Class Notes

Category: Class Notes

Looking for Sasquatch?

It’s time for the Environmental Studies Fest, this Thursday, March 8^th at 4:15 pm in the Atrium between Youngchild and Steitz Halls.

Come see what ENST students have been up to……and get Snacks!

Here’s what’s on tap:

Transpiration source water and geomorphological potential of root growth in the Boulder Creek CZO, Colorado (Brenna Skeets)
The effects of climate change on plant traits and fruiting phenology of Delphinium nuttallianum (Kari Spiegelhalter)
Environmental Sustainability Meets Economic Security: China Can Grow Green (Devin Burri)
Sea Turtles in French Polynesia (Devin Burri)*
Acoustic Monitoring of Local Bats (Ronan Christman)
Looking for Sasquatch: Explorations as a Wilderness Ranger in the Siskyou National Forest (Will Meadows)
Effect of land use on flooding events in the Apple Creek basin (Elissa Tikalsky)*
Unique Aspects of Urban Planning in Hong Kong (Elissa Tikalsky)
What role does Palm Oil play in Sierra Leone economically, environmentally and culturally? (Amanda Dwyer)*
Environmental and Economic Effects of the Reuse of Pint-Sized Plastic Bottles in the Palm Oil Market of Freetown, Sierra Leone (Amanda Dwyer)
Modeling the effects of insulation and air exchangers on indoor temperature, humidity and particulate matter (Eli Hungerford)*

*ENST 650 Capstone projects

For those of you without access to the many thousands of copies of The Lawrentian around campus, this week’s cover story features none other than the good work of the champions of the Innovation & Entrepreneurship program.

According to Professor John Brandenberger (and, no, his first name is not “Emeritus”) “There is no better time than the present… to teach liberal arts students who are developing the creative skills to be innovators over their four years at Lawrence, to be aggressive in their entrepreneurship.”

Well put.

President Beck also weighs in:

“In the arts, professors are interested in theater internships, print-making workshops and other ventures that enable students to connect their major to a business orientation. There are many examples of student interest so far, such as The Rabbit Gallery and Baroque Music and Dance Ensemble. [In addition], alumni are offering more and more internships to students, to help students put their thoughts into action, sometimes for the first time.”

The cover photo of The Lawrentian includes I&E stalwarts Professor Adam Galambos and Professor Gary Vaughn, along with a nice profile shot of budding entrepreneur, Ranga Wimalasuriya

Man Bites Dog Reading Book

It is well known that author’s clamor for Oprah’s endorsement because the book sales go bonkers, and sales of the author’s other books also go bonkers. The conventional wisdom is that publishers love Oprah because she pumps up book sales.

On the other side of Chicago, however, Northwestern’s Craig Garthwaite has another tale to tell: Oprah’s endorsements reduce overall book sales:

In the publishing sector, endorsements from the Oprah Winfrey Book Club are found to be a business stealing form of advertising that raises title level sales without increasing the market size. The endorsements decrease aggregate adult fiction sales; likely as a result of the endorsed books being more difficult than those that otherwise would have been purchased.

It is I who emphasized that startling finding. Here’s how Garthwaite describes it:

At the genre level, the post-endorsement period is marked by large sales declines in the romance, mystery, and action categories. These genres were popular prior to the endorsements in the geographic areas demonstrating the largest endorsement responses. Using quantitative measures of text readability, I show that endorsed titles require one additional year of education to read than is typical for romance, mystery and action books. Furthermore, the post-endorsement sales decline was largest following the endorsement of classic novels, which require nearly four more years of education to comprehend than typical romance, mystery, or action titles. Since the cost of consuming a book is the combination of the retail price and the opportunity cost of the time spent reading the text, the post-endorsement sales decline in publishing should be considered similar to endorsements in other sectors that shift consumers towards more expensive products.

I read through the paper this evening, and this will likely wind up on my Industrial Organization reading list for next year. We’ve seen a similar phenomenon in our analysis of the beer industry — advertising doesn’t increase overall sales so much as it redistributes sales within the sector. Indeed, we kick off that class with a simple advertising game model, where advertising expenditures are treated as a prisoner’s dilemma, and we learn why incumbents are often copacetic with an advertising ban. The analogy here, I guess, is that a beer producer that heavily advertises a new, difficult-to-drink product could cause an overall beer consumption to go down (possible ad line: New Bud Super Dark: It’s Like Drinking a Bagel ! ).

I wonder if the “light beer” revolution of the 1970s had the opposite effect?

Via the fellas at Marginal Revolution.

Economics of Innovation in the New “Pamphlet” Era

This week seems to be innovation week for me, as I am reading two short books on the heels of The Great Stagnation. Reading these pieces, I can’t help but get the feeling that the economics profession is hurtling into a blog-soaked, pamphlet-era frenzy. First up for Econ 100 is Alex Tabarrok’s Launching the Innovation Renaissance (review here), where Tabarrok makes a case against patents, holds out promise for prizes, and makes a plea for broad educational reform in both primary and secondary education. For the Reading Group crowd we have Erik Brynjolfsson and Andrew McAfee’s Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy, and with a subtitle like that, who needs a description?

So for those of you who have read one and need a primer on the other, here you go:

As a warm up to Renaissance, here is Tabarrok giving his TED lecture. Here’s a bit on education. (If you follow all the links at Marginal Revolution, you can pretty much read the whole book).

Here are Brynjolfsson and McAfee summarizing their argument in The Atlantic. See also Professor Finkler’s recent plug.

I’ve read both and recommend both. We’ll see what my Econ 100 students think. Thought provoking all around.

Keynes, Cowen, Brynjolfsson, McAfee & Capitalism

Here’s the update from the reading group.

On the subject of big, fat profits in the financial sector, you might consider visiting some of these pieces. On the subject of big, fat incomes in the financial world, Cowen offers up a simple theory on why so many smart young people go into finance, law, and consulting. Adding fuel to this fire, “Mr. D” sends me this helpful blog post from Ezra Klein, arguing that Ivy Leaguers head to the Street because that’s where they get their “real” education. Do you buy that? And, in a similar vein, “Mr. P” wants to know why Americans don’t elect scientists.

We left off yesterday with the open question of what the best-case scenario is for market economies moving forward. Where are the big productivity gains going to come from? What type of work is to be done? Is manufacturing dead or alive, or does it even matter? (See Professor Finkler’s previous post). Has John Stuart Mill’s concern about the inevitable decline in radical breakthrough inventions finally come home to roost?

And, this opens the door for next week’s book, Brynjolfsson and McAfee’s Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy. There are a couple of secondary sources on this, as well, including pieces from The Economist and The Wall Street Journal.

By all rights, this term’s 391 DS reading group should be titled Keynes, Cowen, Brynjolfsson, Backhouse, Bateman, McAfee, and Capitalism, but that doesn’t quite roll of the tongue, does it?

Nor would it fit on your transcript.

Can’t Beet these Profit Margins

This past week in 100 we tackled the unusual welfare economics and the effects of price controls. For introductory economics courses, rent control and minimum wage policies generally serve as the dominant examples of controls that mean well, yet have perverse impacts. But I’ve always had a soft spot for the U.S. sugar program, which continues to surprise and astonish.

As you probably don’t know, but might suspect, the average U.S. citizen consumes about 140 lbs of sweeteners per year, about half coming in the form of sugar and the other half in the form of some sweet corn goodness.

Because of import restrictions, however, U.S. consumers pay a rather steep markup over world price. In class I cited a 2010 article where U.S. prices were about $0.35 per pound compared with $0.20 on the world market. If you take $0.15 per lb. times 70 lbs. times 300 million people, you’re starting to talk about real money.

But on a trip over to Mark Perry’s blog, I see that sugar prices have gone absolutely bonkers in the past two years. Perry has a nice figure that shows the markup is now more like $0.25 per pound, meaning that sugar producers are now really going to the bank. Perry estimates that with the markup, U.S. consumers pay about $3.5 billion more for sugar than they would absent the quota. Although that is certainly a tall number, on a per capita basis it only comes to about $10-$12 per person.

On the other hand, the U.S. sugar producers pocket a healthy chunk of that $3.5 billion.

In one of the all-time great sound bites, Judy Sanchez from U.S. Sugar Corp. said sugar policy has “zero cost” to taxpayers and offered up this line:

Face it: Sugar is given away for free in restaurants, where they charge you for water, they charge you for an extra slice of cheese on your hamburger. The sugar is so affordable that it’s given away for free. That’s because American sugar policy works.

Do you suppose sugar would still be “given away for free” if the U.S. price was cut in half tomorrow?

UPDATE: For some background, here’s a Congressional Research Service report — usually readable, often helpful.

Winners, Losers, and Microsoft Update

Our Senior Readers have forged through Liebowitz and Margolis’s Winners, Losers, and Microsoft, so terms like “increasing returns,” “network effects,” “serial monopoly,” and “lock in” are now rolling off their tongues. I am very impressed with how the group has embraced the book and how fluid the discussions have been. I will count this one as a winner.

So, as a follow up, we have an absolutely remarkable data point from Business Insider (via Mark Perry) that the iPhone is now bigger than Microsoft. (See here for background to the big pies).

The iPhone.

Bigger than Microsoft.

That is remarkable.

The Informant

“Economics is what economists do”

As I was preparing for Econ 100 for next term, I came across a piece by Roger Backhouse and Steven Medema on the definition of economics. Or, to put it more bluntly, what exactly is economics anyway?

Backhouse and Medema run through a bunch of textbook descriptions of what dismal scientists spend their time thinking about, and offer up a few choice quotes. The first candidate is from the indefatigable Paul Krugman and Robin Wells from their intro textbook: “Economics is the study of economies, at both the level of individuals and of society as a whole.”

That seems pretty accurate, but I don’t think economics is nearly as exciting as they make it sound. ;-)

Here’s another from David Colander, a man who knows a thing or two about The Making of an Economist. He says “Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.”

Coordination, indeed. For us market types, scarce resources are generated and distributed via market forces (e.g., prices), and there are all sorts of “agents” running around maximizing this and that — utility, profit, market share, Facebook friends, etc…

Harvard’s Greg Mankiw simply says “Economics is the study of how society manages its scarce resources.” Pithy, to the point, possibly accurate, and consistent with what Robert Heilbronner tells us in The Worldly Philosophers. More on that later.

Or perhaps try the more pro-market friendly Gwartney and Stroup et al.: “[E]conomics is the study of human behavior, with a particular focus on human decision making.”

Couldn’t that describe psychology?

Scarcity, choices, allocation, behavior, decision making — not exactly narrowing down our subject here, are we?

So, for the punch line, here is the classic Jacob Viner quip, “Economics is what economists do.”

That’s it!

Thanks to Mr. T for the tip. You can read the full piece here.

And here is the citation: Roger E. Backhouse and Steven G. Medema. 2009. “Retrospectives: On the Definition of Economics.” Journal of Economic Perspectives, 23(1): 221–33.

Backhouse, by the way, is one of the co-authors of our ECON DS-391 and Econ 601 books. So we’ll be hearing more from him in the coming weeks.

Excessive Monetary Easing is Part of the Problem

If short term interest rates drop from .1% to .02% does it generate more economic activity? If long term rates drop from 3% to 2% (or even 1.7% as with 10 year US Treasury Notes), will people want to borrow more given the current economic environment? Most readers know my pessimism regarding answers to these questions. The IMF, in its latest global financial stability report, makes the case quite strongly. Furthermore, as argued previously and by most “Austrians” since Mises and Hayek, overly cheap capital causes a great deal of mis-allocation of capital. The Financial Times editorial today summarizes the IMF report.

The IMF’s latest global financial stability report says rightly enough that the eurozone crisis, and the row over the US debt ceiling, sparked an increase in risk aversion. But the IMF worries that exceptionally low interest rates are building a fresh credit problem. They have spurred a hunt for yield which, as widely broadcast, has sent too much capital to emerging markets. When capital is too cheap, it is mis-allocated.

The FT editorial concludes:

Either credit markets see reasons for economic cheer that have eluded everyone else, or low interest rates have sparked another round of irresponsible lending.

Meet your textbook author, Jonathan Gruber

It’s time again for us to profile one of our favorite textbook authors, today featuring Jonathan Gruber of Public Finance and Public Policy fame — the text from Econ 271 last term. I certainly endorse everything about the book aside from the $200 price tag, and Alex Tabarrok calls this one of the best textbooks ever. If you don’t want to wait around for me to teach 271 again, you can go straight to the source through MIT’s open courseware program.

As I pointed out in class a few dozen times, Gruber is a big deal in health economics, and Slate.com has a nice profile as part of its “most innovative and practical thinkers of our time” series. The dog bites man here is that Gruber has his hands both in Massachusetts health care reform (Romneycare), as well in the recent federal health care legislation (Obamacare). Slate’s contrarian instincts find the potential 2012 presidential showdown between Romney and Obama too delicious a prospect to pass up.

Hi Guys!

Also included is an interview with Professor Gruber, along with a preview of the forthcoming health economics comic book, er, graphic novel. Wow.

On the Road with F. A. Hayek

This fall, Professor Galambos and I will be leading a group read of F.A. Hayek’s The Road to Serfdom. The course will be offered for one unit as DS 391 — On the Road with Hayek, and we will have a sign up and coordinate times at the beginning of fall term. I expect with this book we will probably meet eight of the ten weeks.

If you are the type that lets one-unit courses slide, you might consider picking up the book and giving it a once over this summer in preparation for fall term. I suggest you get the edition edited by historian of economic thought, Bruce Caldwell.

For those of you looking to kill an hour with a podcast, here’s Caldwell at EconTalk, talking about Hayek.

Here’s Hayek’s classic American Economic Review piece, “The Use of Knowledge in Society.” And here. And here’s Hayek’s Nobel lecture, “The Pretence of Knowledge.”

See you this fall.

UPDATE: You can get an add course sheet outside of our offices.

Math 300 Final Exam Help

Question: Prove that any sequence of the word “buffalo” of length n>1 is a valid English language sentence.

Proof (via Brad DeLong’s comments)

First, let n be odd. We start with n=3: “Buffalo buffalo buffalo”; that is, some buffalo do buffalo buffalo, i.e., some buffalo are buffaloed by buffalo. But of course the buffalo who are buffaloing may themselves be buffaloed by buffalo, so just as some cats that watch mice are chased by dogs, or as we say, cats dogs chase watch mice, buffalo that buffalo buffalo themselves buffalo buffalo, and we can say that buffalo buffalo buffalo buffalo buffalo. Anytime we have the noun buffalo, we can add the relative clause “who are buffaloed by buffalo”, or better, instead of the noun phrase “buffalo who are buffaloed by buffalo”, we may say simply “buffalo that buffalo buffalo”, then add the rest of the sentence, yielding “Buffalo that buffalo buffalo buffalo buffalo”, or even better, “Buffalo buffalo buffalo buffalo buffalo”. To a sentence consisting of n (odd) occurrences of the word, we can produce a sentence of n+2 occurrences.

Thus for any odd n, a sequence of n occurrences is a sentence.

But just as a dog that chases cats is a dog that chases, buffalo that buffalo some buffalo are buffalo that buffalo, so from one of our sequences of an odd number of occurrences, we can lop off the final direct object, producing a sequence of an even number of occurrences that is a grammatical sentence. For any n>1, odd or even, a sequence of n occurrences of “buffalo” is a grammatical English sentence!

Q.E.D.

The True Costs of Electricity

In Econ 100 this week we talked about external costs (and benefits) and the equivalence of carrots (prices) and quantities (sticks) in terms of the possible “optimal” equilibrium outcomes. The elephant in the room in these types of discussions is the measurement of the so-called external costs. As if on cue, environmental economics superstar and sometime Presidential advisor Michael Greenstone and his co-author Michael Looney have upped a paper with their estimates of these costs associated with electricity and energy.

Here’s their money chart.

The glaring purple associated with coal shows that the principal external costs are not from greenhouse gases, but from conventional criteria pollutants (e.g., NOx, PM). The external costs of coal, even new “clean coal,” are estimated to be higher than the actual operating costs. Yikes.

It’s worth noting that both solar and wind have non-trivial carbon footprints, because the variability of supply requires ample natural gas plants to cover supply on days when the wind doesn’t blow and the sun doesn’t shine. Certainly, developing battery storage technologies may well turn out to be the biggest environmental challenge of this next half century.

The results are probably worth quoting at length (after the break): Continue reading The True Costs of Electricity

Supply & Demand Mania Continues

Don Boudreaux has assigned a Pop Quiz over at his blog, Cafe Hayek.

1. Which group of persons would most likely benefit from rent control (i.e., a price ceiling or price cap) imposed in the city of Washington, DC?

a. landlords in Washington, DC

b. persons seeking to rent apartments in Washington, DC

c. landlords in the DC suburbs without rent control

d. renters in the DC suburbs without rent control

2. Suppose that engineers at BMW invent a new machine that dramatically increases BMW’s efficiency at producing automobiles and, thus, causes BMW’s production costs to significantly fall. As a result, BMW expands its output and lowers its prices. But also, BMW patents this new machine; only BMW can use it. What is the most likely consequence of this particular invention on the prices that General Motors, Ford, Toyota, and other auto makers charge for the automobiles they produce?

a. no change in the price of non-BMW automobiles

b. the price of non-BMW automobiles will fall

c. the price of non-BMW automobiles will rise

d. there’s insufficient information to answer this question

3. In the 1970s, the federal government imposed price ceilings on oil. The goal was to make fuels such as gasoline and heating oil more affordable. One consequence was

a. consumers ended up getting less oil (and oil products, such as gasoline and fuel oil) than they would have gotten without the price ceiling

b. gasoline shortages

c. higher costs to consumers of acquiring oil and oil products

d. all of the above

For answers, either work on them, or go check out the Cafe Hayek blog.

Causes of Demand Curve Shifts — Expected Price Changes

The first thing to remember about the law of demand is “all else constant.” What we are holding constant includes expected future prices. This from the Financial Times:

Chinese consumers, increasingly alarmed at the rising cost of living, cleared supermarket shelves this week of shampoos, soaps and detergents after state media said four consumer goods companies … would raise prices by between 5 per cent and 15 per cent.

Via Marginal Revolution.

Econ 100 Preview, Complements

Suppose the NFL players and owners fail to agree to terms on a new contract, thus reducing (or eliminating) the number of professional football games this coming season. What are the expected changes (if any) to the equilibrium price and quantity of chicken wings?

Answer here.

Certainly, you will be more likely to get the correct answer if you rely on the basic theoretical model, rather than just winging it.

Nobody’s bailing, nobody’s sailing, but we’re watching it from shore

Schumpeter Roundtable’s Cecily McMillan is featured in today’s Appleton Post-Crescent.

A 22-year-old government major from Atlanta, Ga., McMillan is the granddaughter of Harlon Joye, an early member of Students for a Democratic Society (SDS), a 1960s organization that helped fuel the nation’s civil rights movement, fought for economic justice and participatory democracy and protested the Vietnam War.

Ms. McMillan has been busy down in Mad-town, even organizing a Tuesday bus trip. Yet, she still found time to come and talk about Capitalism, Socialism, and Democracy.

No mention of Schumpeter in the article, but she undoubtedly had a well dog-eared copy with her on the bus.

Born in the Corn

Our Econ 280 class just got through a spirited debate on ethanol policy (tough luck to the guy that drew “pro-ethanol”), that featured this piece from Hahn and Cecot. Certainly, the class seemed sympathetic to this change of heart from super-environmentalist, Al Gore:

“It is not a good policy to have these massive subsidies for first-generation ethanol,” Gore said at a green energy conference in Athens, Greece, according to Reuters. First generation refers to the most basic, energy-intensive process of converting corn to ethanol for use as a motor vehicle fuel additive.

On reflection, Gore said the energy conversion ratios — how much energy is produced in the process — “are at best very small.” “One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee,” he said, “and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president.”

Yikes.

If Hahn and Cecot’s benefit-cost analysis didn’t convince you, perhaps this bit of visual evidence will be persuasive (c/o Knowledge Problem). The first map is the votes on an amendment to an appropriations bill proposal to prevent EPA from encouraging sale of gasoline with higher ethanol content. The red represents votes opposing the amendment (pro-ethanol) and the blue represents the votes for the amendment.

The Knowledge Problem piece also points us to where the ethanol production comes from. My “ocular” regression seems to indicate a rather robust relationship between the production and the votes.

Nice!

For more political geography, check out this post on climate legislation.

And if you think the politics is predictable, try out the economics. What happens when the demand for corn ethanol increases? One would suspect the price of corn increases, leading to more corn and a reduction in the supply of, say, soybeans.

Econ Spring Preview

As we head into Spring term, let’s take a look at what is available on Briggs 2nd:

ECON 100 INTRODUCTORY MICROECONOMICS 9:50-11:00 MTWR Mr. Gerard

ECON 120 INTRODUCTION TO MACROECONOMICS 11:10-12:20 MWF 3:10-04:20 R Ms. Karagyozova

ECON 205 TOPICS-INTERNATIONAL ECONOMICS 3:10-04:20 MWF Ms. Karagyozova

ECON 215 COMPARATIVE ECONOMIC SYSTEMS 9:00-10:50 TR Mr. Galambos

ECON 271 PUBLIC ECONOMICS 12:30-2:20 TR Mr. Gerard

ECON 320 MACROECONOMIC THEORY 8:30-09:40 TWRF Mr. Finkler

ECON 391 DS-DISCOVERING KIRZNER Time TBA Mr. Gerard or Mr. Galambos (1 unit)

ECON 410 ADV GAME THEORY & APPLICATIONS 12:30-02:20 Mr. Galambos

ECON 425 ENTREPRENEURSHP AND FINANCE 02:30-04:20 TR Mr. Finkler

Click on the classes for descriptions (or old syllabi for Professor Galambos’ courses). As of this writing, there are still spots in each of these sections. There is a bevy of 200-level classes for all you thinking about taking the Econ route or filling out a minor. There are also a pair of 400-level classes, both seem to be extraordinarily topical.

Once again, Professor Galambos and I will be facilitating a group read, this as a follow-up to the Schumpeter Roundtable — this time we will be Discovering Kirzner. For those of you who have had 300 and love it, this should give you plenty to think about.

Later this week, I will post the tentative schedule for next year. You can also find it here.

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