the conscience of economics

Taxes and Beer — Bar Stool Economics

"Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this…

"The first four men (the poorest) would pay nothing. The fifth would pay $1. The sixth would pay $3. The seventh would pay $7. The eighth would pay $12. The ninth would pay $18. The tenth man (the richest) would pay $59."

The story goes on to explain that a reduction in the price of beer will ultimately affect those who pay the most more positively than those who don’t pay anything or pay less. The analogy suggests that taxing the wealthiest will lead them to do business elsewhere, ie. abroad.

To some extent, this is true. Conservatives and liberals are quite likely to bicker about how much of this is true, of course. But either way, progressive tax systems are designed to target the wealthy to some degree. 

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Three Big Changes in the World of Economics — Noah Smith

”[…]some big things have changed in the field of economics, and America should know about themThree big changes stand out in particular: Econ today is more data-driven, far less politically conservative, and in general much more like engineering than it used to be.”

From theory to data

As of 2011, only 30% of papers published are theoretical works. The usual form is a sort of “structural estimation”, a blend of theory and empirical work. People are demanding proofs now, ideas backed up with hard evidence. With the information available today, it’s difficult to avoid using it.

From laissez-faire to liberal

People have come to realize that markets aren’t perfect and that no government intervention isn’t viable. Markets fail. People aren’t always rational. There is a tendency of economists to favour, to some degree, government intervention.

From policy to engineering

The rise of auction theory has resulted in a boom in private-sector hiring of economists by technology companies (including startups). Auctions are one of those situations in which the “agents” are close to perfectly rational–just the type of case that the theorists of decades past liked to sit around and theorize about. This theory worked. And what works, makes money.” See Google as an example of this. Theory has taken to prediction beyond policy making.

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Gary Becker — The Economist

"At the heart of Mr Becker’s work was the view that “individuals maximise welfare as they conceive it.” Welfare need not mean income; it could derive from the pleasure of altruism or the thrill of deviancy. But critically, this thesis implied that people respond to incentives—a realisation that opened the door to insights across the whole range of human activity.

"Mr Becker first used this approach in his doctoral study of discrimination, a raw issue in 1950s America. At the time economists’ models assumed that employers cared only about productivity, whatever the colour of the worker. Shunting this view aside, Mr Becker instead assumed that many individuals had a “taste for discrimination”, and perceived themselves to be worse off when forced to work alongside people of other races. He then explored how this preference affected labour markets.

"In America, where the black population was roughly one-tenth of the total, discrimination against blacks led to relatively small reductions in white incomes but far more substantial ones for black workers. In South Africa, with a far higher proportion of blacks, discrimination brought much larger reductions in incomes across the economy. Mr Becker pointed out that although competition from more rational firms might gradually eliminate corporate discrimination, market forces alone would rarely erode discrimination rooted in the tastes of workers or consumers. His book on the subject, “The Economics of Discrimination”, became the foundation for subsequent research."

mmmmbeefy96:

Carl Menger the intellectual founder of the Austrian school of economics, his famous contribution to economics is the theory of subjective value.
Eugene Bohm von Bawerk’s works on capital and interest and his criticism of the Marxist labour theory of value and exploitation theory help set the Austrian school.
Ludwig von Mises’ is by far one of the most important, however overlooked, economist in the twentieth century.
Friedrich Hayek’s work on business cycle theory led to him being given a Nobel Memorial Prize in Economics and a revival in interest in the Austrian school.
Hazlitt is the physical reincarnation of the classical liberal philosopher and economist Frederic Bastiat. His articles and books have led to many a new converts for the libertarian movement.
Murray N. Rothbard while alive was the spearhead of the libertarian movement. He influenced many including the famed politician Ron Paul.

mmmmbeefy96:

Carl Menger the intellectual founder of the Austrian school of economics, his famous contribution to economics is the theory of subjective value.

Eugene Bohm von Bawerk’s works on capital and interest and his criticism of the Marxist labour theory of value and exploitation theory help set the Austrian school.

Ludwig von Mises’ is by far one of the most important, however overlooked, economist in the twentieth century.

Friedrich Hayek’s work on business cycle theory led to him being given a Nobel Memorial Prize in Economics and a revival in interest in the Austrian school.

Hazlitt is the physical reincarnation of the classical liberal philosopher and economist Frederic Bastiat. His articles and books have led to many a new converts for the libertarian movement.

Murray N. Rothbard while alive was the spearhead of the libertarian movement. He influenced many including the famed politician Ron Paul.

Four Characteristics of Market Economies

Self-organization is produced by a few different pieces in modern market economies. They are what make markets efficient (in economic terms, of course) and ordered.

  1. Self-Interest: we all buy and sell what we reason as best for us. We work to maximize our utility and profits with what resources we have.
  2. Incentives: the price mechanism is an incentive, as we wish to sell more when prices are high and buy more when they are low. 
  3. Market Prices and Quantities: sellers compete and buyers choose landing us with prices and quantities as determined by this free exchange.
  4. Institutions: laws, contracts, rules… Market activities are all government by institutions mainly created by governments. 

These characteristics have markets behaving as if guided by an invisible hand, to use Adam Smith’s phrase. This refers to the order that emerges from decision making by consumers and producers.

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."
— Adam Smith
Stocks vs. Flows

Distinguishing these concepts separately is very important in many economic discussions. A flow includes a time dimension, for instance, my cat meows four times an hour. If I said my cat meows four times, that would be a stock variable. It has value at a given point in time, rather than over some period. 

Many textbooks and papers like to use the bathtub analogy. The tub holds a given amount of water at any moment. The flow occurs at the tap, and is measured per time unit. 

A country’s GDP relies on the idea of flows. When a car crash occurs, stock is destroyed but flow is created. GDP measures that increase in expenditure dedicated to replenishing the lost stock. 

"There are two things economists fear: one, that things will never get back to normal; and two, that things already have."
"To understand the Great Depression is the Holy Grail of macroeconomics."
— Ben Bernanke
Russia’s Not-So-Little Problem

While the news has been full of what’s going on with Russia and the crisis in Ukraine how how the world is reacting to it, Russia has another situation to face. Sure, its economy was struggling before the crisis, but it’s only getting worse. According to the technical definition, a recession is exactly what we’re looking at.

The Guardian points to five main problems:

  1. The manufacturing sector was starved for investment, and is now uncompetitive.
  2. Lack of industry has pushed the economy to depend even more on oil and gas.
  3. Capital flight has occurred due to the crisis and, of course, endemic corruption.
  4. The value of the rouble has fallen from this outflow of investment and capital.
  5. Sanctions have had an negative (but indirect) impact.

With high oil and gas prices, the economy remains relatively stable. The best case scenario, as Russian government forecasters say, is zero growth over the next two quarters of 2014.