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Insinuendos | 41 comments (41 topical, 0 hidden) | Trackback

Economics by hulver (4.00 / 2) #1 Thu Aug 30, 2007 at 05:17:00 AM EST

I think the trouble a lot of "normal" people have with economics is where the hell does the extra money come from.

If I make something, and sell it to you. You must have got the money from somewhere. And whereever you got it from, they got it from somewhere.

Where does it come from? How is it made?

Personally, the only place I could think of where "new" money would come from would be digging it out of the ground.

If somebody could point me to a simple source that explains the basics, that would be great.
--
smart, pretty, sane. pick two - georgeha

It comes from by DullTrev (4.00 / 2) #3 Thu Aug 30, 2007 at 05:42:19 AM EST

Oppressing the workers, of course.

I'm only half joking.

--
DFJ?
[ Parent ]

Joking or not, you're only half right by lm (4.00 / 2) #6 Thu Aug 30, 2007 at 07:08:26 AM EST

It's profits that comes from paying workers less than the full value of their labor.

Money comes from a printing press.

There is no more degenerate kind of state than that in which the richest are supposed to be the best.
Cicero, The Republic
[ Parent ]

: Indeed by DullTrev (4.00 / 1) #13 Thu Aug 30, 2007 at 09:16:46 AM EST

Hence why I was only half joking. The other half was true...

--
DFJ?
[ Parent ]

Where money comes from by priestess (4.00 / 1) #5 Thu Aug 30, 2007 at 06:38:25 AM EST

If you told 'em that we all just borrow it from the bank, at interest, they'd never believe you.

I think Theophile's rules mostly seem to be roughly what most people think. I doubt that number 4 (Formal Economics Is A Sham) and 5 (Economics is part cult, part conspiracy) are really thought about much at all though. They just think Economics is what Bankers do for a living and it's complicated to do with maths and leave it at that really.

Pre..........
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Yes! The Conspiracy Really Exists...
[ Parent ]

Unfortunately, it's complicated by R Mutt (2.00 / 0) #10 Thu Aug 30, 2007 at 08:10:51 AM EST

First, the question of where wealth comes from is different to the question of where money comes from.

Money is just something that you use to exchange and store wealth. You can increase one without increasing the other.

Regarding where the wealth comes from, it's complicated because there are different places it can come from.

As you say, you can dig new wealth out of ground as raw minerals
You can create wealth through labour: say by turning some cut wood and nails into a more-valuable coffee table
If people value things differently, both parties in a trade can increase their value by swapping something they value less for something they value more.
You can increase production by division of labour allowing you to produce more per person
Between nations you can specialize with comparative advantage
Technological improvements can also increase production
Finally, if you want a headache you can consider things in terms of marginal utility.

[ Parent ]

Re: 2. by hulver (4.00 / 1) #11 Thu Aug 30, 2007 at 08:29:42 AM EST

But where does the purchaser of the coffee table get their wealth from?

Most of your other points seem to come down to that? If you increase production, somebody still has to buy the results of that production. Where do they get their money from?
--
smart, pretty, sane. pick two - georgeha
[ Parent ]

Wealth and money by R Mutt (2.00 / 0) #12 Thu Aug 30, 2007 at 08:44:58 AM EST

The table-buyer can generate wealth through his own labour. How he does that is up to him.

Money is different. As lm says, that just comes out of a printing press. Or these days, flipping a few bits from 0 to 1. The government just declares it to exist, and increases the supply roughly in proportion to the increase in wealth.

[ Parent ]

'increases the money supply' by priestess (4.00 / 1) #14 Thu Aug 30, 2007 at 09:26:10 AM EST

So when the government 'increases the money supply' - who exactly gets that money? Do they just give it to government contractors, or pay it in interest to some bankers, or what?

Pre..........
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Yes! The Conspiracy Really Exists...
[ Parent ]

That's where it gets too complicated for me by R Mutt (4.00 / 1) #17 Thu Aug 30, 2007 at 09:58:08 AM EST

It's called an open market operation. The central bank buys bonds or securities from private banks with money it's just declared into existence. More info here.

However, since the bond can be paid back, or return some interest, it's not quite like just giving the money away. I believe if they decide to reduce the amount of money again, they can just sell the bond they bought and declare the money from the sale to not-exist.

It's all done by magic, Archchancellor...

[ Parent ]

: Damnit by priestess (4.00 / 1) #29 Thu Aug 30, 2007 at 03:15:12 PM EST

I was hoping for a simple application form ;)
Pre.......
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Yes! The Conspiracy Really Exists...
[ Parent ]

Pretty much by lm (2.00 / 0) #18 Thu Aug 30, 2007 at 09:59:16 AM EST

Although, spending also includes entitlement programs, paychecks for government workers, etc.

And there are also government loans, treasury bonds, SBA loans, etc.

There is no more degenerate kind of state than that in which the richest are supposed to be the best.
Cicero, The Republic
[ Parent ]

New money by MartiniPhilosopher (4.00 / 1) #20 Thu Aug 30, 2007 at 10:30:05 AM EST

That, I believe, comes from an ignorance of how fiat money operates. In my own experience I have found that many people have this notion that we still have a metal standard. They have no clue about the bond market or how the central bank issues currency in the form of debt to other banks.

Whenever I hear one of those aforementioned douche bags pontificate about how dangerous [...] videogames are I get a little stabby. --Wil Wheaton.
[ Parent ]

Trading by Horatio Hellpop (4.00 / 1) #2 Thu Aug 30, 2007 at 05:18:24 AM EST

Your list got me to thinking a bit on the subject.
I do quite a lot of trading of fairly rare items, and my observations differ from yours.

Objects have an intrinsic Price, which is an absolute measure of their value.

For the objects I trade, this trait has near-nil value for the average consumer. It's a bit of plastic and paint to them. The rising price of petroleum is causing manufacturers to raise their prices, 10-15%, but from item to item, the cost of raw material is fairly standard.
The labour involved in production is fairly constant, so it's not really a factor, so what's left as variables are 1.) Method of warehousing & delivery 2.) Design

Oddly enough, the design of the pieces is a major cost for the items, because as you increase the number of parts of the item, you must invest in very expensive moulds for each individual piece.
A manufacturer can get away with using the smallest number of individual pieces, but more intricate designs means more sales, exponentially.

When you can vary the complexity of the item by fudging the piece count and tinker with the production run, you can alter the initial sales market and the after-market like a wizard.
This pattern has been observed year after year.

Trade is a zero-sum game. Each trade has a winner and loser depending on whether the actual sale price exceeds the absolute Price.

If you count the after-market in your theory, which I would, then you can see that the "absolute Price" observed by one trader rarely matches that of the trading partner. The transaction is brutally guided by Supply & Demand, yet both parties typically feel they "won".

If your points are predicated upon neither trader having a valid estimate of the value of their items, or that neither trader can objectively determine whether they won or lost, then I'll bow out here.

"You can't really know something until you ruin it for everyone." -some guy who used to have an account here

I think if you have the concept by R Mutt (4.00 / 1) #4 Thu Aug 30, 2007 at 06:27:36 AM EST

Of prices being set through supply and demand, then you've moved beyond the normal person's instinctive view.

I remember reading a (I think) Guardian article by someone who was columnizing about running a restaurant or market stall for a day. She described being horrified to realise that things don't have prices: the seller can just put whatever price label he wants on it.

I think in most people's experience, when there's a massive demand for a hot Christmas toy or concert tickets, the official price remains exactly the same; things just sell out quicker. If someone raises the price in response, then they're a scalper who is doing something unfair: unnaturally raising the sale price beyond the Absolute Price.

[ Parent ]

Some items are the exception... by Horatio Hellpop (4.00 / 2) #7 Thu Aug 30, 2007 at 07:18:28 AM EST

This, for example;

There are, at best estimates, a dozen of these guys on the planet and I own one of them.
They certainly had a fixed cost when they were made, but the supply is so ridiculously small, that the Absolute Price is whatever we (any potential seller) decide to sell it for.
There really is no official price and I wouldn't say that we are unnaturally raising the price.

Your characterization seems to work for commodity items, but not in this case.

"You can't really know something until you ruin it for everyone." -some guy who used to have an account here
[ Parent ]

Sense of fair play. by Christopher Robin was Murdered (2.00 / 0) #33 Fri Aug 31, 2007 at 09:45:18 AM EST

I don't believe that the sense of unfairness one feels when you're being price gouged has anything to do with this notion that "normal" people believe in an absolute price.

Instead, I propose it comes from the awareness that one could have had it at a cheaper price, but now you're being asked to pay more because you're desperate.

Any exchange - economic, social, emotional - in which somebody feels forced to accept a disadvantageous position out of desperation is going to strike that person as unfair. Appeals to a Platonic absolute value need not come into it.

[ Parent ]

I dunno, I think TE is correct on that by lm (2.00 / 0) #35 Fri Aug 31, 2007 at 10:45:11 AM EST

There are really three inconsistent views on this that are held by most people.

First, if a person buys a house for 100k and then finds out that the owner had bought it for 50k the day before the sale, the buyer feels gypped. But if that same person likely would not feel like they were taking advantage of the buyer if the roles are reversed.

Second, if someone finds out that a retailer is selling widgets for $10 that are purchased in bulk for $1 per unit, that person feels ripped off. But that same person finds out that a retailer is selling wotsits for $100 that are purchased in bulk for $91 per unit, that person doesn't feel ripped off even thought the profit per unit is the same.

But in the case of oil companies, people are mad at `price gouging' these last few years as oil companies have made `windfall' profits even though the profit margin for the oil companies hasn't significantly changed. If your profit margin is 9% on money invested and your costs go up by 300%, it just so happens that you make a metric truckload more in cash. But people feel ripped off even thought the profit margin has not changed.

Lastly, when people buy something expensive, such as a car or a house. They usually feel like that item should retain its value. ``I'm not going to sell it for $X! I paid $Y!''

I think the last situation really proves TE's point about things having absolute value in the mind's eye of the general public. The other two situations show some understanding of relative pricing, but they are inconsistent views. And that is one of the great things about the human mind, it is fully capable of holding two contradictory beliefs.

There is no more degenerate kind of state than that in which the richest are supposed to be the best.
Cicero, The Republic
[ Parent ]

We might be approaching the same point. by Christopher Robin was Murdered (2.00 / 0) #37 Fri Aug 31, 2007 at 11:59:41 AM EST

I feel the existence of contradictory beliefs predicated on the situation suggests that people go into situations with strategic and provisional notions of value.

The last example especially doesn't do it for me as, from my point of thinking, it expresses a basic rational reaction to the reality of market economics. What's being expressed there would be an unwillingness to enter into a non-advantageous financial transaction. That's not the same as somebody saying, "Houses never change value! Who the hell decided that houses can change value?"

In most of the cases we've looked at, we're mistaking the disappointment of a person who finds themselves on what they percieve to be the losing end of transaction with the idea that all people hold a sense of the absolute value of things. I still feel that a buyer or seller can feel that they got a bad deal without appealing to the idea that they think they hold an absolute notion of value. All they need to feel is that they didn't get all they believed they might have.

Are there home buyers out there who don't know that homes change value? Are there car buyers that have never hear of blue book value or used car prices? It is possible; but I don't think they represent the normal buyer.

I'm willing to grant that people's sense of value is often off due to lack of knowledge and somewhat egocentric belief that others must hold the same sense of value. But the reality of being a consumer is more complicated. Nobody who lives more than a decade is unaware of massive price fluctuations and the majority of these are, ultimately, treated as normal. Sure, there are occasional flare-ups of consumer resentment (such as the oil "price gouging" investigation - which went nowhere, we should add), but where were the revolts over bread prices and fruit prices and clothing prices and everything else that is no longer as cheap as it was ten years ago?

I think we need something more nuanced to describe how consumers really think about value.

[ Parent ]

On oil companies by wumpus (2.00 / 0) #40 Sun Sep 30, 2007 at 10:22:59 AM EST

The oil companies likely own a large chunk of their wells, refineries, whatever the limiting factor is. The are certainly making a wildly higher profit margin on the same barrel of oil.

The guy who owns the gas station owns none of this and is probably making even less money than before (gas stations are said to make money only on snacks and cigarettes, I don't know if this is true).

Wumpus

[ Parent ]

: I have a hard time believing that by lm (2.00 / 0) #41 Sun Sep 30, 2007 at 07:52:27 PM EST

I have heard from more than one source that gas stations only make money from the mini-marts. I have a hard time believing that as there are still a handful of stations that only sell gas. If a profit was not to be made, those stations should be going out of business.
But as for the oil companies, I think you are kind of, sort of correct. The profit margin for oil companies varies wildly from company to company. I would not be surprised at all if part of this variability came from differences in how much of the production chain the companies own. Yet some of the least profitable companies, BP as an example, do it all from drilling and extraction to refining and retailing.
There is no more degenerate kind of state than that in which the richest are supposed to be the best.
Cicero, The Republic
[ Parent ]

you are lost in a dream by garlic (4.00 / 1) #24 Thu Aug 30, 2007 at 12:29:34 PM EST

I claim my $5.

[ Parent ]

: HAHAHA "TRANSFAN" HAHA by Horatio Hellpop (4.00 / 1) #27 Thu Aug 30, 2007 at 02:24:52 PM EST

Around these parts, that's an epithet. Friends don't let friends buy Weeaboo toys.
"You can't really know something until you ruin it for everyone." -some guy who used to have an account here
[ Parent ]

Others by jump the ladder (4.00 / 1) #8 Thu Aug 30, 2007 at 07:30:29 AM EST

People doing crap or socially neccesary jobs should be paid more than people doing more fulfilling jobs.

Unemployment is caused by immigrants stealing people's jobs.

: Jobs by priestess (4.00 / 1) #15 Thu Aug 30, 2007 at 09:27:45 AM EST

Yeah, people do seem to think that there's a fixed number of jobs in a country, and that automation and immigration leaves people without work. Fixed supply of jobs should be in Theophiles list.
They also seem to think jobs, working for someone else, are a good thing! Woah.
Pre.........
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Yes! The Conspiracy Really Exists...
[ Parent ]
: yeah sneaky by Merekat (4.00 / 1) #16 Thu Aug 30, 2007 at 09:48:59 AM EST

What with their applying, and interviewing and outperforming the other candidates.
I remember having this argument with one guy who was claiming the Poles were being cheap labour in the Irish job market and stealing his jobs. This was while he was on a lucrative contract in Africa. Whose job was he stealing, I wonder?

[ Parent ]

Evelyn Waugh by Dr Thrustgood (4.00 / 1) #9 Thu Aug 30, 2007 at 07:57:37 AM EST

Kicks a lot of arse; Brideshead Revisited is a masterpiece; Decline and Fall and Vile Bodies are likewise wonderful comedies.

That said, I do wish he didn't include precisely one racial slur, complete with the use of the word "nigger," in every book he wrote.

I don't think 4 and 5 should be included by lm (4.00 / 1) #19 Thu Aug 30, 2007 at 10:03:46 AM EST

I don't think they're on the radar of enough people to be considered `folk wisdom'. The first course I took in economics, the professor asked the class of 100 what economists do and drew a bunch blank stares. The second course I took in economics I took (15 years later) had a few pot shots at an answer ``they trade bonds'', ``they sell securities'' that weren't any closer to being on the money.

There is no more degenerate kind of state than that in which the richest are supposed to be the best.
Cicero, The Republic

Democrats by ucblockhead (4.00 / 1) #21 Thu Aug 30, 2007 at 10:47:49 AM EST

Interesting in that Howard Dean was trying to *exactly* that, using mobilized volunteers. IMHO, this is part of the reason the Democratic establishment was so keen on destroying him.
----
_{ウセーバラケダ}

Similar to some other comments by Scrymarch (4.00 / 1) #22 Thu Aug 30, 2007 at 10:54:08 AM EST

Related to 1. Not just objects, but labour has an ideal Price, including crap jobs. Primary, secondary and tertiary industries are worthwhile in that order and involve some sort of large scam.

Related to 2 and 3. Naive protectionism works. Setting a tariff or subsidy protects and strengthens the company targeted.

I wonder how much folk economics is a function of the 20th century economy, with its large centrally set prices (eg by supermarkets) and abstract management of the money supply. On the other hand in a traditional agrarian economy you might be less likely to hold 1, because you haggle every time you trade, but more likely to hold that say interest is evil (because risk premiums are so high that only usurious rates are viable). But people today are perfectly happy to have and use credit of various durations in sophisticated ways (credit cards, mortgages etc).
_{The Political Science Department of the University of Woolloomooloo}

I have a problem with Folk Eco #1. by Christopher Robin was Murdered (4.00 / 1) #30 Thu Aug 30, 2007 at 03:42:46 PM EST

How do we square that notion - if correct - with the fact that most folks have first-hand experience with price fluxuations? We'd have to further square it with the fact that people regularly deal with secondary markets - used bookstores, eBay, flea markets, thrift shops - were prices are different because of context or haggling or what have you. Finally, we've got an increasing number of freelancers and temp workers out there who actively participating in a labor market.

It would seem to me that most people have something like a functional, if not formalized or precise, knowledge of market economics. What they lack is not a sense of supply and demand, but a bigger picture - I'm thinking here of people who collect something that isn't scarce because they understand the demand (which is personal and can be grasped immediately by the individual), but don't really grasp the scope of the supply (which requires macro-level knowledge).

If correct, this isn't bad economic superstition so much as it is rational decision-making made in the context of missing info.

Actually, the more I think of it, the more I'm skeptical of this effort. It strikes me that we're ignoring people's behavior - which is the basis of economics (supposedly) - in favor of nitpicking their lack of technical jargon.

Does a person who can't explain market economics, but can still sell stuff on eBay for profit get the concept of variable value or not?

[ Parent ]

Well by TheophileEscargot (4.00 / 1) #31 Thu Aug 30, 2007 at 04:13:34 PM EST

I think people think of a kind of Platonic ideal of Price, versus the actual price charged. If the actual price is higher than the Price, then you've been ripped off. If the price is lower than the Price, you've got a bargain.

If you look upthread, DullTrev and lm agree that profit in general exists because the worker is paid less than the value of his labour. So, the Price of that labour cannot be the same as the actual price paid to the labourer.
--
"Everything is vague to a degree you do not realize till you have tried to make it precise." -- Bertrand Russell
[ Parent ]

I'm still not convinced. by Christopher Robin was Murdered (4.00 / 2) #32 Thu Aug 30, 2007 at 06:09:41 PM EST

You can feel ripped off without holding to the notion that there was a Platonic ideal of the value of something.

For example, I agree to pay for a movie ticket with a certain expectation of entertainment. If the movie sucks, I feel ripped off. If it was good, I feel I got my money worth. But this doesn't mean I have some absolute notion of what a film ticket should cost. In fact, if like me, you live in a population center, you're well aware that outside of the center, movies often cost less and you can even grab a matinee (which you can't do in the city).

I feel that too many regular transactions, the sorts of things people engage in as part of being a typical economic agent, involve price flux and - perhaps most importantly - these prices fluxes are understood as normal: buying a car, purchasing a house, exchanges on eBay, negotiating the pay and benefits of a new job, selecting phone plans - the list goes on and on. (Which brings up to your example: nobody enters into a negotiation for a job trying to settle for a Platonic ideal of a salary; they are trying to maximize their salary and will ultimately settle for what they believe is the best they can get.)

My point is that I don't believe a majority of people believe that there are absolute values of items. I will grant that people commonly mistake their "demand" levels for the level of the market in general, assuming (when no other info is available) that their assessments of value are generally held. This could be mistaken from afar as holding a Platonic sense of value, but I don't believe it is the same thing. The former is attempting to rationally participate in the market while holding to some empirically unsound data, while the latter is misunderstanding the economic reality of the situation.

I feel point #1 is a generalization based on a (slightly offensive) over-simplification. Which leads us to why "normal" people might not trust economics . . .

[ Parent ]

Sure by Scrymarch (4.00 / 1) #36 Fri Aug 31, 2007 at 10:50:04 AM EST

The point about people dealing with market conditions in practice is fair (as are gripes about snobbishness). eBay isn't exactly what I meant by an artifact of the 20th century - in my experience you're more likely to hold point 1 if you're in the comfortable supermarket shopping middle class rather than, say, an enthusiastic weekend user of the Trading Post, garage sales etc. I agree with TE that it really is a revelation in our low-scarcity economy that things don't have prices. Hopefully a childhood one, but not necessarily. Maybe it never caught on in New York. It wasn't so long ago the Australian government had massive tomes of reference prices for products in the supermarket, for instance. And indeed it's not uncommon for a job to come with a salary or wage attached, no real negotiation possible.

Look, even I still periodically exclaim in wonder how much houses cost these days in my home town. I know perfectly well it's due to restricted supply, population growth, financial deregulation in the 1980s followed by a long period of low interest rates, but how much? For a 3 bedroom house? In Tanah Merah? That's outrageous really isn't it, mmm.
_{The Political Science Department of the University of Woolloomooloo}
[ Parent ]

But by TheophileEscargot (4.00 / 1) #38 Fri Aug 31, 2007 at 01:47:11 PM EST

I think that misses the fundamental point I was trying to make. Economists see the price as being the intersection between supply and demand. Normal people see the Price or value or fair price as being an attribute of the item itself.
--
"Everything is vague to a degree you do not realize till you have tried to make it precise." -- Bertrand Russell
[ Parent ]

: I'm willing to concede that. by Christopher Robin was Murdered (2.00 / 0) #39 Fri Aug 31, 2007 at 02:19:24 PM EST

Though, I think #1 should be something like "value is a property of things, not conditions." It's the Absolute Price part - the idea that there's only one value per item - that I don't buy. Even the homeless dudes on the street know the bottles I toss out mean nothing to me, but are drinking money for them.

[ Parent ]

British gangster films by spacejack (4.00 / 2) #23 Thu Aug 30, 2007 at 11:57:07 AM EST

I remember thinking Sexy Beast was pretty decent.

I saw a couple of older classics recently:
Get Carter - a visual triumph of a grey, drab, run-down, concrete aesthetic. I was surprised by how bleak and mean-spirited it was, considering how old the film was.

The Long Good Friday - Bob Hoskins as an over-the-top ruthless gangster, who's just too reckless for the modern era. I'm tempted to say it's the "original Scarface", except that the original Scarface from 1932 is a surprisingly timeless gangster flick in its own right.

I'm willing to be a plebe here by garlic (4.00 / 1) #25 Thu Aug 30, 2007 at 12:34:31 PM EST

Here's what I think -- The value of a stock that does not pay dividends is a collective hallucination. Daily, or even weekly changes in the stock market valuation of a corporation typically have no relationship with the value of the company.

: Interesting one by TheophileEscargot (2.00 / 0) #26 Thu Aug 30, 2007 at 01:38:50 PM EST

I think it might depend on your experiences of inflation.
During the hyperinflation in interwar Germany for instance, people frantically bought stocks because they held onto their value. The assets of that company had a real value, whereas any money you had became almost instantly worthless.
I think at the moment we've had a very long period of low inflation; during which time the stock market has gone up and down several times. So, it feels that money is more solid and real than stocks.
--
"Everything is vague to a degree you do not realize till you have tried to make it precise." -- Bertrand Russell
[ Parent ]

How about adding . . . by Christopher Robin was Murdered (4.00 / 2) #28 Thu Aug 30, 2007 at 02:43:09 PM EST

"Formal economics must be a sham, or all formal economists would be rich"?

Beating a dead horse, but . . . by Christopher Robin was Murdered (4.00 / 2) #34 Fri Aug 31, 2007 at 10:00:57 AM EST

Unfortunately the article is now behind their paywall, but on the 9th of this month The NY Times reported on a national test on economics given to American high schoolers.

Across the board, they performed better than expected - considering few high schoolers get any specific econ classes. More students scored as proficient or above in economics (79%) than they did in history or science (13% and 54%).

Perhaps the most interesting result, however, was that high schoolers that took econ specific courses or when to magnet schools for econ and business only performed slightly better than those students who had no specific education on the subject:

"But the effect of that exposure was surprising. The test scores of students who had taken economics courses were not necessarily higher than those who had not. On average, students who had taken Advanced Placement, International Baccalaureate or honors courses in economics scored marginally higher than students who had taken no economics at all. But students who had taken 'consumer economics' or business courses tended to score lower."

Perhaps there's some sort of college split. Folks grasp basic concepts, but once you make the leap to theoretical, college-level stuff, you lose most of the population.

Insinuendos | 41 comments (41 topical, 0 hidden) | Trackback


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