The Supply/Demand Graph, Episode #4

The Graph

Crash Course’s explanation of Supply and Demand is pretty spot on. Most economic schools (all but Marxism as far as I know) agree that the equilibrium price is reached where the demand and supply curves meet. The demand curve is determined by how much money buyers would be willing to pay for a product, and the supply curve is determined by how cheap of a price sellers would sell a product.

Marxists, however, believe in the Labor Theory of Value, and would probably reject the the graph entirely. The Labor Theory of Value states that a product’s value is determined by the amount of labor required to produce it, so if a product takes someone 1 hour to make and a different product takes 5 hours, then the second product must be more economically valuable.

Screen shot 2015-08-19 at 12.15.45 PM

(courtesy of SMBC Comics)

Government Subsidies

Crash Course notes correctly that the concept of “fairness” or “the right price” is subjective and is not based in economics:

Some people might want to talk about a price being fair or right, but that all depends on your point of view. The buyer always considers a low price to be a fair price, while the seller considers it unfair and vise versa. In general economists don’t really like to push opinions about prices. Voluntary exchange suggests that the price is there for a reason.

However, immediately after this, they input a little bit of their personal bias when they argue against government subsidies for business who are hurting because of low demand:

For example, assume the demand for strawberries inexplicably falls, so the demand curve shifts to the left, and the equilibrium price and quantity fall. Farmers might go to the government for assistance, but most economists argue there is no reason to bail them out. The market has spoken: strawberries are so over.

While I agree with their position, it’s little awkward to give a policy position immediately after saying that economists don’t like to push opinions. As I’ve noted previously, the market sometimes shifts jobs from one industry to another, and those who argue in favor of corporate subsidies are usually ones the who are afraid of having to change jobs.

But economists are correct in saying that the government should not bail out industries, because it would do a net harm to the population generally, even if it helps a sector. Crash Course acknowledges this when they say:

If the government helps the farmers by giving them a subsidy, it would be putting resources toward something that society doesn’t value. That would be inefficient.

Here I do wish Adriene would have mentioned what the most efficient way to use the resources would be: by not taking it from people in the first place. Since the market (i.e. people spending their own money freely) is the most efficient method of choosing what society wants, why do resources need to be taken from the market in the first place?

Episode #3: Economic Systems and Macroeconomics, Part 1

For episode 3, Crash Course is going big. This episode talks about different macroeconomic systems and the proper role of government, all in 10 minutes. There are a lot of things to unpack in this episode, so this review will consist of multiple parts.

The Factors of Production

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There is no better introduction to macroeconomic theory than by talking about control over the factors of production. Although the term was originated and defined by Adam Smith, Crash Course decided to quote Karl Marx for the same definition: Land, Labor, and Capital.

Free Marketeers might be upset that they attributed it to Marx, but it makes sense. Communists (and socialists for the most part) are often the ones who use the phrase “Factors/Means of Production,” and if you hear someone mention it in conversation, it’s more likely that they are a Marxist than a devotee of Adam Smith.

A Planned Economy

I got confused with Crash Course’s definition of a fully planned economy and its relation to Communism:

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In a planned economy, the government controls the factors of production, and it’s easy to assume that that’s the same thing as communism or socialism, but that’s not quite right. According to Karl Marx, “The theory of Communism may be summed up in the single sentence: abolition of private property.”

If the State owns all factors of production, and therefore owns all property produced from those factors of production, doesn’t that automatically eliminate private property? In other words, how does the public control over the means of production not create communism? What else could it be?

In fact, according to the Wikipedia entry on Communism, Communism is defined by the common ownership of the means of production. There is not a mention of private property in this definition because the absence of private property is the logical conclusion from the definition.

(However, I would accept that Marx’s Communist society is stateless, so Mr. Clifford’s mention of a government controlling the means of production would not be Communism)

A Free Market Economy

Crash Course gave an excellent definition of a free market economy:

In Free Market or Capitalist Economies, individuals own the factors of production, and the government keeps its nose out of this stuff and adopts a Laissez Faire or hands-off approach to production, commerce and trade.

This is, in my opinion, Crash Course’s best work yet. They continue:

In Free Market Economies, businesses make things like cars, not to do good for mankind, but because they want to make a profit. Since consumers, that’s me and you, get to choose which car we want, car producers need to make a car with the right features at the right price. Economists call this the invisible hand.

This is a great definition of capitalism, and one that emphasizes the consumers’ essential role in the process. Instead of focusing on a business’s desire for profit (a necessary element, but not what drives market successes and failures), consumers determine the market winners through their own preferences:

Scarce resources will go to the most desired use and they’ll be used efficiently, more or less. After all if a business is wasteful or inefficient, or makes something that no one wants to buy, then some other business will make a similar product that is either better or cheaper or both. If there’s no consumer demand for a product, resources wont be wasted producing it.

Businesses could not survive in a free market if they did not provide customers with what they wanted better than the competition. Crash Course also provides a look at the alternative: a centrally planned economy for consumer goods:

Assume instead that a government agency was in charge of deciding exactly which types of cars and cell phones and shoes to make. Do you think they could quickly respond to changes in tastes and preferences? If there was only one government monopoly producing cars, do you think they would be produced efficiently?

We don’t even need to speculate what this would be like because it has already happened. For example, during the Soviet Occupation in East Germany, automotive manufacturer VEB Sachsenring had a government-created monopoly on automobile production. Their product was the Trabant, the only car available to East Germans, and often considered one of the worst cars ever built. On top of this, due to the mismanagement of the factors of production, the waiting list for one of these cars was ten years.

Is there anything that the government must do because free markets won’t? Come back later for Part 2.

Robert Wenzel’s Critique of Episode 2

Surprisingly, Crash Course has not released their video for episode 3 yet. I’m pretty sure they record all of the episodes in advance, so I can’t explain why they didn’t release episode 3 Wednesday evening as per usual. Perhaps the topic of episode 3, which was mentioned in the last video to be “how economic systems contribute to differences between countries,” contained some errors, and they are fixing it last minute. I’ll try to get to the bottom of this by tweeting at the co-hosts and official Crash Course Twitter handle.

I’d like to take this time to talk about Robert Wenzel’s observations of the second video.

First, Bob also recognized the mediocre example of a pizzeria, where it isn’t so obvious that people have different skill sets, to describe specialization in trade. He recommends a clearer example:

[People] might become doctors, they might become lawyers, they might become creative movie producers. If they spend five years studying it and then ten years in the field, they’ve got a lot of knowledge. That’s a lot of intellectual capital invested in that sector, so it doesn’t really make sense for them to go to another field. In general, once someone starts down a road of specialization like that, it makes a lot of sense to generally stay in that direction.

Bob also mentions a school of economic thought that rejects specialization:

Karl Marx really didn’t understand specialization. He thought that there would be a society where in the mornings, someone would be making pizza, in the afternoon working on a farm, and later in the day, working at a construction site.

The Marxian idea, in fact, would work best in a pizzeria. One employee could very easily go from preparing the vegetables to making the dough to sweeping the floor without much difficulty. It would be much more difficult to switch from farming to telecommunications consulting.

It’s not that you can quickly put people from this place to that place to the next. It is knowledge of specific localities, it’s the knowledge that someone is familiar with doing something, it’s knowledge because someone has greater intellect or skills or whatever it might be.

I’m not a Marxist, but I would have liked for Crash Course to talk about different economic schools of thought on the subject of specialization. Am I right, comrades?

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