Class Twenty Four

The trade deficit (A negative balance of trade, i.e. imports exceed exports. opposite of trade surplus.)

In the past, people strive to get more with less, ie. Machines, but it doesn’t mean jobs are lost.

The saving of this increased productivity, the acrument soon transferred to consumers and workers.

Why new jobs are created?

Eg. The reason we don’t have bankers is ATM.

A: Complement vs. Substitutes

*until machines can do everything labor can do, some jobs must exist to complement capital (ex. bank tellers and ATMs)

“Trade cost jobs”

When we find way to trade with other countries, it’s the same thing we find some new machine.

*The implication of trade is much smaller than implication of technology.

What matters is not the wage, but how much workers can produce relative to their wage

Wage/MPc(marginal product of labor) I China vs W/MPc I USA

($8/hr)/(4 shirts per hour)                     ($20/h)/(20shirts hours)

Should America produce shirt? What matters is the comparative advantage.

11:20

If trade deficit cost jobs, then trade surplus must create jobs! (but the reality says NO)

WHY? It ignores the dynamic nature of labor market.

i.                     Imports are paid with exports. (The jobs lost in trade is replaced by someone in the USA producing what Chinese want)

ii.                   Richer

*increased productivity is the cause of job losses in manufacturing, not globalization

*shouldn't the economy put people ahead of profits? -> it already does, competition leads to the cheapest and most efficient (best) outcome for consumers

*the only standard of how much to produce is how much we wish to consume

Class Twenty Three

How state like Missisibe get wealth:

i.                     Everyone starts working (people who don’t work previously enter the labor market)

ii.                   People get more productive (technology improvement)

*Thus people fear that technology loses job.

It has nothing to do with trade: It’s the most easy, low-skillful jobs that disappear.

Eg. Chips

No people now supervise the chips, we lost jobs!

What’s the problem?

Terrible jobs are replaced by higher quality jobs

Average wages of service sector than that of manufacture sector we’ve lost.

People who are making money are those who don’t have these skills in the past.

*Technological change today is really different with the technological change in the past.

A lot of technological change today doesn’t necessarily benefit everybody like it was in the past; it requires much unique skills to take advantage of them.

The international trade:

i.                     It’s true that we export corns like 3^rd world country, but if you look the value of what we export, the tops are high technology products.

ii.                   Trade doesn’t lies on that. Look in the past, who knew there will be jobs in biotechnology? How could you imagine what kind of jobs will appear in the future?

Job Replacement:

People who engage in the jobs are those who benefit from trade in the first place.

There’s not a fixed number of jobs (Jobs are created)

Exports-Imports

“Trade Balance”

Goods   Services (used to make up only a small fraction of GDP, now 30%)

Trade doesn’t do anything to the number of jobs, but it changes the kind of jobs you see.

                                                                                                                                   

Class Twenty-two

Self sufficiency is the road to poverty.
                                              Rochester                    Cornell
                          Cameras            5                                4
                                         1cam=2wine           1cam=3/4wine
                                         P-cam =2wine           P-cam=3/4wine
                          Wine                 10                              3
                                         1wine=.5cameras         1 wine=4/3cameras
                                         P-wine=.5cameras        P-wine=4/3cameras
Rochester has a lower opportunity cost of wine compared to Cornell. THUS, Rochester has a comparative advantage in making wine over Cornell while Cornell has an absolute advantage.

Cornell has a lower opportunity cost of cameras compared to Rochester. THUS, Cornell has a comparative advantage in making cameras over Rochester.

No body can have a comparative advantage in producing everything. Comparative advantage is how good are you at producing one thing compared to producing another.

Then Cornell proposes the following proposal:

                                               Rochester                    Cornell

                          Cameras             0                                 4

                                  

                          Wine                 10                                0

                                         P-cameras=1wine       P-wine=1camera

Rochester decides to trade 3 wine to Cornell and Cornell decides to trade 3 cameras back to Rochester.

After Trade:

                                               Rochester                    Cornell

                          Cameras             3                                 1

                                  

                          Wine                  7                                 3

Both Rochester and Cornell are operating outside their PPF. Society is now richer because for the same resources you get more outputs. By definition, trade is sustainable. 

What countries produce is a function of their relative productivity (prices across countries don't matter, what matters for trade is relative price differences within a country).

Reading analysis of In praise of cheap labor, Ricardo's Difficult Idea, and A Raspberry for Free Trade

Outline: The reading assignment of this week consists 3 parts.

In the first article Ricardo’s Difficult Idea, the author defended the idea of comparative advantage proposed by David Ricardo, and examined why some people, even after so many years after its acceptance as a general concept in economics, still do not understand comparative advantage; he argues, people generally renounce the concept for 3 reasons:

i.                     Some intellectuals reject comparative advantage simply out of a desire to be intellectually fashionable.

ii.                   It’s just so hard for them to understand.

iii.                  The aversion of many intellectuals to an essentially mathematical way of understanding the world.

  In the second article, In praise of cheap labor, the author contradicted the idea that cheap labor is evil with 3 reasons:

i.                     Cheap labor is not new.

ii.                   It allows poor country compete within the international market. (ice breaker)

iii.                  Wages are actually higher than they were

  In the third article, by contradicting the incompatible nature between international trade and import restriction on sanitary standards, the author defended the effective nature of free trade.

Rhetorical questions:

i.                     Every time during a recession, there’re always some people, or sometimes government itself, murmuring simple economic sophisms. Why does the government always forget to make and explain their policies out of basic economic concept?

ii.                   We all know the advantage of cheap labor in developing countries, why there’s still some low skill-needed products still tagged “made in U.S.”

iii.                  In international trade, should we really ignore national defense?

Economic concept: all three articles here focus on international trade, which is drove by the concept of comparative advantage. In general, we need to understand that even in an international level, trade and specialization can make everyone better off.

My opinion: In one word, we always need to remember that the trade between countries is exactly the same thing as the trade between individuals. When we faces some new problem, we should not be affected by the misleading complexity but should find out the core features of the problem.

EWOT Eight

Yesterday, I watched a video about the ongoing protest called “Occupy Wall Street” in New York. In that video, a protester’s argument definitely drew my attention; he said: “…Suppose we [can] produce 100 billion, if we [limit ourselves to] produce 50 billion, look how much employment can be created.” Once again, the sophisms that Bastia strived really hard to eliminate appear in some people’s mind.

Let’s scrutinize his argument; he proposes that if we set more obstacles on the process of production, we can get rich by increasing employment. How absurd it is! What he’s arguing is that the source of wealth is labor. In other words, if we look at the effort and the effects of production, he argues that the more effort we make for a given amount of effects, the wealthier we get. I don’t want to prove you why this argument is false. I will just grant its correctness and then let’s find out what will also be true if this argument is true. If it is true that the more effort we pay for a given amount of effects the wealthier we get, it must follows that when the hardness of getting a given amount of effects is infinitely large, then we are infinitely richer. You can see how the absurdity comes out. If I decided to write this article with a quill rather than with a computer, I have to pay more effort for the completion of this paper. Did I get richer by using an ancient and less efficient way of writing? No! I spent more time and energy on something that I can finish easily in alternative choices, if we consider the value of the extra time and energy I spent on writing which I could have spent on something else, I’m just exactly that much poorer!

This is how the argument goes. I not objecting the whole protest, which actually I think is reasonable and socially beneficial. And yet I do argue that people should winnow out some absurd idea of a few unaware minds to maintain the effectiveness and the validity of this protest.

Individualism and Altruism

Outline: In this article, Rizzo presented us the detailed explanation of individualism and altruism. Here he examine why individualism succeed in generate good market outcome whilst altruism, although well intended, fail to make best outcome. In more detail, he mentioned the failing nature of sacrifice, the knowledge problem and thus made a conclusion that: people can preach altruism but they cannot live it.
Economic concept: This is another interpretation of the invisible hand and market system. Furthermore, it also mentioned the law of unintended consequences. In one word, the best procedure to maintain a healthy economy is to make sure that everybody act out of there own interest.
3 Rhetorical questions:
i. We've heard that Bastiat divide  ethics into two categories: philosophical/ religious ones and economic ones. As he argued, it's true that economic ethic generate more significant outcome in reality, but it's also true that religious ones are  superior. How's the concept of individualism affecting out self-perfection and the introduction of general philosophical ethic? 
ii. We've also talked about the problem of Coercion and Corruption of economic activity. Is it reasonable to argue that some behavior should be prohibited although it's out of general individualism?
iii. Are there possible situations in which individualism fail?
My opinion:
I agree that individualism works better than altruism under modern world. But what if the productivity reaches a real high standard, and the self-seeking pattern reaches a new stage that people can easily know what others want? Is altruism really impractical in the future? I remain in doubt.

Class Twenty One

Trade is a difficult thing. When we trade goods and services within a market, we are just changing stuff. How can wealth come from that?

*Aristotle says a trade is just only when people have equal value on it.

Exchange only happens when value are different

People cooperate to get what they want

What’s the sole purpose of production? Consumption

What’s the sole purpose of trade? Consumption

Eg. Baseball Card Exchange

Me            Friend

$200cash for $0.02cards

759 cards------$1000

760 cards------$8000

What happens to the society?

	Before	After
Me	$200cash+$1000	$8000
Friend	$0.02	$200
Total	$1200.02	$8200

Trade creates wealth by taking stuff from people who value it less to people who value them more.

Eg. Hours to complete yard work

	Mike	Rich
Weeding	80min	120min
Mowing	40min	120min

Rich proposes to weed 3/4 of my driveway if I mowed his lawn.

	Mike	Rich
Weeding	20min	210min
Mowing	80min	0min

For society, 6 hours’ work is now finished in 5hours and 10min with the SAME outcome

Where does that wealth come from?

*Production Possibility Frontier (PPF)

1)       All points on/in the frontier are feasible

2)       All points outside are not feasible

3)       Absolute advantage

4)       All points on the PPF are “productively” efficient (at the lowest cost). (to be economically efficient, you need to be on the proper POSITION on the frontier)

5)       Slope is the opportunity cost (trade-off between goods)

6)       Law of Diminishing Returns (increasing marginal cost and decreasing marginal profit)
7)     Economic growth comes from 3 things
                -Resources increase
                -Discovery of better technology (use stuff more efficiently)
                -Trade
If an increase in x-intersect or y-intersect, then:
i. Additional resources 
ii. Improved technology
iii. Specialization and trade with others

Class Twenty

*Rule of law (bus example)

When Rizzo told you that bus driver shouldn’t stop, he’s not telling you we should help people. While in fact, if the drive stops, he may be able to improve social welfare.

*The question is, we have a giant information problem:

The social goal is to improve the welfare of many people without hurting anybody. That’s the goal deciding whether you should stop or not. We need to consider social cost.

College (into class) vs. Customers (onto bus) Expectation Problem

I.                    Which situations in our life tend to give us the most confidence about whether we gonna have success engaging in particular transactions.

Eg. The sign of a hotel about not allowing pet in the room. Why “we love pets?” not “pets are really costly”? Why they’re playing emotional games rather than logical convincing?

*Relying on strangers, then you can free of your friends.

Eg. If you go to a dining hall, you pick up an apple; do you really care that the farmer loves you?

You’d want more farmers competing, “my apple is cleaner” “my apple taste better”

Eg. A few years ago, I want to buy a house, and then I went into a store the pass the guy behind the table whom I’ve never seen before the important documents. What gave me the confidence, given many things that MAY be going wrong?

*Feedback Loops the most important thing you gonna learn about what market economists can do when they are working well (give the confidence to you). It’s they provide feedback.

Eg. For the real estate company, there’re feedback loops that ensures good performance. The reason is there’re consequences perhaps very serious to the company if they fail. It’s not just they lose money. People lose jobs, the whole company may disappear. There’re two reasons why that might happen:

*Rule of law doesn’t help me here. It can’t be trust. You can only trust it when you’ve developed some good reason to trust it.

i.                     Competition is part of the reason why feedback loops are important. (If this company doesn’t perform well, you turn to other company.)

ii.                   Competition is not enough. When the people in the company fail, they actually feel bad about it. You need people in society that have some sort of moral sense of good and bad, right and wrong, hard work and reward. The company tries to hire honest people. People who regularly do things wrong wouldn’t be there.

*Then people in the real estate company are not doing so because they love you.

*When you see a problem, don’t start thinking about politics, just ask questions about: ”why feedback loops” are not there? For big government, if you want to do things well, reward what’s right, that’s what you need to think about.

II.                  Trade + Specialization

Any study of economics in the real world involves the study of exchange of property.

*We exchange not the goods itself but property rights.

What’s the whole point of economic activity?

*The world has scarcity and we want stuff. So the real economic challenge is we ask ourselves:

i.                     What stuff should we get produced?

ii.                   How do we decide to do it? Factories…machines…(Production questions)

iii.                  What’s the stuff is produced, how do you get it to people? (Allocation problem)

“Input”------“Black Box”------“Stuff”

*Factors of production (inputs also known as):

i.                     Land (air, water, trees, anything there that people can touch it)

ii.                   Labor (The natural stock of human beings. Whatever your skill, your gene is when you come to the world, called god given, that’s labor )

iii.                  Capital (something that must first be produced for the purpose to produce thing else)

1)       Physical (machines…)

2)       Human (any increment to your ability that happens in your life, not just education.)

*To produce capital, you have to sacrifice land, labor, it’s a new trade-off.

*The real challenge of economics is to make use the god given to make the stuff we want.

III.                What exactly do we mean by “economic activity”?

Prior to industrial revolution, outside of a few small societies, there was virtually no economic activity happening on earth. There was productive activity. In history we produce what we want, but that’s productive activity. What makes economic activity? It’s: The second you decide NOT to do sth. for yourselves.

i.                     Specialization (when you work for yourself, you don’t specialize)

ii.                   Exchange

iii.                  Discovery (technology), figuring out new patterns of sustainable specialization and trade. There is a time lag associated with discoveries. 

*The more that we become self-sufficient, the less economic activity out there.

The challenge of economic activity, it to develop P.S.S.T. (patterns, sustainable, specialization trade)

The challenge of free economics it to figure out when I should take the risk not to do something for myself. It’s true that self-sufficient make you poor, but at that moment, I know I can get pizza from other sources.

*One of the things that characterized major recessions is when these patterns of specialization and trade break down. People become really self-sufficient during that period.

*In the long-run, the challenge for any economy is to solve a lot of MATCHING problem.

Eg. Somebody show you an i-pad, you found you need it.

i.                     The production capacity, the technology within society to be able to do that.

ii.                   Match the skill sets of the people in economy with what people want, with the available technology.

*Trade is good. (Everyone realize the goodness of trade):

People have confusion about trade because two things weird about trade:

i.                     When you exchange, nothing new is created.

ii.                   When I do exchange with people, isn’t that exploit?

Class Ninteen

Golden Rule (motivation is to better others rather than benefit yourself)

*Do it to others, and then others will do it to you.

It’s good for society if it’s possible and it works in certain conditions: when the economic condition is simple and small and you know the people around. But the real society is big and impersonal (you have to deal with person you don’t know).

*In commercial society, what really happens is: I’ll do something for you, if and only if you do something for me. We use others in the transaction as means to our own ends. (Where the “immoral” sense come from)

*It doesn’t work even work when everybody in the world is perfectly altruistic.

What makes the golden rule fail?

People are not used to make other people as their ends.

Knowledge problem

Trade + competitive advantage

i.                     Self-interest (in society, we actually celebrate it: eat healthier food, got better education, stop smoking.

ii.                   Reciprocal Altruism

Toney: Tony needs a kidney; he gets one anonymously (from Tim)

10yrs, Tina struggles with her mortgage

There’s nothing different if it happened out of golden rule (10 years later Tony pay the mortgage for Tina) or self-interest (sell and purchase). We just shrink the distance and time.

*Market transaction is nothing but reciprocal altruism happening instantaneously.

iii.                  Only buying and selling firms are viewed as greedy and self-interested. Firms are really greedy when they charge price, try to sell product to you.

1)       When consumers make choice, they are also greedy.

2)       Don’t people who sell their labor for high price greedy?

*What is it activates human behavior and how does it help us to get American cheese at the corner? It’s not selfishness that motivates people in a commercial society: some people just do for love or like, avoiding bored, satisfaction.

*self-interest to economists: that you pursue the projects that interest you. That’s true both for mother Teresa and jack the trapper. Adam Smith mentioned self-law, not self-interest.

*Golden rule is really hard for us to get a mortgage or cheese.

Eg. Should bus driver wait for Rizzo?

Let’s thinking about the difficulties for the bus driver when he decide whether to let Rizzo in:

i.                     If he wait for Rizzo, there’s gonna be some delay. Suppose there’re 45 passengers on the bus, you delay each of them for 1 minute, then it’s 45 minute. May be some people miss something important. The point is the bus driver can’t know. Even if you can know, it’s to cost to do so.

ii.                   Rule of law. Following the rule of the bus company, the driver try to maximize the profit of everybody is he doesn’t have enough information. The driver who waits is actually not so virtuous, since he violates the rule of law. It’s impossible for the drivers in a society all arbitrarily decide where and when to stop.

*What is moral-appropriate rule?

We can’t assume Golden Rule because of Knowledge Problem.

Silver Rule: Do not do to others what you would consider unfair or unjust if they did it to you.

Soft vs. Hard Principles

Eg. What the responsibility of businesses and corporation should bear in a society? People always say: shouldn’t businesses operate with a little bit more responsibility or love? I think there’s no conflict between profit and social responsibility. Should business give portion of their profit to charity? Possible response:

i.                     It’s perfectly ok to be charitable with your own money. (This is moral). It’s totally inappropriate to be charitable with someone else’s money. Most Corporations are NOT privately hold. No country get rich because of charity.

ii.                   There’s no such thing as enough profit. The world is incredibly uncertain. If you sacrifice in the name of responsibility, you may destroy the company entirely, and put everyone out of work.

iii.                  Running a successful business requires using selfless-values. It is best for the people who run the business. Eg. Apple is famous for customer service. Those companies who treat employees and customers badly will find it extremely hard to thrive.

iv.                  A charity doesn’t love me like my brothers love me. (Personal decision)