Bikes and Carrots Programming Note

I'm putting together a post on that I hope will help you understand why, after passing a 700-billion dollar bail-out, the markets remain in turmoil.

In my last Carrots and Bicycles post I mentioned that I wanted to look at what happens when you view your microeconomic choices when faced with macroeconomic realities.

If you have time over the weekend, I recommend that you view this video, from Annenberg Media. What we're going to be looking at next week is the C + I + G curve, and some curious effects on you and I as individuals as government attempts to fix things. If you haven't signed up for Annenberg Media yet, please do so. It's free and fast. After you've signed up, look for Program Number 14, "Stabilization Policy". Of all the information you can get over the next few days, having an understanding about the differences between Monetarists and Keynesians is probably one of the most important distinctions I can ask you to have.

To put it into shorthand, most Republican economists are Monetarists. Most Democrats are Keynesians. The reason for this difference I think is that the Keynesian model is so simple. It approaches macroeconomic theory with the tool-kit of the microeconomist, and offers simple solutions to complex problems.

And then the Keynesian wonders why things don't work. Their conclusion is that there must be some sort of perversion in the market, and that requires greater regulatory control. You and I know that less, rather than more regulation is what markets seek. So I guess it's time to tell you, we're going to be looking at diseconomies; the things that cludge markets up.

Watch the video. Please.

The Curious Impulse to Control Others

It's not up to me to fix everything.

You're okay with that, right?

Likewise, isn't it true, that I really shouldn't expect you to "fix everything", either?

So, what is it that you can really expect me to do, just as much as what should be my reasonable expections for you doing anything to "fix everything"?

Answer? Not a lot. Why would you either expect me to fix everything for you, or have me expect you to fix everything for me?

When we break down how people actually work together, it's pretty simple to see that I'm okay with you going off and living your own life. You want to spend your weekend gardening, uh, okay. Want to run off to the hills and run your trax? Still okay with me.

In fact, whether I want to spend the next hour playing the piano, or sitting here typing is of little moment to you, your life, your family and your friends. I "get" that. (Although you'd be missing some very inspired interpretation of Claude Debussy. If I were on the piano.)

When you go to work, when you decide to clean your house, most of what fills your life is determined by the most important person in the world: you. Whether you buy a new car, or even if you pay your bills, why is that important to me?

All of the little details of our lives we face, we make the choices of what we do by our read of what we need do. Sometimes what we need do is golf. But, generally, if you grew up with some reasonable semblance of authority, you've learned there are things you've gotta do. Wanna keep your job? Best show up on time and do your best to earn the approval of your boss and your peers. Wanna keep your apartment? Best to pay your rent on time...and earn the approval of your landlord.

You own a car or you own a bike. Either way you've learned it best not to swerve in and out of traffic when you're on the road. You didn't need to learn a lot of rules. Given man's inherent capability to intuit outcomes, you could "see" that swerving our bike in traffic could end up killing you. True, too, with an automobile.

So much of what we do is in this sense, unregulated. Governments couldn't exist, nor could they have formed, if there was a need for regulation to exist in order to provide form and function for our everyday activities. Most days, most times, we live as if there was no government at all. The most common intrusion of government in our lives is when we see a cop car in our rear-view mirror. And, just curious, what is your reaction when you see a cop car in your rear-view? Even if you're "clean", there's an appreciation that for a moment, you and your life are at risk. Risk of delay, risk of embarrasment, risk of a ticket. One day I watched a car with two little old ladies in it get pulled over by an Astoria Police officer and she walked up with her hand on her side-arm. Like, can you do a risk assesment? Better get that weapon ready, these septuagenarians could decide to bolt! And anyway, what would you think if you saw a cop walking up to you with his--or her, in this case--hand on his gun?

It should be obvious, if I've done my job of writing effectively, that mostly we don't want or need government. In the first case, it's because not much of what we do is either the concern of anyone but ourselves, but the fact is, what you or I choose to do at any particular minute is normally no one's concern but for ourselves. In the second case, we perceive the danger of what can happen when we become threatened with involvement with that power that is held by our government. It is our natural sense of things that we're better off at further than arm's length distance from government in its various forms.

Who has the right to tell you what to do, anyway? There is an old concept of law that addresses the "who" in who has the right to tell you what to do. (Be aware, that this old concept is under attack by groups such as teachers' unions.) That this seigniory exists between parents and their children. That this relationship exists between and man and his wife. That parents have the right to demand behaviour from their offspring, just as a spouse can demand a certain level of obeisance from her husband.

Again, when we look at our natural behaviour, such things, such as seigniory, aren't issues for debate. Most of us neither need nor require government.

When you hear conservatives grumbling about the reach and scope of government, it is against this backdrop of what naturally regulates our lives that is at the root of this grumbling. There are certain government services which are defined as necessary. Fire protection. Police services. You gotta love the Coast Guard. Throw in the military and you have a pretty good idea of what types of services are necessary services of governments, and that, due to the level of complexity of our society, that there are additional services that governments can provide at a level that matches need, for the lowest possible cost. If you're going to organize a port district and levy a tax against property owners resident within the district, you're going to need to have a governmental organization responsible for the taxes gathered, the the decisions to spend those taxes, that is accountable to the voters of that taxing district.

So we add services to what is referred to as the Public Sphere.

You see, we have a Public Sphere as well as a Private Sphere. Now the idea behind a separation between the Public and Private Spheres has been around as long as I can remember. In the "old days"--back before SB 100--there were pretty clear lines between what the scope and role of government should be, and that those things not within the scope and role of government remained in the Private Sphere. Twenty to thirty years ago, the idea of a limited government was still pretty much in vogue. As government intervention into the private sphere has expanded, through measures which are set up to protect us from ourselves, we find that we have fewer and fewer choices that we can actually make ourselves. Your kid wants to ride his bike? Does he have his helmet on? Wanna drive to the store? Do you have your seatbelt on? Wanna sit in a bar and have a beer? You better not smoke. Nope, you can be one of Oregon's 75-thousand problem gamblers, putting your life, your family's life, your home at risk, but you'd better not smoke while you're sitting in that bar. In some areas of the state, the decision whether to plant or cut a tree in your own yard is regulated.

And yet, the same basic truth is, we really don't want or need government. But government has been our biggest growth industry for the last 30 years. And the plans are, we're going to take huge increases in government programs starting next year.

I get lots of mail each day. There's too much bad news to reprint at times. The past week has had some doozies. Remember Kitz? Former Oregon governor John Kitzhaber has been a stalking horse for the Kulongoski experience. Kitz has kept his hand in, both with community organizations and with the Left-wing base. Here's his latest, in the form of his "We Can Do Better" campaign. Go ahead and open this link up in a new window and scroll down to paragraph four.

"We must also deal up front with the economics of the transition period by openly exploring how the various stakeholders would need to change their business plans to profit within the context of the new design elements."

Translation? We're going to spend a heckuva lot more money chasing a scheme for government provided health-care in Oregon. Even if we don't want it and can't afford it. And for businesses that don't sign up with the plan? It sounds like resistance will present an existential threat.

Let's skip over to our state's treasurer. In an amazing press release, the Treas wants to assure you and our state's legislators that things are okay! Well, gee! Golly! What you don't find out unless you look for it is that Oregon has lost two percent of it's Oregon Short-Term Fund(pdf)! And this is just that amount of exposure related to Lehman Brothers. No word on what portion of the state's portfolio is in the securitized mortgage market through other investment sources. We know there's no market for these holdings, so we'll have to wait and see how bad it turns out.

Good thing he wrote a letter letting folks know that things are okay!

Coming up next week? The State Board of Forestry is meeting in Forest Grove to work on plans to further screw up our timber resources. Leading the agenda towards this new Vision for Oregon's forests?

Developing the alternative approaches is tied to the Board of Forestry's work plan to improve forest management plans on state forests. The Oct. 15 information-sharing session is the second such meeting scheduled by ODF. The first meeting was held in late August.

The results of computer-generated models of alternative management scenarios will be shared. The scenarios were developed to achieve performance measure targets set by the Board of Forestry last November.

A report on the computer outcomes, along with a recommendation, will be presented to the Board of Forestry on Nov. 6.

Both quantitative and qualitative targets were established for nine performance measures, which represent environmental, social and economic outcomes resulting from the management of these lands.

Hooray! We're going to make sure harvesting timber represents social outcomes! Yippee!

There's more. Expansion of Oregon's spending on health care, interfering with energy production oh, and a Day of Culture. Thank God we have the government we need in times like these.

See, we really don't need all this government. We're better off without it. But on the Left, when things get screwed up because we have too much government involved with everything from housing to Culture, they press for more power, more money and more authority. Which leads one to make a fairly natural comparision.

Can you name another group of folks who keep demanding increases in power, money and authority, and continue to fail to do a good job on a daily basis? Well, yeah. That would be teachers and the teachers' union, wouldn't it?

Have a nice day!

Carrots Riding Bicycles: Market Equilibrium II

In my post on Bicycles and Carrots I introduced a lot of terms that are used by economists. Let me list them as I introduced them:

Equilibrium.
Market.
Free market.
Buyers.
Sellers.
Barriers.
Widget.
Perfect substitutability.
Static Analysis.
Dynamic Analysis.
Moment.
Utility.
Value.
Fungible.
Exogenous variables.
Endogenous variables.
Ceteris paribus
Complexity.
Tastes and preferences.
Choice.
Policy.
Fairness.

When we left, you had carrots and I had apples. When we met, I wanted a carrot but you were unwilling to give up a carrot, even if I had given you one or both of my apples.

At that moment, the market for apples and carrots were in disequilibrium, since more carrots were demanded than the market was willing to provide. The question that is begged is; is this lack of equilibrium in the market a good thing or a bad thing?

Did you know that there are two schools of thought? One school is denominated by objective study. The other school is denominated by normative study.

Let’s take a look at our market equilibrium condition, and at the moment of disequilibrium we magically replace my apples with widgets and your carrots with widgets. You want to trade, and I don’t. (Take a look at the last post to understand the concept of “widget”.) If we trade, you still have two widgets and I still have two widgets. Is the market in equilibrium if I refuse to trade? if I do trade?

Let’s take a look at the market for widgets.






The widget market is determined by cost and price. (And since we’re using the perfect widget, the cost of a widget is equal to the price of a widget!) What we find is that the market equilibrium cost and price of a widget is defined by the intersecting lines of the Widget Supply and Demand curves. (Yes, they’re straight lines, but remember, this is a static analysis…in a dynamic analysis the lines would be curved. There’s a more elaborate mathematical explanation available here, just live with the fact that these straight lines are called “curves”.)

What is the ideal price of a widget? One widget. What is the ideal cost of a widget? One widget. And when the cost of supplying a widget equals the price paid for a widget, it is at that moment that the market has established its equilibrium. At One Widget, one will be provided, one will be purchased. Equilibrium.

But what is the advantage to the holder of either widgets or widgets? Markets like this don’t exist, because there’s no advantage to either seller or buyer to participate in the market. No one is better off (although no one is worse off) and I can’t think of a reason to set up a market for trading goods that provide no advantage to either the seller or the buyer. Can you?

So, if we are going to define what a market is, we need to introduce the idea that somehow, as a result of a market transaction, that either the seller or the buyer must see some advantage to himself as the direct result of a market transaction.

We’ve looked at several terms that help us express ways of describing this “advantage”. Utility, value, tastes and preferences. Because we—you and I—are perfectly rational actors, we can see that trading widgets offers neither you nor I any comparative advantage as a result of a trade. So while the market is in equilibrium, no trading takes place because there’s no comparative advantage to either seller or buyer.

So, is equilibrium in the market a good thing?

You hear a lot of talk about “sustainability”. Terms like sustainability and equilibrium are used a lot by politicians and teachers. But what is the value of equilibrium itself? Equilibrium as equilibrium has no value. There is no market because both seller and buyer see that the market cannot benefit them. So, let’s look at the way we create a market where either the buyer or the seller is better off. That is, they have received an advantage as a result of participating in the marketplace.

One of the popular criticisms of markets, and market-driven economies (known as capitalists systems) is the discovery of greed. From Merriam-Webster we get this: “Acquisitive desire beyond reason; greediness; as, a greed of gain.” There is some conjecture that the first example of Man’s greediness was exhibited by Eve. Others look at Cain. If greed itself was to be viewed as a necessary component of capitalism, we must agree that Man, living in the Garden of Eden, was compelled by market forces to eat the apple. I would assert that Adam and Eve, whilst among the environs of Delight, were not subject to the rigorous demands of capitalist exploitation. I would also assert that Eve’s actions showed an “acquisitive desire beyond reason.”

My point here is simply to show that greed as greed isn’t dependent upon some such or another system of economic organization. Greed exists, or has existed, during the entire history of mankind. Condemning capitalism due to greed is only intellectually honest if you condemn socialism due to greed. (For a complete review of the excesses of socialist greed, try looking into the fall of the Soviet Union.)

So I propose that we look at a brief deconstruction of greed. What are the components of greed? Well, as we see above, it is the acquisitive desire “beyond reason”. “Beyond reason” I’m going to leave alone for a moment. Let’s look instead at the “acquisitive desire”.

Utility, value, tastes and preferences.

Let’s take a look at utility.





If I have no carrots, the utility of carrots that I receive from having carrots is zero. But I have an acquisitive desire. I want carrots. I want the utility of carrots. So, I set about acquiring them. But, take a look at the utility curve above.

As the quantity of carrots I have increases, the utility I derive from having these carrots increases. And I get carrots, and carrots and carrots until the utility I can get from having carrots is maximized at M. Then something amazing happens. The more carrots I get, the less utility I received from having carrots. How can this happen?

I chuckle when I hear of the Muslim vision of martyrdom and the 72 virgins. At what point is one virgin enough? 36 virgins? 72? As an older man, the idea of being stuck with a bunch of virgins simply isn’t attractive to me. For me, a woman of wit and experience. (But I’m not a Muslim, so what do I know?)

So, too for us is a new conundrum. At what point do we find ourselves with too many carrots?

What determines “too many carrots” for me may not be what determines “too many carrots” for you. That is, are you able to determine what is, or isn’t, an acquisitive desire “beyond reason” for me? If I have ten carrots and you have zero carrots, is this proof of my greed? Given the utility chart above, if the utility I receive from having carrots hasn’t yet reached point “M”, I think I can argue that I haven’t, as yet, reached a level of carrot ownership that is “beyond reason”.

Another case of the relative utility of carrots may end up with this result: I have ten carrots and want no more; you have ten carrots and you want more.

Is this possible?

It’s at this point where one of the first characteristics of what is defined as “free market Capitalism” is best understood. Given the utility of carrots, given the value you have for carrots, the tastes you have for carrots and your preference for carrots, what comprises the best determinant of how many carrots you own?

Republicans believe that you are the best decision-maker when it comes to determining how many carrots you have. Democrats believe that since there are imbalances in carrot-ownership, the government should step in and make sure there is the same number of carrots for everyone.

For markets to work, buyers and sellers need to come to market and freely exchange goods and services. The number of carrots sold to the number of apples offered determines the price of carrots to apples. And we’ve already noted here that the mere existence of disequilibrium in the market is not, in itself, a bad thing.

At the beginning of this essay I pointed out that there are two different types of economic analysis; objective analysis and normative analysis. Within the academy, this difference is usually referred to as the divide between the monetarists and the Keynesians. Monetarists, in the main, believe that the role of government is to insure that an adequate level of liquidity exists to finance the transactions demands of the economy. Keynesians believe that government needs to define an outcome for economic activity.

As for the other forms of economic analysis, like the Ron Paul guys and the Bob Barr guys, anything that pins itself to barter—or gold—isn’t very interesting.

What is interesting to me is the desire to effect macroeconomic changes with microeconomic policies. Let’s be clear: so far, the market effects we’ve been examining have been microeconomic effects. It has been you and I, with our carrots, apples and widgets. The difference between a micro- and macro-economic analysis has to do with aggregation. We’ve looked, so far, at you as a producer of carrots/widgets, and me as a producer of apples/widgets. So, perhaps, we should look at what happens to microeconomic choices when faced with macroeconomic realities. That is, what happens to my apples when I’m not the only producer of apples, but one of a thousand, ten thousand, or, one-hundred thousand?

POSTSCRIPT: I'd like to welcome a brand new blogger on the intertubes today. You can read his first post, "What's Greed Got To Do With It?" over at Dr. B's Second Rate Economics Blog. Congratulations, Perfesser! (His website has been added to my link's on the right-hand side of this page. He doesn't promise to blog often, but you don't need to find many nuggets of gold before you're a rich man.)