Post Lesson 38/Pre Lesson 39

It is really important to keep in mind the difference between claims or value judgments (normative) and statements of reality (postive) especially when evaluating an argument. Arguments rest on premises and draw to conclusions based on logic. That logic should take you from the facts to the conclusions and you should constantly be evaluating whether there is another alternative to the proposed logic. This is a life skill not just a skill relating to economics. If you have further questions PLEASE come see me.

Secondarily, identifying those normative statements which may be intended to "frame" an argument or discussion by taking certain tradeoffs off the discussion table are important. So, for example, this often occurs when the words 'fairness,' 'greed,' or 'exploitation' are used. It is not that none of those things may occur but rather that we should be sceptical that those words will not merely be used to avoid a conversation about the opportunity cost of an action. The best current examples I can think of come from sequestration. So many of the arguments against sequestration go something like: you can't cut funding from there itll cost lives! The idea being that you should never do something which may, however indirectly, result in death. Of course what often gets left out is that funding that project may cost lives in other areas, so that spending money on airline safety might actually result in fewer dollars allocated to vehicular safety and actually result in far more deaths. In any case, we need to be aware of this.

For next time, in addition to your paper, write out two questions you would put on the final and answer them. Your final 15 IP points will be based on this submission.

Post lesson 37/Pre Lesson 38

The problems of government and business solutions to "unethical" practices as the same. Both government and business involve men, who, if given the wrong sets of incentives, may act in ways that ARE selfish AND at the expense of others. Such situations TRANSFER rather than CREATE wealth. This is something worth thinking about because economics is all about the ways we better allocate resources to CREATE wealth.

Just like in Smith's argument, someone who earns money by producing something has benefitted himself but he likely has also benefited someone else. The key here is that he will have benefited someone else if he is in a competitive market. Generally, markets will police, on their own, any attempt for an individual to be greedy, selfish, unfair etc and in the case where they do not, while governments may be able to help, they often won't for similar reasons because governments do not generally face competition.

In the last part of the discussion about Smith v. Marx v. Keynes I wanted to point out two crucial things. First, all of the above were focused on trying to allocate resources most efficiently. The fact that they came up with different answers is somewhat a result of the different circumstances they saw around them. Second, it is important to know how economists ended up where they are and to value what Smith and economics actually says. Economics does not say that being selfish is the way to get ahead, what it does say is that competition will allow for incentives that align acting in self-interest with service to others.

Next time we'll focus on normative and positive statements. You need to read BE 570-571, 596-603, and 608-612. Then bring an article which addresses an issue you believe needs to be corrected because of greed/fairness/equality etc. Finally, separate this list of statements into normative and positive:

• Higher interest rates cause people to save more
• High income taxes discourage effort
• High taxes on cigarettes discourage smoking
• Road-use charges would increase traffic
• People are more worried about inflation than global warming.
• People should save more
• Government should tax the rich to help the poor
• Smoking should be discouraged
• The tax system should be used to reduce traffic
• Technical change is a bad thing because it puts some people out of work
• Government should do more to reduce carbon emissions in order to save the planet from global warming

Post Lesson 36/Pre Lesson 37

Next time,

1. Read BE 621-627 and 634-637.
2. Then, think about what makes scrooge so unbearable to you. What stands out about Adam Smith's arguments, at least as Sowell tells them? How is this similar or different from Keynes' arguments?
3. Finally respond to this quote in your journal: "It is not from the benevolence of the butcher, the brewer, or the baker that we can expect our dinner, but from their regard to their own interest." Does this quote imply that we only get ahead by being selfish? 

You will turn in your journal after this class.

I hope you enjoyed the discussion and review that Maj Ackerman did with you. Different perspectives are always helpful.

Next time we'll discuss both journals and sets of readings.

Post Lesson 35/Pre Lesson 36

Folks,

I want you to read the short 6 page section of conscious capitalism I emailed to you. In your journal please explain why you want to be an Air Force officer…why would you potentially risk your life for others…and what you think, if anything, that has to do with economics and business.

 

Last time we wrapped up the section on macroeconomics. In particular most classes played a game involving the role of government in society. We saw that different constructs provide different incentives to work or not work and thus provide different outcomes. Government has a crucially important role in both ensuring that free trade can occur (most notably by protecting property rights) but also in keeping itself from preventing trade (or avoiding onerous regulation).

 

The important things:

1. Property Rights (no one stealing your work after the fact)
2. Stucture of Laws
3. Competitive Markets
4. Efficient Capital Markets (ability to get more papers, staplers, workers etc)
5. Limited Regulation
6. Low Taxes
7. Monetary Stability (your work is worth roughly the same across time)
8. Free Trade

Government can either allow for these things to occur or keep them from occuring through being either too involved or not involved enough.

Post lesson 33/Pre Lesson 34

Takeaways:

1. Productivity and Growth, these are the goals...the best use of our scarce resources which are normally acheived via prices. As a result we focus on Unemployment and Inflation which INDICATE whethere we are truly becoming more productive. We use fiscal and monetary policy to respond to changes in either.
2. THE fundamental purpose of government is to establish laws and rights that encourage free trade so that individuals become more productive. The government can, for example, improve on current uses of resources when externalities are present or when lack of ownership results in poor outcomes (ie overfishing). In either case the intervention occurs because prices dont actually convey the aggregate (macroeconmic) price of an action.

No reading. Next time we'll watch a video and I'll have updated grades.

Final Paper

Assignment: You will use no more than 2000 (~4 pages) words to reflect on the topic below. Your writing should reflect an economic thought process and utilize economic principle(s) to support your explanation. Emphasis is especially on developing a sound premise and logic and in logical evaluation of the costs and benefits of potential solutions or conclusions.

Topic
Choose one of the following:
1. Uncover the arguments behind the main competing views about the role of monetary and fiscal policy in the business cycle. I do not want you to pick a side and hail it as the answer; rather, I want you to evaluate the basis for each set of views by using the basic principles where applicable. Note how the priniciples inform each view and where you see contradiction or questions that remain in your mind. I especially hope that you address both pros AND cons of either position in your paper with a mind to the principles. To frame your discussion watch the videos here: http://econstories.tv/category/videos/ starting with "Fear the Boom and Bust" and then use other sources.

2. Discuss how and when income inequality becomes a problem with a focus on the relationship between inequality and the basic principles. It would be useful to think about the relationship between inequality and the economic principles, the different causes of inequality, and the role that government may play in either minimizing or furthering inequality. For example, when is inequality "good" or "bad" and how might the government’s role differ in either case? Or, what role are the economic principles playing or what role are they failing to play when inequality is "bad"? Use these two articles to frame your response: http://businessjournal.gallup.com/content/165716/bad-income-inequality.aspx and http://www.forbes.com/sites/hbsworkingknowledge/2013/08/19/how-income-inequality-affects-individual-behavior/.

Academic Resources:
You may discuss the topic with each other but once writing begins in earnest the work should be solely your own. A documentation statement, as always, is required.

Post Lesson 32/Pre Lesson 33

Folks,

Today we talked about three things: banks, money, and the FED. The FED has the role of setting monetary policy. Like fiscal policy, it is one tool to try to "smooth" the cycles we often experience. In particular the FED tries to keep unemployment and inflation stable. This is a constant trade off between the two and sometimes fails to work. It can work in the short run but expanding the money supply leads to inflation in the long run. In other words, decreasing unemployment today will mean higher prices tomorrow.

Remember the purpose of banks and the roles of money as well as how the FED changes the money supply.

For next time please read the pdf file that I am emailing along with your final paper assignment and answer this question:

Why is national defense often the responsibility of the government? Is there a better arrangement?

We'll talk about this and about the major unifying concepts of this whole block.

Post Lesson 31/Pre Lesson 32

Folks,

Today we specifically discussed the ways that government's raise and spend money. In particular we spent the bulk of the class discussing WHY the government might use fiscal policy. Much like an individual who tries to "smooth out" their standard of living, the government could potentially use fiscal policy in order to "smooth out" national business cycles. The problem is that increased spending during recessions is hardly ever met with the same level of decreased spending during expansions. This is due to the political realities faced by those in charge of spending. If you are still struggling with this please see the primer here: K:\DF\DFEG\Economics\Econ201\Fall 2013\Balser\Block C-National Economy

Second, we talked about taxes. How taxes can change incentives, who pays taxes, and whether companies can merely "pass taxes onto" consumers. How do taxes change your choices or others choice? Some questions you should be able to answer after today:

1. Comment: "To reduce the government's budget deficit, the government should raise taxes on the rich."
2. Comment: "It's better to levy taxes on businesses because they can more easily afford to pay the taxes than consumers."
3. What happens when a city tries to keep bus fares lower for low income workers?
    

Next time we will focus on the other tool of the government: Monetary Policy. You can read BE 386-408 or the supplement here: K:\DF\DFEG\Economics\Econ201\Fall 2013\Balser\Block C-National Economy but you must read one or the other and tell me:

1. How does our banking system "create money?"
2. How does the FED control the amount of money in currency? (what are the three policy tools)
3. During the Great Depression, both Hoover and FDR tried to keep the prices of goods and labor high. What was the rationale and what are the social and economic ramifications of such decisions?

Post Lesson 30/Pre Lesson 31

Today's lesson focused on the foundational importance of the government and the rule of law. Government, properly ordered, gives rise to a functional economy by providing for property rights so that individuals are incentivized to use resources in the most efficient manner. Doing so means that the costs of one's action or inaction will fall upon them and not be reappropriated. Of course a government that is powerful enough to protect you is also powerful enough to take from you. Creating structures such that governments neither find it in their best interest to protect others at your expense or to protect themselves at your expense is the difficult part. Remember also that trust among individuals and with the government results in a willingness to spend my time at what costs me the least. In order to do so, I must become vulnerable and depend on the fact that others will trade with me.

As an aside, government can play an important role when someone else's actions have an effect on society at large. In cases of externalities having government involvement can produce better outcomes but this depends 1) on the structure that is put forward to solve the issue and 2) whether the government might give undue influence to parties which have a specific interest in the issue at hand (ie tobacco companies' lobbies being involved in tobacco legislation).

Next time we'll further discuss just how the government can change behavior via taxes, how they generate revenue, and how and when fiscal policy could be used by using the analogy of personal finances.

Read BE 433-436, 444-451, 458-465, and 468-470. Respond to this question: When do you personally take a loan? why? Now, use the same idea and tell me, when might it be smart to spend more money than you take in as a government (whether you take a loan, sell bonds, or dip into savings)?

Finally, the paper is located at: K:\DF\DFEG\Economics\Econ201\Fall 2013\Balser

Post Lesson 29/Pre Lesson 30

Folks,

You should be able to define all of the terms from my last post. You should also have a basic understanding of how we calculate GDP and what things might change our evaluation of GDP or of economic growth. For example, what happened to inflation, how many people are in a country, or what new goods and services we now have that we didn't 5, 10, or 15 years ago. Generally, it is harder to compare GDP's the further they are apart (time-wise).

Another major topic is how we track inflation by using the CPI, consumer price index. Like GDP it has flaws and is certainly prone to flaws as we change the goods in the index (having an iphone now vs a razor 5 years ago).

For next time I want to move into the Functions of Government. Please read BE 414-426 and respond to this question in your journal: what do you think of as the most basic function of government and why is it important to economics?

RP IV/Post Lesson 28/Pre Lesson 29

Everyone watch this: http://www.npr.org/blogs/money/2011/10/26/141741360/video-what-is-gdp

And be able to define these terms (many should be familiar): Aggregate Supply, Aggregate Demand, National Output, National Income, GDP, Flow, Stock, National Wealth, Economic Growth, Recession, Inflation, Cost of Living, and Deflation

Reflection Paper IV is due next Thursday. The question was:

Reflection paper IV: It is unfair that people can make money merely because they have money. I mean shouldn’t everyone, rich or poor, have to work for their income?

Finally you need to read BE 369-383. Yes it is a bit dry but you NEED to know this stuff. For your journal, what is the greatest miscalculation or misinformation that you had about GDP and what it means before this reading? Additionally, why is it that an increase in only your wage actually makes you better off but an increase in everyones wage changes nothing (hint: focus on what happens to scarcity in each case)?

I hope to have your final paper/project assignment when you turn in your RP IV on Thursday.

Post Lesson 26/Pre Lesson 27

All,

I hope today was a good way to wrap up this section while having some Friday fun. To prep for the GR I'd really encourage focusing on the objectives but also re-reading my blog re-caps. The major theme encapsulated in one line to me is: prices~wages~interest rates and differences in prices-->trade.

Beyond that some good things to think about:

1. wages tell us something about productivity. if someone is more productive they should rightfully be paid more because they (as a productive worker) are a scarce resource which others would love to have.
• as a sub point...the more expensive a person is to do a given job, the greater returns to automating that process if possible
• since the above point is true, trying to legislate higher wages may eventually lead to fewer jobs via automation which suddenly becomes feasible with higher wages
2. statistics can be deceiving...as unemployment stats sometimes are
3. screwing with wages is like screwing with prices....what are the effects?
4. trade is useful because it allows all of us to lower our costs. this is true whether trade is between individual persons or between entire countries
• limiting trade only forces costs to be higher than they could otherwise be
• there may be instances where trade restrictions are important but what happens with those kinds of arguments (ie claiming it as a national security requirement)?
• just because you can pay someone less does that mean you will employ them? no! it would be "cheaper" for an engineering firm to hire the average worker at mcdonalds but this lower cost would result in a drastically lower benefit as well. sometimes the cost is not all that matters. (see the low-wage myth in sowell)
5. we all have a comparative advantage because our costs are ALWAYS relative.
6. Investments come in all sorts of shapes and sizes so to speak. All of them have a purpose, even speculation, in allocating the use of money today and money tomorrow. Interest rates are the prices that allocate the use of this scarce resource.

There is so much more that could be added but hopefully this gives all of you a start on studying. I hope you can relax a bit this weekend and I hope to see at least some of you around the tailgate on Saturday!

Post Lesson 25/Pre Lesson 26

You better know how to do present and future value calculations....that is all.

For next time in addition to the journal assignment from last time add this question:

What is the purpose of insurance and what problem does it solve? Why does government provided or subsidized insurance often fail to solve the problem?

Post Lesson 24/Pre Lesson 25

Interest rates work like prices in that they allocate the scarce resource called money to it's alternative uses, consumption today versus tomorrow. Not only that but the real "price" of money takes into acount both the number we see and what we expect to happen to the value of money over time (inflation). Thus Real Interest Rate = Nominal Interest Rate - Inflation.

Related to this is the difference in real rates of return (or rates of expected interest) among different types of investments: stocks vs bonds vs CDs vs Mutual funds vs real estate etc. Generally the more volatile (or risky) an investment the higher the average rate of return. Additionally, investments (ie bonds) that are longer term have higher rates of return. Why? to compensate for the increased uncertainty and risk over the longer period. So, for example 30 yr bonds will have higher yields (interest rates) than 5 yr bonds.

Finally, to figure out what money in the future is worth today or what money today will be worth in the future you need to know how to complete Present Value and Future Value calculations. You need to memorize the formula to do so, using annual compounding only. Of course these calculations to know the amount of money, expected rates of growth (to get future value) or discount rates (to get present value), and the number of years.

For next time read BE 341-352 completing the standard journal entry and answering this question:

1. Give an example of moral hazard or adverse selection here at the air force academy.

Last time was a check minus.

Post Lesson 23/Pre Lesson 24

Folks,

now we will begin in personal finance! This is an important topic and one in which economics has a lot to say. Why do we invest? Why don't we just buy everything now? Why do other people borrow the money we aren't spending? What encourages or discourages people to lend/borrow? Specifically, answer these questions in your journal as you READ HO 167-170 & 177-180 as well as BE 299-303 (Financial Investments):

1. Explain why lending/borrowing occurs using the definition of economics and the basic principles.
2. What encourages or discourages people to lend/borrow?

The lesson this time was straightforward. Everyone gains from trade because trading changes the costs we face. If someone else has a lower opportunity cost, even if we might be better at it absolutely, we can trade and obtain a cost lower than our own. In doing so we can "skirt" the scarcity of our resources by relying on others thereby seemingly increasing the resources we have.

This is shocking and hard to believe but it's true because all prices (and costs) are a result of relationships between things. Recall that definition of economics, that piece about alternate uses, and when we realize that prices merely reflect those scarce resources and their alternative uses we begin to see that all they tell us is the relationships between things. Thus most attempts to interfere with trade, like attempts to interfere with prices to make things "cheaper" only tend to obscure the true relative value between goods or uses of those goods. Anyway...sorry for the diatribe. You need to be aware of the fallacies of trade restrictions like tariffs save jobs, low wages are unfair and make us uncompetitive, etc. that we may or may not have talked about but was in the reading. You will be evaluated on those things and should be ablt to apply the logic of prices and the principles of economics to trade.

Yesterday was a check by the way. You should also be able to answer these questions:

1. What is the relationship between real and nominal interest rates?
2. T / F When comparing monetary values from different time periods it is best to convert them to a common base year, typically present value.
3. If demand for loans rises and supply falls, the interest rate will INCREASE or DECREASE until equilibrium is reached. When loan prices are LOW or HIGH firms are more inclined to borrow.
4. What is investment?  How is it different from saving?
5. In your own words, describe the purpose or function of financial institutions.
6. Economic speculation is a way of allocating what scare resource?
7. What is interest?
8. In general, what effects would a cap on interest rates have on the market for loanable funds?

The additional reading which covers these questions are BE 295-326

Post Lesson 22/Pre Lesson 23

Folks,

16 Oct, F-1 @ 1900!!!!!
It was a slow start this morning and it seemed that some of you weren't well prepared. In particular asking questions like, "how do I know what they'll trade for?," tells me you hadn't figured out opportunity costs ahead of time. Therefore I gave today a check minus.

Note that everyone was better off than they would have been on their own BUT some countries had larger gains than others.

For next time complete the TRADING GAME REPORT:
1.       Provide a hard copy of the EXCEL worksheet for the TRADING GAME.  Be sure to print the worksheets so they fit on one page
           a.       TRADE PREPARATION worksheet
           b.      TRADING SCORECARD worksheet
2.       Evaluate the effectiveness of your top three trades based on the percentage of the difference in the autarky terms of trade captured.
           a.       Compute results on the TRADING SCORECARD worksheet
           b.      Explain the significance of these values and how you were able to achieve them.
3.       Review the Basic Principles of Economics and discuss how three of these principles relate to the trading game and its outcome.  For example, what happened to scarcity? Why could you make/get more than you did before? How could you possible increase the number of man hours available, isn’t time fixed?

Also, read BE 510-522 & 551-555 (THE ROLE OF TRADE)
Due next time: trade game report
Due on monday!!!!! Reflection Paper III

 

Post Lesson 21/Pre Lesson 22

You all were great! Check plus! Remember that prices convey something to us not just about how good we may be at making something but also about how relatively good or bad we are compared to others and other persons alternative uses of their time. Thus specializing and trading in what we are RELATIVELY (or comparatively) better at makes everyone better off. We'll see this in action next time.

Please complete the spreadsheet and read the trade game instructions here for next time: K:\DF\DFEG\Economics\Econ201\Fall 2013\Balser\Block B - Trade Game

Post Lesson 20/Pre Lesson 21

Folks,

for next time:

1. Read BE 499-507 (this reading should help you complete #2)
2. Complete the Comparative Advantage worksheet located here K:\DF\DFEG\Economics\Econ201\Fall 2013\Balser\Block B - Trade Game
3. Check out what country you've been assigned via the excel file in the same location (we may have a quiz on this)

I dont have any specific journal question for this reading

Last time we discussed basically the issues inherent messing with wages in any variety of ways. Just like prices, wages reflect something about scarcity and alternative uses and even with very GOOD intentions, policies to change this reality often end up with POOR outcomes. Many times such policies even hurt those who it was specifically intended to help. So Job security legislation normally hurts the average unemployed worker, minimum wages actually hurt the poor and unskilled the most, and unions or cartels often result in job lossses for union members, and job safety legislation results in unhappy workers!

as we move into trade and macroeconomics we can see many well intended arguments about "sweatshops," outsourcing, job protection, and explotation in the public arena.

Post Lesson 19/Pre Lesson 20

Folks,

I hope you enjoyed our min wage game. Think of what happens on a larger scale and when the changing of wages in one industry will also incentivize/disincentivize those who might work in other industries. So, if the minimum wage is increased, what might that do to the desire of some to get an education?

Also realize that scarcity and alternatives will change overtime. It's not easy to automate a process overnight but if prices are high enough it may encourage me to automate over a year or more, thus reducing the number of jobs.

Finally, statistics are important only if you know and understand the numbers behind them. With that in mind define these terms along with completing/re-completing the worksheet that was previously assigned:

• Unemployment
• Discouraged Worker
• Underemployment
• Voluntary Unemployment
• Unemployment Trap
• Labor Unions

Post Lesson 18/Pre-Lesson 19

Folks,

Good discussion today in class. I gave it a check. Two main points:

1) Wages, like prices, convey information about scarcity and alternatives both to a producer (who demands labor) and to a worker (who supplies labor). In the case of a producer there are choices between productive resources (land, labor, capital, management) and even between different levels of those resources (having Darelle Revis as your cornerback vs Aqib Talib will depend on other assets of your team). In the case of the worker, wages can indicate to me how I ought to use my current skills or whether I should invest to obtain other skills. In any case, both supply and demand are incentivized and affected by wages.

2) Productivity depends not just on the individual but on the resources and people who surround them. Additionally, wages OUGHT to reflect the productivity of one person versus another but such things are notoriously hard to see precisely because productivity is SO dependent upon outside factors. The choices between what productive resources to use will (as stated above) be affected by how each additional unit will affect productivity overall. In other words the opportunity cost of the next unit of any resource matters. Having 3 hammers and one person just will not increase productivity and so, due to increasing opportunity costs, the producers decision on which resource to employ next will change based on what I currently have.

For next time I'd like you to read one on the following sections:
-Job Security: BE 235-244 & 249-251 (Skip Informal Minimum Wages)
-Collective Bargaining: BE 251-260
-Working Conditions: BE 260-267

Pull out one (or two) sentence(s) which you think defines the reading or is key to Sowell's point.
-ie (and you can't use this!) in the Collective Bargaining section Sowell says: "In general, employers cannot simply make whatever arbitrary decisions they which when there is a competitive market for labor and for the products they sale."

Finally, complete the worksheet here: K:\DF\DFEG\Economics\Econ201\Fall 2013\Balser titled "worksheet-due lesson 19.docx"