Wednesday, April 30, 2008


Dubai is the futuristic city in the desert that has the world's tallest hotel, the second largest marina in the world, the world's largest museum, the world's largest indoor ski slope, and an underwater hotel accessible by submarine. In Ben Mezric's new novel, Rigged, he writes that that by 2010 the emir's goal is to have 15 million visitors annually. In a country made on the fortune of Allah's black blood, Dubai is planning to build a city that attracts tourists. Currently, oil accounts for only 6% of the country's GDP.

In Thomas Friedman's The World is Flat, the author postulates that countries that have McDonalds do not go to war with each other. If UAE meets its goal, there will be peace in the middle east.


During a class lecture, long time friend, Mike Oso, mentioned the term "latifundistas" to explain how land is captured by market forces. Mike showed how farmers in El Salvador don't live on the land they farm so that more land could be used for crop production. Kevin Carson explains the concept better so I'm reproducing it here.

The neoliberal model of large scale cash crop farming for export isn't exactly a product of the "free market."
The Enclosures have been reenacted in the Third World by latifundistas and other feudal landed oligarchs, in collusion with Western agribusiness.
The main cause of starvation, as you say, isn't underproduction. But it isn't too little "trade," either. It's mainly the lack of purchasing power. Land that was formerly was formerly used by peasant subsistence farmers to feed themselves is now used to grow cash crops for the export market, while those evicted peasants sit in shantytowns or hold begging bowls in the streets.
A free market libertarianism that takes the distribution of "factors" as given, without regard to issues of justice in acquisition, really isn't libertarian at all.

A link at Wikipedia on related matter is here.

Tuesday, April 29, 2008


Kevin Carson is the author of Studies in Mutualist Political Economy which is available at Amazon. His email response about how to alleviate foods shorts using Genetically Modified Organisms is "On GMOs, I don't think they're the answer for increased food outputs. If you look at the material from F.M. Lappe in the blog post I linked, she makes a pretty good case that such Green Revolution seeds are useful mainly for large-scale, subsidized agriculture, with subsidized irrigation, on stolen land. Traditional varieties are far better adapted to drought and pests, without the subsidized inputs, and would arguably be a more efficient source of food if the big operations were taken off the govt. teat. Then, too, all the EU (and U.S.) would have to do to eliminate them would be to repeal the patent monopolies they depend on and stop providing taxpayer-subsidized R&D. They couldn't survive in a free market without "intellectual property" and restrictions on commercial free speech (like food libel laws and FDA labelling restrictions). " I have to agree that economies of scale would have to be so enormous to make GMOs affordable. To read Kevin's post on Green Revolution, go to his website or click on his name above.

Monday, April 28, 2008

Let Them Eat Dirt

MSN on hunger. Here.

Tyler Cowen on Freer Trade and hunger. Here.

Dani Roderick on hunger. Here.

The Cagle Post on Ethanol and hunger. Here.

A gated version from the Economist. Here.

End ag subsidies here.

Sunday, April 27, 2008

NFL is a Monopoly

A jury of six found in favor of the United States Football League and awarded nominal damages of $1 in an antitrust suit. Nominal damages are awarded to plaintiffs who have not incurred any actual damages.

Why doesn't the government regulate the NFL? I posit that the demand curve is very elastic and thus very sensitive to price changes. In addition, economies of scale might might the NFL the most efficient producer like a natural monopoly. I find it ironic that a sport that values competition reduces competition for market share.

Saturday, April 26, 2008

Genetically Modified Food

Economists use the production possibilities curve to show consumption choices and opportunity costs of those decisions. Every decision comes with a cost that is sometimes hidden and has unintended consequences. If you have seen the cover of Freakonomics you might have wondered why the sliced apple reveals an orange underneath. Economics is all about what you don't see or the invisible hand. One invisible consequence of our consumption bundle is food fueled inflation.
In my opinion, as consumers voted for a choice of more biofuel, they have inflicted an unintended cost of starvation around the world. In the short-run, consumers must now make lifestyle changes in how they allocate their choices. In the long-run, technology might increase crop yields and shift the PPC outward. Monsanto produces genetically altered food that would immediately increase the food supply, but there is considerable resistance from the European Community. For 50 reasons why GMF are bad, click here.
In the short-run, the supply of food is inelastic given the growing season for food. So is the supply of tillable land. GMF are not the answer for everyone, but provide a starting block for more innovation especially as the long term effects of GMF on health and the environment are uncovered. To suggest that GMF is the only alternative is to suggest a false dilemma. But it is an alternative.
Another alternative is to eliminate the inefficiencies of the market like subsidies. The government should remove the crop reduction program which artificially restricts supply and let the market equate a the socially optimal equilibrium. All tariffs and quotas should be removed and money that is spent on Ethanol subsidies should be reallocated toward crop yield innovation. Liberalizing the market will allow consumers who vote with their dollars to choose the consumption bundle on the PPC that reflects their values. Government intervention with price controls has distorted the market.

Infant Industry Argument

The Kum-N-Go is a convenience gas station near my apartment. When I pull in to the pumps, Ethanol is clearly marked on the pump. Looking at the pump prices, Ethanol is 10 cents cheaper than the alternatives. My owner's manual says to use nothing but 87 octane since the other octanes are not designed for my automobile. So like many Iowans, I feed my gas hunger with corn blended gas without weighing the costs and benefits. I now feel like I was duped by slick marketing to believe that Ethanol was an infant industry.

About five years ago, I wanted to be a silent investor in a new Ethanol plant to capitalize on the new bio-fuel that would help the local economy and relieve our dependence on foreign oil. Now, I watch as tortilla riots in Mexico and retaliatory trade tactics teach me a lesson I have taught many times. Government intervention into the market causes distortions and unbalanced trade patterns. Ethanol receives a 50+ subsidy which encourages farmers to overproduce corn at the expense of other needed ag products. As an example of a market distortion, farmers are now slaughtering their steer instead of feeding corn to their livestock. As Don Smith, Mt. Ayr, told me, "Corn sells for $5 a bushel and livestock sells for 88 cents a pound."

Like many others in Iowa where corn grows just about everywhere even in the sewers, I believed that subsidizing Ethanol production was a good policy to help Ethanol producers get off the ground. But, they've grown use to free money. You can bet the farm subsidies will not end soon even in the wake of famine in West Africa, malnutrition in Bangladesh, and starvation in Thailand.

Friday, April 25, 2008

Eat Dirt

Subsidies are killing children. Let's end not amend ag subsidies to lower the price so children in Bangladesh can have rice. The CATO institute explains it here. Export subsidies to US producers of ag goods are given by the Commodity Credit Corporation and the Export Import Bank. In Haiti people eat dirt. Wikipedia has an entry on geophagy, the practice of eating dirt, here. The Boston Globe has a picture of the dirt cookies here. Subsidies transfer tax revenues to the producer and allows the inefficient producer to survive. I seldom make normative statements, but when I fill up my car with Ethanol, I now think of children eating dirt or living on a bowl of rice. Ethanol is subsidized encouraging more corn to be produced and less wheat. The higher prices for both ag products are killing children around the world. The Ethanol subsidies should stop.

Tuesday, April 22, 2008

Harry Potter

Writer J. K. Rowling is suing a former middle-school librarian for copyright violation. The case is a toss up according to I think she will lose since you copyright an idea which defines a lexicon. The decision is due May 8, 2008.

Sugar Subsidies

Did you know that US citizens spend twice as much on sugar has foreign countries? Through a complex model of price supports, sugar is actually subsidized. You can read more here.

Are there poor farmers in Manhattan who need crop subsidies? You can find out here.

Theory of Justice

What is a fair way to distribute income? Is equal "fair"? In the Theory of Justice, Havard philosopher, John Rawls proposes a way to finding out how individuals view fair.

Rawls proposes that people stand behind a veil of ignorance in which they can't see what they will have. Then before the veil is drawn, have them split up the economic pie. Rawls believes people will share the pie in an equitable way.

In this thought experiment, I believe goods and services will be distributed fairly, but they won't stay equitable. After a way some will have more, some will have less, and some will have none. I can watch a game of monopoly and see this outcome. The notion that society distributes income is a misnomer. No one cuts the economic pie and distributes it like a server at a cafe. People earn their marginal product. Those who are the most productive earn the biggest share of the pie.

Credit and Subprime for Subprime for CreditThe links are from my AP listserve.

Sunday, April 20, 2008

Ricardian Rents

Roger A. Arnold writes in his economics textbook, "In nineteenth-century England, people were concerned about the rising price of grains which were a staple in many English diets. Some argued that grain prices were high because land rents were rising rapidly. Fingers began to be pointed at the landowners, as people maintained that the high rents the landowners received for their land made it more and more costly for farmers to raise grains. These higher prices were passed on to consumers. According to this theory, lower rents would mean lower grain prices."
David Ricardo argued that the direction of reasoning was faulty. Grain prices were high because there was a high demand for grain which caused the price of land to increase. This same argument is what I hear today when I hear people complain about high fuel prices.
These people argue that the oil companies raise the price of oil which in turn rises the price of fuel. They argue that lower oil prices would lead to lower prices at the pump. They have it wrong. Demand is, pardon the pun, fueling the prices.
George Santayana gave his portend warning that "those who cannot remember the past are doomed to repeat it." Although I don't agree with the statement, I would like to change it to "Those who don't know economics are doomed to repeat their ingnorance over and over in front of large crowds who will use it against them in the future."

Mexican Restaurant Model

Almost all Mexican restaurants in Muscatine are family owned. I postulate that in a market that textbooks describe as monopolistically competitive, profits disappear faster than trick-or-treat candy left out in a bowl on Halloween.

Recently, the Guadalajara family restaurant closed down. Some downtowners think that patrons simply changed their tastes and preferences. Others think that the clientele changed dining habits. I think competitive forces eliminated profits.

I was wondering, however, if so many family owned restaurants are profitable as costs can be reduced. In the graph, mentally move the red line down and profits increase. If employing your family to work lowers production costs, then this seems to be a business model for many aspiring entrepreneurs.

Tyranny of the Market

A week ago, Mike Hutchison, lectured about third-world economics based on his experiences in El Salvador. Many of the points Hutch made during his slide show was how the market unequally distributes goods and services. Why are some nations rich and some nations like El Salvador poor?

El Salvador is affectionately called "The Tom Thumb" of the Americas since the country is about the size of New Jersey. With a population of 6.5 million, every profitable opportunity is exploited. For pictures of the political climate and views of geography not available on a map, you can join the 143,000 visitors by clicking here.

One theory why countries are rich comes at the expense of those who are poor. This is what Thomas Sowell calls the zero-sum fallacy. That is, one countries gain is another's loss. So when the US trades with El Salvador, US gains and El Salvador loses. If this was true, then why would anyone trade? El Salvador would be better keeping their coffee and sugar instead of trading. I don't buy this theory as it is contrary to the theory of comparative advantage. Also, simple logic will prove my point. At one time China and India were poor. As these countries expanded trade, both became posperous. Think of the millions who died under Mao's communism who would have been helped by open markets. countries trade because they mutually benefit.

Some social scientists theorize that some countries are poor because of Dependency Theory. In this theory, resources flow from the poor to the rich like a vaccuum. This is another spin on the zero-sum fallacy, but is a serious criticism of trade. Suppose that the US wants to expand its market to achieve economies of scale. Natually, the US will expand to those countries that have the lowest marginal cost or the poor countries. I don't buy this theory either because proponents point to anecdotal evidence that suggests that decreases in the wealth coincided with increases in wealth of rich nations. I believe that this commits the Post Hoc Ergo Propter Hoc Fallacy. Productivity increases wealth since more can be produced sometimes at a lower cost.

El Salvador produces coffee and sugar. Both ag products are subject to natural disasters and competitive forces which reduce the price received by producers.

The market is not the best system for distributing goods, but it's better than communism. It's ironic to me that the choices people make act like a tyrant when dictating who gets what and how much. Perhaps the next evolution of macroeconomics will be a social theory that enriches everyone in world not just those who own the factors of production.

Saturday, April 19, 2008

Endowment Effect and Credit Cards

When Jake received his Mastercard in the mail with a $500 credit limit, he maxed it out that same day. I am wondering if Jake thought the money was free and acted in response to what behavior economists call the Endowment Effect. Jake clearly values the worth of the goods more than $500 as he will pay more than that plus interest.

Emily Lofgren Places First in State FBLA

Muscatine High School Junior, Emily Lofgren won the state FBLA Law contest on April 4, 2008. I am so proud of her as she exhibited all of the traits of a winner. On Tuesday nights, she would go to the library to study negotiable instruments, wills, and bailments while in a multitude of school activities and dance. Emily is the type of new student who is proving the old paradigms wrong. The old school of thought is to specialize. The new school is showing that today's students are capable of more than past generations.

This is Crude

The following picture along with an implicit thought that this will be our transportation if crude oil prices continue to climb. On several levels this is interesting. Suppose that someone in 1890 saw the prices of homes increasing. Would this man think that homes would be unaffordable in the future? Using this reasoning, how can people afford to the homes today? I also believe that if the price of oil gets too high, then alternate sources of fuel will become profitable for businesses and alternate forms like fuel cell, solar, hydrogen and others will then be substituted for light, sweet crude. If this isn't so, then why are we living in beautiful homes and not mud huts?

Should You Change Majors?

Erika had changed her major from Economics to Finance to Accounting. Her parents were not happy with her. They wanted her to choose a major and stick to it since each change was costing them more. Erika wanted to make the best choice. She wanted a career that was rewarding, fulfilling, and made her happy. Should Erika choose a major and stick to it or keep her options open?

A choice like the one Erika has to make happen to all of us every day. Do you watch Family Guy or CSI? What do you want to eat for lunch, pizza or sub? I think everyone considers what they give up when they make decisions and cling to bad choices because they are afraid that making a leap or taking a risk might yield less satisfaction. Thus, people make decisions on what economists call “sunk costs.”

A sunk cost is a cost that cannot be recovered. As an example, suppose you rent the movie, No Country for Old Men. After 30 minutes of watching this movie, you get the feeling that this isn’t exactly your kind of movie. Do you finish watching it or shut it off and watch another movie? Most people would reason that they’ve already invested $5 and 30 minutes into the movie so they might as well finish it. This is irrational decision making since you’re letting the 30 minutes you’ve sunk into the movie dictate the next hour and a half of your time. If Erika sticks to her original Econ major, it is like watching the rest of a movie that she doesn’t like. Erika should change her major and forget about the time she has sunk into her education.

Here’s another example of sunk cost decision making. Let’s say that Amber meets a boy that she’s intensely attracted to. Should she stay with him the rest of her life or should she keep her options open?

There are many happily married couples who were high school sweethearts, but is this rational? Suppose there are 100 eligible boys that Amber could date. If she clings to the first boy she dates, then the probability is 1/100 that this is the right one for her. If Amber dates 99 boys and rejects them, then there’s a 1% as well that the last boy is the man of her dreams. She should date more than one but less than 99. Probability theory predicts that Amber should date 37% of the boys then choose the next best boy that is better than all of the ones she has dated and marry that lucky one. Now, don’t you wish your mother would have given you advice like that?
Erika should try all three majors in college then select the one that is the best of the three alternatives. Making a decision in this way will eliminate sunk cost decision making and maximize her happiness.

Are Casinos an Oligopoly?

Do you like to play cards? In the movie 21, a team of MIT students develop a system for beating blackjack in Las Vegas. As the players become known on the strip, they are banned from casinos who refuse their business. The Plymouth Agency distributed a facebook of the card counters with their aliases and disguises to most of the casinos on the strip. Each casino had similar rules and methods of operations. I think the casinos act like an oligopoly. Given that the size of each casino is fixed, it follows that a Cournot pricing model is employed. Information about whales, gorillas, and big players can be shared instantly. I believe there is substantial collusion between casinos to cooperate on prices making the casinos an oligopoly.

Economics of Church

Why do you go to chruch? I'm sure there are many reasons, but while attending the Cornerstone Baptist Church in Ames last weekend, I reasoned that many attend church to learn about the teachings of Christ. For example, this week the congregation is learning about "The Sermon on the Mount (Matthew 6:1-4)." I reasoned that many attend church to obtain the information about faith. I noticed as the members of the church bought coffee and cookies, music CDs, and books. Do churches try to maximize profits? If so, then the pulpit model resembles an information model that presents some interesting problems for the church.

The church model that I would draw is characterized by high fixed costs and low marginal costs and a downward sloping demand curve. As the graph shows, the church would maximize profits at point 1 and charge a price of P1. This is interesting to me since I believe that a church's goal should be to save as many souls as possible which occur at point 2.
How could a church charge a price? The church could require an offering at each service, require members to attend classes after church, evangelize, minister, perform on stage, work in the kitchen, and distribute dogma. Since the church is a fixed supply in the short-run but the Word is perfectly elastic, the church models an artifically scare good and the church can maximize profits at point 1, where MB = MC.
My observation is that an information good is bundled to add value. Thus, coffee and amenities are offered at a low opportunity cost. Wikipedia writes, "That is the strategy of grouping multiple items together and selling them as a group. Bundling allows sellers to better predict the demand for the bundle. While it is difficult to know which items in the group an individual person wants, they are likely to value some of the items enough to purchase the bundle, even if they don't value any of the items enough to buy it separately. However, this only works when it doesn't cost much to sell extra items in a bundle that are unwanted. Information goods fit this profile since it doesn't cost anything to make extra copies.That is the strategy of grouping multiple items together and selling them as a group."
Many atheists point out that the Bible is full of contradictions. Perhaps it is a sad irony that the economics of the church are also contradictory. In this blog, I have only presented one side of the argument contrary to John Stuart Mill admonition. I welcome discussion.

Gas Prices Primer

Click here for an excellent primer on gas prices. Several weeks ago, I wrote my own paper complete with 30 jokes and cartoons about gas prices which I will send on request. Simply send your request to:

Monday, April 14, 2008

The Words of the Prophets

In a country where there is no freedom of speech, freedom fighters paint their words on the walls. For a primer on Graffiti, click here. Click here to see the graffiti of El Salvador. Truth will find a way.

El Salvador Economics

Recently, Mike Hutchison presented his experiences and perceptions to an economics class. My thoughts continue in this post. For pictures of El Salvador communities, click here.

My father used to say, "Everyone has to eat. If you get a job in the food industry, you'll always have a job." When looking at El Salvador, one finds a country rich in natural resources. A country so robust in natural resources should be able to supply so much food to its country that they could have all they want at a low price. So why does food have a relatively high price?

Ag products like corn and wheat tend to be a normal good. But these goods are also income inelastic. This means that as incomes increase, people increase their demand for ag products but not noticeably.

Ag markets are notoriously vulnerable to supply changes because of weather and technology. El Salvador lies along the Pacific ring of fire, and is thus subject to significant tectonic activity, including frequent earthquakes and volcanic activity. El Salvador's position on the Pacific Ocean also makes it subject to severe weather conditions, including heavy rainstorms and severe droughts, both of which may be made more extreme by the El Niño and La Niña effects. These natural disasters can dramatically change the price of domestically grown product.

Technology continually pushes the supply of ag products to the right lowering the price. Advancing technology, uncertain weather climate, and an income inelastic demand for ag products make producing corn, wheat, and soybeans a poverty choice. A worker who chooses to work as a farmer is choosing to live on a subsistence income. Perhaps this is why now more Salvadorians are now working in the service sector such as tourism. El Salvador's tourism industry has grown dynamically over recent years as the Salvadoran government focuses on developing this sector. Last year tourism accounted for 4.6% of GDP.

On the beaches where you can see the San Miguel volcano and perhaps hear Reggae musicians play percussion instruments heralding the revolution, economics is playing a different tune--provide the goods and services that maximizes profits in the tourist industry then trade for those goods that can be produced at a low opportunity cost---like food. Economics is the study of the way people behave. Economics is an invisible hand that guides in decision making. It's a sad irony that economics guides the Salvadorians to make decisions that the guriellas gave their lives to make.

Sunday, April 13, 2008

Random Walk and Gambling

I was so impressed with A Random Walk Down Wall Street that I only teach efficiency markets. Since watching the movie 21, I've renewed my interest in statistics. To the left is a graph of 8,000 coin tosses. Note that there can be an extended time when the number of heads that occurs outweighs the number of tails. During this time, a gambler might conclude that he is hot or the outcome is because of his skill. Yet, if he plays the game long enough, he'll break even. In the moive American Gangster, I heard a quote that went, "There's a difference between quitting and quitting while you're ahead." If gamblers would quit when they were ahead, then I could understand why they play the game. I tend to like the moral Bob Seger song, "You're Still The Same". If you play the game long enough, you'll lose. Gamblers who think that they have a hot hand are committing a logic fallacy since the cards don't remember the past.

Third-World Economics

My long-time friend and brilliant colleague, Mike Hutchison, presented his slide show on his experiences in El Salvador last week. As a young teacher, I was greatly impressed with my colleague's commitment to human and civil rights. His presentation was deeply philosophical and contained complex economic principles. If I can also digress, I also learned how to stand up for principles that one believes in. Now, on to several salient and penetrating thoughts that I had during the 45 minute presentation.
Mike pointed out that during the time he spent in the country the main exports was coffee and sugar and food needed for subsistence was imported. He pointed out that food was just as expensive in El Salvador as it was in the United States. The irony was that the Salvadorian's could just as easily grow their own food instead of import it and growing it would be cheaper. I objected to his conclusion as I think the economy is working at its comparative advantage and ag markets are textbook examples of perfectly competitive markets. Since the USD is the currency that is used to purchase goods and services, the Law of One Price prevails.
Implicit in this one-minute slide was that workers are being exploited by the market. This was my favorite part of the lecture, and one I spent the most time thinking about. Mike's point was the choices we make have consequences--some undesirable. The exploitation argument is powerful since it excites an appeal to sympathy (argumentum ad misericordiam). The argument offers an emotional explanation of income differences that might be the result from differences in ability. It also redirects the blame rather than accepting the burden for change and instituting a revolutionary spirit. The argument imputes a sense of entitlement and morality to the lower class. It other words, using exploitation as a reason for living standards is a cop out.
Let's test my theory. Due to the efforts of guerrillas during the Salvadoran Civil War and FMLN, elections have become free. I don't know if the political climate has changed, but markets are freer. What has happened to ag markets? Wikipedia lists El Salvador among the 10 poorest countries in Latin America. Approximately 2.4 million (35.2%) people live below the poverty line, its GDP real growth rate is low compared to its neighbors, and 6% of the population is unemployed with much underemployment. Has the standard of living increased or decreased since the political reform?
Our public school system is geared toward inducing our best teachers to retire. It's sad when great teachers who have developed vast amounts of intellectual capital leave our system because it's more beneficial. The debate and stimulation from one minute of Mike's presentation is greater than any of the district initiatives that are pushed on us like the economics of El Salvadorian president Napoleon Duarte pushes on his countrymen.

Monk and Marginal Product

While investigating a murder, Mr. Monk in Outer Space, Natalie and Monk visit the Forensic Accounting Unit of the SFPD. Monk discovers that this unit recovered 22 million in cash, stocks, and other assets from white-collar crime. As a result, the FAU has the coolest tech toys in the universe. Natalie and Monk question the appropriation of funds recovered from criminals. Should the FAU be allowed to keep the money recovered in order to help them fight crime better or should the money be distributed equally among all departments?

The discussion revolves around what department is more important to the SFPD. Should the unit that busts a narcotic ring get to keep the money recovered or should it be divided equally? Murder is a capital crime, but embezzlement is not. Monk wonders if the money could be better spent solving murder cases. What about child abuse cases where there's no recovery? I argue that the FAU should be allowed to keep their marginal product.

Card Counting and Return on Investment

In a perfectly competitive market, all profits have been competed away. Economists call this normal. Economists explain it like this. Say you are making a profit selling used paper back books on Ebay. Someone will see you making a profit, and they will start selling books as well. This increases the supply of paper back books and decreases the price. When the price decreases to the point where no one is making a profit, no one enters the market and those left are making a normal profit.

In the movie "21", the MIT students are shown making a killing by counting cards in Blackjack. What is the reality? If someone is making that much money, others will enter the market and compete profits away.

Newsweek reports that those who are able to count cards make a 1% return on investment. This is hardly enough to attract new participants into the market. In Las Vegas, if the house sees you counting cards, you are asked politely to leave. Blackjack is an odd equilibrium to me. It combines skill with unfavorable risk. I am risk-averse. It seems to me that more money could me made investing in T-bills.

Saturday, April 12, 2008

Half Empty or Half Full and Behavior Economics

Do you see the glass half empty or full?

When my father passed away, I only had my mother left. I started to make more trips to Davenport, Iowa, to visit her on the weekends. I felt that I didn't want to have regret when died. The regret was never knowing her in her old age. My behavior implies that I value her more than before. I am wondering if that's rational and reflects the relative scarcity.

Organ Transplants

My enriched economics textbook asks what would the supply and deman for organ transplants look like. I think law and economics are ways of looking at the same thing. This is how I answered the assignment. If the "floor" makes it illegal to sell organs, but legal to be a donor, then the floor would be set at zero. From the graph, 100 organ donors would be willing to supply kidneys, lungs, livers, and other organs. The higher equilibrium suggests that there is a black market for these organs. My textbook has a case where the price of a liver reached $5 million on Ebay before the illegal online auction was shut down.
In Made to Stick, the authors tell a tale of a kidney heist. Chip and Dan Heath argue that kidney harvesting is an urban myth. Econ 101 implies that there is an equilibrium for illegal organs.

The Appeal

The Appeal, by John Grisham, "centers on a small Mississippi law firm who wins a big verdict over a chemical giant, Krane, that has spread carcinogenic pollutants. Krane, fearful that this verdict, if not overturned, would set a precedent that would eventually destroy it, goes into action. It files an appeal that will find its way to the state supreme court, and hires a "dirty tricks" firm to unseat a sitting justice believe to be unfriendly. This is a viable strategy since Mississippi elects their Supreme Court justices and 69% of its voters know little about the court's candidates." This according to the comment posted by Thomas M. Loarie on Amazon.

After reading the book, a colleague of mine became upset that judges could be bought. Was the book a work of fiction or fact? In a Q&A section for the book's promotion Amazon asks "The Appeal overtly suggests that elected judges can be bought. If the novel is meant as a cautionary tale, what's next--the Presidential primaries?" Grisham answers "Why not? Over one billion dollars will be spent next year in the Presidential primaries and general election. With that kind of money floating around, anything can be bought."

In the book Judge and Jury by Eric Helland and Alex Tabarrok, they conclude in a chapter entitled The Effect of Judicial Elections on Tort Awards, "Partisan-elected judges must cater to their constituents, and they must raise campaign funds to get elected."

The Appeal is fiction. If truth is stranger than fiction, then The Appeal might just become truth.

Friday, April 11, 2008

Tobacco Subsidies

Tobacco Subsidies in United States totaled $530 million from 1995-2005. To some students in my Enriched Economics class this figure staggared them with a contradiction of logic. On one hand, my students are enundated with facts about cigarette smoking and cancer from a federally funded program, Just Eliminate Lies. On the other hand, they hear the federal government subsidizes the very products that JEL is trying to eliminate. Why would the government subsidize big tobacco?

The econ 101 answer is that the government has imposed a price floor on tobacco sales. A price floor establishes a minimum price on a product. In the diagram, the equilibrium price is 50 cents. But a floor pushes the price to 70 cents. Notice that the quantity demanded decreases from 400 to 200 when the floor is legislated.

But legislating a price floor the quantity of smokers decrease, but the revenue increases for $200 to $262 (.70 * 375), assuming inelastic demand. The great German philosopher, Immanuel Kant believed that your actions should be consistent with your ethics. The government's apparent contradictory actions are consistent with their belief that smoking kills. This joke is taken from Aristotle and an Aardvark go to Washington shows how sometimes actions and beliefs conflict.
A woman is in her doctor's office, when she suddenly shouts out, "Doctor kiss me!" The doctor looks at her and says that it would be against his code of ethics. She pleads with him to kiss her and each time he refuses. Finally, he says, "Look. I'm sorry. I just cannot kiss you. In fact, I probably shouldn't be sleeping with you."

Thursday, April 10, 2008

Why Are So Many College Professors Foreign Born

Many past students of mine complain about their instructors in college being foreign. I had the impression that the professor for the class was doing research and put a bright, teaching assistant in charge of the class. I was wrong.

There are many more graduate students from foreign countries than the US. Since teaching positions at the universities are filled by doctorates, it only makes sense that the supply of professors has increased as more qualified, foreign-born workers are hired by the universities. In the near future, you will find that 2/3 of the instructors were born in India, China, Japan, France, Germany, the Middle East, and Scandinavia. You will also find that the majority of the students are US born. Perhaps it will be a strange irony that foreign nationals will be teaching traditionally American subjects. At least, US students will learn that hard work and not bequests are the way to life's fulfillment.

A kind of related note that many of our high school students are taught about the US Constitution by a Kosovo immigrant.

Wednesday, April 09, 2008

File Sharing

Technology allows us to make copies effortlessly or at a low opportunity cost. I think technology is like a photocopy machine that encourages file and information sharing. Thus, copy and paste functions make grading student papers harder but does increase the content. Weighing the costs and benefits of the proliferation of information is difficult especially in the area of intellectual property. In the following letter to the editor of the Quad-City Times, I try to explain why the courts should enforce copyright laws about file sharing.

Enforcing copyright laws is the answer to illegal file sharing (Federal courts shore up music industry’s old business plan) not minimizing the relative fines. The fines must not be high enough if one million files are illegally downloaded on a daily basis.

Intellectual property rights must be enforced to induce musicians and artists to continue to create more music. Think about how much work you would supply if you had to give it away. Today, copying a song from Lime Wire or Kaaza is as easy as a couple of clicks of the mouse.
When a musician writes a song, all of the cost in incurred in making the original. The next 10,000 copies can be produced with little or no cost. This presents pricing problems for the music producer since consumers equate the price of a product with the cost to make it. When music buyers see the $1 price of a download on iTunes, they believe the price is too high so they share files on a P2P network. This is interesting too me as these same buyers would not take a nickel from the coffee fund but think nothing about taking intellectual property.
Today, just about anything can be digitized. Photos, television shows, lectures at the university, and textbooks are a few information goods that can quickly be digitized and shared. The federal courts must enforce copyright laws or the amount and quality of intellectual property will diminish. In this information age, protecting the rights of information providers that include musicians should be a robust function of our courts.

The Movie "21"

In the movie "21" MIT students devise a card counting trick to beat the house in Vegas. In the opening scene we see the brilliance of a character solving the Monte Hall Problem. I was wondering why these geniuses always kept the same hand signals and always went to Vegas. Those two mistakes were huge. In competition you never go to the well too many times.

Tuesday, April 08, 2008

Lose Yourself in the Music

Here's an excerpt from a letter I sent to the QC-Times.

The Sunday Editorial Page was a shock to me. A cursory reading of the the article, seems to indicate that it's okay for listeners to disregard intellectual property rights when swapping P2P files. I am sorry to read that your stance is to encourage lesser penalties for those who steal music. I believe that the fines should be even higher to discourage file swapping on sites like Lime Wire and Napster. Society must believe that the price of music is too high relative to the benefit they receive from illegal downloads or they would be willing to buy the songs instead of steal them.

When a good is so abundant, society values the good at a low price. This is why water is cheap and diamonds are expensive. Music is abundant. Music is as easy to copy as pushing a button on a photocopier. But, artists have to know that their work will be protected by copyright laws or they will not invest the hundreds of hours necessary to write, record, and promote their work. Think about how much work you would be willing to do if you had to give it away.

In work completed by Dan Ariely, he found that workers would steal near money. By near money, he meant they would take home a pencil or paper clips from work. He found that they wouldn't steal a nickel from the cash draw, but when something of little monetary value was abundant, then they would be slightly likely to take it. Students in my class admit to having to much music in their collection that they don't even know what they have. With the ease of sharing music, it's easy to be tempted to steal a near money song with a value of $1. As rapper and hip-hop musician Eminem spit, it's easy to "Lose yourself in the music the moment you own it."

Monday, April 07, 2008

Post Hoc

Often times I read in the newspaper that the current economic problems are caused by the housing crisis. Although housing is one problem, I believe there are many other variables contributing to the downturn. One variable just might be expectations. To say that housing is causing the current crisis, is to say "because of this, therefore this" and commit the post hoc fallacy.

Sunday, April 06, 2008

Clarence Thomas and Oral Arguments

In the March 10 issue of TIME, the magazine reports that 0 is the number of times in the past 2 years that Supreme Court Justice Clarence Thomas has asked a question during any of the court's oral arguments. 144 is the number of cases that have been brought before the court since he last commented, on February 22, 2006, during a death-penalty case. This kind of reporting is a misuse of statistics to paint a bleak picture.

During the Burger years, it was customary for the 9 justices not to ask questions. It wasn't until Scalia joined the court in 1986 did the court expect a hot bench.

In Jeffery Toobin's, THE NINE, I learned that the justices isolate themselves in their offices and don't have an open-door policy that allows casual drop in chats. In fact, Thomas expected that he would be able to walk up and down the halls to find sharing of best practices. What he found was quiet, reflective erudition. Given the time of Justice Thomas induction, I would conclude that a quiet introspection is his legal paradigm.

Thomas Schelling

Winner of the 2005 Nobel Prize in Economics, Thomas Schelling, wrote about how small changes in tastes and preferences could "...lead to such very drastic equilibrium results that looked very much like extreme separation." This is what I was thinking as I attended a service at Sacred Heart Church on a cold and windy day Thursday. The proud neighborhood where in my mind's eye I could hear cathedral bells disappearing down the valley and the priest praying in Latin, "Abbas , Filius , Sanctus Phasmatis." Small changes in a preference for white workers to live in the suburbs, changed the composition of the residents around Iowa Avenue and 10th Street in Davenport, Iowa.

Now, mansions are boarded up, paint is blistering off homes where the doors hang on one hinge, and weeds crawl up to the doors on cracked concrete stairs. As the white labor force moved to the bedroom communities like Bettendorf and Pleasant Valley, the tax base dwindled in the city, schools closed and houses abandoned. Even the streets around the school express the pain of white flight. Brick have been heaved by the extreme hot and cold weather in Iowa making the street look like deep lacerations exposing the earth beneath. A statue is the church courtyard expresses the pain, "Your hands are all I have."

Let's assume that Davenport Central (pictured) is predominately black while the surrounding school districts are predominately white. Other things being equal, black teachers have no preference where they work, but white has prefer the suburbs. Let's assume that salaries are higher in the suburbs than in Davenport. Will the salaries for black teachers be the same as white? Will a small preference lead to a vast segregation between black and white population? Will the quality of teaching be the same in both schools?

As the funeral procession passed businesses like the Pink Poodle, I mourned the passing of a great church and a friend. Impressed on me were the compelling conclusions of Schelling's "Dynamic Models of Segregation." What appears to be segregation is simply a preference with unintended consequences.

Subjective Probability and the de Finetti Game

Ask any AP student how they did on their exam, they will give you an estimate of how they "feel" about their performance. How do you know if the student is giving you the whole truth and nothing but the truth?

The Italian statistician, Bruno de Finetti, found a way to measure subjective probability. Say you ask a student how they did on the AP Micro exam, and they say the aced it. How did they really do? Tell your student, "We are going to play a game. You have a choice. You can either draw a ball from a bag that have 98 red balls and 2 black ones, or you can wait and see how you did on the test. If you happen to draw a red ball out of the bag, I'll give you $300. If you wait to see your test results and you earn a 5, then I'll give you $300. If your student says, she will draw from the bag, that means she doesn't think the probablity is 98% that she'll earn a 5. You then ask questions like, now their are 80 red balls and 20 black ones. Do you want to draw from the bag or wait for the exam results?

When you ask students if they are interested in learning about a topic, they will less than truthful. When residents are asked how much they will use a new park, they will over-estimate the amount of time they will use at the park. When teachers are asked to complete a survey about administrative performance, they will offer words that do not convey their true feelings. When obtaining subjective data from a population, the de Finetti Game will help extract the truth.

Saturday, April 05, 2008

Campus Parking

A negative externality occurs when the social costs of consumption are greater than the private costs. Say students are leaving school at the end of the day. Each student acts in their own self-interest trying to get out of the parking lot as fast as possible. Each student acts without regard to the "costs" that they are imposing on others and society. For example, while waiting in line, cars pollute and block emergency vehicles. As the graph to the right shows (click to enlarge), the optimal equilibrium should be less than Q* when all costs are included. Given this clinical analysis, why does Muscatine Schools insist on two exits from the school?

The average wait to exit the school after the 3:15 bell is 30 minutes. Our school should buy the property from the city cemetery and make an exit to alleviate traffic congestion. I believe that the cost of the investment would be less than having students and staff waiting in line to exit the school. Most students do not drive straight home. Some go to work or run errands or even go out to eat.

Other ideas include making Cedar Street and Mulberry a one-way when school is being released, staggaring out times, making students take a right turn to exit, using a traffic policeman to have students exit in a safe and speedy way, and making students pay to leave right after school.

Behavior Economics

What is the Endowment Effect? Behavior economists like Dan Ariely, believe that people value their possessions more than they are worth. So if you want to make someone feel good who has just suffered a loss, you could say, "Count your blessings". I thought behavior economics was a widely accepted discipline within economics but reading Cafe Hayek, I get the impression that many economists doubt the conclusions of behavior economics.

One such dispute is over the Loss-Aversion behavior characteristic. In this theory, actors are so risk-averse that they would rather take a loss that risk any potential gain. I completely believe this theory as I have seen it repeatedly played out in wrestling.

My strategy was to combine both the Endowment Effect with Loss-Aversion. I simply would give an opponent a leg to hold on to as bait, then I would use any of two or three moves to "counter". I learned this from Dan Gable before the 1972 Olympics. Dan said that American wrestlers would continue to hold on to the leg while you fed him his lunch. Dan said that Russian wrestlers would let go of the leg, but not American. Do the two effects explain property division in a divorce?

Community property law divide the property that married couples accumulated during their marriage to be divided equally in a divorce. Perhaps the respondent wants the house so bad that the division of property becomes unequal in the negotiation of marital assets. I can see this as being attributed to the Endowment Effect.

There's much to learn about this field, and perhaps I don't have the correct analytical paradigm to evaluate this field. But it's sure fun. Check out Dan Ariely's link to his blog on the right side.

Friday, April 04, 2008

Slippery Slopes of Monopoly Regulation

Von Maur has the greatest men's shoes in the world. Wednesday night I found a pair of Johnston-Murphy Venetian loafers that I just had to have for summer slumming. I checked out the price at and found that the prices were the same in both places. While searching Zappos, I noticed that there were over a hundred different kinds of shoe suppliers. The list is here. It appears to me that shoes are produced in a purely competitive market. That's what bothers me.

A ruling by the US Supreme Court in Brown Shoe Co., Inc. v. United States, 370 U.S. 294 (1962), blocked the merger between Kinney shoes stores and Brown because the merger would be the beginning of a monopoly. At the time of the ruling, Kinney had less than 1% of the market share. Like dominoes, each shoe producer would be bought up and a monopoly would "tie the laces up" on the shoe market. This is a slippery slope arguement since it allows for, as Thomas Sowell states in Economic Facts and Fallacies, "unlimited extrapolations". The Vietnam war was a result of this kind of thinking. This kind of thinking might say, if we allow girls to wear short skirts to school, next they will come naked. A slippery slope argument is a non sequitar.

When regulating the shoe industry, the government should allow the free market to distribute goods and services. With the hundreds of shoe supplies, you can bet that shoes are being bought and sold in a competitive market.

Thursday, April 03, 2008

Eulogy For A Friend

Nature's first green is gold,
her hardest hue to hold
Her early leaf is a flower,
but only for an hour.
Then leaf subsides to leaf,
So Eden sank to grief.
So dawn goes down to day.
Nothing gold can stay. Robert Frost

On a cold October day, I asked Don if I could marry his daughter. On that day, he gave me Cinderella. In stark contrast, today, we interned Don. As I write this, it's a cold rainy day in April. Heraclitus wrote that you never step into the same river twice. Just like there are no two rivers the same, no two people are the same. Don fought in WWII and was married over 60 years. Even in his last days, he lived with humor. With this may you fly away and find peace and love. Nothing gold can stay.

Inelastic Supply of Ag Products

How many boxes of corn flakes are there in an acre of corn? Don Smith of Mt. Ayr tells me that there are 42 boxes of cereal in one acre. How many head of cattle can Don raise in a year? On his 80 acre farm in between Ft. Dodge and Carroll, Iowa, Don is able to raise 65 head. "Why," he asks, "do I feed corn that sells for $5 at the coop to cattle at earn .88 a pound?"

Supply is very inelastic for the octogenarian farmer who sold is bar and grill to start farming. This means that Don can't buy more land to grow corn or feed cattle in the short run. Don is at the mercy of the market. This year has been good for Don. "I can only remember two times in my whole life that yields have gone up and prices have gone up." Don believes that the deman for ethanol and high exports to Japan account for the market annomally. In economic 101 terms, there has been an increase in demand and a decrease in supply. Don can't change how he feeds cattle or the amount of corn he's planted so if there's an exogenous supply shock in oil, Don cannot change his supply. This year, Don is going to store his corn crop hoping for higher prices in the future fueled by higher energy prices.

Do farmers play the market? Don does. He also has a part-time job driving new cars for the local dealership. Given the changes in supply and demand, why would anyone farm?

Wednesday, April 02, 2008

Stacking the Deck

This quote, from Aristotle and an Aardvark go to Washington, deserves logical inspection. "If the Iragi regime is able to produce, buy, steal an amount of highly enriched uranium a little larger than a single softball, it could have a nuclear weapon in less than a year."--George W. Bush, October 7, 2002. The authors, Thomas Cathcart and Daniel Klein analyze this statement by concluding that President Bush was "Stacking the Deck."

Stacking the deck is an argument that omits arguments that could refute the very point being made. In law this is equivalent to the prosecution's failure to provide exculpatory evidence to the defense. When stacking the deck, writers, presidents, and attorneys only give the evidence that supports their premise while withholding evidence to the contrary. This is like Oscar Mayer saying that their hot dogs have 10% less fat than Hormel's when Oscar Mayer's contains 50% fat. It's like our new tardy policy at Muscatine High School.

We were told that tardies to class are now nonexistent since the new policy has been instituted. The new policy punishes a student 30 minutes if the student is late. Students find it economically beneficial to skip the class instead of being late since there's no punishment for skipping. Our administration is stacking the deck when they only report tardy data and failing to report the data of students skipping. Students of science call this "data beautification."

Suppose Hillary says "We cannot take another four years of George W. Bush in the white house given how he has destabilized the Middle East." What Hillary is failing to omit is many of the other bills, laws, and economic policies that were good that also were administrated during his presidency. Hillary was stacking the deck. Is this why a house of cards quickly falls down?

Cool Websites

Do you believe that graphical interpretation of data is the key to understanding? Gapminder has some brilliant videos on human carbon emissions, examine the demograhpics of our changing world, and learn that the impossible is possible. You'll find video lectures too. Click here.

For everything water, click here.

Tuesday, April 01, 2008

How Money is Created

In this video, fractional reserve banking is explained. The video is funny and accurate, but comes at a high opportunity costs of 43 viewing minutes. The New York Fed also has some comic books that they will supply free of charge.

Facts and Fallacies in Economics

Russ Roberts hosts a podcast where he interviews leading economists. Recently, Dr. Roberts interviewed Tyler Cowen on monetary policy. The podcast can be found on iTunes or at

If you want to look at macro data in a new light, listen to Dr. Sowell discuss facts and fallacies. The link is found here. Highlights of the interview are found on the website for visual learners.