Tuesday, March 20, 2007

Inflation and Real Income at the Time of Voltaire

One of the benefits of having access to a number of economic journals is serendipity. I am on the circulation list for a copy of the Journal of Political Economy (JPE) published by the University of Chicago. While I admit I frequently don't understand many of the articles, I always enjoy the back cover.

The back cover of the JPE always has a literary excerpt that illustrates an economic concept. The February 2007 issue (Vol. 115, No. 1) has a piece on Labor Markets and Monetary Policy taken from Voltaire's The Age of Louis XIV. It is an excellent illustration of the relationship between, money, inflation and real wages.

"[W]hile everything else has increased, the sum total of the currency, the quantity of gold and silver bullion, the price of commodities, nevertheless the soldier's pay has remained the same as it was two hundred years ago; foot soldiers receive five sous in cash just as they did in the time of Henry IV. Not one of all these ignorant men, who sell their lives so cheaply, is aware that, taking into account the raising of the currency and high prices of food and commodities he is receiving about two-thirds less than the soldiers of Henry IV. If he knew it and demanded an increase of two-thirds of his pay, he would have to be given it; in that event every European power would maintain but one-third of its present troops, the forces would remain in the same proportion, and agriculture and manufactures would profit by it."

This piece illustrates a number of points. You may point out that a depreciation of 66% over two hundred years is not extreme. You may find many who would agree with you, but it still significant. The explanation may be that an inflation rate that low is barely noticeable over the working life of a soldier of the time. Nevertheless, it is still illustrative.

Additionally, I would point to the last sentence. The idea of all the powers of Europe reducing their armed forces by two-thirds but maintaining their proportional strength, while maybe not likely is an interesting mind exercise. And the secondary effects are also important. If the standing armed forces are reduced, this has the possibility of increasing productive labor and with it, national wealth. (I won't even go into lost wealth due to pillage - a method of increasing one's military pay, at the time.)

As always, your comments are welcome.

Posted by TSchilling at 1:57 PM Comments (0)

Monday, March 12, 2007

People Respond to Incentives, Apparently

An entry in the Monday, March 12, 2007 issue of The Wall Street Journal (subscription required), asks "What Is a Tooth Worth?" The story states that $1 is the usual cost, but then recounts one youngster who saw that increase to $2 when a tooth was lost in a bicycle accident (for the extra pain). The same child then saw the price on his two front teeth net $5 (evidently because of their prime location); and a further escalation to $10 when he lost a tooth on a Florida vacation. According to his mother, the child spent the next few days of vacation trying to dislodge additional teeth. Go figure.

There's more information as the story continues, but I found this a great example of price as a message.

As always, your comments are welcome.

Posted by TSchilling at 3:21 PM Comments (0)

Tuesday, March 6, 2007

Of Legos, Assumptions, and Economics

I've been following a story about a classroom experiment involving Legos that first came to my attention in the TCS Daily blog. It originally struck me as interesting and perhaps an example of well-intentioned individuals without an adequate background in economics.

However, since the story first broke, it has been picked up and commented on in a number of places, including Don Boudreaux at Cafe Hayek and Stephen Karlson's Coldsprings Shops (see the 3.3.07 entry). Not only were the posts interesting, but the comments frequently were heated, and numerous. As a result, I decided to dig a bit deeper.

I found the original article in the archive of Rethinking Schools. After reading the article, I jotted down a number of thoughts and would be interested in hearing your thoughts, as well, as I think the whole experiment speaks to the issue of economic systems and economic institutions (the formal and informal rules or traditions we put in place to guide decision-making). All of my thoughts were generated as a result of the original Lego town being destroyed. While there were some interesting things (positive and negative) going on prior to that, the article was focused on the experiment the teachers put in place after the destruction.
1. The teachers indicated they did not want to just step in with new rules, but hoped to guide the students in developing a different system. Yet, they removed the Legos until a system was developed under their guidance and that reflected their desired outcomes.
2. The teachers shared their personal views about property and power, yet no one seemed to defend the role of property in an economic society. Essentially, only one view appeared to be put forth. It seems that I learned somewhere that our institutions and systems are based on the assumptions we make. If the assumption is that property is "bad", then that assumption may drive the development of the rules and the system.
3. There was a discussion with the children that seemed to focus on the topic of giving vs. sharing. I did not see any parallels drawn to the concept of charity. And I concluded (perhaps wrongly) that charitable work was seen as a power issue as opposed to a moral imperative. Again, assumptions at one level may have influenced the development of the rules.
4. The issue of limiting home sizes would have been an ideal opportunity to discuss planned growth and zoning in as much as it relates to urban economics. These are real issues that can and should be discussed at some point to promote economic understanding.
5. I questioned the establishment of a trading game as a mechanism for allocating resources. First, I think trading involves a different incentive structure than building as it promotes short-term over long-term considerations. Additionally, when the trading is compulsory vs. voluntary exchange, you introduce a different incentive structure that goes beyond what many economic systems try to achieve.
6. As I understood the article, the rules eventually limited personal choice to the design of the child's Lego person. I have visions of Levittown in my head.
7. Finally, the comment that houses were "public structures" seemed to imply that one could be excluded or moved, not unlike being voted "off the island." After all, if the structure is public, the public would seem to have the power to allocate resources to and for the individual.

Admittedly, some of these thoughts formed hastily, and I may comeback and update this entry. But I'm interested in your thoughts.

Posted by TSchilling at March 6, 2007 10:22 AM

CommentsWow! I almost couldn't believe what I was reading. I agree Tim. These teachers missed a great opportunity to teach their students some real economics, instead of pursuing of their own political ideas. I wonder if this was what "reeducation" in China was like.

Posted by: Amanda G. at March 21, 2007 3:53 PM

Clearly the teachers at Hilltop completely missed the mark and squandered an opportunity to teach their students about the way that our economy really works. I'm particularly concerned that teachers across the country are going to look to the Legoland activity, with the assumptions established by the teachers in Seattle, as a good learning experience for their students. My longstanding belief that all teachers in the United States should receive pre-service and ongoing in-service training in teaching economics in the K-12 classroom is further confirmed by the numerous erroneous lessons the Hilltop teachers taught their students with the Legoland activity.

Posted by: Andrew H. at March 28, 2007 2:18 PM

The teachers in Seattle clearly do not understand the U.S. economy. They missed the opportunity to teach important economic content that every student should learn as an informed citizen--the connection between private ownership in the economy and democracy. Sadly, Andrew is right. Other misinformed teachers will read this article and see this as an opportunity to impose their own economic misunderstandings on their students.
This example of an experiment gone bad certainly provides further evidence of the need for economic education for teachers.

Posted by: Mary S at March 28, 2007 5:01 PM

Your comment about the teacher's assumptions driving the discussion was dead on. The article seemed to imply that the children's responses came purely from their own ideas without any influence. It's as if the teachers didn't realize just how manipulative their assumptions were. I also think it's sad that no discussion was made about how resources are most efficiently allocated. I was a little confused by the rules at the end. The buildings were publicly owned but the builder had complete control of its design. Since the whole point of playing with legos is deciding how to build things, doesn't that essentially make the builder the owner?

Posted by: Aaron Johnson at March 29, 2007 10:39 AM

There appears to be an opportunity to put together a lesson illustrating the tension between inequality and creative destruction that the teachers missed in their efforts. But for preschoolers? Hmmm...

Posted by: Stephen Karlson at March 30, 2007 6:17 PM

Friday, March 2, 2007

Economics of John Adams

I am currently reading John Adams: Party of One, by James Grant. People who know me well know I have long been interested in the second President, and I have read a number of biographies of him and other members of his family. I will probably review this book thoroughly when I finish, but I have found something worth noting.

Grant examines the economic John Adams in a way that few authors have. I'm only about half-way through the book, and I've been struck by several things: Adams' view on national wealth, which strongly paralleled Adam Smith's (he saw the true wealth of the North American state lying in its people and institutions, not its resources); his concern with monetary policy, specifically the over-issuance of money by the Continental Congress; the tendency of the same body to write too many checks against loans secured in Europe; and Adam's personal view on borrowing. He personally found it loathsome to borrow, and would sell his assets (at one point, even considering selling parts of his personal library) before borrowing. Yet he managed to convince the risk-averse Dutch financial community to extend a loan to a fledgling entity that, at that point, had only been recognized by the French court.

For teachers looking to integrate some economic topics into an early American History course, or make some connections to other learning in an economics course. This book offers some interesting insights.

As I said, I'll review more thoroughly when I finish. But in the interim, this book can make you think beyond the normal biography of the person and the period. Your thoughts are welcome.

Posted by TSchilling at March 2, 2007 9:59 AM

Posted by: Mark Thoma at March 2, 2007 12:35 PM