When the economy gets into recession, people become anxious about their jobs, worried about not being able to get employed or having not enough money to finance their spending, so they get sick more easily. Right? Wrong! Fortune magazine ran a story that tells otherwise; in fact, it even surfaced the inverse relationship between death rates and unemployment rates!
Interestingly, people are actually working too much in most developed world today. Reducing work would make them healthier and perhaps allow them to live better lives though it might not satisfy all their wants. In any case, no amount of work would be able to satisfy all their wants in the first place. The implication of this is that there is actually an optimal income level for each person involved in a particular job. In a sense, an economy at any one time has an optimal national income so that the population is healthy (optimal health-productivity balance, long life expectancy and lower mortality).
I was randomly visiting those blogs of authors, journalists, economists ERPZ link to. It is a good way to find inspiration for things to write about or to hunt for stuff to read. I stumbled upon Harford’s column article on Financial Times a week back. He discusses briefly on the importance of feedbacks and how they mess things up sometimes.
Save on that...
From Harford’s blog, I also learnt about this new book, Scroogenomics by Joel Waldfogel. It looks like a pretty interesting short read but I probably would be spending on it and I’m not too confident that it’ll be available in Singapore. Harford presented a short take on the concept that Professor Waldfogel conceived in 2005.
Professor Waldfogel believes that:
We make less-informed choices [when we buy gifts], max out on credit to buy gifts worth less than the money spent, and leave recipients less than satisfied, creating [… a] “deadweight loss” [much like when there is an externality present in the market].
In some way, when we perceive the giver and receiver as a single entity (the consumer) and the seller of the gift as the producer and explore this consumer-producer relationship, the deadweight loss is quite evident. It is like having a weird syndrome where you confuse your preferences and lose the ability to put a value on the goods you purchase. That would mean you might be willing to pay $30 for a Large Fries at MacDonalds and try to haggle for a bed at IKEA for $6 – both of which results in losses if the transactions succeed (you lose in the first case and IKEA loses in the second).
Tyler Cowen’s Discover Your Inner Economist, however, argues that gifts are signaling tools for the giver to create certain impression in the receiver of himself/herself. That suggests that the losses are probably compensated in the market through the creation of this impression, through any changes in the chemistry of the relationship between the receiver and the giver of the gift. Perhaps given that the consumer from this perspective is just the giver, as long as the receiver gives him/her enough face by feigning joy (when there isn’t any) upon receiving the gift, there’ll be no deadweight loss. Actually there is, borne by the receiver for the effort.
This week’s package has arrived! It’s pretty heavy so I’m cutting down on the quantity of reads. As always, we begin with a talk from the wonderful conference, TED; by Physicist David Deutsch that attempts to explain the sudden explosive development in our ability to explain the world. Deutsch speaks slowly and refers to his notes frequently but his explanations and knowledge of reality is brilliant. The anecdotes and examples he gave are both apt and interesting enough to compensate for his lack of speaking prowess. In the lecture, Deutsch introduced the Royal Society‘s motto, “Nullius in Verba” (Latin for “take nobody’s word for it”) which I found immensely intriguing.
For those interested to know about economics in the world today can listen to the interview with 2005 Nobel Economics Laureate Joseph Stiglitz. It’s a pity there’s no subtitles available for the interview as well as the TED.com lecture linked above.
Finally, plunge into the long read by Peter York from moreIntelligentLife, How Marketing has got under our skin explores the history, trends and current state of the issue of self-branding or personal branding.
In the field of the sciences, research and achievements at the cutting edge is often poorly understood by High School (or Junior College) students. Take for example this year’s Nobel Prize for Physics; it was given to physicist Charles Kao, “for groundbreaking achievements concerning the transmission of light in fibers for optical communication” and two other physicist “for the invention of an imaging semiconductor circuit – the CCD sensor”.
Not many of us actually concern ourselves with the workings of the CCD sensor (it’s something found in digital cameras) nor optical communications and I’m sure pre-college education focuses on none of that. Students who are really interested in Physics might not be able to directly draw links between the inventions and discoveries made by the Nobel Laureates and the stuff he reads or study about. The maturity of a subject like Physics almost definitely ensures that stuff studied at the forefront is highly specialized and in some sense, narrow.
On the other hand, economics is more accessible than it appears to be. The Nobel Prize for Economics this year was awarded to economists (Oliver E. Williamson) “for his analysis of economic governance, especially the boundaries of the firm”; and (Elinor Ostrom) “for her analysis of economic governance, especially the commons”. It is interesting to note that both of these economists are studying workings of important economic agencies (or agents) outside the workings of the traditional market mechanisms.
The prize rightly demonstrates a heightened appreciation of economics as a subject to study cost-benefits and incentives rather than one that scrutinizes money. Posner neatly summarizes Williamson’s work and its implications in his entry while Becker discuss the inherent difficulties in real world organizations on Becker-Posner Blog. It should be easy for a JC student with background in economics to realize the link between Williamson’s work and the stuff he/she is studying after reading Posner’s entry. It is the ability to draw this link that reflects how much of a science the study of economics actually is – the basic principles of incentives, cost-benefits analysis all applies even when there might not be the perfect information or perfect rationality in the real world.
The Straits Times caught my attention again the week before with a particular article by Robert Skidelsky, which was a contribution to Project Syndicate. In Keynes versus the Classics: Round 2, Skidelsky highlighted the problem with today’s Keynesians being unwilling to work out the implications of irreducible uncertainty for economic theory. The article was essentially a response to the two economist, Krugman (his article) and Cochrane (his response here and here) who are engaging in an academic quarrel of sorts.
Krugman started out criticising the love for elegant economic theories of classical (implicitly speaking, Chicago school) economists. And Cochrane shot back, arguing that to attribute excessive fluctuations in the market to ‘irrationality’ is theoretical nihilism. And we all know that all that buying and selling has got motivations behind them even if these were results of false information, pure emotional preferences. I like Skidelsky’s analogy about the theater on fire (which might have been used previously by other economists as well):
It’s like what happens in a crowded theater if someone shouts “Fire!” Everyone rushes to get out. This is not “irrational” behavior. It is reasonable behavior in the face of uncertainty.
I’m not sure if Robert Skidelsky is a Post-Keynesian like Hyman Minsky but his extensive research into John M Keynes has brought him to write several volumes about this economist once touted as a saviour of capitalism. In any case, I believe Keynes simply sprinkled some important ideas that are pertinent to our study of the economy and there is definitely a need for further studies into the insights of Keynes about our modern capitalist economy and possible save it from itself once again.
The economy doesn’t (always) tend towards equilibrium as classical economics textbooks suggests. But things are worst when things tend towards an equilibrium that doesn’t benefit the society in general, many social phenomena that I’ve described in a previous post. The social/market forces are pushing the situation towards something no one wants; without an authority mandating stuff, no one have the incentive to help reach the collectively beneficial outcome.
In a recent article by James Surowiecki in The New Yorker, he discusses how success of big banks builds upon success and bring about the mega big banks that results in a concentrated banking system. It is thus possible that we allowed banks to grow big and stay so because the market naturally tends towards that and we have problems assessing the welfare gains from increasing bank sizes, as suggested by Surowiecki:
The trouble is that the “market” for banking is so distorted—by switching costs, by government subsidies and guarantees, and by the banks’ market power—that it’s hard to know whether big banks are adding value or are simply exploiting their oligopolistic positions.
The only problem that we know with the concentrated banking system is that they increase financial risk. That being said, regulations will have to start moving towards managing the risk that is contained in the financial system and if this really do result in policies that have to limit the size of banks then so be it. The government is the only one who can act as a dam holding up the floodwaters of market forces.
