The Near Triumph of Market Economics

This was a very interesting read. The author had formed obvious opinions favoring neo-classical thought. With that in mind, I believe they did a good job summarizing the battle of economic thought that persists today. Something interesting to note is a point made that even though classical economic thought is continuously attacked, somehow the attacks have seemed only to refine it. Today neo-classical thought continues to persevere amongst a diverse academic environment.

I also find the argument interesting that every economic woe to ever exist since Adam Smith is the fault of politicians, Marxists, socialist, and anything not neo-classical leaning. Maybe that argument wasn’t intended. However in that case, it was accidently articulated very well.

I very much liked the point that was mentioned about Friedman desiring a consensus on economic thought. It seems to me that there is a place for neo-classic thought and a place for Keynesian thought. Marx made some good points as well, and to this day I wonder if we will still see the revolution of the worker that he imagined. However, the bickering seams to continue. Not only among academic elite, but among politicians and also among the people in general.

To me, before we can answer the question “Who is right?” we must first answer the question “What is the purpose of economics?” Is it to allocate resources in the most effective way? Is it to improve the quality of life? Is it to grow GDP? I argue that the purpose of economic policy is the same as the purpose of government, to insure life, liberty and the pursuit of happiness. I don’t care how efficiently resources are allocated if I am not free. I would even be willing to sacrifice my standard of living to ensure freedom. I believe the majority of Americans feel that same. I suspect the worldview may be a little different.

The last thing I wanted to comment on was the two opposing views between Musgrave and Buchanan. One trusted Politian’s and the other did not. I don’t know how anyone could trust politicians in general. Power corrupts and though there may be exceptions to the rule, politicians in general are corrupt or become corrupt. This is essential to our economic system because no matter what the best economic choice is, politicians will only do it if it benefits them. This is a universal concept and at the base as to why we fought for our independence.

Two words; term limits. If we imposed term limits on congress then this would eliminate many problems we have. Legislatures would no longer work feverishly to get re-elected. Instead they can do what best for the people. Some might think that gerrymandering would cease, but I think it would continue for party power. So we also need to eliminate gerrymandering. It would be best if we could reset these lines to some kind of generic geographical lines, but even if we didn’t over time demographics would change and the currently lines would mean little for political party re-election. Another problem is fund raising. Congress uses “fund raising” during legislative sessions as a form of extortion. They threaten laws and then the corresponding interest come begging to throw a fundraiser in order to help the congressman see their view of the issues.  If we eliminated fundraising during legislation sessions, combined with previously mentioned items, it would help limit congressional extortion.

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Thought On John Keynes

Thoughts on Keynes

By Benjamin Bowman

I find it interesting that author highlighted the great success and large fortune amassed by Keynes. Although many other men and women we have read about have had successful careers, and I assume became wealthy, the author never really has made it a point to describe their fortunes. Maybe, the reason for this is the method by which Keynes amassed such a larges fortune. He did so by successful securities speculation to a level that is quite impressive. During the years he lived there were wild swings in the markets, and someone good at analyzing markets could have made a lot of money, and he did.

It is no surprise then that Keynes was fairly accurate at imagining the economic for his grandchildren as he wrote “Economics Possibilities for our Grandchildren” in 1930. He wrote at a time where many people believe that the rapid increase of quality of life, and rapid economic development was coming to an end. Many people believed that things were going to get worse, and not better. Keynes however, saw a bright future. He felt we were merely adjusting to a new economic climate. That the rapid changes in technology had simply led to some maladjustment that needed to be worked out, but the future was going to be great. He was right.

            Keynes was obviously successful as an economist. I find it interesting that again we see an example of scientific thought being influenced by the events of the time. We have seen this time and time again, that multiple people are discussing and developing similar principles of economics. My conclusion was that scientific thought is molded by current scientific and social conditions. In this case Keynes wrote and developed much of his monetary policy during the great depression. I wonder how his theories would have differed if he developed them without the influence of the great depression. Likely, he would be influenced by some other factor that helped to direct his thought.

            I also find it interesting that Keynes is an excellent example of how someone can be educated on the status quo and venture away from group thought. Though it is very difficult, it is possible. Keynes himself describes it as a “long struggle of escape.” Most notably was his inability to accept Say’s law. This was not without good reason. It seems that this dissent is what led him to his new theory. While trying to articulate why he thought that Say’s law was wrong, he ended up formulating his own solutions to aggregate demand.

            To me, Keynes drift from group thought not only demonstrates vision, but courage. A part of “Economics Possabilties for our Grandchildren” makes me think that Keynes, as many great men and women, really wanted to make the world a better place. He believed that within 100 years from 1930, all the economic problems of the world would be solved. Of course he realized that this was more of a wish than a prediction, but it also demonstrates his vision. Especially in a time of depression, he believed that greater days were to come. I believe that one day we may reach a solution, not to eliminate all woes from society because society has a way of self inflicting them, but a solution that helps self regulate economies so that they cannot get to far out of control. Of course politicians, wars, and evil will most assuredly screw up any perfect system. Maybe it’s just a dream, but I believe it is a good goal.

            Another way that Keynes differed from classical economist is in money theory. Classical economists believed that people held money for transactions and that the transaction demand for money was directly related to income. Keynes believed this as well, but said that people also held cash because of a preference for liquidity. He also said that the main determinant of investment was the interest rate, not the income. The higher the interest rate, the more likely people are to hold bonds instead of cash.

            A unique part of Keynes’ money theory is his liquidity trap.  He argued that the interest rate might fall so low that everyone would withdrawal from bonds. This would imply that there is a floor to interest rates, and that at some point lower interest rates would not induce further investments. The significance of this is that it means the affect of monetary policy was not so simple and predicable as the classics thought. Keynes concluded that monetary policy designed to work through interest rates is useless in the face of depression and widespread unemployment. For this reason Keynes recommended strong fiscal policy instead of interest rate manipulation only in order to stimulate the economy.

            Keynes did not accept that the private sector was a fail-safe guard against long-term unemployment. He argued that government should tax and spend in order to influence the business cycle. He believed that the government should stand ready to execute a planned effort to use all it’s tools available to stimulate the economy. This idea of government intervention eventually became a way of orthodox thought. It spread into almost all institutions of higher learning.

Keynes is a very interesting subject to study because it is the first economist that we have read about who’s thought and theories have not completely settled down into its place in economic thought. Most of the other economist have either been discredited or been accepted for their usefulness. Although there may be some persisting debate, I don’t think to the degree of the debate that lies around Keynes philosophies.

            Keynes’ conclusions rely heavily on empirical estimations of elasticity of his own theoretical functions. These estimations are extremely difficult to obtain, and some would argue impossible. There are a lot of difficulties involved in the price declines required for some of Keynes’ theories.  One of the first arguments that Keynes make in “Economic Possibilities for our Grandchildren” is that prices had not fallen enough. Nevertheless, my point is that many parts of Keynes philosophies are still debated to this day. Only time will tell how Keynes fairs in the history of economics.

Economics Possibilities for our Grandchildren – John Maynard Keynes

http://www.aspeninstitute.org/sites/default/files/content/upload/Intro_Session1.pdf

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Thoughts on Chamberlin and Robinson

Thoughts on Chamberlin and Robinson

By Benjamin Bowman

We have been reading a lot about competition models, but mostly economists have focused on perfect competition or no competition. This is mainly because it’s more difficult to create a graphical representation of imperfect competition. Cournot attempted to explain duopoly. This perhaps was one of the first official attempts at scholars to do so. The solutions that Cournot suggested were based on flawed assumptions, but after about 50 years his work inspired others to take up the challenge including Chamberlin and Robinson. They each wrote independent books concerning this challenge.

It is interesting that they wrote on the same problem at the same time, but independent of each other.  Great minds really do think alike, sort of. The book also makes mention that throughout history there are examples of similar but independent discovers at the same time. I can only imagine that certain environments foster new ideas, and often there is simply more than one person capable of making the discovery.

            However, it wasn’t immediately or directly that Chamberlin and Robinson became a feature answer to this question. Before they published their books there was already fierce debate between Taussig and Pigou concerning railway rates. They were discussing how best to explain the varying railroad rates, either with Marhsall’s joint supply or with price-discrimination. This was an important debate, mostly because it challenged the middle ground. In fact, in 1961 Chamberlin attributed the origin of his theory of imperfect competition to this debate.

            Chamberlin was inspired by this debate to continue to investigate markets that did not fit into monopoly conditions or perfect competition conditions. He called his new theories “monopolistic competition.” There are several aspects to his theories, one of which is product differentiation. Chamberlin realized that not only can companies compete on price, but also on non-price basis. He recognized that some firms in a competitive market could have some kind of “unique product or advantage” that gave them at least some control over price.

            Pigou already recognized this to a point, but Chamberlin elaborated the idea and listed some examples. An example he used was intellectual property, thought probably not called that at the time. He said that copyrights, trademarks, brand names etc., may give a product or company some degree of uniqueness and therefore a competitive advantage.

            It’s important to notice that advertising in order to differentiate under perfect competition or monopoly conditions would be countered productive. As a monopoly, the consumer has no other choice, and so there is no need to differentiate the brand or product. Under perfect competition, the firm makes and sells all of its product at a market given price. By definition of a perfect market, all products would be homogeneous, and therefore there is no need for brand loyalty or brand recognition. Advertising for differentiation is a mute point. However, Chamberlain recognized that advertising does work to shift the demand curve, and in fact it was a common practice.

            Robinson, however, did not contribute much to the role of advertising and product differentiation as elements of monopolistic markets, but instead developed a “set of tools” that were useful in the analysis of partial-equilibrium analysis of markets and market structures. She modified the concept of marginal revenue, and used it to analyze several different types of markets. Instead of trying to classify all the different levels of competition (competitive monopolies), she used the monopoly model to help analyzed them. There are just as many levels of competition within markets as there are markets themselves. It would be impossible to catalog each and every one. Therefore, by creating tools to help analyze the entire spectrum of competition levels, her method was more general and more comprehensive.

            An area in which Robinson seemed especially interest was price discrimination. Price discrimination is the practice by a firm with monopolistic power, of charging different prices to different consumers for the same product. A good example of this is ski-resorts. While local ski resorts offer fantastic discounts targeted at locals, they charge “full” price to tourists that travel from around the world to visit this destination. Why? Because they know the tourists will pay it.

            Originally described by Pigou, the discussion first evolved around conditions necessary for price discrimination.  First, the firm has to have some degree of monopolistic (price setting) power. Second, the firm must be able to recognize or artificially create separate markets for its products. Third, relative profitability must be different between the separate markets.

            Robinson showed that Pigou was wrong to assume that price-discrimination would not cause a change in supply. In fact, Pigou’s conclusion was only accurate for special cases. Robinson showed that based on the concavity of the demand curves in the market, the supply will be either increase or decreased depending.

            This conclusion was important in analysis of various transportation and public-utility markets. Using the contributions of Robinson, we able to discriminate between markets that would benefit from price discrimination, and markets that would not. At the same time, markets in which price discrimination would not benefit the consumer can be identified and price discrimination limited. Probably one of the largest affects this discussion of price discrimination had was in anti-trust legislation. Because priced discrimination requires some level of monopolistic power, a large body legislation in the United States requires a firm prove the benefit of price discrimination to the consumer by establishing a kind of “welfare” test using Robinson’s analysis.

            It is interesting that thought they took almost completely different approaches, they both made significant contributions. The reading makes it apparent, that the argument of who is right, or if any one answer is better, has not completely been decided yet, at least at the time of the writing.  In my opinion, it would be better to build a dynamic form of analysis, which instead of trying to predict every variable, would be able to adapt the model based on the situation. I guess in that way I lean toward Robinson a little more than Chamberlain.

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