Markets

Russ Roberts at Cafe Hayek has generously made an essay available.  It is a visual explanation of how markets use knowledge. For those of you teaching AP Micro or Principles courses, this will be very handy. For those of you teaching more traditional courses or who feel it might be beyond student reading ability, it might be good background for you to integrate into your lesson. Either way, it is worth your time.

Happy Birthday to MV=PQ

It seems that today is the sixth birthday of this blog. Six years ago today, the first post went up.  I can only guess at how many people have visited over the years. The current counter does not include the almost two years it ran under the auspices of the Chicago Fed. And it does not cover all of the time I was at the Powell Center for Economic Literacy, or since then. And I've gained a co-author since then.

Regardless, I thank all of you who are regular (or even irregular visitors). It's been great.  

The Rule of 72

When teaching about interest, it’s always useful to make an aside and familiarize students with the rule of 72.  The rule allows for a rough approximation of doubling time once a rate of growth is known.  One merely takes 72 and divides it by the rate; the result is a rough estimate of doubling time. Thus something that grows at 4% should take about 18 years to double in size. Something that grows at 6% will take 12 years, etc.

It is usually used when talking about compound interest. I’ve even heard it used when discussing inflation. The power of growth working on growth is impressive, when you start to talk about larger numbers. Conversely, small numbers make you wonder why you should bother, as seen in this XKCD cartoon.

However even smaller numbers, left on their own over long periods of time, can result in truly astronomical sums.  Here’s a story from Lapham's Quarterly (HT to Arts & Letters Daily) on that very topic that can be used to wind up class when you have time.

And the government thinks it has troubles with the debt now….

Markets

I know we tell students that the market exists where supply meets demand.  But we also have consider what each of those mean.  Demand is a willingness to buy. Supply is willingness to sell. If you don't have both, you don't have a market.

Soderbergh's "King of the Hill"

The employment situation in our economy is like nothing we've seen since the Great Depression, both in terms of long term unemployment and median duration. Things are staggeringly bad, but we can try to find bright spots where we can.

One such bright spot is that one of my favorite directors, Steven Soderbergh, has just released a new movie, Contagion. Back in 1993, Soderbergh made a film of one of my favorite books, "King of the Hill", A.E. Hotchner's account of being a schoolboy in 1933 in St. Louis. I missed the film in the theaters, and have searched in vain for it in any format since. However, Amazon has just made it available through their new "Amazon Instant Video" feather. You can find it here.

It's a heartbreaking story of a family struggling to survive the Great Depression. It begins with Hotchner's family way behind on their rent in a single room occupancy hotel, with his father having to travel to scramble for work and his mother's health failing. Hotchner eventually has to stay as a squatter in their apartment so that they can't be evicted, while he plays mind-games with himself to deal with starvation. But through it all, he is a kid, and plays marbles and does other kid things, while trying to hide from his school friends how desperately poor he is.

We have a better social safety net these days, but with poverty at rising rates, I wonder about how many people I interact with each week who are quietly suffering like Hotchner did as a boy.

xkcd on Opportunity Costs

This cartoon is often brilliant. And always be sure to run your cursor over the cartoon for an extra kicker punchline.

The Principal-Agent problem

Yet another great example from Dilbert.

Marginal revenues and marginal costs of running an NFL team

My favorite football (and policy) analyst is the tastefully named Gregg Easterbrook, who writes Tuesday Morning Quarterback for ESPN.com. He presents analysis that it's more profitable for NFL teams to lose cheaply than to spend a lot of money to try to win. The marginal cost of getting better players seems to greatly exceed the marginal revenue from increased revenues that come to teams with better winning records. If this is true, it would explain...a lot of bad teams.

I also wonder if in leagues where this is true, is there more turn-over at the top?

Jurgen Stark resigned from the ECB

Wow, one of the hardest hardliners on the European Central Bank, Jurgen Stark just pulled a surprise resignation. He was unhappy about the degree to which the ECB was being accommodative to Greece, Italy, and Spain.

Efficient markets and football

It's important to have our priorities straight. Tonight President Obama gave a major economic policy speech, but he made very sure that he was done in time for the Packers-Saints kickoff. (I suspect that part of the President's political base feels betrayed because, in a concession to Republicans, his speech preempted a re-run of Big Bang Theory.)

But back to priorities, and by that I mean football. Tim and I are in good moods because Michigan State and Northwestern won their first games of the year, and this makes us happier than fans of Oregon, TCU, and Notre Dame. However, as a fan of Northwestern, I have less hope for the future than do fans of these other teams (and not just relating to the specific history of Northwestern's post-season performance). And this gets to the Efficient Markets Hypothesis (EMH).

The EMH has been getting kicked around lately, but its basic idea is simple. It is that arbitrage takes away free lunches, that we shouldn't expect to find consistently profitable trades in asset markets. The simplest form of the EMH (usually called the "weak form") is that charting prices should be useless, that is, the current price of an asset is the best predictor of its future price, and adding information about past prices doesn't help our prediction accuracy at all.

Behavioral economists find some evidence for deviations from the EMH based upon "loss aversion", where people are sometimes reluctant to sell an asset for less than they paid for it. Perhaps this explains something that the brilliant Nate Silver documents about the power of pre-season NCAA football polls. In some fun econometric work, he finds that the final football rankings depend on how the teams did in terms of wins and loses over the season...but also on how they were ranked in the pre-season poll, before the first game is even played!

So, yes, if Michigan State ends up ranked ahead of Northwestern, I'm going to blame it on those pre-season polls.

Children

During the past year or so, Bryan Caplan of George Mason University and the Econlog blog has been very visible as a result of his new book "Selfish Reasons to Have More Kids." Based on what I've read about the book, it applies economic thinking to child-rearing and one of the upshots is "it's less expensive and can be more fun than you think." (I've decided I need to read this book, even though my kids are basically in the final stages of growing up and I’ve already had fun.) This clearly connects to some of the early work on economics of family size, why we marry, have children, etc.

But my thoughts were moved to revisiting the issue after seeing this cartoon. I would welcome comments from anyone who has read Bryan's book.