Everyone Works for Everybody

Here is a very good video that shows how the modern economy offers more diversity and more "wealth" due to exchange and specialization.

Some will call it simplistic, but the idea is correct. Because of the power of specialization and the division of labor that is possible with the modern marketplace, we have more choice and most of us enjoy better living standards than the wealthy of even a century ago. And, a great many people are involved in making those standards possible. And those same people benefit by providing us our wants and needs through the exchanges we make for their goods and services.

Does Military Conflict Boost the Economy?

Is it possible that when people talk about the ability of military conflict to "stimulate" the economy, this is what they have in mind?

I think that, like the broken window fallacy, people forget about the loss and how resources could have been otherwise used.

Theory of Moral Sentiments

The new edition of The New Statesman contains this review of Adam Smith's The Theory of Moral Sentiments (TMS).  (HT to Arts & Letters Daily). The review is by Amartya Sen, who won the 1998 Nobel Prize in Economics and teaches economics and philosophy at Harvard.

Sen's review puts the book in its proper context vis-a-vis The Wealth of Nations and helps explain why Smith is not the free-ranging, no-holds-barred self-centered capitalist that many people think. I've recommended TMS in the past and I will use this opportunity to do so once again. If you who really want to understand Smith and his message in The Wealth of Nations, you should read The Theory of Moral Sentiments. It is work, but it is rewarding.

Agriculture, Choices & Poverty

I really enjoy it when one resource becomes even more relevant due to another item popping up.

The topic for this post is agriculture, choices and poverty. My first recommendation is this research article on the Voxeu web site. It's a basic study of the effect on agricultural trade barriers on global poverty. The imposition of trade barriers is a choice, frequently a political one, which has far-reaching economic effects. There are often domestic benefits for the country imposing the barriers. And there are often foreign costs that are not considered.

The authors of the study feel that the costs to global poor are significant. Their conclusion states that removal of agricultural trade barriers could lower global poverty by 3%. While that may not sound like much, in absolute terms it is more impressive.

According to their research, removal of agricultural trade barriers will increase demand for the produce of the global poor who live in rural areas and depend on agriculture for their livelihood. The study recognizes that increased demand also can raise the price of staple foods these same poor need to survive. But it also posits that removal of global barriers, while providing higher prices for food for export can have beneficial effects on food prices within the various countries, and on wages. Overall, the Voxeu piece is a worthwhile read.

The second resource also deals with agriculture, poverty and choice. It deals with the "buy local" choice. This article in Foreign Policy magazine (HT to Division of Labour) shows how decisions to "buy local" can have an impact on global agriculture markets, again affecting the poor in other countries. It has some amazing photographs, as well.

This third article, from today' edition of The Wall Street Journal gets into the definition of a farmer's market. In my opinion, it also talks about how market drive competition and how competition reduces costs. If you’ll pardon the pun, it’s just some "food" for thought. Please share yours (not your food, your thought).

Debt, Debtors and Financial Reform

In another confluence of resources, here is an opinion piece that appeared in last Sunday's edition of The Washington Post. It deals with the failure to do anything significant about the national debt, not just now but over the last several decades. What really got my attention was the opening, which referred to Bill Gross, a founder of the investment firm PIMCO and his reluctance to buy any more U.S. debt. In fact, according to the author, Gross is unloading some of his holdings in favor of bonds from other countries. It seems he worries about our commitment to do anything about the national debt.

Of course, there is a recently formed bi-partisan commission that is to address the problem. But, you know what - "been there, done that, got the t-shirt." Some will say, "Yes, but the situation is more serious now. We'll certainly take action." Perhaps.  I think we will hear great statements and see wonderful posturing. These are, after all, the same people who think they can reform the financial system.

This brings me to this next item from The Indianapolis Star.  (HT to Carpe Diem.) Seems to me this may be another Captain Renault moment.

What do you think?

The Question of Research and Risk

Given the last flight of the Space Shuttle is not too far off, the future role of NASA is in question. That eventually leads us to ask "Who should fund research?" "Who should bear the costs of high risk ventures?"

The argument for private funding (corporate, etc.) is that knowledge then is proprietary and can be used for private gain. Losses are part of the risk. The argument for government funding is that knowledge should be available to everyone, and the cost should thus be spread as any gain should be for everyone.

However, this cartoon reminds me that many of the discoveries that are part of the "Age of Discovery" ended up being for the benefit of government (kings, etc.). Anyway, it's something you can use to stir debate.

Making of Florida One

There are so many concepts you can pull out of this video (HT to Cafe Hayek): exchange, specialization, division of labor, interdependence, economies of scale (imagine the cost if you were building only one), productivity, economic institutions, etc.

Please share other ideas.

Remember Which Way the Finger(s) Point

I find that one of the more enjoyable aspects of teaching macroeconomics is engaging in discussions about current events with students. It can often be enlightening and disenchanting at the same time.

The enlightenment comes from the fact that the students are aware of the problems, and often have a fundamental grasp of the facts. The disenchantment often comes from how they don't grasp basic relationships (how one event can be related to another) or what the event has to do with decisions they make as individuals or that they make as members of a larger community. Students often fail to see how the macro is just the sum total of a whole lot of micro.


I frequently have to remind them that if they see a problem and they think they know where the blame lies, they should point the finger - and remember that when pointing a finger, three are pointing back at them. The idea is that the event (and any economic event) is not random and is not isolated. It is often the accumulation of decisions made, or can be the result of decisions not to choose. This brings me to the subject of today's post.

This article from yesterday's edition of The Washington Post talks about a study from the International Monetary Fund. (I know, that makes it suspect for many of you, but you should read the article at least.) The study basically says that the economic future depends on the developed countries of the world changing some behaviors - significantly.

And while the recommendations seem logical, I wonder to what extent the United States will respond with "Yeah, good idea, I hope the other nations are paying attention."  While I don't think this warrants a lesson before the AP exam, it might be an interesting topic for discussion after the exam is over, when you're trying to fill time between the AP exam and graduation/the end of the school year.

Please share your thoughts on the article and whether you think the U.S. can change its behavior.

Decreasing Marginal Utility

For those of you looking for something to illustrate decreasing marginal utility, I draw your attention to this comic strip.  While not the best example, I think it works and it's reasonable funny.

Please share your thoughts.

Prisoners Dilemma and Comic Books

First, for those of you who discuss game theory, have you ever considered using comic books? The Eco-comics blog has a classic example in this post. I'm not familiar with the heroes in the featured post, but there's a link to a Batman scenario that will be more familiar to those of us who read comics a few decades ago.

Depending on your students, it might be useful.

Future Nobel Prizes?

The Clark Medal is given to young (under 40) economists who have made significant contributions to the field. And a significant number of Clark Medal recipients have gone on to win Nobel recognition.

Today's post on RealTime Economics, one of The Wall Street Journal blogs, talks about leading candidates for this year's Medal (announced today, I believe). Click on the links describing the work of some of these scholars. Some of it is fascinating and has some potential for classroom examples of key concepts.

I was very interested in the work on economic development.

Substitutes and Inferior Goods?

Finally, here is a little levity to help ease you into the weekend.

Feel free to share your thoughts.

NFL Draft

For those of you into pro football, tonight may be as much fun as the Super Bowl, but without the expensive commercials. Yes, it's the opening round of this year's NFL draft.

Today's issue of The Wall Street Journal has two engaging articles. This first one is about how the NFL draft drives economists crazy. Talk about a pricing system that really doesn't work... And there's a graphic that lays out an alternative auction system. As the article indicates, it incorporates a little game theory. It's fun.

The second article is actually just a chart with an explanation. It compares salaries of 10 first round picks with the salaries of major corporate executives. I find it interesting that people get upset with the salaries paid to people in corporate America, but don't seem to mind the fact that rookie players, many of whom don't make it past their first year, get paid more.

I think it goes back to what we choose to value. To what extent do salaries reflect what we truly value? I'll leave the question with you.

Prices as Signals to Suppliers

We often tell our students that prices are important because they send messages. They don’t just send messages to consumers about what to buy and how to prioritize their wants. They also send messages to producers. They provide answers for the basic economic questions "What to produce?", "How to produce?", and "For whom to produce?"

The message can become clearer in articles like this one from The Houston Chronicle (HT to Izzit - you can find a lesson plan to accompany the article at the site under April 21, 2010).

The article talks about high technology designed to find deep oil. The cost of this technology and the recovery of the oil are only economically feasible because of higher prices. And the prices are a product, not only of the higher costs of recovery, but of the increasing demand. (Remember price is a scissors.)

Take a look at the article. I'd be interested in your thoughts.

GDP Debate

One of the early chapters in the AP Macroeconomics course, and a key part of any study of macroeconomics, deals with economic growth and its measurement. It leans heavily on understanding what gross domestic product (GDP) is; as well as the various components (consumer spending, investment spending, government spending, and net trade). This is an important idea because time is also spent examining the importance of capital and policy, among other things, in impacting GDP.

Another aspect of the study is the shortcomings of GDP as a measure of economic progress. Because it doesn't quantify items like leisure time, cultural amenities, etc., many feel it is not an adequate measure.

To explore the idea of GDP and its adequacies/inadequacies you might want to visit The Economist this week, where there is a debate: "This house believes that GDP growth is a poor measure of improving living standards."

You and your students can examine the statements, vote on the motion, and examine some background reading. This may be an interesting way to review that section of the course, especially if you are getting ready for the AP and/or IB exams.

Please share your thoughts about the site.

Institutions and Choice

Regular readers of this blog know that I believe institutions play an important role in any economic system. The rules that exist (whether formal or informal) do a great deal to shape our decisions and create all kinds of incentives (economic, political, social and emotional) that play a role in how we make decisions.

To that end, I want to draw your attention to this book review from Sunday's edition of The New York Times (HT to A&L Daily). It offers some intriguing insights. And I think it can help us teach about institutions in the economics classroom.

For example, understanding cultural differences can offer insights into choices we make, or even choosing not to decide. How many things do you (or your students) do that are habits or traditions? Is there a law that says certain things must be done certain ways? But we do so because we perceive an incentive to do them a certain way.

Read the review, think about it, and please share your thoughts.

Comparative Advantage, Interdependence & Volcanoes

Take a look at this story from National Public Radio's Planet Money blog. While many of us are aware of the economic problems related to air travel caused by the volcano in Iceland; I suspect few even considered this aspect. I know I didn't. But it's an excellent example of the concepts of comparative advantage (Kenya's advantage in growing and providing flowers); and interdependence (Kenya's exports and GDP are impacted by sale of flowers to Europe). More posts later today.

Housing Related

With the recent allegations of fraud leveled against a major financial firm, and the indications that financial instruments linked to home mortgages were involved, it seemed like a good time to list some resources related to housing and the financial crisis.

Please note any one of these resources is going to be incomplete. And even taken together, they don't present the full story. But they do represent some informative and, in at least one case entertaining, pieces for your use.

Let me start with this post by David Warsh at Economicprincipals.com. Warsh give his thoughts on a new book, Slapped by the Invisible Hand. While this is probably not the definitive exploration of the crisis, Warsh thinks this version offers much that has been missing in previous attempts.

Next are a couple of timelines of the crisis that might offer a chronological perspective, as well as help explain the interdependence of various sectors of the economy. The first is from the Federal Reserve Bank of St. Louis. It is part of a larger resource section on their website, and is quite good. It even includes a downloadable .pdf.

The second is from The Council on Foreign Relations. It is more visually attractive, in my opinion. And it offers some other timelines as a way of augmenting the story.

Now we come to a couple of visual aids. This one is from Visualeconomics and is what led to this entire post. It's an interesting graphic representation of single family home sales from the mid-1960s to 2008.  By itself, the data does not mean a lot. How much of this is due to the Baby Boom generation coming of age and being able to afford a house; and how much is due to institutional changes in the economy? It's impossible to tell from the graph. But the trend is clear.

The other visual is something I've posted before. It's the home price roller-coaster. An innovative representation of home prices going back to the 19th century (I suspect some of the older data is estimated) up to 2007.

Again, the representation does little to explain why. But it does give a sense of the price of housing over the period. It does not explain how significantly housing has changed over the period (indoor plumbing, central heating/air, size, etc.). And those are significant factors in the price. But it's engaging.

Please share other resources. I don't expect this is a big topic as many of you prepare for the upcoming AP exams. But it might offer a direction for post-exam exploration or a recurring theme for next year.

David Ricardo's Birthday

As we near the end of the school year, and as we get closer to the chapters on international trade, it is fitting that we recognize David Ricardo's birthday. It is to Ricardo that we owe the idea of comparative advantage. And his example of English wool and Portuguese wine remains one of the classics of economics.

To find out more about Ricardo's work on comparative advantage, as well as theories of rent, growth and money, check out mini-biographies here, here, and here.

Has the Recession Ended?

While the end of the recession has not officially been dated, many economists are pegging it at or about June of 2009. And there are some interesting aspects to the discussion. There are two items regarding the issue in The Economist. Both are worth your quick review.

First is this one, which deals with the basics of calling a recession. It helps put to bed the idea that recessions are only a matter of Gross Domestic Product measurement. And it speaks to the concerns of policy-makers.

The second item is a blog post. It deals with one observer's concerns about this recovery, if it is a recovery, and the reason for continued concern.

In themselves, both of these are probably not going to contribute much to your class. However, they could provide a set-up to discuss the impact of policy on the business cycle.

Interactive Innovation Graphic

This item also comes from The Economist. It's a very interactive graphic on innovation. It allows you to play with a number of variables and graph the impact of economic innovation in various countries over time.

Macro Graph Video

Finally, for those of you getting students ready for the AP or IB economics exams, here is a short video that shows "All the Graphs You Need to Know for the AP Macro Exam."

I suspect that many of you already know about it. But if you don't, it might help your review sessions.

Greek Debt Crisis: Institutional Factors at Work

Today’s edition of The Wall Street Journal contains a very good story  that examines the role of corruption in Greek society as a factor in that country’s current financial crisis. (Subscriber content at this writing, but plug the headline into your browser, you may find an open version.) And while things like corruption are not the sole cause, the story provides a good example of how an environment that lacks protection of property rights and encourages bribery can, over time, rob an economy of growth.

And whether or not you can find the whole article, the video and interactive graphics are very informative and were open access the last time I checked. I hope you give it a look.

Psychology and Economics of Business Cycles

Barry Ritholtz at The Big Picture has put together a very engaging post on the psychology of the business cycle (HT to Chartporn). It contains a number of intriguing charts that make a case on how the psychological aspects of human nature feed the economic cycle and vice-versa.

Take a look and give it a read. Let me know what you think. But also share how you think you might use this in class, or if you would use this in class. While it probably doesn't apply to what you "have to teach" either for an exam or to meet certain benchmarks, I think its ability to help students understand is very good, and therefore it shouldn't be dismissed.

This Is Globalization

Long-time colleague, Dr. William Polley at Western Illinois University offers this post. Although the link seems to require payment to access the story, Dr. Polley sums up the relevant point - an excellent example of globalization.

To make the point clearer, take a map of the world. Start at Duluth, MN, and draw lines to all the other parts of the world that are affected or will be affected (according to the story) by the transaction of the ship taking on grain.

Business Organization

When teaching about firms, here is an example of vertical integration that is priceless.

Panics, Manias, etc. - The Funny Side

Dr. Mark sends this link. You can probably expect to find it as a national touring company. This is an opportunity for all those economics teachers who are also frustrated Broadway types to really step to the fore.

Growth

Reader and friend Dr. Mark sent a link to this visual from FlowingData. It's a dynamic presentation showing the growth of WalMart and Sam's Club, from a single store in Arkansas in 1962 to a retail giant. It's impressive. And it adds meaning to the term "exponential".

The final image reminded me of something I saw on Chartporn. Also an impressive outcome, but definitely not as much fun to watch as the FlowingData link. Thanks Dr. Mark.

'Tis the Season

I ran across this a couple weeks ago, I think.  I've been saving it for an auspicious moment.  Now seems right.

Coincidence, Correlation or Causality

Friend and regular reader, Dr. Mark, passes along this link to an article in The Onion (a satirical newspaper for those of you unfamiliar with it).  This is why we remind students to constantly ask "does this make sense?"  Also why we insist on data collected over longer periods of time. :)

Encouraged Workers

First, here's a bit of humor from Limericksecon to take you into the weekend. It does a nice job explaining how previously-discouraged workers, moving back into a recovering job market, can actually increase unemployment.

It makes a nice follow-on to this post of mine from last month.

Peace and Trade

And second, here's an interesting piece on the Voxeu web site.

If you read The World Is Flat by Thomas Friedman, particularly the first edition, you are familiar with the idea that globalization reduces conflict. Friedman states that no two countries with McDonalds had ever gone to war. That no longer holds, I believe. But the idea is that trade promotes peace. The economic gains from trade outweigh the potential losses from warfare. Therefore it is in the interest of the countries to find a different channel to resolve conflicts.

While noting that political and historical benefits may be stronger motivators for trade agreements (bilateral and regional) than the economic benefits, the authors point out that they are not substitutes but can be viewed as complements. I'm not really doing the article justice, but I hope you will find it interesting.

Birthday Observance

Today we commemorate the birth of economists John R. Hicks.  He was one of the most influential economists of the 20th century.  He and Kenneth Arrow were cowinners of the 1972 Nobel Prize in Economics.  And while you may not have heard of him, you should learn more about him.  You can find out more here and here.

This is really a serendipitous notice.  I just started reading a collection of Hicks's essays a couple days ago.  It is most interesting.

Upward Sloping Demand Curves

There is an excellent discussion of upward sloping demand curves over at EconomistsDoItwithModels. What I enjoyed was that it included discussions of both Geffen goods and Veblen goods. Her comment about the lack of empirical examples was also noteworthy for me.

It might be helpful when presenting demand in the micro portion of your course.  And if not, it's still interesting, because there are always students who confuse shifts in the curve with moving along the curve.  These are the students who will offer examples of higher prices resulting from increased demand creating shortages.  They often believe that somehow the curve for the product or service they are talking about has gotten kinked at some point and now slopes upward.  But what is usually the case is either the supply curve has shifted left or the demand curve has shifted right, or some combination of the two.  The result is higher prices.

Let me know what you think.

Coincident or Leading Indicator?

Would this be an example of an economy turning the corner or one that has already turned?

Interesting but Inconsistent

Finally, while this series of posters (HT to Chartporn) is entertaining and interesting, it doesn't track the same items from decade to decade. Consequently, the progress in the data is lacking. I would recommend looking at a couple of annual reports from the Dallas Fed to provide the same kind of information. The main drawback with them is the data only goes into the 1990s. Nevertheless, you can find links to the Fed reports here and here.

Financial Literacy Skills

Yesterday's post on The Wall Street Journal’s Real Time Economics Blog shares some interesting findings about financial literacy skills. It seems that, in one small, test of people with incomes above $50,000 per year, higher levels of skills contribute to a reduced feeling of discomfort during periods of economic trouble.

While the sample is small, it does demonstrate how financial literacy skills can impact our comfort levels with decisions we make, particularly in periods of recession and unemployment. I hope you find it of interest, and I would welcome any comments.

Earn More, Spend More

Here is a post on Voxeu that might be helpful when discussing the link between income and demand - the marginal propensity to consume. The article looks at five questions about the relationship:
• How does household consumption respond to changes in economic resources?
• Does the response depend on the nature and duration of the changes?
• Do anticipated income changes have a different consumption impact than unanticipated shocks?
• Do transitory income shocks have a lower impact than permanent ones?
• What about small changes compared with large ones?

It also contains an interesting graphic that, in my opinion, would be helpful in explaining the connection. Let me know what you think.

James Mill

He was the father of John Stuart Mill, but he was an economist in his own right, and a friend of Jeremy Bentham and David Ricardo. While not known for many original contributions to the field, he helped to popularize many ideas such as Bentham’s utilitarianism. And today is the anniversary of his birth.

If you've read about John Stuart Mill, you are aware of the impact his father had (for good and for ill) on his life and intellectual development.

Read more about James Mill here and here.

Value-Added Tax

For those of you approaching the unit on fiscal policy in your class, the standard line is that fiscal policy consists of two tools - taxes and spending.

Do any of you spend time going farther than that? Specifically, when you discuss taxing, do you talk about the sources of tax revenues? I usually mention three - income, wealth and spending. Income taxes are familiar to our students. Even if they don't have jobs themselves, they are familiar with the concept - tax is paid or withheld based on the amount earned. This is frequently where we discuss proportional (same percentage regardless of income) vs. progressive (higher percentage on higher income) taxation.

Students frequently have an idea about wealth taxes, as well. Property taxes of various kinds are examples of wealth taxes. For most cases your students are familiar with, like property taxes, the level is constant and levied on the property involved.

And sales taxes are a good example of consumption taxes that your students are probably familiar with. And depending on how sales taxes are levied in your state and locality, they may offer a lot of opportunities to discuss how taxes affect behavior. For example, when I lived in Illinois, there was a significant difference in the sales tax depending on whether you purchased in Cook County (Chicago) or in the collar counties. It wasn't unusual for people to "shop" downtown and make the purchase out in the 'burbs.

Here is a good article from The Wall Street Journal about value-added taxes (article is subscription only, but plug the headline into your browser - you may find the article elsewhere). Since they are generally considered taxes on consumption, it's often assumed that they are administered like sales taxes. However, because they can be national in nature, there are many considerations that go into what is taxed, what isn't or at what levels. I think you may like it.

***UPDATE***
Here is a post by Ezra Klein of The Washington Post on the above article.

If It's Depressing, How Can It Be Great?

I know some of you are off on spring break. I also know some of you teach American History and may be about to jump into the Great Depression. For you I have some links to help you emphasize the economics.

The first is from the latest issue of Policy Review, a publication of the Hoover Institution. The article lays much of the blame at the steps of the Federal Reserve. It basically restates the position of the late Milton Friedman that the Depression was the result of miscues and errors on the part of the central bank. (The then "16 year-old" central bank - and as I like to point out, how many 16 year-olds do you know that never make mistakes?) There really is nothing new here. And since Chairman Bernanke apologized to Milton Friedman at a special dinner a few years back, there's really nothing controversial here. But the piece is clear and well-written. And if you're not familiar with the argument, it provides a good summary for an aspect that many textbooks don't cover.

The second source is an interview with Harvard economist Robert Barro on the Five Books web site. (HT to Greg Mankiw.) Barro talks about his research on the Great Depression and names five books he feels are important to understanding it. They are not beach reading. But for those of us who are really into the subject, they present a good set of additions to the bookshelf. (I already have one.)

If you're off, enjoy the break. If you're not, enjoy yourself anyway.

Risk and Moral Hazard

I recently was teaching about risk, and we discussed moral hazard and adverse selection. That's probably what put the concepts into my mind. Then I was watching the movie Joe vs. the Volcano which starred Tom Hanks and Meg Ryan. It hit me. Here's an example of how "knowing" the future can affect our choices. Specifically, Tom Hanks' character, Joe, is told he has an incurable disease. He is then approached by a multi-millionaire to take on a dangerous mission - one which would end with him throwing himself into a volcano. All his expenses are covered. He immediately begins making decisions and taking risks that he previously wouldn't have taken - moral hazard.

Take a look at it and let me know if you agree.

Turning the Corner?

The newest issue of The Economist has a special report on the U.S. economy. It has several components (checkout the links on the right-hand side of the page under "Related Items"). They are all very interesting, and each is fairly short. They touch on a variety of issues discussed in this and many other blogs over the past year or so: savings, institutional issues, international trade, and productivity, just to name a few.

Each article, in addition to laying out solid information, also raises some questions. For example, in both "The End of the Binge" and "Look after the Cents", I was struck by the fact that both authors seemed to overlook the fact that the baby-boomers were among the most-indulged generation in our history. To expect them to switch from spend-thrift to super-saver without a near catastrophe, in hind-sight, was perhaps optimistic - logical, but still optimistic.

Nevertheless, as many of you are preparing for spring break next week, these articles may be worth adding to your "to do" list.

George of the Jungle and Supply and Demand

Depending upon your age, there are at least two incarnations of George of the Jungle. The full-length film starring Brendan Fraser, and the original animated version from the late 1960s or early 1970s.  (There is a newer animated version on Cartoon Network, but I haven't seen it.)

I always enjoyed the original version immensely. (Draw your own conclusions.) And I was happy to find many of the originals on YouTube.  I ran across this episode that does a funny job of explaining how changing tastes influence demand, and how that influence prices and changes behavior about natural resources - in this case, ooh-ooh bird feathers.  And it all happens in the first minute-and-a-half.  Enjoy