Creative Destruction

 This short piece of video has some good possibilities for explaining "creative destruction" (HT to Mark Perry), but it also opens the door to discussions of division of labor, structural unemployment, complements and substitutes, and economic growth.



Give it a look. I think you might enjoy it. And please share your thoughts.

Teaching Economics in Light of the Financial Crisis

John Taylor (of "the Taylor Rule") poses a very intriguing question in this post on Economics One from last Saturday. And while the formal implication for many of us (especially at the high school level) is probably some time off, his argument is sound.

He proposes dropping the traditional micro/macro division when teaching introductory economics courses. His case rests on the assertion (and I agree) that for students to really understand the current crisis takes a mixture of some micro and some macro principles. I believe the best way to help students understand economics is to put in context. But very few real life examples are strictly micro issues or strictly macro issues. They can be stripped down to one or the other, but doing so often forces us to omit something.

To what extent do you "mix" micro and macro, especially if you're teaching an AP or IB econ course and your students' focus is "the test"? I would welcome your thoughts on this. I think Taylor's case is very good.

A Trio of Visuals

First of all, thanks to Chart Porn for all three of the charts in today’s posts. They're great mind-munching material, something to chew on as the holiday comes to an end and the return of school beckons/looms (depending on your personal view) around the corner.

The first is this one from AwesomeGood. The data is old, but the presentation is interesting. I would really like to see the information for 2008 and 2009. Regardless of the age of the data, we can see why retailers are always so interested in holiday sales.

The second is a series of graphs from USA Today. The index they've compiled would seem to indicate a turn in the economy. By my judgment, it is too early to tell whether the recovery has "legs". The components of the index are mixed, but they "pop up" if you select from the table to the right of the second graph.

After looking at both of those, it is always good to remember the difference between coincidence, correlation and causation.  Hence, take a look at this.

The last graph reminds me of this comic.

What Assumptions Are Present?

There are some usable observations in this edition of Frazz.



What functions of money are assumed?  And what role does the central bank have in making those assumptions correct?

Just something light to keep the brain cells churning during the holiday.

Did You Know...

this? (HT to Division of Labor.) Captain Renault, for one, is shocked.

Headline

First, for those of you observing a holiday today, best wishes.  We're recovering from "big breakfast" and "present pandamonium" at our house.

As for the headline, does anyone else feel uncomfortable about this?  And does the timing bother you?  Given everything that happened, and all the many contributing factors, I keep thinking "one step forward, two steps back."

Changing Economy => Changing Economics

In today's edition of The New York Times, columnist David Brooks offers an intriguing view of the current state of the field of economics and why it is what it is.  His key insight is that when the economy was about "making things", economics  most closely resembled physics.  But now that we exist in an information economy, the nature of economics has and needs to change.  This can provide a partial explanation for the rise in interest in behavioral and institutional economics.

It's short, but thought-provoking.  You may want to give it a look.  Please share your reactions.

Santa vs. WTO

Thanks to folks at the Real Time Economics blog of The Wall Street Journal for this.  I hope you enjoy it, and that it provides some food for thought, or at least reflection on the holidays.

As always, your thoughts are welcome.

Following Up on Some Previous Posts

First, here is more on the late Paul Samuelson courtesy of David Warsh at Economic Principals. Warsh sees Samuelson's Foundations of Economic Analysis and Economics: An Introductory Analysis as part of the pantheon of great economics texts, and lists only four others: Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations, David Ricardo's Principles of Political Economy and Taxation, John Stuart Mill's Principles of Political Economy, and Alfred Marshall's Principles of Economics. That's some powerful company.

The second follow-up relates to the post about Russ Roberts and Lord Robert Skidelsky discussing John Maynard Keynes on PBS's NewsHour last week. The original broadcast used only a short amount of the discussion between Roberts and Skidelsky, now you can see the entire conversation which went on for about an hour and a half.

For history of economics geeks, this is about as good as it gets.

Some Good Economic News “for the Holidays”

Actually it's a bit after the fact, as is the case with most economic data. Still, the Chicago Fed's National Activity Index posts a strong improvement (although still negative) in the month of November.

Some might think be tempted to combine this with the opinion piece by Blinder I highlighted recently. And while I think the data might contribute to the foundation, it is "old data". I'd make sure there are other reinforcing arguments.  But still, it's a "ray of light", another "green shoot" reflecting actual activity.

Opportunity Cost as Demonstrated by Spiderman

Eco-Comics gives us this innovative way to explain opportunity cost using Spiderman's never-ending dilemma of balancing crime-fighting with family quality time. I think it has some potential for classroom use, don't you?

Substitution Principle and Revealed Preference

And here's a holiday-oriented comic strip that helps illustrate revealed preference (she'd rather leave trees in their natural state), substitution and inferior goods (I'm sorry, this is a normative statement but Grog just doesn't make it as a "tree"), and maybe a flair for innovation.

Films and Prices

An old colleague of mine back in Illinois used to do an activity with his students where they converted movie box office gross to current dollars and then listed the most popular films by adjusted gross.  Needless to say there were some surprises. 

The new issue of The Economist has a chart that does the work for you. Have a pleasant weekend.  Don't forget to check back from time to time over the holiday.  I'll be here.

An Optimistic but Convincing Scenario by Alan Blinder

I didn't post yesterday, but here are some items (the first three from The Wall Street Journal) that I hope will make up for it.

First, this opinion piece was in yesterday's edition of The Wall Street Journal (free content at this writing). Princeton economist and former Federal Reserve Vice-chairman Alan Blinder makes an interesting case for an improving economy. He does say that he's purposely looking for a rosy scenario, and reasons for concern remain. The outlook is plausible and worth dissecting with your classes. I think this could be used to help students analyze positive vs. normative economics in analysis.

What do you think? Too rosy? Possible but not probable? Or possible enough to keep looking for further hints?

Spendthrift to Penny Pincher

From today's edition of WSJ, an article that examines how the current economy has impacted some basic psychology about spending vs. saving. It is subscriber content at this writing, but if you use your browser to search for the title of this post, you should be able to find an ungated version.

If you can't find the article, the main point of the article that I took away is that the recession has had an impact on Americans' financial behavior. We are spending less and saving more. That may be, but I'm not sure it represents a long-term change. The institutional structure has not changed significantly. Our tax structure and our financial system does not reward saving, and investment is treated only marginally better. We still have mechanisms in place to give favored tax status for certain borrowing. And I haven't noticed a reduction in the commercials encouraging us to "buy, buy, buy." I suspect that once the economy gets back on firmer footing, we will see the American consumer rise with a list of back-ordered wants. It may take a while, but I don't see this recession turning us into our grandparents or great-grandparents who survived the recession while raising a family.

One further point related to Blinder's piece (see post above), his scenario doesn't see us turning into massive savers either.

What do you think? Has this recession significantly changed the way you look at spending/saving? Or will you return to your previous habits when the economy recovers?

Debtors Dilemma

The third article from The Wall Street Journal (free content at this writing) continues a series that I've referenced recently. The article is about people who choose to walk away from their mortgages, even when they can still make the payments. What I found helpful was a side-bar about the big questions people face when making the decision. I was pleased to see a couple of questions that were about ethics/morals of debt. The interactive graphic which shows the percentage of foreclosures that were deemed "strategic" in each state, is also worth looking at.

Do you think it's worth using the article and the "Big Questions" with your students in economics class? How about in personal finance?

Debate about John Maynard Keynes

Finally, on yesterday's PBS Newshour, George Mason University economist Russ Roberts, host of the EconTalk podcasts, and Lord Robert Skidelsky, author of the three-volume biography of John Maynard Keynes, debated the relevance of Keynes in today's economy. Russ is also working on a rap about Keynes, apparently. The Newshour piece is worth the time (about 10 minutes).


As always, I welcome your thoughts.

A One-Armed Economist

This is why President Truman asked for a one-armed economist. And while this isn't a circumstance of one economist espousing both positions, it's still an example of why many people don't trust economics or economists.

On the one hand...


and on the other...


The message depends on what you hope to promote, I suspect. For what it’s worth, I think the second statement is correct. The recession is over, but the end date of the recession just hasn’t been called yet. The first statement is also correct, but only because the economy can not reach its potential as long as unemployment (a lagging indicator) is at current levels.

Which side do you and your students come down on? I look forward to your comments.

R.I.P. Paul Samuelson

Paul Samuelson has passed away.  I'm one of the few who never used the Samuelson text as an undergrad or grad.  But I heard him speak on a couple of occasions.  Economics has lost a great thinker and teacher. He was the second economist to win what would become known as the Nobel Prize for Economics.

Information and Decision-making

Anyone who teaches about markets also makes it clear that properly functioning markets depend on full information.  When all parties have full information, they make better decisions.  As in this case...



Once the kids know it's the king, the decision is clear.

Economics in "My Fair Lady"

People sometimes don't believe me when I tell them I think about economics day and night. But here is an example even I think is unusual. I literally woke out of sound sleep the other night thinking “Economics in My Fair Lady." I had been flipping through channels the other night thinking and noticed the movie was playing. I thought my one son (who generally loves old musicals) might enjoy it, but I couldn't cajole him into watching with me. Consequently, I didn't watch any of it, but that is what planted the seed.

I think my mind was running through the various numbers and must have gotten stuck on Eliza's song, "All I Want...". It's a cute little ditty about Eliza's simplicity, but it deals with wants and prioritizing them. Those of us of a certain age can remember "wants and needs." But we don't separate them like that anymore. We focus instead on prioritizing wants – what is needed to survive, etc.

The song works because Eliza talks about the things she wants and they can be prioritized quite easily. Just a final bit of fun for the weekend.

Cartoon...

A good friend and regular reader sent a link to an interesting cartoon that appeared on The Big Picture.

I think the difference depnds on who they're talking to as much as who is talking.
Thanks Mark

Walk Away

Yesterday's edition of The Wall Street Journal had a front page story below the fold that was titled "American Dream 2". The article was about how some people have walked away from home ownership when mortgage balances exceeded home values. Some are now renting, sometimes larger houses with rent lower than their previous mortgage payment. This is understandable and, in itself, not that surprising.

One part of the story was particularly troubling. It mentioned people who just stop paying their mortgage, putting their money into vacations, etc. Is that ethical? The availability of funds that otherwise would be paid for housing is allowing them to spend on other things. But the losses to the banks may have to be picked up by the taxpayer. Is there an institutional basis for what they are doing? Do the existing rules in our society (both formal laws and informal beliefs) provide a basis for understanding this behavior?

Some may argue that the banks, mortgage brokers, and others were not ethical in placing them in homes they may not have been able to afford. But does one justify the other? This story has some excellent possibilities for use in economic analysis and maybe even an exam question. Give it a look.

The Role of the Young in the Health Care Plan

The Chicago Tribune has an excellent story on the vital role the young play in the proposed reforms of the health care system. (HT to Izzit.org).

It's basically the same role they play in the Social Security system. That may seem cynical, but from what I can see, it's true. Current funds are used to support current spending. The article raises a question in my mind. If young people use marginal analysis with a short time horizon, how might that affect their decision to participate?

Izzit has a lesson plan to accompany the article here.

The Falling Dollar

When we teach our students about exchange rates, it's easy to draw scenarios showing how a falling currency helps exporters and hurts importers and a rising currency helps importers and hurts exporters.  But here is a very nicely done graphic courtesy of The New York Times. (HT to the folks at ChartPorn.)

By the way, I'll be on the road until Friday.  I probably won't be posting (but one never knows).  I'm hoping to have something unusual for Friday's post.  Until then, keep checking and commenting.  (And don't be afraid to check out the books on my carousel.)

Economic Forecasts

One of my favorite ways to fill time when travelling is listening to podcasts. And my favorite source is EconTalk with George Mason University professor Russ Roberts. Russ was a recent guest on NPR's Money Planet talking about the folly of trying to forecast the economy. He puts things into perspective. It's less than 15 minutes long. Enjoy and share your thoughts.

There’s No Such Thing as Free…

With many of us looking to Copenhagen (swell to "Wonderful Wonderful Copenhagen" in Hans Christian Anderson, starring Danny Kaye), it's fitting that we provide some links to a pair of climate-related stories. Both focus on the cost of a likely plan to reduce green-house gas emissions.

The first is from The Economist. And while the online article is short, the chart is good. The second story is from a special section that ran in yesterday's edition of The Wall Street Journal. Again, the graphics are pretty good. And I found the story - indeed the whole section - thought-provoking.

Information Asymmetries and Exchange

I believe that "economic thinking" can be used to explain a lot of "non-economic" phenomena. This came to mind while I was listening to an episode of This American Life on my public radio station this past weekend. The episode was about mind games, and I only listened to the first two segments. What struck me was that there were social exchanges going on that were caused by deliberate information asymmetries. If this kind of deception were going on in "the marketplace", many of us would cry "fraud." We might even demand retribution, compensation, or "justice." My question for you and your students, what is our reaction in the social arena?

I would welcome your comments.

Marginal Analysis in a Holiday Classic

During the weekend, I watched one my holiday traditions, Irving Berlin's White Christmas. About 37 minutes into the film, Bing Crosby and Danny Kaye find themselves on a train from Florida to New York. Danny gave away the tickets and now is trying to get Bing to go to Vermont to meet up with "the Haynes Sisters." What popped in to my mind was "marginal cost/benefit analysis." If you get a chance, watch it and see if you agree.

World without Wal-Mart

The students in my global economics course have a class blog to contribute to as part of the course expectations. One of them posted this interesting piece about "Life without Wal-Mart" over the weekend.

Compare the list of innovations to Schumpeter's definition of entrepreneurial activity (briefly explained in this previous post) and see how they match up. Let me know what you and your students think.

Economics and Somali Pirates

I think this story from The Financial Post about Somali pirates setting up a "stock exchange" has a lot of possibilities. (HT to Arts & Letters Daily.)

It provides a platform to launch discussions on a variety of concepts. The author examines risk and reward, providing an opportunity to discuss incentives. The story can also be used to discuss markets and other economic organizations (or lack thereof), as well as the rules (institutions) used in the market (from participation to cash to barter). There are even aspects of marginal analysis (cost vs. benefit) that can be brought out with a little discussion of "everyday life" in Somalia. As you're approaching the end of the semester and looking for something to prime their brains for exams, this could be a fun and educational diversion.

I welcome your thoughts and comments.

The Federal Reserve

I was at the Board of Governors yesterday watching the College Fed Challenge final.  (Congratulations to Lafayette College for winning and for the other finalists Harvard, Northwestern, and Rutgers.) I was reminded that the Senate begins confirmation hearings for Fed Chairman Ben Bernanke. Here is a relevant link from Economic Principals.

One of My Holiday Traditions

Many of you are already aware of this, I'm sure. But it is a tradition on this blog.  PNC Wealth Management has released its annual Christmas Price Index, tracking the cost of Christmas as set forth in the classic 12 Days of Christmas.

It has games and lesson plans to use with the index. Just something to keep in mind as you get closer to the holidays and the students have a little more trouble focusing.

Micro Choices Can Have Macro Implications

And speaking of the cost of Christmas, check out this link. Someone is all for helping the economy.

Follow-up

Rather than update existing posts, I'm going to follow-up on two items from yesterday.

The first relates to yesterday's post about the "Agent-Principal Problem." In addition to the clip from The Office linked in yesterday's post, you might want to look at this piece from yesterday's edition of The Wall Street Journal (free content at this writing). I should have posted it yesterday, but I didn't get to finish the paper until last night.

The second follow-up is on holiday shopping courtesy of FoxNews. It is the preliminary data on Cyber Monday. It appears that total spending was up by a healthy amount. The interesting thing is that individual sales were smaller. We shopped at more places, spending less at any one.

Options, Choice and Exchange

This strip would seem to indicate that too many options can create problems when making choices.



It also illustrates that some don't see voluntary exchange as a "win-win".  One suspects some information asymmetries here.

Real Income

Steve Horwitz at The Austrian Economists blog has some enlightening information culled from Census Bureau data, and he's spread it out over three posts.

In the first, he looks at the percentage of U.S. households below the poverty line that have certain appliances. His thinking is that these represent real gains in income as they represent a better standard of living.

In his second post, Horwitz examines the gap between the percentage of households in the lowest quintile that have the same appliances and compares them to the percentage of households in the highest quintile. He then compares the finding from two different years to see if there is a change in the gap. While he admits that the rich have relatively little room to rise, the important thing is that the gaps on almost all items narrowed over the two years covered in the comparison. More information would seem to be in order.

For the third post, Horwitz uses a table generated by Mark Perry at Carpe Diem to compare the cost of the items in terms of hours worked at the average hourly wage for all industries. This is reminiscent of some work that appeared in annual reports of the Federal Reserve Bank of Dallas back in the mid-1990s. The conclusion there was similar, as I recall. And while opponents might note that the structure of the economy and available jobs is changing, I will note that has been the case for as long as I remember. And yet the trend seems to continue.

Finally, I thank Mark Perry at Carpe Diem for linking to the original post. I look forward to comments.