Throughout High School, I was a big part of my school's drama department. my school had a pretty big department, with an entire building set aside for its auditorium. I participated in five different productions every school year--two main stage productions that were open to anyone in the school, and three productions that were set aside just for members of the "Advanced Drama" class. It was a blast. I had so much fun. I have easily lost track of how many plays I have been a part of over my life time. I've played the full gambit of roles, ranging from Romeo to Bum Number 6 (really), and I think I was pretty good. Not the best, but not too shabby, either.
There are many reasons I love the theatre. Going to watch a play is always an experience. There is something very different about watching live people perform in front of you, as compared to watching a screen in a dark movie theater. Watching a movie is a bit more passive. It could be a beautiful romance, or an action packed thriller, but the audience is still relegated to observing something that was finished long before they sat down. In live theatre, however, the story is literally being retold every night to a new audience. Every night, the actors are interacting with the script, the audience is interacting with the actors. A person is running the lights, a different person is running the sound, a full crew team is working in the back to make sure every piece of the set and every prop is in exactly the right place at exactly the right time. And all of this happens in perfect synchronicity...well...maybe not exactly. One thing that I learned during my time in theatre is that no two nights are the same. A production is a living, breathing beast every time the curtain rises. There are so many things that could go wrong every night, but still for the most part, everything usually seems to work out. The show must go on, right?
More than anything else, though, my absolute favorite aspect of the theatre--whether I'm on stage or off--is the characters. My favorite type of show is one with a simple set, and minimal props or flashy lights, and instead has very in-depth character development. When watching a play, I love to try to figure out what a given character is going to do next. I love to see how an actor interprets a role. I love to see how different actors interpret the same role. When acting in a play, I love to become a character. I love to get inside his brain and really understand exactly why he makes the choices he does. I love to lose myself in his life and really know what make him tick. I move stage right, not because my director tells me to, but because I feel myself drawn in that direction. I break down, cry, and beat my breast, not because it says so in the stage directions, but because my world is falling apart. I do this because I really understand what he needs and what makes him move.
Right about now you're probably scratching your head in confusion, asking yourself what the hell this has to do with economics. Most people think of economics (often called the "dismal science") as only having to do with money and interest rates and GDP. Actually, it is much more than that. I think of economics as a behavioral science which uses the tools of statistics, calculus, and marginal analysis to figure out what makes people tick. I usually tell people that economics is sort of like applied sociology. Economists (microeconomists, at least) often find themselves wondering why people do the things that they do. Instead of just trying to guess at this question, though, we try to actually measure it. We use data sets, statistical analysis and theoretical and mathematical models to describe how people respond to the world around them. If prices rise, what do people do? If the government imposes a tax, how do people react? If a minimum wage is set, what is the result? How do school administrators respond to mandatory school testing? (Keep this last one in mind for a later post!).
I guess you could say that I use both theatre and economics to fulfill the same passion within myself--my passion for people. I find people to be very interesting. I love talking to them. I love learning their likes, their dislikes, their hopes and their dreams. I love to understand why people do the things that they do. I love to understand what makes them tick. The theatre gives me an artistic medium through which I can explore the emotions and inner workings of people. Economics gives me the tools to analyze people's actions, and come up with objective, scientific reasons why people act in the ways that they do.
Anyway, I hope that I have convinced you that, although you don't need a utility function to analyze a play, economics has a lot more in common with the theatre than most people think.
Have a magical day!
Saturday, May 31, 2014
Friday, May 30, 2014
The Deceptive Unemployment Rate
So we hear a lot about the unemployment rate. It is one of the most widely used macroeconomic measurements. We all know that high unemployment rates are bad, and low unemployment rates are good. Simple enough, right? What exactly is the unemployment rate, though? It a percentage that represents the number of unemployed people divided by the number of people in the labor force, or
\[Unemployment \; rate=\frac{number \; unemployed}{number \; in \; labor \; force}\]
times 100, technically, if you want to express it as a percentage.
Now it's important to understand precisely the definitions of these terms. The labor force is defined as anyone who is able and willing to work. that last part is important. A person has to not only be of an appropriate age and be physically/mentally able to work. He or she must also be willing to work! (This will factor in later) Those that are considered "unemployed" must be a subset of the labor force. One is considered unemployed if he or she is willing an able to work, but is unable to find a job.
Now, with this in mind, what ways is it possible for the unemployment rate to be decreased? (that is what we want to happen, right?) Well, the most obvious way for this to happen is if a larger percentage of the labor force becomes employed. In terms of our equation, that would mean that, the size of the labor force held constant, people would simply leave the numerator, thereby decreasing the value of the expression as a whole. This is probably what we usually think about when we think of a decrease in the unemployment rate.
There is actually a second way to decrease the unemployment rate, though. Let's look really carefully at our definition of what the labor force is. Remember, those in the labor force must be both able and willing to work. Let's consider someone who has been searching for a job for a long time, and has given up hope. this is what we call a "discouraged worker". It is a person who is perfectly able to work, but has stopped actively searching for a job. This person will not be recognized as part of the labor force, and consequently, will not be recognized as an unemployed person. It is true that he or she is not employed, but to be unemployed one must be in the labor force. If this person becomes a discouraged worker and leaves the labor force, he or she will be removed from both the numerator and the denominator of our original equation. It turns out that this will also reduce the value of our expression. This means that if people just stop looking for work (meaning that no one new has started working) the unemployment rate will still decrease. Crazy, huh?
Now this is all well and good, but I actually didn't know that reducing a numerator and denominator by the same amount would always reduce the value of the a given (regular) fraction. I know this is a long-known mathematical fact, but I had never come across it, so I decided to prove it to myself. Let's try to do it.
Consider a fraction \(\frac{x}{y}\) which represents the unemployment rate. To stay consistent with our earlier discussion, let's say that \(x\) represents the number of people unemployed and \(y\) represents the number of people in the labor force. Let us suppose that a certain number of people (let's say \(a\) people) become discouraged after not finding a job for a long time and decide to stop looking, and thereby leave the labor force. This means that the unemployment rate is now \[\frac{x-a}{y-a}\] What we have to do is figure out which is bigger, and which is smaller. Since we don't yet know, I will use a question mark in between the two sides until we can figure it out. Like this: \[\frac{x}{y}?\frac{x-a}{y-a}\] Well if we take this expression, and multiply the denominators on both sides of the expression we will get \[x(y-a)?y(x-a)\] Multiplying through, we get \[xy-xa?xy-ya\] We can then subtract \(xy\) from both sides of the equation and get \[-xa?-ya\] Then divide by \(-a\) to get \[x?y\] So what does this tell us? Well, we said that \(x\) represented the number of people unemployed, and \(y\) represented the number of people in the labor force, and we said earlier that the unemployed is a subset of the labor force, meaning that the number of people unemployed must be less than or equal to the number of people in the labor force. I think we can safely assume that this will be strictly less than, so this means that \[x < y\] Now all we have to do is get back to the original expression. No problem. Just do the opposite of everything we just did in reverse order. So we'll start by multiplying both sides by \(-a\). Don't forget to switch the direction of the inequality, since we are multiplying by a negative. \[-xa>-ya\] Next, add \(xy\) to both sides: \[xy-xa>xy-ya\] and factor out an \(x\) on the left side and a \(y\) on the right side: \[x(y-a)>y(x-a)\] Finally, divide by \(y\) and by \((y-a)\) to give our final expression: \[\frac{x}{y}>\frac{x-a}{y-a}\] And there you have it. If you decrease a fraction by the same amount in the numerator and the denominator, the original fraction will be greater than the new fraction (assuming that the numerator is smaller than the denominator).
So what is the moral of the story? Be careful when someone tells you with great joy that the unemployment rate has gone down. Such a decrease does not necessarily imply that more people are working. It might just as well mean that some people have given up and have stopped looking for work entirely--not exactly a reason for joy.
Now, once again, I know this is nothing new. I just didn't know it for sure myself until I sat down and proved it. I hope you enjoyed it as much as I did.
Have a magical day!
Now it's important to understand precisely the definitions of these terms. The labor force is defined as anyone who is able and willing to work. that last part is important. A person has to not only be of an appropriate age and be physically/mentally able to work. He or she must also be willing to work! (This will factor in later) Those that are considered "unemployed" must be a subset of the labor force. One is considered unemployed if he or she is willing an able to work, but is unable to find a job.
Now, with this in mind, what ways is it possible for the unemployment rate to be decreased? (that is what we want to happen, right?) Well, the most obvious way for this to happen is if a larger percentage of the labor force becomes employed. In terms of our equation, that would mean that, the size of the labor force held constant, people would simply leave the numerator, thereby decreasing the value of the expression as a whole. This is probably what we usually think about when we think of a decrease in the unemployment rate.
There is actually a second way to decrease the unemployment rate, though. Let's look really carefully at our definition of what the labor force is. Remember, those in the labor force must be both able and willing to work. Let's consider someone who has been searching for a job for a long time, and has given up hope. this is what we call a "discouraged worker". It is a person who is perfectly able to work, but has stopped actively searching for a job. This person will not be recognized as part of the labor force, and consequently, will not be recognized as an unemployed person. It is true that he or she is not employed, but to be unemployed one must be in the labor force. If this person becomes a discouraged worker and leaves the labor force, he or she will be removed from both the numerator and the denominator of our original equation. It turns out that this will also reduce the value of our expression. This means that if people just stop looking for work (meaning that no one new has started working) the unemployment rate will still decrease. Crazy, huh?
Now this is all well and good, but I actually didn't know that reducing a numerator and denominator by the same amount would always reduce the value of the a given (regular) fraction. I know this is a long-known mathematical fact, but I had never come across it, so I decided to prove it to myself. Let's try to do it.
Consider a fraction \(\frac{x}{y}\) which represents the unemployment rate. To stay consistent with our earlier discussion, let's say that \(x\) represents the number of people unemployed and \(y\) represents the number of people in the labor force. Let us suppose that a certain number of people (let's say \(a\) people) become discouraged after not finding a job for a long time and decide to stop looking, and thereby leave the labor force. This means that the unemployment rate is now \[\frac{x-a}{y-a}\] What we have to do is figure out which is bigger, and which is smaller. Since we don't yet know, I will use a question mark in between the two sides until we can figure it out. Like this: \[\frac{x}{y}?\frac{x-a}{y-a}\] Well if we take this expression, and multiply the denominators on both sides of the expression we will get \[x(y-a)?y(x-a)\] Multiplying through, we get \[xy-xa?xy-ya\] We can then subtract \(xy\) from both sides of the equation and get \[-xa?-ya\] Then divide by \(-a\) to get \[x?y\] So what does this tell us? Well, we said that \(x\) represented the number of people unemployed, and \(y\) represented the number of people in the labor force, and we said earlier that the unemployed is a subset of the labor force, meaning that the number of people unemployed must be less than or equal to the number of people in the labor force. I think we can safely assume that this will be strictly less than, so this means that \[x < y\] Now all we have to do is get back to the original expression. No problem. Just do the opposite of everything we just did in reverse order. So we'll start by multiplying both sides by \(-a\). Don't forget to switch the direction of the inequality, since we are multiplying by a negative. \[-xa>-ya\] Next, add \(xy\) to both sides: \[xy-xa>xy-ya\] and factor out an \(x\) on the left side and a \(y\) on the right side: \[x(y-a)>y(x-a)\] Finally, divide by \(y\) and by \((y-a)\) to give our final expression: \[\frac{x}{y}>\frac{x-a}{y-a}\] And there you have it. If you decrease a fraction by the same amount in the numerator and the denominator, the original fraction will be greater than the new fraction (assuming that the numerator is smaller than the denominator).
So what is the moral of the story? Be careful when someone tells you with great joy that the unemployment rate has gone down. Such a decrease does not necessarily imply that more people are working. It might just as well mean that some people have given up and have stopped looking for work entirely--not exactly a reason for joy.
Now, once again, I know this is nothing new. I just didn't know it for sure myself until I sat down and proved it. I hope you enjoyed it as much as I did.
Have a magical day!
Wednesday, May 28, 2014
How Much Pollution Do We Want?
Below is a transcript of a lecture I was going to give with Ronnie Davis. Unfortunately, we never got the chance but I thought this would be a good place to share it. I hope you enjoy!
There is often much pressure put on the government to regulate corporations and society in general in the name of the preservation of our environment. It is somewhat taken for granted that the government knows exactly what society needs in order to conserve our resources. People assume that the government knows exactly what the correct amount of pollution is for the public. Now notice that I said the correct amount of pollution. Do we know what the correct amount of pollution is? Do you know what the correct amount of pollution is? I certainly don’t know what it is. Do you think that the correct amount of pollution is zero? That would be great, wouldn’t it? Zero pollution. We would have clean air, and clean water, and a quiet and serene world. We would also be free of cars, computers, mass-produced products, telephones, the mail system, and even candles and wood-burning stoves. Zero pollution is not the best level of pollution. So what is? How can we figure it out?
The answer lies in finding some way to measure what society wants, and what is most efficient for society. There are a few different methods that are available to measure what society wants. One of these methods is the political process. Society can vote on different candidates that have different platforms about the environment. One politician might advocate very heavy regulations, and another might advocate light regulations. One might want to focus his or her attentions on the pollution of cars, while the other wants to focus his or her attentions on the pollution produced by paper mills. Of course, the obvious downfall of this is that you cannot make everyone happy. Not everyone agrees on what the appropriate level of pollution is relative to the products and benefits we receive at the cost of that pollution. But that’s not that big of a problem. We always chose the best people to run the country, and every country always chooses the best leaders with the best policies that will regulate pollution in a way that the costs of pollution will exactly equal the benefits we derive from that pollution. The government always gets it right!! right? Right??? Well…maybe not. But if we can’t rely on the government to satisfy our desire to have just enough, but not too much pollution, then how can we ever achieve an efficient level of pollution?
Well that is the question. Another possible method of measuring what society wants is something called Free Market Environmentalism. Does that sound like an oxymoron? It does to a lot of people, but bear with me. So what is free market environmentalism? It is the idea that, when left to their own devices, actors in the free market can achieve an efficient balance between conservation, production, and pollution. It is the idea that there could be market-based solutions to the world’s problems related to excess pollution.
What this idea hinges on is something called Property Rights. Ever heard of them? You probably have. It’s the concept of “mine”. It means that I own my property, and I can do whatever I want with my property so long as what I do does not infringe upon your property. So what can I not do with my property? I can’t use my property to steal your property. I can’t use my property to hurt you. I can’t use my property to deface of destroy anything that you own. So what can I do with my property? Well, I can dig a hole in my back yard and bury it and forget about it—that way no one can take it, so long as they don’t find it! But that doesn’t really allow me to use my property. It just allows me to have it and say that it is mine. What else can I do? I can use it! I can consume it in some way that gives me satisfaction. Use it in some way that makes me happy. For example, if I own a slice of pizza, and I am hungry, I’m probably going to eat it. That would probably make the most sense. But what if my property included an entire pizza pie? Well, if I’m really hungry, I guess I could eat that too. But what if I had TWO large pizza pies with extra cheese and pepperoni and mushrooms? I might eat some of it, but I probably can’t eat all of it at once. I’m going to eat a few slices, but then I’m going to save it! I’m going to put it in the refrigerator and save it for later that day (or breakfast tomorrow). Now why would I save my pizza instead of eating it all right now? Because I believe that the pizza will retain enough of its value in the future to warrant consumption at a later time.
Alright, so why are we talking about pizza? What does this have to do with the environment, and how does it inform how we can measure society’s demand for pollution and production? Well, according to free market environmentalists, what we really need in order to ensure an efficient level of pollution is well-defined property rights to natural resources. The argument is very similar to the one we just encountered about my pizzas. If someone (let’s say a fisherman) owns some natural resource (let’s say a pond with fish in it), then that fisherman has a very strong incentive to not “over-fish” the pond. Why? For the same reason I didn’t eat all my pizza in one sitting. The fisherman is not going to over-fish the pond because he believes that the fish in the pond, if allowed to reproduce, will create a perpetual stream of income in the future. If the fisherman decides that he wants to fish every single fish out of his pond, he can certainly do that (it’s his pond after all), but it wouldn’t be a very smart move, considering that he could use the pond, and those fish, in the future if he just cuts back on his fishing a little bit. This fisherman is what we call the “residual claimant”. After all is said and done, he owns the pond, and all the fish, and all the income that it generates. After he has fished all the fish he has decided to fish, sold or consumed them, and paid all his bills, he will either gain a profit, or incur a loss. As the residual claimant, he gets all the profit, or he incurs all the loss. The residual claimant of a natural resource has a very strong incentive to make sure that that resource remains profitable into the future so that he can continue to gain from it in future years.
Now let me paint you a different picture. Let’s say that a bunch of different fisherman all share this pond in common. There is Connor the fisherman, and Ronnie the fisherman, and Billy the fisherman and everybody shares the resources in the pond. Remember—sharing is caring!—they all decide individually how much each person wants to fish. Billy might fish a little, and Ronnie might fish a lot, and each person gets to keep and profit from anything he catches. So what’s going to happen to the fish in the pond? Well, let’s try to figure out who the residual claimant is to the pond. Is it Billy? Is it Ronnie? Is it Connor? Well…it’s actually none of them. No one really owns the pond, because there are not well-defined property rights to the pond. So does anyone have the incentive to conserve the fish in the pond? Does anyone have the incentive to make sure that there is a constant stream of profit coming out of the pond in future years? No! No one has the incentive to reign in the amount they fish because they are not guaranteed the residual claim to the offspring of the fish in future years. So what is the end result? The fish population in the pond is probably going to be completely depleted in a year or two. Think about it. If Connor, being a forward-thinking and rational human being, decides to only fish enough to make a little profit so that there will be plenty of fish in the pond for next year, what is going to happen? Ronnie is going to catch all the fish that Connor didn’t! So Connor’s going to end up with a smaller profit than he otherwise could have had, and he won’t have any profit next year because Ronnie and Billy all caught the extra fish! So if Connor truly is a rational human being, and he understands all of this he’s actually going to catch every damn fish that he can as soon as he can so that Ronnie and Billy can’t get them. To put it another way, I’m going to eat both pizzas right now. Why? Because if I don’t eat both pizzas right now, as soon as I can, Ronnie and Billy are going to eat them instead. I might have a belly-ache, but at least I got to consume my resources. We call this the “Tragedy of the Commons”.
So let’s get back to the government. What if the pond if publically owned? What if it is owned by the government? Then what is going to happen? Well let’s go through the same thought process. Who is the residual claimant if the government owns a natural resource? There isn’t one! Who owns the pond? The government owns the pond. Who owns the government? We own the government. So who owns the pond? We all own the pond. So does anyone have any incentive to conserve anything if anyone in the nation can come to the same pond and fish as much as they want? No. Of course not. There is no residual claimant, so there is no guarantee of profit in future years, so there is no incentive to conserve, and more importantly, there is a very strong incentive to consume as much as possible right now, because if I don’t catch as many fish as possible right now, I probably won’t be able to catch any extra tomorrow. I don’t benefit—in fact, I am worse off—if I decide to curtail my fishing and conserve the fish. The result: The Tragedy of the Commons! And a serious tragedy it is!
So the best and most efficient way to conserve natural resources is to have well-defined, enforceable property rights over those resources. This way, goods will be produced, and fish will be caught, and pollution will be generated, only so long as it is profitable to do so. The problem with this approach is in how to define these property rights. Property rights of some natural resources are really hard to define, and even harder to enforce. Air comes to mind. How do we define property rights over the air? Well it is really hard to. Especially because air blows around, and by the time you complain about my factory polluting your air, you’re going to have a really hard time pinning that pollution down on anyone in particular. Who are you going to sue for infringing your rights to clean air? Is the hassle worth it to you? This is such a problem because it is so easy for businesses to “externalize” the cost of pollution onto the public. The trick to solving this problem is to get the businesses to “internalize” the cost of pollution, so that it will factor into their income statement. There are some solutions that have been explored. Most of them do require some government regulation, but in a much different way than the EPA passing arbitrary regulations directly on businesses. A possible solution is called “Cap-and-Trade”. With Cap-and-Trade, the government “Caps” the amount of a certain pollutant that can be released into the atmosphere, and then the government issues a certain number of pollutant vouchers to businesses which can either use them (by polluting) or sell them (Trade) to other firms. In this way, pretty efficient outcomes can be achieved because those firms that are more profitable, and are more able to bear the burden of these internalized costs of pollution will be able to produce (and pollute) more, while those that are less profitable (and probably less efficient) will either produce less or end up going out of business. The main problem now becomes figuring out just how high that “cap” should be set. There is no getting around the need for the government in this sense, but over time (a long time, perhaps) it is reasonable to believe that the government can find a relatively efficient cap on pollution.
So what have we learned today? Property Rights, Property Rights, Property Rights! If you own something, you have the incentive to take care of it and make sure it retains its value for the future. If you are the residual claimant of a resource, you are able to capture all of the profits generated from the use of that resource, and therefore have a strong incentive to conserve that resource for future use. If there is not a residual claimant to a resource, then there is no incentive for anyone to conserve anything, because resources not used today will simply be resource that are used today by someone else. The result of this is the Tragedy of the Commons. If the government owns a resource, everybody owns the resource, and then there is definitely no residual claimant. In this case, it is very likely that that resource will be fully depleted very quickly. Finally, we learned that in order to define some property rights, it may be necessary to utilize the government in a limited sense—just enough to pick a level of overall pollution, and then allow the market to sort out how much each individual is going to be allowed to pollute. Overall, it is important to realize that the government is not a panacea to all our problems. The government’s solutions are usually not the most efficient, and are usually unrepresentative of a large portion of the nation. Using the free market, and sometimes the government in a limited sense, we can most accurately measure just how much pollution we really want.
Sorry that was a bit long, but if you stuck with it, I hope you liked it!
Have a magical day!
There is often much pressure put on the government to regulate corporations and society in general in the name of the preservation of our environment. It is somewhat taken for granted that the government knows exactly what society needs in order to conserve our resources. People assume that the government knows exactly what the correct amount of pollution is for the public. Now notice that I said the correct amount of pollution. Do we know what the correct amount of pollution is? Do you know what the correct amount of pollution is? I certainly don’t know what it is. Do you think that the correct amount of pollution is zero? That would be great, wouldn’t it? Zero pollution. We would have clean air, and clean water, and a quiet and serene world. We would also be free of cars, computers, mass-produced products, telephones, the mail system, and even candles and wood-burning stoves. Zero pollution is not the best level of pollution. So what is? How can we figure it out?
The answer lies in finding some way to measure what society wants, and what is most efficient for society. There are a few different methods that are available to measure what society wants. One of these methods is the political process. Society can vote on different candidates that have different platforms about the environment. One politician might advocate very heavy regulations, and another might advocate light regulations. One might want to focus his or her attentions on the pollution of cars, while the other wants to focus his or her attentions on the pollution produced by paper mills. Of course, the obvious downfall of this is that you cannot make everyone happy. Not everyone agrees on what the appropriate level of pollution is relative to the products and benefits we receive at the cost of that pollution. But that’s not that big of a problem. We always chose the best people to run the country, and every country always chooses the best leaders with the best policies that will regulate pollution in a way that the costs of pollution will exactly equal the benefits we derive from that pollution. The government always gets it right!! right? Right??? Well…maybe not. But if we can’t rely on the government to satisfy our desire to have just enough, but not too much pollution, then how can we ever achieve an efficient level of pollution?
Well that is the question. Another possible method of measuring what society wants is something called Free Market Environmentalism. Does that sound like an oxymoron? It does to a lot of people, but bear with me. So what is free market environmentalism? It is the idea that, when left to their own devices, actors in the free market can achieve an efficient balance between conservation, production, and pollution. It is the idea that there could be market-based solutions to the world’s problems related to excess pollution.
What this idea hinges on is something called Property Rights. Ever heard of them? You probably have. It’s the concept of “mine”. It means that I own my property, and I can do whatever I want with my property so long as what I do does not infringe upon your property. So what can I not do with my property? I can’t use my property to steal your property. I can’t use my property to hurt you. I can’t use my property to deface of destroy anything that you own. So what can I do with my property? Well, I can dig a hole in my back yard and bury it and forget about it—that way no one can take it, so long as they don’t find it! But that doesn’t really allow me to use my property. It just allows me to have it and say that it is mine. What else can I do? I can use it! I can consume it in some way that gives me satisfaction. Use it in some way that makes me happy. For example, if I own a slice of pizza, and I am hungry, I’m probably going to eat it. That would probably make the most sense. But what if my property included an entire pizza pie? Well, if I’m really hungry, I guess I could eat that too. But what if I had TWO large pizza pies with extra cheese and pepperoni and mushrooms? I might eat some of it, but I probably can’t eat all of it at once. I’m going to eat a few slices, but then I’m going to save it! I’m going to put it in the refrigerator and save it for later that day (or breakfast tomorrow). Now why would I save my pizza instead of eating it all right now? Because I believe that the pizza will retain enough of its value in the future to warrant consumption at a later time.
Alright, so why are we talking about pizza? What does this have to do with the environment, and how does it inform how we can measure society’s demand for pollution and production? Well, according to free market environmentalists, what we really need in order to ensure an efficient level of pollution is well-defined property rights to natural resources. The argument is very similar to the one we just encountered about my pizzas. If someone (let’s say a fisherman) owns some natural resource (let’s say a pond with fish in it), then that fisherman has a very strong incentive to not “over-fish” the pond. Why? For the same reason I didn’t eat all my pizza in one sitting. The fisherman is not going to over-fish the pond because he believes that the fish in the pond, if allowed to reproduce, will create a perpetual stream of income in the future. If the fisherman decides that he wants to fish every single fish out of his pond, he can certainly do that (it’s his pond after all), but it wouldn’t be a very smart move, considering that he could use the pond, and those fish, in the future if he just cuts back on his fishing a little bit. This fisherman is what we call the “residual claimant”. After all is said and done, he owns the pond, and all the fish, and all the income that it generates. After he has fished all the fish he has decided to fish, sold or consumed them, and paid all his bills, he will either gain a profit, or incur a loss. As the residual claimant, he gets all the profit, or he incurs all the loss. The residual claimant of a natural resource has a very strong incentive to make sure that that resource remains profitable into the future so that he can continue to gain from it in future years.
Now let me paint you a different picture. Let’s say that a bunch of different fisherman all share this pond in common. There is Connor the fisherman, and Ronnie the fisherman, and Billy the fisherman and everybody shares the resources in the pond. Remember—sharing is caring!—they all decide individually how much each person wants to fish. Billy might fish a little, and Ronnie might fish a lot, and each person gets to keep and profit from anything he catches. So what’s going to happen to the fish in the pond? Well, let’s try to figure out who the residual claimant is to the pond. Is it Billy? Is it Ronnie? Is it Connor? Well…it’s actually none of them. No one really owns the pond, because there are not well-defined property rights to the pond. So does anyone have the incentive to conserve the fish in the pond? Does anyone have the incentive to make sure that there is a constant stream of profit coming out of the pond in future years? No! No one has the incentive to reign in the amount they fish because they are not guaranteed the residual claim to the offspring of the fish in future years. So what is the end result? The fish population in the pond is probably going to be completely depleted in a year or two. Think about it. If Connor, being a forward-thinking and rational human being, decides to only fish enough to make a little profit so that there will be plenty of fish in the pond for next year, what is going to happen? Ronnie is going to catch all the fish that Connor didn’t! So Connor’s going to end up with a smaller profit than he otherwise could have had, and he won’t have any profit next year because Ronnie and Billy all caught the extra fish! So if Connor truly is a rational human being, and he understands all of this he’s actually going to catch every damn fish that he can as soon as he can so that Ronnie and Billy can’t get them. To put it another way, I’m going to eat both pizzas right now. Why? Because if I don’t eat both pizzas right now, as soon as I can, Ronnie and Billy are going to eat them instead. I might have a belly-ache, but at least I got to consume my resources. We call this the “Tragedy of the Commons”.
So let’s get back to the government. What if the pond if publically owned? What if it is owned by the government? Then what is going to happen? Well let’s go through the same thought process. Who is the residual claimant if the government owns a natural resource? There isn’t one! Who owns the pond? The government owns the pond. Who owns the government? We own the government. So who owns the pond? We all own the pond. So does anyone have any incentive to conserve anything if anyone in the nation can come to the same pond and fish as much as they want? No. Of course not. There is no residual claimant, so there is no guarantee of profit in future years, so there is no incentive to conserve, and more importantly, there is a very strong incentive to consume as much as possible right now, because if I don’t catch as many fish as possible right now, I probably won’t be able to catch any extra tomorrow. I don’t benefit—in fact, I am worse off—if I decide to curtail my fishing and conserve the fish. The result: The Tragedy of the Commons! And a serious tragedy it is!
So the best and most efficient way to conserve natural resources is to have well-defined, enforceable property rights over those resources. This way, goods will be produced, and fish will be caught, and pollution will be generated, only so long as it is profitable to do so. The problem with this approach is in how to define these property rights. Property rights of some natural resources are really hard to define, and even harder to enforce. Air comes to mind. How do we define property rights over the air? Well it is really hard to. Especially because air blows around, and by the time you complain about my factory polluting your air, you’re going to have a really hard time pinning that pollution down on anyone in particular. Who are you going to sue for infringing your rights to clean air? Is the hassle worth it to you? This is such a problem because it is so easy for businesses to “externalize” the cost of pollution onto the public. The trick to solving this problem is to get the businesses to “internalize” the cost of pollution, so that it will factor into their income statement. There are some solutions that have been explored. Most of them do require some government regulation, but in a much different way than the EPA passing arbitrary regulations directly on businesses. A possible solution is called “Cap-and-Trade”. With Cap-and-Trade, the government “Caps” the amount of a certain pollutant that can be released into the atmosphere, and then the government issues a certain number of pollutant vouchers to businesses which can either use them (by polluting) or sell them (Trade) to other firms. In this way, pretty efficient outcomes can be achieved because those firms that are more profitable, and are more able to bear the burden of these internalized costs of pollution will be able to produce (and pollute) more, while those that are less profitable (and probably less efficient) will either produce less or end up going out of business. The main problem now becomes figuring out just how high that “cap” should be set. There is no getting around the need for the government in this sense, but over time (a long time, perhaps) it is reasonable to believe that the government can find a relatively efficient cap on pollution.
So what have we learned today? Property Rights, Property Rights, Property Rights! If you own something, you have the incentive to take care of it and make sure it retains its value for the future. If you are the residual claimant of a resource, you are able to capture all of the profits generated from the use of that resource, and therefore have a strong incentive to conserve that resource for future use. If there is not a residual claimant to a resource, then there is no incentive for anyone to conserve anything, because resources not used today will simply be resource that are used today by someone else. The result of this is the Tragedy of the Commons. If the government owns a resource, everybody owns the resource, and then there is definitely no residual claimant. In this case, it is very likely that that resource will be fully depleted very quickly. Finally, we learned that in order to define some property rights, it may be necessary to utilize the government in a limited sense—just enough to pick a level of overall pollution, and then allow the market to sort out how much each individual is going to be allowed to pollute. Overall, it is important to realize that the government is not a panacea to all our problems. The government’s solutions are usually not the most efficient, and are usually unrepresentative of a large portion of the nation. Using the free market, and sometimes the government in a limited sense, we can most accurately measure just how much pollution we really want.
Sorry that was a bit long, but if you stuck with it, I hope you liked it!
Have a magical day!
Tuesday, May 27, 2014
My Opinion on the Minimum Wage
I came across an article today that I posted on my Facebook entitled A Modest Proposal to Ban Volunteering, by A. Barton Hinkle. This was a sarcastic article which pretended to take the side that "If people aren't allowed to work for $7.24 an hour, even if they want to, then they darn well shouldn't be allowed to work for $0 an hour either." The article points out the arbitrary distinction that people make between volunteerism and all other types of work. It's okay to do work for nothing, but as soon as you get paid at all, your paycheck must immediately jump from $0.00 to $7.25. Why the jump? why $7.25? Why not $7.24? To me, it seems very arbitrary and artificial.
This article stirred up a bit of discussion among my friends, and I thought it would be a nice way to introduce my opinion about the minimum wage. I'm sure most people have heard the argument that the minimum wage raises unemployment, but let's flesh out exactly why this is so, and why the minimum wage can harm the very people that it attempts to help. Let's say that I am unskilled, and attempting to find employment. I am hired by some company, and am paid the federally mandated minimum wage of $7.25 per hour. Since I am unskilled, let's say that I am only able to gain the company $5.00 per hour. This means that for every hour that I work, the company which I am supposed to be helping to remain profitable is actually losing $2.25. If I work 40 hours a week, for a year and do not noticeably improve, I will have lost my company about $4,680.00. Not exactly chump change. No business owner in his or her right mind would keep me on. Sooner or later, the company is going to cut its losses and fire me. If I am not able to increase my skill level very quickly, this will happen every place I go within a relatively short period of time. Anywhere I go, I will be fired, because I will always be detrimental to my company.
If, on the other hand, there was no minimum wage, I would be able to accept a wage of $5.00 per hour and work to improve without the imminent threat of termination. As time goes on, and I raise my skill level, I would be able to credibly ask for a higher and higher wage, and seek other employment if I do not get the wage I desire. If I never get to work in any one place for an extended period of time because my skill set is not adequate for $7.25 per hour, I will never be able to improve my work and I will never be able to credibly request higher wages. The truth is, I am better off working for $5.00 per hour than not working at all because the minimum wage shut me out of long-term employment.
Often, people are afraid to do away with regulations that have been in place for a long time because these regulations feel safe. We often see the government as a benevolent force that protects us from harm and unfairness. I don't wish to say that the government is evil, or that the people in the government do not have good intentions. I only wish that people would take into consideration the unintended consequences of many well-intentioned government policies.
Either way, something to think about. I hope that I gave you a new way to look at the topic.
Have a magical day!
In case you wanted to read the the article alluded to above:
http://reason.com/archives/2014/05/26/a-modest-proposal-to-ban-volunteering
This article stirred up a bit of discussion among my friends, and I thought it would be a nice way to introduce my opinion about the minimum wage. I'm sure most people have heard the argument that the minimum wage raises unemployment, but let's flesh out exactly why this is so, and why the minimum wage can harm the very people that it attempts to help. Let's say that I am unskilled, and attempting to find employment. I am hired by some company, and am paid the federally mandated minimum wage of $7.25 per hour. Since I am unskilled, let's say that I am only able to gain the company $5.00 per hour. This means that for every hour that I work, the company which I am supposed to be helping to remain profitable is actually losing $2.25. If I work 40 hours a week, for a year and do not noticeably improve, I will have lost my company about $4,680.00. Not exactly chump change. No business owner in his or her right mind would keep me on. Sooner or later, the company is going to cut its losses and fire me. If I am not able to increase my skill level very quickly, this will happen every place I go within a relatively short period of time. Anywhere I go, I will be fired, because I will always be detrimental to my company.
If, on the other hand, there was no minimum wage, I would be able to accept a wage of $5.00 per hour and work to improve without the imminent threat of termination. As time goes on, and I raise my skill level, I would be able to credibly ask for a higher and higher wage, and seek other employment if I do not get the wage I desire. If I never get to work in any one place for an extended period of time because my skill set is not adequate for $7.25 per hour, I will never be able to improve my work and I will never be able to credibly request higher wages. The truth is, I am better off working for $5.00 per hour than not working at all because the minimum wage shut me out of long-term employment.
Often, people are afraid to do away with regulations that have been in place for a long time because these regulations feel safe. We often see the government as a benevolent force that protects us from harm and unfairness. I don't wish to say that the government is evil, or that the people in the government do not have good intentions. I only wish that people would take into consideration the unintended consequences of many well-intentioned government policies.
Either way, something to think about. I hope that I gave you a new way to look at the topic.
Have a magical day!
In case you wanted to read the the article alluded to above:
http://reason.com/archives/2014/05/26/a-modest-proposal-to-ban-volunteering
An Economic Analysis of Child Labor in the Developing World
I thought an appropriate place to start was with some of the original research that I have done for a couple of my classes. This first post will be about a paper I did with Ethan Trice in my Junior year of undergrad. It is called An Economics Analysis of Child Labor in the Developing World. This paper was in large part a meta-analysis, making use of data obtained from a variety of sources to give credence to our theory. This paper looked at the correlation between child labor and child abuse/abandonment in the developing world--specifically the developing world. We theorize that relatively higher rates of child labor will tend to be associated with relatively lower rates of child abuse/abandonment in the developing world, and vice versa. If so, we believe that this will be a result of the greater intra-household bargaining power of the working child as opposed to that of the non-working child. Let's flesh this out a bit.
Inspired by a 1999 paper authored by Kaushik Basu, our paper does away with the oft-assumed economic model that treats the household as a conflict-free unit which makes decisions as a unified whole. Instead, we assert, as does Basu, that as the proportion of who earns what changes within a household, so does the consumption of that household, even if the overall income of the household remains the same. This really make a lot of sense when you think about it. This is not just true for children, or for developing countries. For instance, it is likely that the expansion of the rights of females in the United States was affected, at least in some part, by the increased percentage of income generated by women relative to men in recent decades. Although the simplifying assumption that households are unified is useful for many economic analyses, it is detrimental to the aim of this paper, and has therefore been relaxed.
Let us consider this concept in relation to the topic at hand. In the developing world, there exist families that truly live on the margins of subsistence, and must therefore make horrible decisions between allowing their children to receive an education, and being able to provide enough food, clothing, and other basic necessities for those children. The child that chooses to/is allowed to work will be more of an asset to his or her family, relative to the child who refuses to work or is not allowed to do so. The latter child will be more of a liability to that child's family. It may seem harsh or cold to consider children as assets or liabilities, but given a family truly living on the margin, it makes sense to hypothesize that a child that is a net drain will be more likely to be abused or abandoned than a child that is a net benefit, all else equal.
Our empirical analysis seemed, in large part, to confirm our theory. We looked at countries in Latin America, India, and Africa, and considered the United States as a Benchmark, since the US is a fully developed country. We found that, as expected, the United States had relative low rates of both child labor and child abuse. This makes sense because the United States is fully developed and no longer needs children to supplement family incomes. In absolute terms, much of the poor in America are far better off than the vast majority of people in the developing world. The same incentive structures, are therefore not present in the US as in truly impoverished countries.
Latin America, on the whole, tends to have a relatively low child labor rate, but a relatively high child abuse rate. Further, much of the Child Abuse seems to be under reported.
One potential outlier we found was Columbia. According to a 2005 paper by Bill Van Auken, Columbia seems to have relatively high amounts of child labor and child abuse. However, "close to half of those who work are paid nothing, while the rest earn an average amounting to just one quarter of the Colombian minimum wage, which is $41 a month." If this is true, then this seeming contradiction actually fits well with the theory of our paper. A child's intra-household bargaining power does not increase merely because a child works--it increases only if that child is actually able to supplement the family income. A child that works, but is paid nothing, has not contributed anything extra to the family, and is therefore just as much of a liability as a child that never worked at all.
We found that India seemed to have an extremely high abandonment rate. Of the Twenty-million orphans in India, only 0.3% have both parents dead. This means that the vast majority of Indian children without families have been abandoned by their parents. Further, according to a 2007 paper by Geeta Pandey, "53% of the surveyed children report one or more forms of sexual abuse." On the other hand, India seemed to have a relatively low child labor rate of only about 5.0%, according to the International Labour Organization (ILO). Because such a relatively low percentage of the child population works, many children in India are more of a liability then they are an asset, and are therefore more prone to mistreatment and abandonment.
Our analysis of Africa finds support for our theory from another angle. Because of widespread disease in Africa (due to AIDS, River Blindness, Malaria, etc.) there is a deficit in the labor force. Children are needed to fill this deficit. As a result, there is a very high child labor rate within Africa relative to other developing countries.
Although there are laws in Africa that prohibit child labor, these laws are largely ignored. In tandem with these relatively high rates of child labor, the child abuse rates are relatively low. Studies that we look at show that children in Africa are rarely beaten by their parents. Further, the vast majority of orphans in Africa have both parents dead. Only 5.0% of these orphans are abandoned with both living parents. This should make intuitive sense. If a child is working for the family, and helping to supplement the family income, then that child will be a net asset to that family. It would make little sense for a family member to abuse or abandoned an able-bodied worker, especially when there is such a deficit of labor. At the margin, we would expect these families to treat these working children better than do the families in other developing countries in which children do not or cannot supplement the family income.
Inspired by a 1999 paper authored by Kaushik Basu, our paper does away with the oft-assumed economic model that treats the household as a conflict-free unit which makes decisions as a unified whole. Instead, we assert, as does Basu, that as the proportion of who earns what changes within a household, so does the consumption of that household, even if the overall income of the household remains the same. This really make a lot of sense when you think about it. This is not just true for children, or for developing countries. For instance, it is likely that the expansion of the rights of females in the United States was affected, at least in some part, by the increased percentage of income generated by women relative to men in recent decades. Although the simplifying assumption that households are unified is useful for many economic analyses, it is detrimental to the aim of this paper, and has therefore been relaxed.
Let us consider this concept in relation to the topic at hand. In the developing world, there exist families that truly live on the margins of subsistence, and must therefore make horrible decisions between allowing their children to receive an education, and being able to provide enough food, clothing, and other basic necessities for those children. The child that chooses to/is allowed to work will be more of an asset to his or her family, relative to the child who refuses to work or is not allowed to do so. The latter child will be more of a liability to that child's family. It may seem harsh or cold to consider children as assets or liabilities, but given a family truly living on the margin, it makes sense to hypothesize that a child that is a net drain will be more likely to be abused or abandoned than a child that is a net benefit, all else equal.
Our empirical analysis seemed, in large part, to confirm our theory. We looked at countries in Latin America, India, and Africa, and considered the United States as a Benchmark, since the US is a fully developed country. We found that, as expected, the United States had relative low rates of both child labor and child abuse. This makes sense because the United States is fully developed and no longer needs children to supplement family incomes. In absolute terms, much of the poor in America are far better off than the vast majority of people in the developing world. The same incentive structures, are therefore not present in the US as in truly impoverished countries.
Latin America, on the whole, tends to have a relatively low child labor rate, but a relatively high child abuse rate. Further, much of the Child Abuse seems to be under reported.
 |
| English,
Cynthia and Godoy, Johanna (2010). <http://www.gallup.com/poll/139376/child-abuse-underreported-latin-america.aspx> |
One potential outlier we found was Columbia. According to a 2005 paper by Bill Van Auken, Columbia seems to have relatively high amounts of child labor and child abuse. However, "close to half of those who work are paid nothing, while the rest earn an average amounting to just one quarter of the Colombian minimum wage, which is $41 a month." If this is true, then this seeming contradiction actually fits well with the theory of our paper. A child's intra-household bargaining power does not increase merely because a child works--it increases only if that child is actually able to supplement the family income. A child that works, but is paid nothing, has not contributed anything extra to the family, and is therefore just as much of a liability as a child that never worked at all.
We found that India seemed to have an extremely high abandonment rate. Of the Twenty-million orphans in India, only 0.3% have both parents dead. This means that the vast majority of Indian children without families have been abandoned by their parents. Further, according to a 2007 paper by Geeta Pandey, "53% of the surveyed children report one or more forms of sexual abuse." On the other hand, India seemed to have a relatively low child labor rate of only about 5.0%, according to the International Labour Organization (ILO). Because such a relatively low percentage of the child population works, many children in India are more of a liability then they are an asset, and are therefore more prone to mistreatment and abandonment.
Our analysis of Africa finds support for our theory from another angle. Because of widespread disease in Africa (due to AIDS, River Blindness, Malaria, etc.) there is a deficit in the labor force. Children are needed to fill this deficit. As a result, there is a very high child labor rate within Africa relative to other developing countries.
 |
| The Table above shows the Child Labor Participation rates of children in various developing countries. The three tallest bars in the middle are three different regions of Africa. Graph taken from Unicef (2013). Monitoring the Situation of Children and Women. <http://www.childinfo.org/labour.html> |
Although there are laws in Africa that prohibit child labor, these laws are largely ignored. In tandem with these relatively high rates of child labor, the child abuse rates are relatively low. Studies that we look at show that children in Africa are rarely beaten by their parents. Further, the vast majority of orphans in Africa have both parents dead. Only 5.0% of these orphans are abandoned with both living parents. This should make intuitive sense. If a child is working for the family, and helping to supplement the family income, then that child will be a net asset to that family. It would make little sense for a family member to abuse or abandoned an able-bodied worker, especially when there is such a deficit of labor. At the margin, we would expect these families to treat these working children better than do the families in other developing countries in which children do not or cannot supplement the family income.
The general conclusion of our paper is that although almost all would agree that, holding all else equal, a world without child labor is preferable to a world with child labor, all else is not equal. We live in a world where millions of families live on the margins of subsistence, and really need their children to help supplement the family income. It may be reasonable to consider child labor to be a type of inferior good. Once a country is able to do without child labor, it tends to shed itself of the practice. Unfortunately, however, this can take a lot of time. Vilifying child labor will
not solve the problems of children in developing countries, and expecting
developing nations to be able to immediately absolve themselves of all
dependence on child labor is impractical and unrealistic. It is the belief of the authors of this paper that child labor is necessary
for developing countries to grow so that future generations can experience the
luxuries of the developed world.
If you would like a copy of our full paper, shoot me an email at connor.cosenza@gmail.com.
Have a magical day!
References for further reading:
Auken,
Bill Van (2005). “Latin America’s social crisis.” World Socialist. <http://www.wsws.org/articles/2005/may2005/amer-m11.shtml>.
Basu,
Kaushik and Van, Hoang Pham (1998). “The economics of Child Labor.” American
Economic Review. Vol 88, No. 3 p. 412-427
Pandey, Geeta (2007). "Abuse of Indian children
'common.'" BBC News. <http://news.bbc.co.uk/2/hi/6539027.stm>.
Monday, May 26, 2014
Welcome!
My name is Connor J. Cosenza. I am a grad student at Johns Hopkins University's Washington DC campus, pursuing a Masters of Science in Applied Economics. I recently completed my Bachelors of Arts at Mercer University, in Macon, GA (go Bears) with a major in Economics and a minor in Mathematics.
Magic at the Margin is just a personal blog I decided to start up in order to have a venue to share my thoughts on economics, politics, mathematics, or any other topics I might find interesting. The name is indicative of one of the most important ideas in modern economics--that people think and make their decisions "at the margin", or "from this point forward". An example of this is the very creation of the blog. A blog could potentially be useful to me in the future. I don't know exactly how so, but I know that many people I know find them to be helpful. This means that the marginal benefit of creating the blog is at least positive, and could possibly be great. The cost of the blog is really only the cost of my time, of which I currently have plenty. The marginal cost, then, is quite low. Since it seems that the marginal benefit of creating a blog outweighed the marginal cost of doing so at this point, Magic at the Margin was born.
I'm not sure how often I will post here, but I hope to do so regularly.
Have a magical day!
Magic at the Margin is just a personal blog I decided to start up in order to have a venue to share my thoughts on economics, politics, mathematics, or any other topics I might find interesting. The name is indicative of one of the most important ideas in modern economics--that people think and make their decisions "at the margin", or "from this point forward". An example of this is the very creation of the blog. A blog could potentially be useful to me in the future. I don't know exactly how so, but I know that many people I know find them to be helpful. This means that the marginal benefit of creating the blog is at least positive, and could possibly be great. The cost of the blog is really only the cost of my time, of which I currently have plenty. The marginal cost, then, is quite low. Since it seems that the marginal benefit of creating a blog outweighed the marginal cost of doing so at this point, Magic at the Margin was born.
I'm not sure how often I will post here, but I hope to do so regularly.
Have a magical day!
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