The Auctioneer

The following is a summary of Ruccio’s lecture Tuesday 2/26 in Marxian Economics.

One of the basic assumptions of neoclassical theory is both consumers and firms are price takers. Each individual attempts to maximize its profit/utility based on the given price. By determining the maximization at multiple prices, the demand/supply curves can be derived. These curves are graphed and at the intersection is the equilibrium price and quantity.

This basic logic revolves around both the firm and consumer “taking” the given price.

The question remains: who sets the price? The easy (and seemingly obvious) answer is from equilibrium. But how is this equilibrium achieved? The only answer our class offered were variations of “It just happens”. The logic would start, “Well the demand curve moves out and then there is a new equilibrium.” Which makes plenty of sense on a graph but none in the real world. How do firms and consumers achieve and agree upon this equilibrium? Both are price takers. They accept the price of the market.

The answer is there must be a price setter: an auctioneer. This theoretical auctioneer calls out prices until the market is satisfied. That means that this process is not instantaneous but a temporal progression toward equilibrium. Also the auctioneer represents a third unexplained actor in the market.

NCL theory has admitted to the existence of an auctioneer but assumes that she is unbiased. This seems doubtful unless there are computers calculating these prices. As we know, there is no auctioneer at the check out line of grocery stores. Where the price is determined and who is determining it, is certainly much more complicated than the nice clean graph NCL theory presents us with.

Ruccio sent out these two articles after the lecture

A Solution to the Alleged Inconsistency in the Neoclassical Theory of Markets: Reply to Guerrien's Reply

by Deirdre McCloskey

McCloskey discusses the auctioneer as conversation and game theory, emphasizing that this apparent contradiction does not invalidate the logic behind supply and demand.

This book review emphasizes more the irrationality of consumers.

GDP inaccurate judge of a countries welfare? Who would have thought.

I read the attached article for my Macro class (I will cut and paste it into the comments).

Some economists are shocked that although Europe sports a higher productivity per head than America, Europe’s GDP per head remains ¾ of America’s. This leads to questioning why Europe’s higher productivity does not lead to higher GDP and ultimately more happiness. Because our GDP is higher, we must be happier than Europeans right?

However, Gordon Brown an economist at Northwestern is quick to point out the flaws of equating GDP and social welfare. He first points out European’s have opted for shorter weeks and longer holidays. This does not contribute to GDP but obviously leads to a better life. Other lifestyle decisions (small local stores as opposed to far away mega stores, better public transportation) lead to less GDP for Europeans, but probably a better life.

Also GDP includes many purchases that don’t lead to a better life. Gordon mentions because the American climate is more volatile than Europe’s, Americans spend more on heating and cooling to achieve conditions more natural in Europe. Obviously higher utility bills do not lead to a better life than Europeans. He also points out higher American crime rates lead to higher security costs. Catastrophe recovery spending (cleaning up the Exxon Valdez, reconstructing New Orleans) are not doubt good things to spend money on, but are certainly not making American lives better than European. Litigation and advertising are probably included too.

This article doesn’t even mention the biggest problem with the high GDP=good life mindset: consumption isn’t the only thing that makes people happy. A sense of community, education, beautiful nature; all these things lead to a better life but are not included in GDP. I feel like I’m beating a dead horse knocking on GDP like this, but I thought this was a good article and it got me a little riled up.

Nicholas

Relevant Development

Esther Duflo and Abhijit Banerjee (coolest names ever?) are challenging the conventions of development economics by experimenting with randomized testing. This micro-approach to what are often macro- problems are giving us clues as to what works, what doesn’t work, and why? What are some of the findings?

Mr. Kremer and two other economists, in fact, did the textbook experiment — and found that textbooks didn’t improve test scores or graduation rates in rural western Kenya. (The students were probably too diverse, in terms of preparation and even language, to be helped by a single curriculum.) On the other hand, another randomized trial in the same part of Kenya found that treating children for intestinal worms did lift school performance. That study has led to an expansion of deworming programs and, as Alan Krueger of Princeton says, is “probably improving millions of lives.”

A few things about this new approach: I find it refreshing that the trials take into account context, a feature often absent in most development prescriptions. This is the wake-up call to development economics that it needs to snap it out of its “more aid will solve all world poverty” dream. As some of these tests are proving, pouring money into inefficient or ineffectual programs, no matter how much money it is, will contribute little to development. Though it may be disheartening to know that all those textbooks didn’t have the intended effects of raising graduation rates, this provides a lesson that sometimes seemingly unrelated improvements (such as treating intestinal worms) may provide the desired effect.

Here is another interesting article by about the recent beef recall and the economics of factory farms. The author quite pessimistically attributes the scandal as a natural development of the efficiency fanaticism that plagues modern production methods. The constant pressure to produce more in less time at lower costs has lead to unattainable quotas, inducing producers to bend the law in order to meet demand.

Stop Recyling, Eat More Meat, Drive Hummers!

In your face, Mother Earth! Your Global Warming doesn't scare me anymore! Why? Because there are plenty more of where you came from...all over the solar system! They are only a few...hundred light years away...


shoot...


Some serious news: increasing wealth (as measured by GDP) is not leading to improved health outcomes (in infant mortality rates) as many predicted they would (bad news for MDG). Unfortunately, I'm not surprised. Rising GDP's can, and often do, result from increasing wealth in an increasingly concentrated upper class. While gains may be shared by the lowest classes, they are usually minimal, and depend upon proximity to the money-making areas. Long story short: if you are poor but live in a major city in a increasingly developing country, you might see improvements in your total welfare. BUT, if you are poor and live far outside a major city (the large majority do), then you will see little benefit come from increasing growth in your country's GDP. The article talked about India which has seen tremendous gains in GDP over the last decade, but still lags far behind in infant mortality rates. The reason? Less than 1% of the country is employed in the service/IT sector, the main driver of the country's economy. That means 99% have seen little to no welfare gains. There are other factors contributing to infant mortality (racism, classism, cultural practices) but countries with more egalitarian development see similar gains in the social welfare sector.

The Only Movie Worth An $8 Ticket (Plus $5 For Popcorn)

One of my all-time favorite movies/books is Fight Club, not only for the callous social commentary, captivating storyline, and quotable quotations, but for the economics!

Cost-benefit Analysis:

Narrator: A new car built by my company leaves somewhere traveling at 60 mph. The rear differential locks up. The car crashes and burns with everyone trapped inside. Now, should we initiate a recall? Take the number of vehicles in the field, A, multiply by the probable rate of failure, B, multiply by the average out-of-court settlement, C. A times B times C equals X. If X is less than the cost of a recall, we don't do one.
Business woman on plane: Are there a lot of these kinds of accidents?
Narrator: You wouldn't believe.
Business woman on plane: Which car company do you work for?
Narrator: A major one.

Materialism/Alienation:

Narrator: You buy furniture. You tell yourself, this is the last sofa I will ever need in my life. Buy the sofa, then for a couple years you're satisfied that no matter what goes wrong, at least you've got your sofa issue handled. Then the right set of dishes. Then the perfect bed. The drapes. The rug. Then you're trapped in your lovely nest, and the things you used to own, now they own you. (from the book)

Tyler: You're not your job. You're not how much money you have in the bank. You're not the car you drive. You're not the contents of your wallet. You're not your fucking khakis. You're the all-singing, all-dancing crap of the world. (from the movie)

Long-run analysis (I’m kidding…maybe):

Narrator: On a long enough timeline the survival rate for everyone drops to zero.

There is sooooo much more. Watch the movie. Then watch it again. Watch it 30 times. I always find something new and interesting each time I watch it.

Consuming Inequality

Forget income inequality! What you consume matters – according to this op-ed. The authors cite the glaring inequality in income in the U.S. (15-1 between the top and bottom fifths) but through some number sorcery and supernatural assumptions, the authors show that the gap is a mere 2.1-1, in terms of consumption.

…if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.

Let’s take the adjustments one step further. Richer households are larger – an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1. The average person in the middle fifth consumes just 29 percent more than someone living in a bottom-fifth household.

Really? Something doesn’t seem right...

The exact bundle of goods considered in this study is not explicitly stated, and further, what is “consumed” doesn’t include everything that leads to a happy, healthy life. Expenditure – for health care, education, housing, etc. – may not show huge disparities across income groups but the actual quality of service may differ substantially.

Example: the lowest fifth income group is shown to consume a little more than a third less food than the top fifth. But quantity (money spent) doesn’t always equal quality. Lower income groups are more likely to buy cheap, mass-produced foods generally lacking in nutritional value and high in all the delicious stuff (fats, sodium, sugar, plus many chemicals that I can’t pronounce). Higher income groups are able to afford much higher quality food which is much more nutritionally balanced.

Also, looking at the wealth of the top fifth doesn’t highlight the tremendous concentration of wealth in the hands of the very, very few. I would like to see a comparison between the bottom fifth and top %1 or %.1. A significant as the 15-1 income ration between the top and bottom fifth is, it doesn’t even come near to reaching the 400(ish)-1 ratio of CEO to average worker income. What is their consumption gap?

Back to the Future...of Biofuel

I'm a big fan of the Back to The Future Movies (1 and 2 for sure...3 was just ok). My favorite part of the movie, besides the hover board, the johnny b. goode scene, and "1.21 gigawatts!!!", was the DeLorean. In the second movie, Doc Brown converts the DeLorean to run on garbage instead of gasoline...aka...biofuel! Where is Doc Brown's Nobel Prize???

Well this trip down memory lane is all in response to a series of articles that have popped up since yesterday on the topic of biofuels. Here are the links to some of them:

LA Times
NY Times
Washington Post
National Geographic

What is the future of biofuel? Are they causing more harm than good? What about the polar bears???

Though the rhetoric paints a pessimistic picture, there is hope (ask Felipe about this if you want to know more...)

Sean

Battle of the Sexes

Men are assumed to have a natural competitive instinct; more so than women, at least. Professional sports, the military, chess tournaments - any group or event characterized by aggressive or cut-throat behavior- is usually dominated by men. Conventional wisdom holds that the more competitive nature of men in comparison to women is a product of Darwinian evolution, i.e. it is not a social construct, dependent on culture and norms. New studies are questioning these assumptions about gendered competitiveness. Studies were carried out on two different groups: the Maasai - a patriarchal society, and the Khasi, a matrilineal society. The findings? Men of the Maasai society displayed a stronger competitive drive than women. No surprise there. What about the Khasi?

"Yet, this result reverses in the matrilineal society, where we find that women are more competitive than men. Perhaps surprisingly, Khasi women are even slightly more competitive than Maasai men, but this difference is not statistically significant at conventional levels under any of our formal statistical tests."

What does this mean? If we take this analysis a step further, we can question the "natural-ness" of human competitive nature. If competitiveness is not universal (in the sense that neither male or female is inherently "more competitive"), then we can frame competitiveness as a social construct. The question then become: what norms, values, institutions, and relations create or define our competitive behavior? What are the costs/benefits of this behavior? How do we change it?

Sean

Money Morality

A new blog, and a new look at the Societe Generale scandal! Dan Ariely takes a behaviorist approach to the scandal, citing a study done on Harvard and MIT students and their tendency to cheat (I've always wondered why these experiments usually involve ivy-league students. Perhaps ivy-leaguers have a predisposition to dishonesty...which would explain a lot about our government and big business...). You can read the details of the experiment in the post, but what were the main conclusions?

So what’s going on here and what lesson can we learn about it for Societe Generale? As it turns out, it is much easier for us to be dishonest when we are one step removed from cash. This is why we are more comfortable taking office supplies home than cash; Why it is relatively easy for executives to cheat by backdating their stock options; and this I suspect is why Jerome Kerviel was able to erase $7.14 billion for Societe Generale. After all, he was dealing with stock derivatives that are multiple steps removed from cash. This might seem a very pessimistic perspective on human nature, but if we accept that when we deal with more abstract and nonmonetary currency our morality is less able to guard us against dishonesty, we might be able to learn some lessons from this disaster and reduce the likelihood of waking up one day to another Societe Generale?

This can be taken further than just cheating and scandal. The same sort of moral abstraction can account for the enactment of trade or foreign policies that result in death, destruction, or poverty. By taking a step back, guilt and responsibility can often be transgressed. The question is: how do we get politicians to "feel" the impact of the policies they legislate?

Presidency for Sale!

How much would you pay to be President of the US? $100?...$100,000? How about $100 million? More?

This year the candidates are pulling out all the stops (and all the money from their wallets). Hillary and Obama have each spent well over $100 million. Small-government Republicans aren't innocent of big-spending either (but what politician is innocent....of anything?)

I find the most interesting thing to be WHERE the money goes. Guiliani's campaign paid over $300,000 to HIS OWN COMPANIES...of course he says that he doesn't see any of this as profit.

Our presidential candidates are spending more on television adds than some of the poorest countries make in a year!

Poor Countries, Rich Countries, and Quantum Mechanics

Here is an interesting post by Dani Rodrik comparing the lifetime happiness between rich countries and poor countries (don't ask me how they measure aggregate lifetime happiness...). The graph shows a positive correlation between GDP per capita and a country's overall happiness. I found it interesting that Brazil and Mexico, both with GDP's per capita about 3 times lower than the US, and both with egregious income inequality, have a lifetime satisfaction rating equal to the US! How??? They should be miserable, right? Not all countries with similar inequalities have the high happiness ratings (look at China and India) and many countries with low income inequality are very happy (those jolly Scandinavians). What makes Brazil and Mexico so different (obviously, these questions assume that this study and graph represent reality, which is a huge assumption...and we all know the trouble you can get into with huge assumptions...). I've always been, and probably always will be, skeptical of "happiness" measurements. Happiness...marginal utility...it all seems to be a perversion and over-simplification of human relations and decision making, often leading to perverse and over-simplified theories, resulting in perverse and over-simplified policy prescriptions.

Just a passing though: has anybody seen/heard/read/made up any work on quantum mechanics and economics? I think it is a fascinating combination. Quantum mechanics, as sort of the anti-science of science, would, properly applied, be an interesting critique of the mechanistic fetish of modern economics. Another question: why does mainstream economics model itself after a (somewhat) obsolete physics theory? What sort of forces and frictions (that was just too easy...) are involved that slow the adoption of relativity and quantum mechanics (maybe even string theory) into economic theory?

Sean