain that what the Indian gains is far more than the American looses in the short term, and that they both come out ahead in the long term. Despite all of the outsourcing, our unemployment figure stands at 5% and our GDP keeps rising. How is this possible?
The GDP part is simple. First off, we are paying less for the same goods and services, leaving money left over for other things. This is equivalent to getting a raise and is the definition of a rising GDP. The second is that we have, if not the most, among the most productive workers in the world. The combination of high levels of skill and high levels of technology make for an unbeatable combo. But surely the reduction in wages offsets the gains from cheaper goods, right? Not a chance. The extra money that is gained from outsourcing is the source for creating new jobs. That money is spent, much of it in the domestic economy. The more motivated and entrepreneurial minded people out there will make themselves rich by taking risks and being rewarded (and some will fail and be ruined) while the rest of the people will get jobs paying them what their labor is worth.
Aha! This is why outsourcing is bad, the new job doesn’t pay as much! Once again, people get paid what their labor is worth. If their wages go down, it is because their skills are no longer valued as highly. This may sound harsh, but there isn’t any better alternative. A popular idea is to pay people more than their labor is worth. The value is not determined by previous wages or union laws, it is determined by what people are willing to take to do that job. For many lower skilled assembly jobs, that wage is set in China or India through competitive wage pricing (i.e. the wage is better than their alternatives). More and more IT work is also being done over there as well due to the ease of shifting the work. If the American workers in these newly devalued jobs lobby congress to pay them what they used to get paid, guess who gets to take up the slack? We do, either through direct payments of the good (made possible by government eliminating competition such as imports), tax subsidies (like much of agriculture), or a large number of extra unemployment benefits (like in states that have mandatory union hiring laws) all the while depriving someone in a desperately poor country that would do just about anything for a job. Where’s the justice in that? We get to support someone or some business above and beyond what they are worth just so we can keep a poor country poor? Like I asked before, why are Americans worth more than Indians? Why do they deserve to be supported and not someone that is willing to work for every dollar they earn? Clearly the most equitable thing to do is to let people earn their money. This presents people with a powerful incentive to keep their skills desirable and allows for the most efficient and therefore least expensive means of making goods. As a side benefit, we can help poor countries climb their way into prosperity. It’s a win win situation in the medium to long term, and it is the ONLY way to insure continued innovation and growth for both countries. So what moral grounds can someone argue against outsourcing? No really, I’m very curious…
Isaac