Alchian and Allen on the irrelevance of economists and economic principles to progress
24 Jun 2014 Leave a comment
Learn Liberty | The most dangerous monopoly: When caution kills
22 Jun 2014 Leave a comment
in applied price theory, applied welfare economics, economics, economics of regulation, technological progress Tags: drug lags, health and safety
The Ten Pillars of Economic Wisdom By David R. Henderson
22 Jun 2014 Leave a comment
in applied price theory Tags: David R. Henderson
- TANSTAAFL: There ain’t no such thing as a free lunch.
- Incentives matter; incentives affect behaviour.
- Economic thinking is thinking on the margin.
- The only way to create wealth is to move resources from a lower-valued to a higher-valued use. Corollary: Both sides gain from exchange.
- Information is valuable and costly, and most information that’s valuable is inherently decentralized.
- Every action has unintended consequences; you can never do only one thing.
- The value of a good or a service is subjective.
- Creating jobs is not the same as creating wealth.
- The only way to increase a nation’s real income is to increase its real output.
- Competition is a hardy weed, not a delicate flower.
Costs do not determine prices!
21 Jun 2014 Leave a comment
in applied price theory, Austrian economics, F.A. Hayek Tags: price determination
The misconception that costs determined prices prevented economists for a long time from recognizing that it was prices which operated as the indispensable signals telling producers what costs it was worth expending on the production of the various commodities and services, and not the other way around. It was the costs which they had expended which determined the prices of things produced.
The entrepreneur forecasts whether consumers are willing to pay enough to justify him bringing his product to the market. If consumers are unwilling to pay enough for him to make a profit, he will not supply in the first place.
The order brought about by the mutual adjustment of many individuals in a market
21 Jun 2014 Leave a comment
in applied price theory, comparative institutional analysis, F.A. Hayek, Milton Friedman Tags: Adam Smith, FA Hayek, Milton Friedman, Pete Boetkke, spontaneous order
Pete Boettke has written extensively about how The Wealth of Nations is about social order among strangers. The market is a social order much larger than our span of moral sympathy.
In civilized society [man] stands at all times in need of the co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature.
But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.
Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.
To realize this social cooperation, Boettke argues that social institutions must be in place such as private property, keeping promises through contract, and the acceptance of the legitimacy of the transfer of property by consent. The division of labour is the key to the ability of the market system to produce social cooperation among distant and different anonymous actors.
The civilising influence of commerce is well-known as is it as the key to peace. We fear neither Russia nor China because of extensive economic interdependencies makes war pointless for all. The common market ended war in Western Europe.
The co-operation and peace is a spontaneous product of Hayek’s concept of catallaxy which is
the order brought about by the mutual adjustment of many individual economies in a market
The youtube clip is Milton Friedman’s discussion of the famous essay I, Pencil and how strangers cooperated in peace and harmony in the market even though they might hate each other if they ever met. I, Pencil details the complexity of its own creation and the numerous people involved is the absence of a master mind, of anyone dictating or forcibly directing these countless actions. Instead, we find the invisible hand at work.
Capitalism is a system which enables cooperation between millions of strangers so that they may jointly pursue their diverse goals.
"Pot Is the New Pizza" in Washington State – Hit & Run
20 Jun 2014 Leave a comment
in applied price theory, economics, economics of regulation, entrepreneurship, industrial organisation Tags: decriminalisation, grey markets, marijuana
Evan Cox left pizza delivery and now employs 50 people in Washington state in his pot delivery company:
Although it is legal to buy marijuana in Washington state, the person who delivers it could be guilty of a felony. That hasn’t stopped Winterlife from attracting competitors.
Mr Cox has registered as a business with the city and state, but he cannot open a bank account, thanks to federal rules.
In April, he paid $167,000 in sales tax to the Washington State Department of Revenue—in cash.
via Door-to-Door Dope Delivery: "Pot Is the New Pizza" in Washington State – Hit & Run : Reason.com.
Taxes and the labour supply in Europe
20 Jun 2014 Leave a comment
in applied price theory, labour economics, labour supply, macroeconomics Tags: labour supply, taxes
Richard Rogerson, 2008. "Structural Transformation and the Deterioration of European Labor Market Outcomes", Journal of Political Economy found that:
1. Hours worked per adult in France, Germany, Italy Europe decline by almost 45% compared to the US since 1956
2. The decline occurs at a steady pace from 1956 until the mid 1990s, in contrast to the fact that the relative increase in unemployment occurs in the mid 1970s.
3. The decline in hours worked in Europe is almost entirely accounted for by the fact that Europe develops a much smaller service sector than the US.
4. Relative increases in taxes and technological catch-up can account for most of the differences between the European and American time allocations to the market and outside over this per.
Ohanian, Rao and Rogerson 2008 in "Work and taxes: allocation of time in OECD countries" found
1. A steep decline in average hours worked per adult and large variations across OECD member countries in the magnitude of this decline.
2. Changes in labour taxes accounted for a large share of the trend differences.
3. Countries with high tax rates devote less time to market work, but more time to home activities, such as cooking and cleaning.
4. This reallocation of time from market work to home work is much stronger for females than for males.
The higher elasticities of labour supply of women, and married women and mothers are beyond dispute. Modern empirical labour economics as led by Mincer was built around explaining female and joint labour supply.
Richard Rogerson, 2007 in "Taxation and market work: is Scandinavia an outlier?" Economic Theory, found that how the government spends tax revenues when assessing the effects of tax rates on aggregate hours of market work.
1. Different forms of government spending imply different elasticities of hours of work with regard to tax rates.
2. While tax rates are highest in Scandinavia, hours worked in Scandinavia are significantly higher than they are in Continental Europe with differences in the form of government spending can potentially account for this pattern.
3. There is a much higher rate of government employment and greater expenditures on child and elderly care in Scandinavia.
Examining how tax revenue is spent is central to understanding labour supply effects:
1. If higher taxes fund disability payments which may only be received when not in work, the effect on hours worked is greater relative to a lump-sum transfer.
2. If higher taxes subsidise day care for individuals who work, then the effect on hours of work will be less than under the lump-sum transfer case.
Robert Tollison on the bureaucratic reluctance to apply even simple price theory
20 Jun 2014 Leave a comment
in applied price theory, Public Choice Tags: Robert Tollison
We were told [at the Council of Economic Advisers to the President that]… you can’t make policy based on economic theory. … It was clear they weren’t willing to listen to an analytical argument. …
You can go all the way through the regulatory aspects of the government, and you just see that the basic choices are getting filtered out by some other mechanisms than what I would call economic sense.
And the role of the economist there is a stopgap—keep them from doing something completely dumb, just completely dumb.
The share market speaks on renewable energy
19 Jun 2014 Leave a comment
in applied price theory, energy economics, financial economics Tags: Bjørn Lomborg, event studies, renewable energy
The Moving Forces Behind Market Prices
18 Jun 2014 Leave a comment
in applied price theory Tags: Bill Allen
Some economic fallacies don’t die easily. Take the belief that the only determinant of a market price is the cost of producing the particular good. When a price rises or falls, it is commonly assumed that the item’s cost of production must have gone up or down. And there is a tendency to condemn price increases which are not apparently due to higher production costs.
But market prices are not mere reflectors of production costs….
What does determine [prices]… is competition among consumers for the available supply. An increased demand would cause the price to be bid up. A smaller available quantity would further intensify consumer’s bidding. Conversely, a diminished demand or an increased supply would weaken consumers’ competition and cause the price to fall.
There are thus two factors which determine a market price: consumers’ demand and the available supply. Either or both can change without any change in the cost of production…
The lesson is clear. Prices move up or down in order to ration the existing supply among those who demand it. And market-clearing prices can be very different for the same good at different times or in different locations–even though production costs are identical. So long-distance calls are cheaper at night; matinees are cheaper than evening performances; early-bird restaurant specials are less expensive; and U-Haul trucks from Detroit to Houston were much higher priced than the same trucks from Houston to Detroit.
Production costs do influence market prices, but only to the extent that these costs affect the available supply. It is that supply and consumers’ demand which are the real moving forces behind market prices.
Bill Allen
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