~PCCapitalist
Civil War/Friendship Economics
Slate Magazine published an interesting article on the Civil War and how it helps Economists measure the effect of friendship. Here is what they find:
“They find that men serving in companies with tight social connections—like shared birthplace and occupation—were more likely to stand and fight than those in less tight-knit companies, where desertion rates were up to four times higher. The bonds of friendship also mattered for Union soldiers who ended up in Confederate POW camps: Soldiers imprisoned with others of similar backgrounds were much more likely to survive to see the war’s end.
When economists look at friendship and social networks, what they see is people trading favors—you scratch my back and I’ll scratch yours. A friendship’s value is determined by the benefits of favors you receive weighed against the cost of the favors you’ll need to do in return. A friendship built on cold economic foundations can be sustained only as long as the gains of the long-term trading of favors exceed the benefit of taking one last back scratch before putting an end to the relationship (though news travels fast, so retaliation from others in your social circle may help to keep you from taking advantage of others).”
Thought this was interesting. It sheds light more for Economists to study social relations and networks.
The rest is here.
~PCCapitalist
The Layman’s Fiscal Stimulus Economics Lesson
Since the stimulus package passed last night, there needs to be some time for everyone to understand the particular economics behind this. As NetRightNation has pointed out this has been pointed out rightly that it is full of pork. This is logical from the politicians because they are trying to win votes. If their constituents feel as if they are not being taken care of during this time of crisis they will surely be voted out. Most non-Economist do not completely understand every aspect of this plan but they feel it is wrong. So what is the “fiscal stimulus” and what are the theories and counter theories in Economics about it?
This of course starts with our good friend John Maynard Keynes. Keynes worked on a way for us to get out of recessions with government in mind. He worked on a concept called “the marginal propensity to consume.” It was hard to find a chart but above is the consumption and income for 1935-36. As you can see consumption is very close to income. The marginal propensity to consume is how much a person will spend if you give them a dollar. If it is .9 then they will spend 90 cents on the dollar. So for simplistic terms this means that it is a multiplier and important to note for injecting money into an economy. The basic idea is that the increase of government spending on the economy will multiply rising people’s incomes throughout the economy, which will make the initial demand boost. The Keynesian economist (KE) says that it is the loss in demand that has caused the recession. The KE would also believe that businesses would have a coordination problem and they need government to ensure demand will always be there so they can invest. So what is the solution? The government.
Basically, Milton Friedman and other monetarist came along and believed that this was wrong and that in fact you must use monetary policy to shift the aggregate demand, which is everyone’s demand added together. This includes interest rates and the monetary base. So now we have two schools of thought basically arguing over how to increase demand.
So what are the problems with these? First, the problem is even if we assume this can work, there is a huge lag. As in the economy is already in recovery by the time the fiscal stimulus effects everyone, government will not get data that we are out of the recession until a couple of months after the fact. This is why monetary policy is preferred until recently. It is much quicker and requires no legislation. Second, if people expect the tax cuts to only be temporary they will not respond in the way that they would if the tax cut was permanent. The expiration of the Bush tax cuts could be a culprit to the current crisis. The third problem, is called crowding out. This is when we increase fiscal debt which leads to higher interest rates. That will then lower the demand in the private sector and then these would counteract each other. This is why adjusting the interest rate has been the governments favor plan. Of course, if you will notice then interest rate is the lowest it has ever been and loans aren’t coming out. This is because the central bank cannot control the real rate of interest.
What is the real solution then? First, we must eliminate the capital gains tax for good. This is important to make permanent as I mention the lag problem before. We also must deregulate banks and allow them to invest in more than just small business loans and mortgages. Whenever someone invests into the stock market, one of the first tips you will hear is diversify. We do it but we do not allow banks to do it. The Federal Reserve must work on targeting inflation and not creating it. There will be a downward pressure on prices but this will be due to a readjustment period and not because people are burning their money. We should adopt a balance budget. This will not happen over night but it will ensure prosperity for the future of America. We reduce spending and extend the Bush tax cuts. These all will allow for more investment. We do not need to be obsessed with Americans spending money. If they take their extra earnings from these tax cuts and elimination of the capital gain tax then we will encourage investments. This will allow for these bad assets to be bought up.
~PCCapitalist
The New Marxist Movement: Zeitgeist Movement
When Karl Marx was writing his works and others took his work and came up with their designs for Socialism and Communism, it caught onto the masses. There is a new movement called Zeitgeist that is related to the Venus Project that seems to be getting more and more popular in online circles. When you read the ‘about’ information, you do not get a good feeling on what this organization is all about. They claim that there is a problem with the current situation and at one point claim it is Capitalism’s fault. They believe that they can rebuild society with technology and make humanity more efficient. Now this is where they draw you in and make you believe that you can agree with them, but the devil is in the details.
If you then move to “the Venus Project” you begin watching a video of a utopian space age. It shows the perfect cities with the perfect buildings, with the perfect everything else. Of course, they claim it’s not utopian. The designs of the cities is not my problem. The problem is if it wanted to be done privately then that is fine, but I can assure you they are far beyond that. They believe that there needs to be one world government. Now when you get to the F.A.Q. it begins to show its true colors.
For example:
“Social problems result from scarcity. When a few nations control most of the world’s resources, there are going to be international disputes no matter how many laws or treaties are signed. If we wish to end war, crime, hunger, poverty, territorial disputes, and nationalism, we must work toward a future in which all resources are accepted as the common heritage of all people.”
It is utopian to believe that you can get rid of scarcity. This is a nice way of saying that communal ownership is better that private ownership. Let’s look at the definition of Communism: “a political theory favoring collectivism in a classless society.” Sounds like them to me. (They do also talk about a classless society.
Another example:
“Simply stated, a resource-based economy focuses on resources rather than money, and provides an equitable distribution thereof in a humane and efficient manner. It is a system in which goods and services are available without the use of money, credit, barter, debt, or servitude.”
This is Socialism and Communism at its best. Instead of people producing and exchanging, everything is distributed. They either believe in only one of the two things. Either they believe that robots can do all the work and they can live off of it or Communism. This is where everyone works and then all the production goes into one big pot and then is equally given out. Not to mention that as Hayek put it money is in fact one of the great inventions of freedom. The poor man has more good he can acquire with money. That if there was an abolishment of money and rewards, and favors were the currency, then power would be concentrated with those with that position.
Then you know it is good when in the FAQ’s a question is “How is this different from Communism?”
Here they say the difference is that machine production will eliminate labor and that Communism didn’t do this. They also argue that Communism used police. And here comes my favor line of theirs:
“The Venus Project’s aim is to surpass the need for the use of money. Police, prisons and the military would no longer be necessary when goods, services, healthcare, and education are available to all people.”
Instead of politicians there will be computerized stuff telling people what to do. This somewhat sounds like the matrix. And here is the kicker:
“Communism has no blueprint or methodology to carry out their ideals and along with capitalism, fascism, and socialism, will ultimately go down in history as failed social experiments.”
Are you kidding me? Okay one last thing. They ask, “is there a need for government?” Here is the answer:
“As to the need for government, only during the transition from a monetary based society to a cybernated high-technological resource based economy of common heritage would it be necessary to utilize the services of systems analysts, engineers, computer programmers, etc. They will not dictate the policies or have any more advantage than other people. Their job will be to carry out the restoration of the environment to near natural conditions as possible on land and in the sea. They will also economically layout the most efficient way to manage transportation, agriculture, city planning, and production. This too is always in the process of modification and updating to fit the needs of an ever-changing civilization. There are no final frontiers.”
If you go back and look, this was what the transition from Socialism to Communism was suppose to be like.
Okay, so I could go on about how bad this is and how it will never work and any attempt to do so will cause destruction of freedoms and personal liberties. Except, F.A. Hayek already did that with The Road to Serfdom. He wrote this in 1944. This group can pretend to be unlike Socialist but any time you design society you are a Socialist. The one thing F.A. Hayek put best in his book The Fatal Conceit is that no one designed today’s society. It has evolved through a quest for inefficiency.
This group will use human rights and freedom to attract people but in the end, if someone plans out your whole life and your cities and everything else, you are not free. They are going to argue that a few men in the world control us today. The people that interfere are governments, not individuals. It is easy to get wrapped up into this feeling of “only if.” Only if we could create this world everything would be perfect. Only if we could equalize everyone’s goods, everyone would be equal. No two people are born the same, and to try and prevent that would destroy society.
The website is here if you don’t believe me.
~PCCapitalist
Cigarette to Small Cigar Substitution
This from USA Today:“The surging popularity of small cigars, available in fruit and candy flavors, is prompting state and local governments to try to regulate and tax them like cigarettes.Baltimore announced this month that, beginning in October, it will require single cigars retailing for less than $2.50 each to be sold in packs of five.
Last year, three states — Massachusetts, New Hampshire and Rhode Island — passed bills to tax small cigars at the same rate as cigarettes.
Small cigars, the fastest-growing segment of the tobacco market, are the same size as cigarettes but typically have a brown wrapper that contains tobacco.”
This is just economic agents (people) acting when taxes are imposed on them. Since Cigarettes are being taxed to high heaven people will in turn substitute a similar good. Politicians love to tax cigarettes because they can pretend they are doing it to reduce consumption all the while hitting the most inelastic demand curve. That is the one that is least effected by a price increase. Looks like they were wrong.
The rest is here.
~PCCapitalist
Should we be allowed to by stocks in banks?
Because no individual ever designed Capitalism, most people do not understand it. In a recent article on the investor website Seeking Alpha, the Pragmatic Capitalist wrote a story on whether banks should be publicly owned. Disclaimer: when reading this you must know the his terms are public being owned by stockholders and private being not owned by stockholders. Now in the news public means taxpayer/government owned. Here is what he has to say:
“Being public means you must maximize profits for your shareholders. If you don’t, your shareholders will eventually kick you out on your behind (unless your name is Rick Wagoner). In their search to maximize profits the banks took on more risk than they were accustomed to. After all, the competition was steadily increasing EPS and the CEO across the street was making $10MM more than you were so you clearly needed to inject a little nitrous into your business model. In banking, that means taking on more risk and boosting EPS at any cost. So what did they do? They made big bets on a few sectors of the market – primarily housing. This plan worked great for almost a decade. Bank’s earnings soared. They were no longer just borrowing from the fed at 3 and lending at 6. They were creating all sorts of products that ensured no one would call them “economic girly men”. And the earnings and CEO pay proved it.
But a funny thing happened while Wall Street fell asleep at the risk management wheel: The wheels came off. The car veered. The car crashed. And then it exploded. And then it exploded again. And I’m pretty sure it’s getting ready to explode again (as I write this, not to pick on Citi, but the stock is down 20% to an astounding $5.35 per share). There was an inherent conflict of interest in being a public company here. The idea of maximizing profits and keeping up with the Goldmans meant taking on more risk or perishing. It meant that banks were using cash for buybacks at record high stock prices in attempts to increase EPS. It meant that banks were buying up smaller banks to streamline their operations and give the appearance of organic growth. Would these vital institutions have been so imprudent if the public scoreboard over at the NYSE had not driven them to be so greedy?”
The reason why banks got greedy is because people are greedy and people run banks. This however was no different than 5 years ago, 10 years ago, and 100 years before that. People are always going to be greedy. Whether they are owned by a group of people who are on the board, an individual, or stockholders will not make a difference on degrees of greediness.
The reason why banks have a problem is because they are only allow to invest into mortgages, thus not allowing themselves to be diversified. When you invest in the stock market, the first rule is buy low, sell high and the second is diversify. We do this all the time, even when making daily decisions. Why do we constrain banks in the same way? I believe it is because we have an attitude that banks are dangerous, they should always give us a return, and houses will always be safe. People always say land is the safest investment and they aren’t making anymore of it. This is a common misnomer. Land is no different than any other commodity and it can be artificially made (see the Kansai Airport in Japan). People need to treat banks like what they are. investments not safes.
The rest of the post from the Pragmatic Capitalist is here.
~PCCapitalist
Barack Obama continuing an AbortionTradition
This from USA Today:
“President Obama on Friday quietly ended the Bush administration’s ban on giving federal money to international groups that perform abortions or provide information on the option.
Liberal groups welcomed the decision, while abortion rights foes criticized the president.
Known as the “Mexico City policy,” the ban has been reinstated and then reversed by Republican and Democratic presidents since Ronald Reagan established it in 1984. Democrat Bill Clinton ended the ban in 1993, but Republican George W. Bush re-instituted it in 2001 as one of his first acts in office.”
On this issue people get mixed up in Pro-Life and Pro-Choice, which has nothing to do with this debate at all. This is an issue of fiscal responsibility. This is a decision whether to spend valuable taxpayer money in a way that the government was never entitled to. This is not a job of the government. This is not something that the market is not allocating any money to. We know there are a demand for abortions. We have seen this when it was illegal. One of the arguments of the Pro-Choice people is that it would allow it to be safe since there is a demand for it. If this is true then why do we need to fund it?
Let’s take another look at it. I like to smoke cigars. I believe it is a right that I have. I do not need the government subsidizing me or the local tobacco shop of what I want to do. This is because it works fine as is. I pay for the cigar. They give me the cigar. End of transaction. There should be no difference when it comes to abortions, guns, meat, or any marketable item.
The rest is here.
~PCCapitalist
Marxism Versus Capitalism
This title of this post is my new project with a Marxist debating Capitalism, Socialism, Labor theory of value, and many others. I invite you all to join and contribute. The Austrians did it years ago and now it is time to do it again. This is because people have not learned.
The link is here.
~PCCapitalist
Adam Smith meet Invisible Hook
This is from Princeton University Press. It is Dr. Peter Leeson, who I had for Austrian Economics and will have for graduate school, talking about the current situation of pirating. His new book “The Invisible Hook” comes out soon and many, like myself, have pre-ordered it:
“Lately it seems that barely a week passes without headlines of Somali pirates’ latest depredations and yet another, bigger, and more daring pirate attack. In November one crew captured a Saudi supertanker, the Sirius Star, along with the 25 crewmembers and $100 million in crude it was carrying—a prize big enough to make Blackbeard blush. Last week the pirates ransomed their prize for $3 million, releasing the ship and crew.
Between January and October 2008, 63 pirate attacks were reported in the Gulf of Aden and off the coast of Somalia. Somali pirates hijacked 26 ships; fired on 21; and took nearly 540 sailors hostage. By contemporary standards, at least, these “pirate statistics” are remarkable.
But an equally impressive “pirate statistic” has gone virtually unnoticed: the number of seamen who survived their harrowing captivities by Somali sea dogs and lived to tell the tale. For example, all of the Sirius Star’s sailors were “in good health” when their pirate captors released them. And they’re not alone. According to data from the International Maritime Bureau, in stark contrast to the impressive number of assaults, only one sailor has lost his life at Somali pirate hands. This represents less than two-tenths of one percent of crewmembers taken hostage by Somali pirates between January and October and an even smaller percentage of the total number of sailors these pirates have attempted to capture.”
This shows that economics can be both fun and intellectually stimulating. Dr. Leeson takes something that most kids are in love with and applies economics to it. Every man is always using economic calculation to better themselves. In this case it is the Somalian pirates, so enjoy.
His book, as I understand, will actually focus on the golden age of pirating most people think about before recent events. He is going to take about the structure of how pirates organized themselves without government to ensure that they are not abused and still be able to have the Captain give orders, somewhat like a Constitution.
The rest is here.
~PCCapitalist
