Category: Economics

An interesting analogy

Once again, the discussion of one of the posts over at Cafe Hayek

has provided me with fodder for my own post. One of the commentators asserted that “the economy” was there to provide jobs for people so that they can feed and shelter their families. Another poster pointed out that the economy has no more purpose than weather systems do. There’s some interesting insights to be gained from that point. If you can imagine that we are not only affected by “weather systems” but that our decisions (as a whole) are what make them, a much different view of the economy emerges. We have to make decisions based on the situation we are in, but our decisions along with everyone else’s are what make up markets. Nobody stands in the rain and says, “God, this sucks, someone should DO SOMETHING about this!” and yet people do this all the time when it comes to market forces.

Ah, I can hear some people out there saying, “But if our decisions make up the economy, then surely we can control it, right?” Well, maybe if everyone (or a vast majority) were coordinated enough. The trouble is that every single person’s situation is different from the next and so every person is subject to different decision making processes. This is why it is almost impossible to coordinate enough people to make any real impact on markets. It is also why when changes are forced onto a market from above bad things happen.

Most people “see” patterns in markets and the economy and assume that someone or something must be responsible for those patterns. There isn’t any one person or group of people making those decisions in our economy (thank God) and trying to figure out the something that causes those patterns is like trying figure out why a cloud looks a certain way. The rationale behind a free market approach is that everyone is free to make whatever decisions that will benefit them the most. The patterns that result in the economy are brought about by free choice. There will always be something that any particular person doesn’t like, the popularity of Wal Mart, the loss of jobs in a certain sector, or the automation of work in manufacturing, but if those things come about because people prefer those things (voting with their feet and wallets, not by what they say), then that’s probably the way they should be. If someone comes along and says that one of those things is wrong and that we should “fix” it, they are effectively saying that people shouldn’t have made the decisions that they made. Of course when someone says something like that, they are arguing from their own view of the world. There is no way that they can imagine, let alone take in every unique person’s situation and decision making process.

Maybe John Doe was running late and Wal Mart was open on the way from work, maybe Jane Smith had some dental surgery done that week and the only way she could afford the medicine was by using the pharmacy at Wal Mart, maybe Jack Rogers is a cheap bastard and not paying the absolute lowest price on anything drives him crazy, maybe Judy Juarez likes to go someplace where the check out clerk speaks Spanish, etc. There are an infinite number of possible reasons to choose (or not choose) any particular business and no one person can make an informed decision for everyone. If people are allowed to make their own decisions, certain patterns will emerge. You may not like all of them, but those patterns are the result of everyone making the best decision for themselves in their particular situation. And just like the weather, you may not like rain, but stopping it for your own comfort (or the imagined comfort of others) has serious consequences.

Markets, and the economy that is made of them, are formed by people’s decisions in day to day life. If everyone is free to choose what they want and everyone is free to compete (both businesses and people) for money, the resultant patterns are made by people’s priorities and what they feel is important. You might disagree with their priorities or how someone goes about making their life as good as they can make it, but that’s none of your business. Or to put it another way, worrying about those things is as useful as saying that it shouldn’t be raining right now, or that the humidity is too high.

Isaac

economics

Economics

So many topics!

They keep coming at me! I think to myself, “Gee, that’s interesting, I’ll have to think more about that,” and then BAM another thing hits me… So here’s some things that some recent podcasts made me think about…

The current president of the Czech Republic gave a speech a little while back. He talked about a bunch of stuff, but he used a memorable phrase. He warned us to watch out for the people that want to “Rule from above.” A great, simple phrase that he was using to refer to any group that wants to impose it’s will over others. One of the things I like about it is that it applies equally to neocons, environmentalists, socialists, PETA, lobbyists, etc. Anyone that feels that they are in the right and feels that the government should compel the rest of us to obey want to “Rule from above.” In a free society, the groups should try to get others to voluntarily come over to their side. I think we do pretty well with this in general, but the President grew up under the Soviet Union and he knows oppression. He warned us to not give up the freedom that his country had only so recently been given.

Another podcast talked about how nations got out of poverty. One of the first things that struck me was that several people suggested that we stop trying to “fight poverty” and instead tried to create wealth. There’s something to be said for that. Often times, the measures used to fight poverty merely hold things in check, keep the status quo and try to prevent any deterioration. Not always, but often times the best that can be hoped for with many programs is that things don’t get any worse. Wealth creation implies an improving situation or at least an improving chance of getting better. Anyway, Tyler Cowen, economics professor at GMU and an author over at Marginal Revolution made the somewhat controversial remark that it is the country’s economic and entrepreneurial situations that were the overriding factors in determining prosperity more so than the cultural baggage that might come along with the country. He used the example of Somolia vs. the US. Obviously, we do a lot better in the US than Somalia does, but is it because of the culture or the economic situation? Being the empiricist that he is, he studied Somalis that came to the US. They did much better than their folks back home. This doesn’t clinch it for me, but I think he’s mostly right.

Of course then I thought about Yemen. What happens if you have a dysfunctional economy and a less than a go getter attitude nation wide (I’m being kind here)? Well, the obvious answer is that you get what Yemen is today. The more interesting question is how do you change it? I think Professor Cowen has the right idea, if the institutional structures are in place that allow people to prosper if they are willing to put in the work, things will eventually change for the better. The key is that they have to see a potential payout for the work. I’m not exactly sure why that’s not there now, but it obviously isn’t…

Isaac

economics development third world corruption

Economics

Pies and the economy

There’s an interesting discussion going on over at Cafe Hayek about the so called distribution of wealth. To simplify, the main thrust of the argument is that we are all so much wealthier (as economists determine it, by our options) than we were in the past, quibbling over how that wealth is distributed is downright petty. I’ll try to tackle the main argument in another post (I’ve been saying that a lot recently), but there was an interesting set of points made in the comments. I’ll paraphrase and strip out the technical jargon. As a counter point, one commenter suggested that if we were to divide up a pie between three children and give them one piece each, all of them would be better off. But if we divided it up so that one child got 85%, the next one got 13%, and the third got 2%, the third child would be pretty upset even though he had more than he had before.

Fair enough, the child would be upset, and maybe with good cause. But there’s a big difference between that pie and the output of the economy. First of all, there isn’t a fixed size of “the pie”, it can grow and shrink. So yes, maybe someone is still getting only 2%, but if the pie is the size of Kansas, he might not care. This isn’t as far out as it might sound. Compare Bill Gates with, well, just about anyone with a decent job. Bill Gates makes far more money, but most people don’t really care as long as they get enough to do what they want, and it’s a far smaller piece of the economy than 2%…

Another important difference is that there isn’t anyone that decides how much each person gets. People forget that what we make is dependent on all the other prices in the market, not only for labor, but everything else as well. What we get paid is a result of all of the prices on the market, there isn’t anyone doing the distribution, unless everyone counts as someone…

Another commentator brought up the point that a better analogy would be if one of the children made the pie and the three of them decided how to split it up. Imagine one kid saving up his money, reading like crazy on how to do it, buy the ingredients, fail at a couple of attempts, and finally come up with a decent pie. Then the three would “democratically” decide on how to split it up. LOL, you can be sure who will be happy and who won’t be happy! Ideally, the person could make the pie any size they wanted and could divide it up however they wanted. Of course they would be limited by the available oven size, the pots and pans that they had access to, etc. but they could, within reason, make whatever size they wanted. The bigger it is, the more of a pain it is, but there is a greater payout as well. Anyway, you get the gist of the exercise. The economy is not a fixed thing, and there isn’t a third party that can divide it up without cheating someone.

Isaac

economics economy