Sunday, June 26, 2011

Examples of Transaction Costs and Inefficiency in Pop Music

I was driving to conference session and was listening some music in my car.  When Runaround by Blues Traveler came on. It occurred to me that the lyrics dealt with an efficient exchange.  The fact that the parties were not trying to minimize the transaction costs, i.e. they were erecting impediments that kept them from reaching an agreement. 

As I thought further, I thought of two more songs (both considerably older) that also dealt with the same issue to some extent.Those were Hello, Goodbye by The Beatles and Let’s Call the Whole Thing Off by George and Ira Gershwin. In both cases, the inability or unwillingness to communicate (transaction costs) is causing a failure of consensus and efficient “exchange.”  None of the songs are perfect, but they may be helpful in setting up the discussion or topping off discussion.  What are your thoughts? Will this work? Does it work?  I know I’m going to try it. I'm also interested if you can think of more recent examples or songs from different genres.

Friday, June 24, 2011

Wealth and Income Effects of Monetary Policy

Back when I worked for the Federal Reserve Bank of Chicago, there were a couple of issues that had to be dealt with repeatedly. One was the limitations of monetary policy – there were certain macroeconomic goals that were easier than others to address through monetary policy. The other was the fact that monetary policy was a broad tool.  One could not really initiate policy to affect a narrow sector of the economy – too often it had effects on other areas.

This latter is illustrated well in an opinion piece (free content at time of this writing) from today’s edition of The Wall Street Journal . The piece is critical of the Fed’s monetary policy move referred to as QE2.  The charge is that it was meant to have a specific effect on financial markets, but has had unintended consequences in other markets, such as commodities.  While I don’t pretend to know whether this is true or not, the piece does explain how QE2 resulted in wealth effects and income effects.  And it is there that it provides a service for those of us who teach.

In explaining the linkage between an accommodative monetary policy and prices (of both securities and commodities) it can be used to help students understand the wealth effects (confidence arising from rising stock prices) and income effects (falling real income) that accompany the changing value of the dollar.

You might want to take a look. Let me know if you agree.

Specialization and Trade vs. Self-Sufficiency.

This is why trade makes us better off...we all can't be good at everything. Of course there is the satisfaction (utility) you receive from doing it yourself.

Thursday, June 23, 2011

Vanity, Thy Name is License Plate

If you look in today's edition of The Wall Street Journal, you will find this amusing "puzzle" to share with your students. The set-up, Marshall and other 19th century economists noted that producer cost was the sole basis of price. Consumer value had to play a part, as well.  Essentially the consumer's willingness to pay had to relate to the utility they received.

What utility is received from a vanity plate?  I was taught that there were three kinds of utility - form, place and time.  I have my idea, but I'd be interested in your thoughts.

Tuesday, June 21, 2011

Changes in Economic Thought

I know not everyone shares my interest in and enthusiasm for the history of economic thought. But for those who do, here is an article freom the most recent issue of Region Focus, published by the Federal Reserve Bank of Richmond. (HT to Cafe Hayek)

The author examines how the most recent crisis caught the economics profession napping, and suggests how the crisis may change the profession. It provides some basic insights into how economics has changed over the years as a field of study. And for those of you who regularly seem to have students who are enraptured by the subject, this might be something to share with them. I hope you find it as interesting as I did.

Thursday, June 16, 2011

Out of Poverty: Financial Institutions and Economic Development

Here's a news release (HT to Marginal Revolution) that could be useful a number of ways.  It's about some research that came from data collected by Dr. Robert Townsend of MIT. It the article speaks to the role of saving in helping people out of poverty. But I think it would be useful when discussing financial systems, institutions (the importance of saving), and the formation of capital. There are links to various articles, working papers and a book on Dr. Townsend's page. I'm also adding the book in my carousel at left. I hope to pick up a copy soon. Then I will share my review.

Friday, June 3, 2011

For the Next Time You Teach Monopolies

Here’s a very good article from The Economist on substitutes and why monopolies don’t have absolute power in the marketplace. (Thanks to Carpe Diem for the pointer.)

I know I’m constantly dealing with the perception that monopolies have ultimate pricing power. I face it with my high school students, my undergraduate students, and occasionally even with graduate students. 

They seem to forget a factor in demand is the availability of substitutes.  And as prices rise, the search for substitutes often gets more intense. Once those substitutes are found and economies of scale can kick in, (this can be a significant period of time) the monopoly may suddenly find itself the victim of creative destruction.

There are other factors to pursue, of course. But this has the potential be a great discussion starter or an anecdote to toss into discussion.

Thursday, June 2, 2011

Elevator Externalities

Here's an interesting little mind exercise courtesy of a couple professors at Northwestern.  I think the set-up could be a great discussion starter, don't you?
HT to Marginal Revolution for the pointer.