Posts Tagged ‘Macroeconomics’

Trying to make sense of bailouts and other such Socialist ideas

December 2, 2008

All over the internet I keep hearing things like, or along the lines of; Obama will save us from ourselves, and other such drivil. I hear on a near constant level that this is what free market economics gets for the people. When, in point of fact, the United States does not operate in a true free market economy, much less in a  laissez faire model. Which is actually what these very same people imply has been being used in recent memory. These are most often self appointed masters of economic thought. Picking and choosing bits and pieces of what they have learned, or just heard along the way. Never mind the basic tenets of Macroeconomics and Microeconomics, after all they have an agenda to pursue. That most often being the destruction of western society in general, and capatilism in particular. They are in fact usualy espousing Social Economics. However they do so based upon emotion, not upon reasoning and most often without any sense of logic.

Hence, I will post a bit about the Natural Laws of Economics. Please follow the link, as there is a wealth of information to be had there.

A natural law is a proposition that is universal to a subject matter. In science, a natural law consists of propositions describing and explaining observed regularities. There are in economics some basic regularities which have been designated as natural laws of economics. These include:

1. The law of demand. When the price of a good falls, the quantity demanded does not fall. Usually, the quantity demanded rises with a fall in price. Strictly, the law of demand applies to the substitution of cheaper goods for more expensive goods due to a relative change in price. The law of demand also applies to the whole economy: when the whole price level falls, with the amount of money remaining constant, a greater amount of goods will be purchased. 2. The law of supply. When the price of a good rises, the quantity produced does not fall. Usually, a higher price for a produced good results in a greater quantity produced.

3. The law of diminishing returns (law of decreasing marginal productivity). Given a fixed amount of some input, when ever more amounts of the variable input are added, eventually, the marginal product (the last unit’s contribution to output) declines.

4. The law of one price. In an efficient market, a financial asset will tend to have one equilibrium price, because of arbitrage.

5. Gresham’s law. Bad money drives out good money when the bad money is legal tender.

6. The law of reflux. In competitive free-market banking, there cannot be a permanent over issue of banknotes, since any issued in excess of the quantity demanded will be redeemed.

7. Law of supply and demand. In a free market, the equilibrium price of a good is that at which the quantity supplied equals the quantity demanded.

8. The law of diminishing marginal utility. As one obtains more and more of a particular good, eventually the marginal utility (value from one more unit) declines.

9. The law of unintended consequences. Human actions, and especially governmental acts, have consequences which were not intended and not anticipated by the actors.

10. The law of iterated expectations. One cannot use the limited information at some previous time in order to predict the forecast error one would make if one had better information later.

11. Engel’s law. The proportion of income spent on food in an economy is inversely proportional to the general welfare of the society in that economy.

12. Wagner’s law. As an economy grows, government spending has increased by a greater proportion.

13. Foldvary’s law of inequality. Inequality equals the concentration of a distribution times the number of units (I=CN).

14. Say’s law of markets. The supply of goods will pay the factors of production such that the payments are equal to the value of the product, and therefore aggregate quantity supplied equals aggregate quantity demanded.

15. Law of time preference. People tend to prefer to obtain goods sooner rather than later, and will pay a premium (i.e. interest) to shift buying from the future to the present.

16. Law of the market. Statements made by market participants are assumed to be truthful, and products are presumed to be safe and effective unless stated otherwise.

17. Pareto’s law of distribution. There is a general tendency for 80 percent of the consequences to result from 20 percent of the causes, which often applies to property, 80 percent of the wealth owned by 20 percent of the population.

18. Law of cost. All costs are opportunity costs, the true cost being what is given up to get something.

19. Law of comparative advantage. Trade takes place because parties specialize in the products which have a lower opportunity cost, rather than merely a lower physical cost.

20. The law of wages. The wage level of an economy, where labor is mobile and competitive, is determined by the marginal productivity of labor at the margin of production, i.e. the least productive land in use.

21. The law of rent. The economic rent of a plot of land equals the difference between its output and the output at the margin of production, i.e. the least productive land in use, using the same quality of labor and capital goods.

22. The law of capital goods. Investment in capital goods and human capital expand until the expected return on investment, adjusted for risk, equals that of the long-term real interest rate.

23. Walras’ law. If there is an excess quantity supplied in one market, there must be a matching excess quantity demanded in another market.

24. The law of economizing. People tend to economize, maximizing gains for a given cost, and minimizing costs for a given gain.

25. The law of economic rationality. Human action is economically rational if one’s preferences are consistent and if one economizes.

26. The Gaffney effect. The public collection of rent equalizes the discount rate for land usage, since otherwise people would have different credit costs for purchasing land.

Fred Foldvary


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Income Redistribution: Bailing out states

August 15, 2008

Capital flow, the minutia of macroeconomics that gives the science its appeal, is the key to economic growth. Communities compete with incentives including reduced taxes and discounted land with high capacity infrastructure to attract new capital flow for job creation. The trade off is that the tax base generated by the new industry will offset the initial cost of infrastructure and reduced tax revenues. This mode of operation extends to the state level as well, albeit on a larger scale.

However, state governments often appear bi-polar, with an Economic Development Division promoting the state as an excellent environment for investment while the Department of Revenue—at the behest of the state legislature—seeks to maximize the revenue from businesses. Michigan is a perfect case study, with its “Michigan Golf” radio promotions touting the state as a vacation destination while the business media reports on its one-state recession and the economic mismanagement of Democrat Gov. Jennifer Granholm. The taxation and regulation regimen proposed by Granholm and codified by the Michigan Legislature has spurred the flow of economic and intellectual capital away from Michigan over the last eight years, yielding increased unemployment, increased demand for public assistance and increased budget deficits.

For the better part of two decades business schools have drilled students in the portability of capital in information-driven economies. There are only two impediments to capital flow: lack of natural resources and the possibility of asset confiscation by local authorities. By their rhetoric, we know that Granholm of Michigan and Gov. David Paterson of New York have no qualms about wealth redistribution, but they don’t have the tools (or the guts) necessary to take it to the extreme of, say, Hugo Chavez in Venezuela. Instead, they will beseech Congress to increase its benevolence upon their respective states by increasing taxes on the whole of the country. Their political calculus is simple: Increase the regulatory and tax burden across the entire country, and then their respective states won’t look so bad.

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The Bakken Formation and energy independence

July 23, 2008

The Bakken Formation like the Pieance Basin Oil Shale holds great promise for development. Price and technology have been the big considerations in the past when exploitation of these resource’s have been discussed. Now, it seems that the price of oil is such that cost effectiveness may well be past the point of profitability. The opportunity costs involved take on many faces though. Mostly hunters and fishermen, but also ranchers, farmers, and those that care for the environment.

My Fiance who is a Geological Engineer and Geo-chemist has told me that the technology is now available that would allow extraction with minimal environmental impact. That, however does not include the refinery, or some portions of necessary pipelines. Those two issues are pretty troublesome to someone like me.

Then we get to the big money rumor mills that say there are impending finds in the north of Russia and in Indonesia. If true, the American Dollar will be in some rather serious trouble. Those folks in other places that are in fact propping up America through purchasing T-Bonds and such will in all probability stop doing so. Making a switch to alternative energy sources will be expensive enough without having to deal with a near worthless currency. This is where International and Political Economics come into play with a vengeance.

The flip side is that if we can rapidly build alternative energy sources as well as use the oil that we have available we should be able to weather the storm, so to speak. We also need to have a President that has the inner courage to reverse President Nixion’s policy that took the United States off the gold standard.

I believe that we are indeed heading into a rather rough row to hoe.

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Whiskey and Gunpowder Oh My!

June 14, 2008

From the American Conservative Forum this little bit of historical education may be of interest to those that appreciate both economics and history. Great find Shooterman!

Whiskey and Gunpowder
June 12, 2008
By Lord William Rees-Mogg
London, England, U.K.

House of Cards

Economic theory tries to deal with a limited number of factors and the mechanisms by which they interact. The main factors are population, food, energy, property, and manufactures, all of which are physical realities capable of being counted. They are the beans that bean counters count with. There are four mechanisms of exchange: money, barter, markets, and allocation. These are the mechanisms by which the beans are exchanged.

Different economists have put emphasis on different factors. David Ricardo, the classical economist of the 19th century, was a banker who gave special attention to money; Thomas Malthus, another founder of 19th-century theoretical economics, paid particular attention to population. Indeed, he is the founder of population studies.

Karl Marx, the founder of socialist theory, paid attention to manufactures, and to population, seen particularly as labor. The leading 20th-century economists, such as Maynard Keynes, Irving Fisher and Milton Friedman, have been derivatives of the Ricardian or monetarist school, though Keynes was a rebel against classical Ricardian orthodoxy.

Unfortunately, it is impossible to think of all these factors simultaneously. Perhaps there will be a time in the future when some supercomputer will be able to calculate the interreaction of the global economy holistically. We are still far away from that day.

At present, the limitation of the human intelligence means that we can concentrate effectively on only one of these factors at a time. The selection of any one of these factors or interreactions for study draws attention away from other, equally important factors. One can be both a Ricardian or a Malthusian, but one cannot concentrate on both aspects of economic analysis simultaneously without a loss of focus.

However, one can simplify economics by using the different physical factors as a checklist to detect signs of difficulty. That does make economics the gloomy science. At present, the world is suffering from a crisis of overpopulation, with the human population stretching the food supply beyond its limits. Population is continuing to grow, although there is already an inadequate food supply for 6 billion people and famine is growing in Africa. It is possible that the 21st century will replace the 19th as the century of famine.

Food is very closely linked to energy. Food production is dependent on the oil industry, in cultivation, in transport, and in protection against pests. The food price has followed the oil price, to the point at which millions of people cannot afford a minimum food supply. That is already a catastrophe, and the trends are unfavorable. There is also a significant shortage of water.

Markets have flagged food and energy as danger areas for the world economy, by raising their prices. Property and manufactures are secondary to food and energy, in that their prices can change without immediately affecting the price of food and energy. In fact, there has been a worldwide fall in housing prices, particularly notable in Britain and the United States, at a time of steep increases in food and oil prices. The price of manufactures has been held down by the growth of low-cost Asian manufactures.

There is much discussion of the scale of the global economic crisis. Some people expect it to cause a crisis comparable to the Great Depression, a wiping out of capital values, a liquidation of global debt. We cannot yet be sure, but we can see that the main factors of global economic development are all in difficulty. On the one hand, there is oil at $130 per barrel — on the other, there are banks writing off billions of dollars of assets.

I do not see any basis for economic analysis that would not throw up really alarming signals. These adjustments of the fundamental factors in any analysis put huge pressures on every government. In the 1930s, most governments were destroyed by the slump. In Britain, Labor lost office in 1931; in Germany, Hitler came to power in 1933, as did Franklin Roosevelt in the U.S. I fear that process will be repeated, even if only by democratic defeats. The storm of the world is still rising.

Regards,
Lord William Rees-Mogg

Economic Alarms

http://amcon.proboards99.com/index.cgi?board=basic&action=display&thread=534

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