I haven't been able to do a lot of posting the past few days because I've been at a conference. My review of Greg Clark's book not withstanding (I actually wrote a good part of that just before I left); my time has been dominated by presenting at and attending sessions or otherwise involved in travel. Consequently, when I got to my office this morning and finally got a chance to look at the backlog of mail, I found out that yesterday's (4/9/08) issue of The Wall Street Journal included the last article by one of my favorite columnists, Jonathan Clements.
Jonathan has been writing a column for the Journal since 1994. I've read most of his "Getting Going" series with amusement and interest. He always does an excellent job of explaining issues related to personal finance in a way that experienced as well as novice readers can benefit. He often provided me with a new perspective using an old and familiar tool.
His final column was no different. He talked about why we all should save and invest for our futures. "Nothing new there," you may say. But by using some simple old tools of economics: opportunity cost, risk/return, and money as a store of value, he provided one of the best cases for saving that I've read in some time. It is succinct and powerful. I would strongly recommend you consider sharing it with your students.
Now, just in case you're just discovering this resource, Clements also produced an online column with links to 10 of his favorite columns from the past. It was a great way for him to say "goodbye." I know that, for me, Wednesday mornings with the Journal won't be the same.
I hope you find them helpful and I look forward to your comments.
Thursday, April 10, 2008
Tuesday, April 8, 2008
What I'm Reading
I finally finished reading A Farewell to Alms by Dr. Gregory Clark. I say finally because Clark's book took me a bit longer to read than I would have anticipated, given its size (377 pp). It took longer for two reasons: Clark's writing style in this book is more academic than many of the popular economics books that have come out recently, thus it wouldn't qualify as beach reading. And his thesis is thought-provoking, as well as controversial.
In the book, Clark investigates one of the great puzzles in economic history - the Industrial Revolution. Considering its impact, economists and historians both are still at a loss to answer the questions of "Why then?" and "Why There?" Specifically, "what factors caused the sudden expansion of economic activity at the end of the 18th century?" And a parallel question, "Why in Great Britain, instead of elsewhere?"
The approach Clark takes is to frame things in a Malthusian context. (For those of you unfamiliar with the ideas of Thomas Malthus, check here.) Clark maintains that, until 1800, the world seemed to be in a classic Malthusian trap. As population grew, it would outpace the ability to feed itself. This would reduce life expectancy, which would reduce demand pressures. As costs fell with decreasing demand, real income would rise and, ultimately, population would rebound. But around 1800, the approximate beginning of the Industrial Revolution, things changed dramatically, especially in Great Britain and the United States.
If I read Clark correctly, the "why then?" is due to some changes in the demography. Clark points out that while the population as a whole had been subject to the pressures outlined by Malthus, the pressures were not distributed evenly. hanges in technology and learning had provided some structural changes. These changes had generally raised living standards, and population was growing. But it did not grow evenly - and that is the crucial point. While birth rates were generally elevated across income groups, child survival rates were not. The upper classes fared better than the lower - as one might expect.
The "why there" seems to me to be a function of institutions, both formal an informal. On the formal side, it was the laws of inheritance; and on the informal side, the appreciation and provision of education. Generally, the inheritance laws provided for the eldest son to inherit most of the estate, with some provision for other siblings. These other siblings are the key. Because they did not inherit a large portion of the estate, they often were forced to seek their fortunes elsewhere, among people of a lower class. Because the siblings came from a higher socio-economic group, they brought certain views and expectations with them. They generally did not fall far in the economic strata, and they brought ideas that would change the views others. This often included a different work ethic and a longer-term appreciation for income and what it could bring. It also meant that they brought an appreciation for education and ideas that could spread within their new circle of contacts.
Dr. Clark's research is excellent. He does not rush to build his argument, rather he spends considerable time developing a strong case, layer by layer, for his thesis. Given the somewhat controversial nature of the thesis, this is prudent. Overall, I found this book interesting. I was able to link much of what Clark discussed with ideas I had when I first came read the works of Fernand Braudel. (For those who would like to know more about Braudel, check here.) Braudel was a historian in the middle of the 20th century. He would develop a unique way of writing history, integrating large aspects of economics and sociology in his work. Dubbed the Annales School, Braudel changed history and historiography from personality and event driven to a longer view, integrating the living conditions, beliefs and structures of the wider population. Economics, particularly on a personal level, played a large part in what Braudel wrote. And I think Braudel's view is certainly compatible with, if not generally supportive of what Clark proposes.
I would recommend this book for anyone interested in general economic theory and the Industrial Revolution. As I said before, I would not go so far as to call this a leisurely read - like some current economics books written for general audiences - I would call it an important read, as I think it will generate some controversy.
As a final note, I would recommend you also check out the book chat for this work on the Marginal Revolution blog. It was done in four parts, and you can find them here, here, here, and here.
I look forward to your comments.
In the book, Clark investigates one of the great puzzles in economic history - the Industrial Revolution. Considering its impact, economists and historians both are still at a loss to answer the questions of "Why then?" and "Why There?" Specifically, "what factors caused the sudden expansion of economic activity at the end of the 18th century?" And a parallel question, "Why in Great Britain, instead of elsewhere?"
The approach Clark takes is to frame things in a Malthusian context. (For those of you unfamiliar with the ideas of Thomas Malthus, check here.) Clark maintains that, until 1800, the world seemed to be in a classic Malthusian trap. As population grew, it would outpace the ability to feed itself. This would reduce life expectancy, which would reduce demand pressures. As costs fell with decreasing demand, real income would rise and, ultimately, population would rebound. But around 1800, the approximate beginning of the Industrial Revolution, things changed dramatically, especially in Great Britain and the United States.
If I read Clark correctly, the "why then?" is due to some changes in the demography. Clark points out that while the population as a whole had been subject to the pressures outlined by Malthus, the pressures were not distributed evenly. hanges in technology and learning had provided some structural changes. These changes had generally raised living standards, and population was growing. But it did not grow evenly - and that is the crucial point. While birth rates were generally elevated across income groups, child survival rates were not. The upper classes fared better than the lower - as one might expect.
The "why there" seems to me to be a function of institutions, both formal an informal. On the formal side, it was the laws of inheritance; and on the informal side, the appreciation and provision of education. Generally, the inheritance laws provided for the eldest son to inherit most of the estate, with some provision for other siblings. These other siblings are the key. Because they did not inherit a large portion of the estate, they often were forced to seek their fortunes elsewhere, among people of a lower class. Because the siblings came from a higher socio-economic group, they brought certain views and expectations with them. They generally did not fall far in the economic strata, and they brought ideas that would change the views others. This often included a different work ethic and a longer-term appreciation for income and what it could bring. It also meant that they brought an appreciation for education and ideas that could spread within their new circle of contacts.
Dr. Clark's research is excellent. He does not rush to build his argument, rather he spends considerable time developing a strong case, layer by layer, for his thesis. Given the somewhat controversial nature of the thesis, this is prudent. Overall, I found this book interesting. I was able to link much of what Clark discussed with ideas I had when I first came read the works of Fernand Braudel. (For those who would like to know more about Braudel, check here.) Braudel was a historian in the middle of the 20th century. He would develop a unique way of writing history, integrating large aspects of economics and sociology in his work. Dubbed the Annales School, Braudel changed history and historiography from personality and event driven to a longer view, integrating the living conditions, beliefs and structures of the wider population. Economics, particularly on a personal level, played a large part in what Braudel wrote. And I think Braudel's view is certainly compatible with, if not generally supportive of what Clark proposes.
I would recommend this book for anyone interested in general economic theory and the Industrial Revolution. As I said before, I would not go so far as to call this a leisurely read - like some current economics books written for general audiences - I would call it an important read, as I think it will generate some controversy.
As a final note, I would recommend you also check out the book chat for this work on the Marginal Revolution blog. It was done in four parts, and you can find them here, here, here, and here.
I look forward to your comments.
Friday, April 4, 2008
An Economic Way of Thinking about Romeo and Juliet - Act Five
For those of you just joining us, we are using an economic way of thinking to examine William Shakespeare's Romeo and Juliet. We started with an introduction last week, March 28, and have been doing an act a day. Today we finish this little exercise with...
Act V
The first scene of the final act finds Romeo in Mantua. There he is met by a messenger from Verona who bears sad tidings – he has seen Juliet lowered into the family crypt. Romeo is understandably distraught, and thus sets up the only financial transaction of the play that we are privy to. Romeo seeks out an apothecary (Remember the convenient shopping?) to purchase a poison. He has chosen to join his Juliet in death and seeks a strong potion to use in committing suicide. At first, the apothecary is reluctant to provide the poison. It seems there are stringent laws in Mantua about dispensing such drugs – providing an incentive against their sale. But Romeo points out that the vendor is poor, starving, and possibly on the verge of death. In Romeo's mind, the prohibition cannot be much of a disincentive to one in such a state. He points out the hard straights the apothecary is in, and secures the poison. The transaction takes place. Romeo chooses to buy. The apothecary chooses to sell. Both choose according to incentives (Romeo wants to die, the apothecary to live). And both face possible costs of this choice in the future.
The second scene offers little in the way of choices. However, it does provide us a key insight into economics and economic thinking. We find in this scene that Friar Lawrence's letter to Romeo, outlining the plot to feign death and allow Juliet to escape to Mantua, was not delivered. Romeo is without a vital piece of information. This actually explains his harsh choice in the previous scene. Economics tells us that we make better choices if we have more information. Given the lack of a vital piece of information (Juliet is faking death); Romeo has chosen based upon incentives that do not correct. His choice, while tragic, is logical if we understand the economic way of thinking.
The final scene takes place in the graveyard. First, Paris arrives with a servant, intending to leave flowers on the grave of his late bride-to-be. Next, Romeo arrives with his friend and servant, Balthasar. Romeo dispatches Balthasar with a letter for his father, explaining his actions. He further charges Balthasar not to return before delivering the letter, under pain of death – a strong incentive one would presume. But it is not strong enough, as Balthasar chooses to stick around and keep an eye on Romeo.
Romeo and Paris then confront each other. Paris misunderstands Romeo's presence, assuming he came to defile the grave of a family enemy. Romeo does not want to fight, but chooses to do so anyway. His incentive appears to be a desire to join Juliet as soon as he can, and Paris stands in the way. Meanwhile, Paris' servant has gone for help. Additionally, Friar Lawrence arrives, hoping to intercept Romeo. He runs into Balthasar who tells him that Romeo is already in the graveyard and has been for some time. But Balthasar, under Romeo's previous incentive, declines to go with the Friar to find and presumably stop Romeo.
Meanwhile, Paris and Romeo have fought, and Paris has lost – the consequence is death. Romeo then chooses to drink his potion and dies next to Juliet. Friar Lawrence arrives too late for Romeo, but just as Juliet stirs. As she awakens, he offers the choice of going to a convent. But this is not a strong enough incentive, as Juliet wants to be with Romeo. She seeks some of the poison, and finding none, takes up a dagger and kills herself. At this point, the graveyard might as well be Grand Central Station. The watchmen arrive, the Prince arrives, the Capulets arrive and Lord Montague arrives – his wife having died of a broken heart over Romeo's exile. Friar Lawrence tells all, from his plan to spirit away a seemingly dead Juliet to join Romeo in Mantua, to the lost communications, and the death of the young lovers. The feud is ended in grief and Montague vows to erect a gold statue of Juliet, in memory of her faithfulness. As the story ends, we are left with a fuller understanding of the costs related to choices made by Romeo and Juliet under the incentives in place. Mercutio, Tybalt, Paris, Lady Montague, Romeo and Juliet all lie dead. These costs were unknown and in the future at the time the choices were made.
Act V
The first scene of the final act finds Romeo in Mantua. There he is met by a messenger from Verona who bears sad tidings – he has seen Juliet lowered into the family crypt. Romeo is understandably distraught, and thus sets up the only financial transaction of the play that we are privy to. Romeo seeks out an apothecary (Remember the convenient shopping?) to purchase a poison. He has chosen to join his Juliet in death and seeks a strong potion to use in committing suicide. At first, the apothecary is reluctant to provide the poison. It seems there are stringent laws in Mantua about dispensing such drugs – providing an incentive against their sale. But Romeo points out that the vendor is poor, starving, and possibly on the verge of death. In Romeo's mind, the prohibition cannot be much of a disincentive to one in such a state. He points out the hard straights the apothecary is in, and secures the poison. The transaction takes place. Romeo chooses to buy. The apothecary chooses to sell. Both choose according to incentives (Romeo wants to die, the apothecary to live). And both face possible costs of this choice in the future.
The second scene offers little in the way of choices. However, it does provide us a key insight into economics and economic thinking. We find in this scene that Friar Lawrence's letter to Romeo, outlining the plot to feign death and allow Juliet to escape to Mantua, was not delivered. Romeo is without a vital piece of information. This actually explains his harsh choice in the previous scene. Economics tells us that we make better choices if we have more information. Given the lack of a vital piece of information (Juliet is faking death); Romeo has chosen based upon incentives that do not correct. His choice, while tragic, is logical if we understand the economic way of thinking.
The final scene takes place in the graveyard. First, Paris arrives with a servant, intending to leave flowers on the grave of his late bride-to-be. Next, Romeo arrives with his friend and servant, Balthasar. Romeo dispatches Balthasar with a letter for his father, explaining his actions. He further charges Balthasar not to return before delivering the letter, under pain of death – a strong incentive one would presume. But it is not strong enough, as Balthasar chooses to stick around and keep an eye on Romeo.
Romeo and Paris then confront each other. Paris misunderstands Romeo's presence, assuming he came to defile the grave of a family enemy. Romeo does not want to fight, but chooses to do so anyway. His incentive appears to be a desire to join Juliet as soon as he can, and Paris stands in the way. Meanwhile, Paris' servant has gone for help. Additionally, Friar Lawrence arrives, hoping to intercept Romeo. He runs into Balthasar who tells him that Romeo is already in the graveyard and has been for some time. But Balthasar, under Romeo's previous incentive, declines to go with the Friar to find and presumably stop Romeo.
Meanwhile, Paris and Romeo have fought, and Paris has lost – the consequence is death. Romeo then chooses to drink his potion and dies next to Juliet. Friar Lawrence arrives too late for Romeo, but just as Juliet stirs. As she awakens, he offers the choice of going to a convent. But this is not a strong enough incentive, as Juliet wants to be with Romeo. She seeks some of the poison, and finding none, takes up a dagger and kills herself. At this point, the graveyard might as well be Grand Central Station. The watchmen arrive, the Prince arrives, the Capulets arrive and Lord Montague arrives – his wife having died of a broken heart over Romeo's exile. Friar Lawrence tells all, from his plan to spirit away a seemingly dead Juliet to join Romeo in Mantua, to the lost communications, and the death of the young lovers. The feud is ended in grief and Montague vows to erect a gold statue of Juliet, in memory of her faithfulness. As the story ends, we are left with a fuller understanding of the costs related to choices made by Romeo and Juliet under the incentives in place. Mercutio, Tybalt, Paris, Lady Montague, Romeo and Juliet all lie dead. These costs were unknown and in the future at the time the choices were made.
Thursday, April 3, 2008
An Economic Way of Thinking about Romeo and Juliet - Act Four
Scene one begins with Paris at the cell of Friar Laurence. They are soon joined by Juliet. It seems that the Friar’s cell is a popular destination. Paris and Juliet exchange greetings and talk about the impending marriage. Then he leaves. Upon which, Juliet begins speaking of a wide variety of alternative choices to marrying Paris. Unfortunately, they all seem to end with her dying. The Friar feels that the cost in all of these may be too high. He offers one more choice. She should agree to marry Paris, but on the eve of the wedding, take a potion that will make her appear to be dead. Once she’s placed in the family burial chamber, Romeo will come and take her away to live in with him in Mantua. We see a new choice to be made with the incentive being a new life with Romeo. What is the cost? It’s in Mantua. (Actually, I hear Mantua is quite nice – convenient shopping, nice restaurants, good schools…..)
Back at Casa Capulet, we open scene two with another party to plan. This one will be the wedding feast for Juliet. Juliet enters the scene and indicates she has chosen to acquiesce to her father’s judgment after being shown the errors of her ways by Friar Lawrence. Although it is a complete fabrication, it basically lays out a plausible incentive structure for a choice to agree to marry Paris. Although it is a ruse, it is a skillful ruse – the church and dad’s judgment being strong incentives, at least to dad. And so scene two presents two choices by Juliet: one actual (to lie to her father) and one apparent (to submit to the logic of her father and Friar Lawrence). The incentive structure is still life with Romeo. And that structure is now making it easier for Juliet to choose.
At the beginning of scene three, we find Juliet and her nurse choosing her wedding attire. Lady Capulet joins them briefly, and Juliet dismisses both saying she desires to be alone with her thoughts and prayers. She then focuses on the potion given to her by Friar Lawrence. And in the course of choosing to drink the potion, she lists a number of possible costs or consequences that may lie in the future. "What if the potion doesn’t work – will she end up married? Or will she resort to a dagger? What if the Friar has tricked her and substituted a poison to kill her and save his reputation? What if she wakes in the tomb before Romeo arrives and suffocates?" In her mind, these are possible costs attending the choice to drink the potion. But her strongest incentive is to be with Romeo. In her mind, the possible costs are outweighed by the possibility of life with her love. So she chooses to drink the potion.
Scene four, on the other hand, offers little in the way of decision-making, unless we include Lord Capulet’s choice to stay awake all night supervising the preparation of the wedding feast, while the servants, his wife and Nurse are doing all the work.
In scene five, we see the costs to others of Juliet's choice to drink the potion. (In economics we would talk about externalities – costs borne by others outside the action.) Juliet did not think of how the feigned death would affect her parents, Paris, and the others involved in the wedding plans. But here we see that costs of a choice are in the future – and not always foreseen. And so, we go to the final act.
Back at Casa Capulet, we open scene two with another party to plan. This one will be the wedding feast for Juliet. Juliet enters the scene and indicates she has chosen to acquiesce to her father’s judgment after being shown the errors of her ways by Friar Lawrence. Although it is a complete fabrication, it basically lays out a plausible incentive structure for a choice to agree to marry Paris. Although it is a ruse, it is a skillful ruse – the church and dad’s judgment being strong incentives, at least to dad. And so scene two presents two choices by Juliet: one actual (to lie to her father) and one apparent (to submit to the logic of her father and Friar Lawrence). The incentive structure is still life with Romeo. And that structure is now making it easier for Juliet to choose.
At the beginning of scene three, we find Juliet and her nurse choosing her wedding attire. Lady Capulet joins them briefly, and Juliet dismisses both saying she desires to be alone with her thoughts and prayers. She then focuses on the potion given to her by Friar Lawrence. And in the course of choosing to drink the potion, she lists a number of possible costs or consequences that may lie in the future. "What if the potion doesn’t work – will she end up married? Or will she resort to a dagger? What if the Friar has tricked her and substituted a poison to kill her and save his reputation? What if she wakes in the tomb before Romeo arrives and suffocates?" In her mind, these are possible costs attending the choice to drink the potion. But her strongest incentive is to be with Romeo. In her mind, the possible costs are outweighed by the possibility of life with her love. So she chooses to drink the potion.
Scene four, on the other hand, offers little in the way of decision-making, unless we include Lord Capulet’s choice to stay awake all night supervising the preparation of the wedding feast, while the servants, his wife and Nurse are doing all the work.
In scene five, we see the costs to others of Juliet's choice to drink the potion. (In economics we would talk about externalities – costs borne by others outside the action.) Juliet did not think of how the feigned death would affect her parents, Paris, and the others involved in the wedding plans. But here we see that costs of a choice are in the future – and not always foreseen. And so, we go to the final act.
Wednesday, April 2, 2008
An Economic Way of Thinking about Romeo and Juliet - Act Three
Act III
At the beginning of scene one, we find Benvolio and Mercutio in the town square. They are basically debating whether to go home, as the weather is hot and people's moods are hotter. And Benvolio, at least, is concerned that a fight, given the proper circumstances (i.e. any circumstances at all) Mercutio will end up fighting. Apparently Mercutio fights because he enjoys it. He chooses based on some incentive system – he may have a death wish, he may be an adrenaline junky, he may have yet to lose a fight and thus have an unrealistic view of his own mortality (contrary to the first idea).
Tybalt then appears in the square with some of his homeboys. Tybalt seeks Romeo to settle some imagined slight. Romeo arrives but declines to fight. But Mercutio gives in to his value system and draws on Tybalt. Soon after, the incentive of death to the head of house is forgotten (even though Romeo reminds them) and fight ensues. First Mercutio is killed as Romeo chooses to intervene and prevent bloodshed. Tybalt runs away, but returns to seek Romeo. But with the death of his friend Mercutio, Romeo's incentive structure is now changed. He fights and slays Tybalt. Romeo then flees. This leaves Benvolio to explain all to the Capulets and the Prince. The Prince, facing a cost from a previous choice, changes the rules again, deciding enough blood has been shed and nothing may be gained by taking the heads of the feuding houses. Thus he chooses to banish Romeo. This scene offers many examples of people choosing, (to not fight or to fight), and of people responding to incentives, (whether it be an ineffectual incentive – the death of someone else, or a more effective incentive – revenge). And the choices have costs. For Mercutio, the decision to pick a fight cost his life. For Tybalt, the choice of returning to look for Romeo cost his life. And for Romeo, the choice of fighting and killing Tybalt has cost him his citizenship to Verona. All costs were in the future (remember, the Prince has chosen not to enforce a previous decision against fighting – perhaps the costs of the previous choice were too high - and I suspect none of the fighters thought they would lose). And we've not yet tallied all the costs of Romeo's choice, as we shall see.
We now go to Capulet's orchard, the setting for scene two. Here, Juliet awaits her husband, but instead is visited by her nurse who brings word of the death of Tybalt (Juliet's cousin) at the hand of Romeo and Romeo's subsequent banishment. At word of this, Juliet must choose where her greater allegiance lies – with her old family or her new. Juliet chooses, and again, the cost of that choice lies in the future.
We find Romeo at Friar Lawrence's in scene three. Here, upon finding he's been banished to Mantua, Romeo bemoans his fate – one worse than death in his eyes. What appears to be the full future cost of his decision to kill Tybalt is now apparent to him. He must live without his Juliet. Juliet's nurse brings news of her mistress's distress (now calling Tybalt, now Romeo), which further upsets Romeo. But the good Friar makes Romeo see all is not lost. The Friar proposes Romeo go to Mantua and he (the Friar) will try to get the Prince to rescind his choice banishing Romeo, while informing the feuding families of the marriage. And at some time in the future, Romeo will be able to return. Thus, if Romeo chooses to accept banishment, the immediate future cost of the choice is life in Mantua. The incentive is life with Juliet.
We now head back to Capulet's house for another short scene, a meeting between Lord and Lady Capulet and the suitor, Paris. Here, Lord Capulet assures Paris that Juliet's choice will be moved by her father's judgment, and the wedding bells will ring sometime soon. Lord Capulet is confident that his judgment is sufficient incentive for his daughter on the question of marriage. The "cost" of that choice is a wedding in the future.
Scene five is the last scene in this act. It opens with Romeo and Juliet awakening after their wedding night. They debate whether various portents are of the night or the morning. But Nurse arrives and removes all doubt. It's morning and Juliet's mom is on her way to visit her daughter. Romeo leaves, and Juliet's mom arrives. She informs Juliet that marriage to Paris is in the offing. Juliet will have none of that. Lord Capulet then arrives and finds that his judgment is not sufficient incentive for Juliet to choose Paris. (Of course, he doesn’t know she's already married – an institution that, along with love of Romeo, presents a large incentive to choice.) Lord and Lady Capulet then place a new cost on Juliet's choice to reject Paris. They will, in the near future, turn her out of the house. (This actually presents a positive rather than negative incentive, as it would free Juliet to join Romeo in nearby Mantua.)
As Act III ends, people are choosing and offering incentives with costs in the future all over the place. This play is becoming a playground for studying choice and decision-making.
At the beginning of scene one, we find Benvolio and Mercutio in the town square. They are basically debating whether to go home, as the weather is hot and people's moods are hotter. And Benvolio, at least, is concerned that a fight, given the proper circumstances (i.e. any circumstances at all) Mercutio will end up fighting. Apparently Mercutio fights because he enjoys it. He chooses based on some incentive system – he may have a death wish, he may be an adrenaline junky, he may have yet to lose a fight and thus have an unrealistic view of his own mortality (contrary to the first idea).
Tybalt then appears in the square with some of his homeboys. Tybalt seeks Romeo to settle some imagined slight. Romeo arrives but declines to fight. But Mercutio gives in to his value system and draws on Tybalt. Soon after, the incentive of death to the head of house is forgotten (even though Romeo reminds them) and fight ensues. First Mercutio is killed as Romeo chooses to intervene and prevent bloodshed. Tybalt runs away, but returns to seek Romeo. But with the death of his friend Mercutio, Romeo's incentive structure is now changed. He fights and slays Tybalt. Romeo then flees. This leaves Benvolio to explain all to the Capulets and the Prince. The Prince, facing a cost from a previous choice, changes the rules again, deciding enough blood has been shed and nothing may be gained by taking the heads of the feuding houses. Thus he chooses to banish Romeo. This scene offers many examples of people choosing, (to not fight or to fight), and of people responding to incentives, (whether it be an ineffectual incentive – the death of someone else, or a more effective incentive – revenge). And the choices have costs. For Mercutio, the decision to pick a fight cost his life. For Tybalt, the choice of returning to look for Romeo cost his life. And for Romeo, the choice of fighting and killing Tybalt has cost him his citizenship to Verona. All costs were in the future (remember, the Prince has chosen not to enforce a previous decision against fighting – perhaps the costs of the previous choice were too high - and I suspect none of the fighters thought they would lose). And we've not yet tallied all the costs of Romeo's choice, as we shall see.
We now go to Capulet's orchard, the setting for scene two. Here, Juliet awaits her husband, but instead is visited by her nurse who brings word of the death of Tybalt (Juliet's cousin) at the hand of Romeo and Romeo's subsequent banishment. At word of this, Juliet must choose where her greater allegiance lies – with her old family or her new. Juliet chooses, and again, the cost of that choice lies in the future.
We find Romeo at Friar Lawrence's in scene three. Here, upon finding he's been banished to Mantua, Romeo bemoans his fate – one worse than death in his eyes. What appears to be the full future cost of his decision to kill Tybalt is now apparent to him. He must live without his Juliet. Juliet's nurse brings news of her mistress's distress (now calling Tybalt, now Romeo), which further upsets Romeo. But the good Friar makes Romeo see all is not lost. The Friar proposes Romeo go to Mantua and he (the Friar) will try to get the Prince to rescind his choice banishing Romeo, while informing the feuding families of the marriage. And at some time in the future, Romeo will be able to return. Thus, if Romeo chooses to accept banishment, the immediate future cost of the choice is life in Mantua. The incentive is life with Juliet.
We now head back to Capulet's house for another short scene, a meeting between Lord and Lady Capulet and the suitor, Paris. Here, Lord Capulet assures Paris that Juliet's choice will be moved by her father's judgment, and the wedding bells will ring sometime soon. Lord Capulet is confident that his judgment is sufficient incentive for his daughter on the question of marriage. The "cost" of that choice is a wedding in the future.
Scene five is the last scene in this act. It opens with Romeo and Juliet awakening after their wedding night. They debate whether various portents are of the night or the morning. But Nurse arrives and removes all doubt. It's morning and Juliet's mom is on her way to visit her daughter. Romeo leaves, and Juliet's mom arrives. She informs Juliet that marriage to Paris is in the offing. Juliet will have none of that. Lord Capulet then arrives and finds that his judgment is not sufficient incentive for Juliet to choose Paris. (Of course, he doesn’t know she's already married – an institution that, along with love of Romeo, presents a large incentive to choice.) Lord and Lady Capulet then place a new cost on Juliet's choice to reject Paris. They will, in the near future, turn her out of the house. (This actually presents a positive rather than negative incentive, as it would free Juliet to join Romeo in nearby Mantua.)
As Act III ends, people are choosing and offering incentives with costs in the future all over the place. This play is becoming a playground for studying choice and decision-making.
Tuesday, April 1, 2008
No Surprise in This Surprise
Yesterday, U.S. Secretary of the Treasury, Henry M. Paulson, Jr., announced a proposal that hailed as a sweeping reform of the U.S. financial system. In an effort to restore strength in the nation's financial system, the secretary set forth a list of proposed changes. Some of them would create new Federal entities. Others would subordinate existing agencies to other Federal agencies, changing their mission in some respect. Still others would move activities previously in the hands of the states under the supervision of Federal oversight. Many of these aforementioned proposals seek to give more responsibility to the Federal Reserve System
I am not in a position to, nor am I going to comment on whether this organizational structure is a good one or not. However, I do think that the proposed structure should not be a surprise to anyone with a memory that goes back to the previous administration. In 1999, the Congress passed and then President Clinton signed the Gramm-Leach-Bliley bill, also known as the Financial Services Modernization Act of 1999. This Act revoked the Glass-Steagall Act, passed in the 1930s. Glass-Steagall had, among other things, separated commercial and investment banking in the wake of the 1929 Stock Market Crash and the onset of the Great Depression. But Gramm-Leach-Bliley removed that separation. Indeed, it opened the financial markets up to new combinations - allowing banks to buy stock brokerages and insurance companies; brokerages to purchase banks and insurance companies; and insurance companies to set up or purchase brokerages and banks. At the time, many people feared a wide-scale rush to conglomerate that never happened. But the important part of the legislation, at least for purposes of this post, was to allow the existing regulatory structure to stay in place, but to name an "umbrella regulator" for some of the ensuing combinations. The "umbrella regulator" was given responsibility for overseeing and/or coordinating the activity of other regulators when it came to banks and bank holding companies that combined the firms.
And here's the relevance to this post. That "umbrella regulator" was the Federal Reserve. Part of the reasoning, as I understood it back then, was the potential for combined firms to present a problem for banks, and ultimately for that to manifest itself at the Fed's Discount Window. Now, to my knowledge, the increased responsibility did not result in a huge expansion of the Fed's staff or powers. This may be because the anticipated amalgamation of financial firms never came to fruition. But the framework, at least in theory, was put in place. In my opinion and given the situation, the resulting restructuring that we now are hearing about is the logical next step from Gramm-Leach-Bliley.
This is a significant restructuring, to be sure. But it should not be labeled as a "surprise," at least not in my opinion. But, as always, your opinions and comments are welcome. Do you think this is a "historic" moment in U.S. financial history? Or is it another step in the evolution of the nation's central bank?
I am not in a position to, nor am I going to comment on whether this organizational structure is a good one or not. However, I do think that the proposed structure should not be a surprise to anyone with a memory that goes back to the previous administration. In 1999, the Congress passed and then President Clinton signed the Gramm-Leach-Bliley bill, also known as the Financial Services Modernization Act of 1999. This Act revoked the Glass-Steagall Act, passed in the 1930s. Glass-Steagall had, among other things, separated commercial and investment banking in the wake of the 1929 Stock Market Crash and the onset of the Great Depression. But Gramm-Leach-Bliley removed that separation. Indeed, it opened the financial markets up to new combinations - allowing banks to buy stock brokerages and insurance companies; brokerages to purchase banks and insurance companies; and insurance companies to set up or purchase brokerages and banks. At the time, many people feared a wide-scale rush to conglomerate that never happened. But the important part of the legislation, at least for purposes of this post, was to allow the existing regulatory structure to stay in place, but to name an "umbrella regulator" for some of the ensuing combinations. The "umbrella regulator" was given responsibility for overseeing and/or coordinating the activity of other regulators when it came to banks and bank holding companies that combined the firms.
And here's the relevance to this post. That "umbrella regulator" was the Federal Reserve. Part of the reasoning, as I understood it back then, was the potential for combined firms to present a problem for banks, and ultimately for that to manifest itself at the Fed's Discount Window. Now, to my knowledge, the increased responsibility did not result in a huge expansion of the Fed's staff or powers. This may be because the anticipated amalgamation of financial firms never came to fruition. But the framework, at least in theory, was put in place. In my opinion and given the situation, the resulting restructuring that we now are hearing about is the logical next step from Gramm-Leach-Bliley.
This is a significant restructuring, to be sure. But it should not be labeled as a "surprise," at least not in my opinion. But, as always, your opinions and comments are welcome. Do you think this is a "historic" moment in U.S. financial history? Or is it another step in the evolution of the nation's central bank?
An Economic Way of Thinking about Romeo and Juliet - Act Two
Scene one finds Mercutio and Benvolio seeking for Romeo. They still think he is enamored of Rosaline. But they are wrong. As they disappear, the scene melts into the second scene – the famous balcony scene. And in this scene, there is much ado about choosing. They debate whether to choose other names. They choose to be with one another rather than avoid discovery – even though the choice has a cost. They ultimately choose to marry. The young lovers respond to the incentives – each other’s company and going against the institutions of familial prohibitions. This last choice is not unusual, certainly not for teenagers. And it is a choice grounded in something economists refer to as “psychic income.” This is an emotional profit from an interchange or transaction. And it provides to be as valid an incentive as monetary income. Our lovers choose, and in choosing respond to incentives.
The third scene is fairly short. It takes place in Friar Lawrence’s cell. Romeo arrives and informs the good Friar that Rosaline no longer is the object of his affection. He then requests that the cleric unite him and Juliet in matrimony. A choice thus appears. The good friar’s incentive is to unite two feuding houses and thus restore peace to the city. Given his profession, it’s hard to see how he can resist. (Actually, we can make a case that given his profession it’s hard to see why he would accept.) But incentives act differently on individuals according to their values. Once again, we have incentives (bringing peace to Verona through marriage), and choice (agreeing to unite Romeo and Juliet in matrimony).
Likewise, scene four offers little for us to analyze. A good portion of the scene is made up of taunting and jesting between Mercutio, Benvolio, and Romeo. At some point they are joined by Juliet’s Nurse who brings tidings to Romeo. Romeo, in turn, asks the nurse to bring Juliet to the chambers of Friar Lawrence for the wedding ceremony, and later to provide a rope so that Romeo can scale the Capulet wall and join Juliet for a honeymoon. The nurse readily agrees. The only real example of economic thinking in this scene is a brief speech by Romeo in which he describes the circumstances in which he would draw a weapon and come to the Nurse’s aide. In short, we have some insight into how people choose. Specifically, we now know some of the incentive that would move Romeo to choose to fight. This is not to say it is the only incentive, as we shall see. But, it does allow us to examine some of his values.
Scene five is short but has a clear statement of choice. Juliet’s nurse brings Romeo’s message. She recounts the incentives for choosing Romeo – many of which are physical. And then presents Juliet with the decision, telling her that if she would marry Romeo, she must go to Friar Lawrence’s cell. We are actually left hanging, but Nurse implies that Juliet is leaving, for she goes to find the rope ladder. The incentive (marriage and being with her love) is in place and Juliet chooses.
The third scene is fairly short. It takes place in Friar Lawrence’s cell. Romeo arrives and informs the good Friar that Rosaline no longer is the object of his affection. He then requests that the cleric unite him and Juliet in matrimony. A choice thus appears. The good friar’s incentive is to unite two feuding houses and thus restore peace to the city. Given his profession, it’s hard to see how he can resist. (Actually, we can make a case that given his profession it’s hard to see why he would accept.) But incentives act differently on individuals according to their values. Once again, we have incentives (bringing peace to Verona through marriage), and choice (agreeing to unite Romeo and Juliet in matrimony).
Likewise, scene four offers little for us to analyze. A good portion of the scene is made up of taunting and jesting between Mercutio, Benvolio, and Romeo. At some point they are joined by Juliet’s Nurse who brings tidings to Romeo. Romeo, in turn, asks the nurse to bring Juliet to the chambers of Friar Lawrence for the wedding ceremony, and later to provide a rope so that Romeo can scale the Capulet wall and join Juliet for a honeymoon. The nurse readily agrees. The only real example of economic thinking in this scene is a brief speech by Romeo in which he describes the circumstances in which he would draw a weapon and come to the Nurse’s aide. In short, we have some insight into how people choose. Specifically, we now know some of the incentive that would move Romeo to choose to fight. This is not to say it is the only incentive, as we shall see. But, it does allow us to examine some of his values.
Scene five is short but has a clear statement of choice. Juliet’s nurse brings Romeo’s message. She recounts the incentives for choosing Romeo – many of which are physical. And then presents Juliet with the decision, telling her that if she would marry Romeo, she must go to Friar Lawrence’s cell. We are actually left hanging, but Nurse implies that Juliet is leaving, for she goes to find the rope ladder. The incentive (marriage and being with her love) is in place and Juliet chooses.
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