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    Toasters and Pencils

    Jan 17 • Demand, Supply, and Markets, International Trade and Finance, Labor, Macroeconomic Measurement • 322 Views

    In this TED talk, a designer explains how he tried to build his own toaster. Deciding to focus on five basic ingredients instead of the 100 he would really need, he describes what happened. For the steel, first he needed iron ore. For the plastic, he went to BP to get “a jug” of oil but was unsuccessful so he settled, instead, on using potatoes. (Yes, you can make plastic out of potato starch.) Also, he needed mica and copper and nickel. As you can see, step-by-step, the simplicity of an everyday inexpensive toaster got more and more complex.

    The point?

    By showing how many people and materials were involved, designer Thomas Thwaites sought to display our interconnectedness.

    The Economic Lesson

    Now as economists, we should take his story a step further. Why are people willing to interconnect? The answer is price. During every step of the production process, someone, combining land, labor, and capital, decided that he or she would be willing to exchange a good or a service for a certain price.

    So, in a way, we could say that a toaster exists because of prices and incentives. Economists call the interaction of prices and incentives the price system.

    Written in 1958, a classic essay,”I, Pencil: My Family Tree as told to Leonard Read” illustrated a similar phenomenon. Close to the beginning of the essay, the pencil says, “I, Pencil, simple though I appear to be, merit your wonder and awe…Simple? Yet not a single person on the face of this earth knows how to make me…” 

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    State Dilemmas

    Jan 16 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Government, Macroeconomic Measurement, Regulation, Thinking Economically • 360 Views

    Do higher taxes make you want to move? Hearing that taxes were going up in Illinois, the governor of Wisconsin said, “Escape to Wisconsin.”

    According to census figures, people do seem to be moving to no income tax states. One journalist explains that Texas has become an “engine of growth” because of its “diversified economy, business-friendly regulations, and low taxes.” For Texas, more people will also mean 4 more seats in the House of Representatives.

    However, with a $15 billion deficit, Illinois’s governor indicated a tax hike was imperative. Meanwhile, with a $10.5 deficit, New Jersey’s governor emphasizes spending cuts. Both are worried about businesses and residents leaving their state.

    The Economic Lesson

    The unencumbered movement of people, goods and services over vast areas fuels economic growth. People and resources are then able to optimize their goals by moving. Furthermore, when factories have a larger market, they can enjoy economies of scale. They also have more consumers to target, a larger labor market, and additional places to obtain natural resources and capital.

    Asking what makes people move, Harvard economist Ed Glaeser suggests taxes are not necessarily the reason. Instead, his research indicates that fewer land use and construction regulations result in lower cost housing. Cheaper real estate attracts migration.

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    Chinese Roads

    Jan 15 • Developing Economies, Economic History • 357 Views

    Just 2 Chinese road stories today:

    Charged with evading $556,000 in tolls, a Chinese truck driver was sentenced to life in prison and a $300,000 fine. The Chinese provincial court that convicted him said that for 8 months, he used false military documents to avoid paying tolls during 2300 trips. Reacting to the story, people were more disturbed about expensive tolls than the dishonesty.

    During August, “a monster of a traffic jam,” 60 miles long, trapped drivers for 10 days on a major Chinese highway near Beijing. Construction and few exits seemed to be the culprits. Entrepreneurs, seeing an opportunity, sold food and water to drivers.

    The Economic Lesson

    A crucial part of a transportation infrastructure, roads facilitate economic activity. While roads have been crucial for U.S. economic development, the story would not be complete without including canals and railroads.

    According to World Bank statistics, 49% of all Chinese roads (2007) are paved. To compare Chinese roads to other countries, you might look here. Other facts about China’s roads, primarily from Peter Hessler’s book, are here in econlife.

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    How Much Should Grandma Pay?

    Jan 14 • Demand, Supply, and Markets, Economic Debates, Government, Thinking Economically • 306 Views

    When your Grandma gets her yearly physical, the doctor gets a check from the government. Did you ever wonder, though, who decides how much?

    Because she had to sign up for Medicare at 65, the market did not decide the price and neither did her doctor. Instead, The Wall Street Journal tells us it was RUC.


    The Relative Value Scale Update Committee

    Composed of 29 physicians, RUC  provides a suggested price list to the federal commission that creates the Medicare Physician Fee Schedule. The WSJ says that 90% of the recommendations are followed. 

    Rather than the market, a committee selects the prices that convey information and incentives. Your opinion?

    The Economic Lesson

    Why should we care about Grandma and the doctor? Because Medicare spending now is close to 12% of the federal budget. With 30 million or so baby boomers expected to pour into Medicare during the next 10 years, and 40 more million close behind, spending will skyrocket.

    What to do? Called “The Moment of Truth,” President Obama’s deficit commission report suggests that instead of pursuing “phantom savings,” Congress should implement “common-sense reforms to physician payments, cost-sharing, malpractice law, prescription drug costs, government-subsidized medical education, and other sources.” You can look at the report here.



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    Random Technology Notes

    Jan 13 • Economic History, Innovation, Macroeconomic Measurement • 324 Views

    In 1810, Nicholas Appert, a cook and bottler, inserted some food in a Champagne bottle, sealed it, and placed it in boiling water. Described by James Burke in Circles: Fifty Roundtrips Through History, Technology, Science, Culture, a French newspaper said that this new way to preserve food “brought spring and summer to winter.” (p. 40) It also brought Appert a prize of 12,000 francs from the “Society to Encourage French Inventors” (an approximate translation).

    But that was only the beginning. From champagne bottles, the tin can was only an idea away. Developed in Great Britain by a gentleman who obtained Appert’s patent, the tin can enabled a British ship captain, looking for the Northwest Passage in 1818, to carry a supply of carrots and peas, gravy and roast veal.

    Fast forward to 2011. You will enjoy looking at a more recent innovation, a “robot” that dispenses ketchup (aka the Heinz Automato).


    The Economic Lesson

    In an Econtalk interview, George Mason University’s Robin Hanson explains that our interpretation of the impact of technology on economic growth depends on the time frame. Viewed in smaller increments, like the past century, we see relatively consistent growth rates of maybe 4%. However, when we step back and look at the past 10,000 years, then growth patterns look quite different. Instead of a consistent march forward, we see growth spurts. For example, the onset of farming represented a growth spurt as did the Industrial Revolution.

    Hanson believes that as each new spurt fueled future growth, the standard of living improved much faster than previously. Consequently, a current spurt could have an immediate impact. His name for the growth spurt phenomenon is technological singularity. 


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