Month: July 2015

Episode #2 in Review: Specialization and Trade

Crash Course’s second episode was pretty agreeable.  It explained why free trade is mutually beneficial, gave a good explanation of the Production Possibilities Frontier, and it even knocked down common political arguments that are demonstrably false.  Let’s start with their explanation of specialization.

Specialization is a Pizzeria?

pizzaCrash Course gives a visualization of specialization with the analogy of a pizza-making assembly line.  I hope that this example is effective for those unfamiliar with specialization, but what I was thinking when I saw this was “couldn’t each of these guys very easily switch to a different position at the pizzeria without much fuss?  Is the guy cutting vegetables really that much better at doing this task than anyone else?”  I wasn’t sure if this example was advocating for specialization or just an assembly line business model.

farm

Their best example comes from showing what one person would have to do to make a pizza by himself.  This is a modern take on Leonard Read’s I, Pencil, and it gets the point across faster even than it would take you to read Read’s short essay.

National Trade

model

Understanding the Production Possibilities Frontier is challenging.  They explained the model quickly, and although I was able to follow along in real time, I needed to pause the video after this segment to visualize and absorb the lesson again in my head.

Their conclusion from the model was direct:

You might hear a politician or someone on the news argue that international trade destroys domestic jobs, and even though it may seem counterintuitive, economists for centuries have argued that trade is mutually beneficial to whoever is trading.

To be fair though, international trade may destroy particular domestic jobs, but not the total number of jobs.  In Crash Course’s example, the American shoe industry would suffer as a result of free trade, and the airplane industry would grow.  People hate making less money or getting laid off, even if you explain to them that the economy is better off for it.  Just ask the cab industry.

Let’s go back to that final line: trade is mutually beneficial to whoever is trading.  While true, it’s important to compare this statement to the opposite argument: trade is a zero-sum game where one party wins and the other loses.

There are a fair amount of people who believe that as people get rich, these people are necessarily making others poorer (the money has to come from somewhere right?).  With the exception of thieves, who actually do increase their wealth at the expense of someone else’s wealth, people get rich because a lot of other people have wanted to trade with them.  Bill Gates is not rich because people are poor, he’s rich because a lot of people value his products more than holding on to cash.

The episode gave two good examples of the national benefits of free trade: Japan and Taiwan.  While these examples are good, Japan and Taiwan also have a fair amount of natural resources, and Japan has historically been a developed country.  Instead of these examples, I would look at Hong Kong and Singapore.  These countries are closer to the size of a city, with very few natural resources, and just 60 years ago would be considered poor underdeveloped countries.  But from decades of free trade policies (they are currently #1 and #2 most economically free countries in the world), these tiny countries now have a greater GDP per capita than the European Union’s average.

Not much objection in this week’s episode, and we even have a teaser of next week:

Next time we’ll show you how some of these ideas get turned into economic systems, and how these systems contribute to differences between countries.

Looking forward to hearing about Venezuela.

Robert Wenzel Comments on Episode 1 (and 2)

While my response to episode 2 is in the works, check out Bob Wenzel’s commentary on the first two episodes.

What is Economics?

Wenzel agrees that Crash Course’s definition of Economics is good, but not ideal, because of its potential to delve into behavioral economics.  Let’s look at how Crash Course defined economics through the quote they used by Alfred Marshall:

A study of Man [and Woman] in the ordinary business of life.  It enquires [sic] how he gets his income and how he uses it.  Thus, it is on one side, the study of wealth and on the other and more important side a part of the study of Man [and Woman].

Wenzel cautions that this definition of economics may be “looking and attempting to understand how people reach their goals for action.  [Austrian Economist Ludwig Von] Mises doesn’t do that.  He says ‘okay whatever the reason men have goals, and let’s decide what happens in the economy with regard to exchanges once we understand those goals, regardless of how they come up with those goals’”

This is a significant difference in one of the biggest questions in economics: what is economics?

Microeconomics Examples

Wenzel also takes aim Crash Course’s explanation of Microeconomics.  From Crash Course:

micro

There is a whole other side of economics that look at different questions: How many workers should we hire to maximize profit?  If our main competitor releases their product in May, when is the best time to release our product?

Wenzel points out that economics is not the study of business decisions:

The economist can explain how once a businessman has his goals, how he chooses, but there’s nothing that an economist can do as far as providing insights into something that is really a decision of a businessman or entrepreneur.

Economics is about understanding how the economic system works.  It’s not about telling businessmen how to run their business.

So if the example questions from Crash Course aren’t actual examples of Microeconomics, what questions would be?  How about:

If the price of a good increases, what happens to the demand if everything else stays the same?

If the supply of a good decreases, what happens to price if everything else stays the same?

Macroeconomic Predictions

I didn’t know about this at the time, but Robert Wenzel mentioned that he was one of the economists who predicted the 2008 financial crisis in real time.  To read more about that, you can check out his book, or subscribe to his daily financial advice guide.

Read more of Robert Wenzel at his sites EconomicPolicyJournal.com and Target Liberty.

Ryan Griggs Comments on Episode 1

Friend of Crash Course Criticism and Austrian scholar, Ryan Griggs, has written his own critique of the first episode of Crash Course.

Something I had not considered, Ryan observed Mr. Clifford’s choice of words in calling scarcity and cost “assumptions”:

Let’s start at beginning. Jacob identifies two “assumptions” in economics, the first of which is “scarcity.”

Scarcity is not an assumption. Scarcity is a reality.

Men (and women) have unlimited ends and limited means with which to achieve those ends. These means are necessarily scarce. This is a fact of life, not an assumption.

Jacob’s second assumption is that “everything has a cost.” Well clearly, if means (including time) are scarce, then men must ordinally rank (1st, 2nd, 3rd…) the ends they would like to achieve in the order that they would like to achieve them. In other words, the individual must choose one end over another, over another, and so forth. The first end foregone (2nd ranked end) is the cost of obtaining the first-ranked end. Therefore, scarcity implies cost, because man must choose one end–instead of another–to achieve first. Therefore, cost is a fact of life too, not an assumption.

Ryan also details a subject I have only touched on, but not delved into: the classification of economics as a social vs. physical science.  He writes:

A famous economist writes, “it is a mistake to set up physics as a model and pattern for economic research” (Human Action, p. 6). The scientific method (verificationism) is appropriate for the physical sciences, because it’s subjects aren’t human. This sounds silly, but it’s implications are vast. Chemicals, electricity, rocks, and other elements of nature do not act. Humans are unique in that they are capable of cognition, identifying ends and ranking them according to their preferences. This fundamental distinction means that the method of study in the physical sciences is not appropriate for the social science of economics. After all, its subjects–humans–are inherently different than the subjects of the physical sciences.

Please read Ryan’s full post at his blog.

Why Didn’t Economists Predict the 2008 Financial Crisis?

predict

This was a great question Mr. Clifford brought up in the first video, but then never answered:

People sometimes criticize economists asking “Why didn’t they predict the 2008 financial crisis?” or “Why can’t they agree on what the government should do or shouldn’t do when there’s a recession?”

These criticisms fails to distinguish between Macroeconomics and Microeconomics.  Specifically, all these complaints are about Macroeconomics.

He then goes on to define and explain the differences between Macro and Micro, without ever coming back to the original questions.  Let’s go back to them.  First, the easy one:

Why can’t economists agree on what the government should do or shouldn’t do when there’s a recession?

As mentioned in previous posts, economics has many different theories and different schools of thought.  Economists can’t agree on how to respond to a recession because they don’t all believe the same principles of economics.  For example, some think government spending helps an economy get out of a recession, while others think that government spending hurts the economy.  So it’s not a surprise that these different beliefs in the fundamentals of macroeconomics lead to different suggestions on what the government should do.

Asking this question is similar to “Why can’t politicians agree about what to do about [policy topic]?”

Why didn’t economists predict the 2008 financial crisis?

This is a great question.  If you were watching CNBC or Bloomberg in 2007, you would not hear any debate as to whether we were headed for a recession.  After all, the stock market was up, unemployment was down, and you just bought a house with no money down!  The economy was looking good.

There were, however, people who warned against the impending financial collapse, primarily from the Austrian school.  They even made some television appearances, where they were ridiculed and laughed at on just about every program:

Does this necessarily mean that the Austrian school was right because they were the ones who predicted the crisis?  It doesn’t, but it would be disingenuous to say that “economists did not predict the 2008 financial crisis.” Some of them did.

The argument against this, of course, is “a broken clock is right twice a day.”  In other words, if you always say that a crisis is coming, then you’re going to be right when it happens.  In fact, right now many Austrians are warning of an impending financial collapse, and some of them have even predicted dates of the crisis which have now passed.  We’ll get to this more when we talk about economics as a social science vs. physical science, but Austrians are often characterized as “doom and gloomers” who always warn that we are close to the next crisis.

However, if you watch the video above, Peter Schiff isn’t only predicting a recession, he says exactly how it’s going to happen:

Today’s home prices are completely unsustainable.  They were big up to these artificial heights by a combination of temporarily low adjustment-rate mortgage payments by a complete absence of any lending standards and by speculative buying.

That’s awfully specific, and even if he was wrong about the year (he clearly jumped the gun by saying the crisis would happen in 2007), the fundamentals are pretty dead on from what we know about the recession today.

So take this for what it’s worth:  Austrians are not great at predicting the timing of recessions (but then again, neither is anyone), but the explanation behind it seems pretty solid.

Keynesian Presuppositions

keynes

John Maynard Keynes is probably the most influential economist in currently-practiced economic policy.  Among the Keynesian marks left on economics is the idea of the necessity of government intervention to moderate the booms and busts of the economy.  As the theory goes, governments must spend during a recession to stimulate the economy.

This idea makes a lot of sense if you’re hearing it for the first time.  When you’re tired, coffee helps you get back to normal, and similarly, if the economy is down, you need to kickstart it with some spending to get the ball rolling again.

Adriene alludes to this idea when she says:

stimulus

Economics is the government deciding whether to increase its spending when there’s a recession, and if it’s worth going into debt.

Usually the answer is yes, increase spending, as the United States did with its $831 billion Stimulus Package (also known as the American Recovery and Reinvestment Act of 2009).

The problem with testing economic theories is that you never know if it actually works.  The 2009 Stimulus Package did not have the kickstarting effect that was predicted; the free-market economists said that this was because Keynes’s theory is wrong and government spending does not help the economy because a stimulus package would only take money from the more efficient private sector economy (through taxation) and transfer it to a less productive public sector economy.  However, Keynes supporters argue that Keynes is correct and the Stimulus Package did work, and the situation would have been much worse if the government had not intervened.

Unfortunately, we’ll never know the truth empirically, since economics is not a physical science where you can have an identical “control group” economy to compare it to.  And while Adriene’s point didn’t directly claim Keynes’s theory to be true, she did imply it.  By presenting the downside of spending as “going into debt,” which isn’t necessarily true, she doesn’t mention what real dissenters of stimulus spending would argue: that stimulus packages are a net negative for the economy, even if the country doesn’t have to borrow money to pay for it.

Mr. Clifford makes another Keynesian presupposition when he posits this question as an example of macroeconomics:

moneysupply

Will an increase in the money supply boost output, or just increase inflation?

Framing the question this way essentially presupposes that increasing the money supply can boost output, but the risk is that it may also increase inflation.

This is also derived from Keynes’s theory of government intervention for a recessed economy: increasing the money supply (i.e. creating money and buying financial products with them) will give more money to banks who then lend out that money to people for long-term capital projects (building construction, investing in companies, etc.).  Now there’s more money circulating in the economy as more people get to borrow money to fund their projects, and the financial industry is booming because they are the first ones to get the newly-printed money.  However, printing money runs the risk of prices increasing as the dollar becomes less valuable.  The Keynesian theory describes money creation as a balancing act; the government needs to print just enough to kickstart the economy, but not too much to create an inflation problem.

Again, real dissenters from Keynesian economic theory (or at least those who follow the Austrian Business Cycle) would argue that increased inflation is not the only risk of increasing the money supply.  As the Austrian theory goes, money printing distorts the economy, shifting production from consumer goods (like stuff you buy at CVS) to capital goods (projects that banks give big loans to).  The shift is harmless at first and may even appear to boost the economy, however, this distortion that provokes an artificial boom will ultimately result in an even greater bust.  In other words, the cups of coffee you drank to wake you up will leave you with a bigger caffeine withdrawal the next day.

With these two examples, it’s not too hard to see a preference toward Keynesian macroeconomics, but who can blame them?  Keynesianism is widely-practiced in countries around the world and is supported by many economists.

The least they can do, however, is correctly present the real concerns about Keynesian policies, and not the Keynesian concerns about Keynesian policies.

Meet Our Co-Hosts

You may be interested in who is teaching us economics in this Crash Course series and what their backgrounds are.  Keep in mind this is the first Crash Course series not hosted by either of the founders, John and Hank Green.

Jacob Clifford teaches high-school economics at San Pasqual High School in Escondido California.  He is the founder of ACDC Leadership, a website for “student-focused teaching resources that makes learning exciting, powerful, and fun.”  Mr. Clifford has released his own YouTube videos that explain economics for his students. It’s obvious why Crash Course chose this guy to be a co-host: he pretty much does the same thing as Crash Course but with a smaller budget.  He also has a pretty high ratemyprofessor score.

Mr. Clifford received his Master’s in Economics from the University of Delaware.

If you recall, his part of the show is going to talk about “theories and graphs of economics, you know, the textbook stuff,” so it makes sense that he knows the high school economics textbook front-to-back.

Adriene Hill is a Senior Reporter of the public radio show Marketplace, where she’s been there for five years.  Most of her news segments are about Media & Technology, but she also seems to follow the Greece Debt Crisis pretty closely.  Her role is to talk about real world applications and examples of economics to relate Mr. Clifford’s theoretical points to stuff you’re familiar with.  She has a Master’s in Political Science from Northwestern.

I’m not sure how they found Adriene Hill.  Crash Course did have an agreement with PBS, but Adriene’s Marketplace is owned by American Public Media, a separate entity.

Any findings, thoughts, or conspiracy theories about how Crash Course found Adriene Hill, please let me know.

As far as I know, neither of the hosts have background in Austrian Economics or taken Tom Wood’s Liberty Classroom.