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    Macroeconomics and Mandelbrot

    Oct 18 • Government • 339 Views

    How are macroeconomics and the British coastline similar? Mathematician Benoit Mandelbrot could tell us.

    Dr. Mandelbrot was the father of fractal geometry and the idea that the closer you look, the more you see. From a distance, the British coastline will appear straight. However, looking closer and closer increasingly reveals indents and zigzags. Consequently, Dr. Mandelbrot believed that it was actually much longer and even infinite. The significance? Something we might think is simple is really complex.

    Similarly, in the economic world, most policy decisions sound so logical. When people earn more, they spend and they save the extra income. If government taxes more, then it gets extra revenue.

    However, as with the British coastline, looking closer reveals increasing complexity. In “The X Factor of Economics,” referring to the recent stimulus spending, Nobel Prize winner Robert Solow says, “One thousand other things were happening that had an effect on employment and the G.D.P.” With taxes, from a “distance” we see the rich, the middle class, and the poor. Looking closely, though, are countless variables that distinguish workers’ incomes.

    Responding, Duke professor Dan Ariely comments, “…So we either simplify the problem and offer a solution, or embrace the complexity and do nothing.” 

    The Economic Lesson

    In a Teaching Company lecture from his 20th Century economic history course, Macalester Professor Timothy Taylor explains why he thinks that the beginning of the 20th century was a turning point for macroeconomic policy. Citing the inception of the income tax, creation of the Federal Reserve, and new federal regulation, he discusses the changing role of government.


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    Closed Professions

    Oct 17 • Businesses, Demand, Supply, and Markets, Regulation • 276 Views

    If you are a Greek pharmacist, you are guaranteed a 35% profit on the drugs that you sell, your store can be no closer than 820 feet from another pharmacy, and you probably paid close to $400,000 for a business license. Called “closed professions” because Greek regulations dominate their character, they include taxi drivers, lawyers, and 70 other livelihoods. 

    At the World Bank’s Doing Business Index, which ranks the “ease of doing business” in a country, Greece is #109 out of 183 countries. To start a business in Greece, for example, requires 15 procedures. In the U.S.(ranked #4), the number is 8 and for New Zealand (ranked #2), only 1.

    The Economic Lesson 

    Easily doing business takes us straight to the GDP. As the yardstick that measures the value of the annual production of goods and services in a country, the GDP depends on entrepreneurs, business owners and managers for its sustenance.  

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    Powerful Women

    Oct 16 • Behavioral Economics, Businesses, Gender Issues, Labor • 242 Views

    Lady Gaga is #7. Yes, according to a 2010 Forbes list of the most powerful women in the world, Lady Gaga’s power is surpassed by just 6 other women: Michelle Obama, Irene Rosenfeld (Kraft Foods CEO), Oprah, Angela Merkel (Germany’s Chancellor), Hillary Clinton, and Indra Nooyi (CEO of PepsiCo). Why? As Forbes expressed it, their criteria include a “buzz” and a business component.

    This took me to a WSJ Jonah Lehrer article. Citing studies about how people achieve power, Lehrer challenges the traditional assumption that ruthless individuals are more likely to reach the top. Instead he says that “people give authority to people they genuinely like” and ostracize those who are malicious. Even among chimpanzees, males who were best at socially connecting ascended to dominance.  

    However, Lehrer also tells us that once people achieve power, their behavior changes. Those with authority tend to become less empathic and to behave inappropriately. Also though, they acquire a toughness that can come in handy.  

    The Economic Lesson

    Controlling power is basic to the success of a market economy. To some extent, the invisible hand uses competition, demand, and supply to harness self-interest. Still though, in the Wealth of Nations, Adam Smith alluded to the “wretched spirit of monopoly” (p. 461) as a threat to economic health. Smith also points out that, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.  


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    Nobel Cash

    Oct 15 • Economic History, Economic Thinkers, Financial Markets, International Trade and Finance • 313 Views

    If you win a Nobel Prize, you get a cash prize of approximately $1.5 million. The size of that prize relates to how well the foundation that manages Alfred Nobel’s endowment has fared.  According to the Financial Times, during the 1990s the payout increased each year. More recently, prize amounts have been frozen because of a plunge in the fund’s value.

    When he created the endowment in 1895, Alfred Nobel specified that its assets should be invested in “safe securities”. The Times says that today, the fund is apportioned among global stocks, fixed income, and alternative investments that include hedge funds. The fund’s executive director said that in the future, additional attention would be given to “risk control”.

    When economist Robert Lucas won his Nobel Prize in 1995, half was given to his ex-wife Rita. As stated in their 1988 settlement, “‘wife shall receive 50 percent of any Nobel Prize.’ The clause expired on October 31, 1995.” Albert Einstein’s Nobel money also had to go to an ex-wife because of their divorce settlement.

    Talking about the cash prize, Elinor Ostrom, the first and only woman to become an economic Nobel laureate (and she is a political scientist) said that she donated it to fund research at the Indiana University Foundation.

    Winners Robert Mundell and Gary Becker were concerned about exchange rates. Expecting the euro would appreciate against the dollar, Mundell first converted his kronor to euros. Gary Becker postponed collecting his prize as he sought to buy futures to protect its value against the dollar. Before he completed the transaction, a Swedish currency crisis diminished the value of the prize from $1.2 million to $900,000.

    Chemistry winner Martin Chalfie, a Columbia professor, pointed out that an international prize used to be tax free. Now, though, as he expressed it, “50 percent of it immediately went to the city, the state, and the federal government. The rest of it is going to help put my daughter through college.”

    The Economic Lesson

    Just like the price of a dress, the “price” of foreign currency can fluctuate in response to demand and supply. Because the Nobel Prize money is paid in Swedish currency, exchange rates affect its size.



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    A Phone Call From Adam Smith

    Oct 14 • Demand, Supply, and Markets, Economic Thinkers, Labor, Macroeconomic Measurement • 264 Views

    The phone rings. The caller says he is Adam Smith and you have won the Nobel Prize in Economics. Your response?

    As you know, the 18th century author of The Wealth of Nations, Adam Smith, is perhaps the greatest economic thinker. Seemingly chaotic, the market seemed more orderly after Smith told us about the role of the invisible hand.

    The person who calls the winners, Smith’s namesake, is the editor-in-chief at nobelprize.org. As he introduced himself, I wonder what he said to the economists.

    This year, the work of the three economics winners was especially relevant. Focusing on labor markets, their research sought to explore why laborers remain unemployed even when jobs are available. As expressed on the Nobel website, “…although the perfect employee or buyer may be out there somewhere, the job and property markets unfortunately do not work with such efficiency that you can locate them immediately, or indeed at all.”

    I wonder whether the slow match time between jobs and employees is happening in San Francisco. According to a recent WSJ article, San Francisco is experiencing a “boomlet” in web and digital media companies. And yet, during August, their unemployment rate was 9.7%.

    The Economic Lesson

    To calculate the unemployment rate, you need to know the size of the labor force and the number of people who are 16 years old, a part of the labor force, and looking for jobs. Currently there are approximately 155 million people in the labor force which includes anyone who is 16 or older and employed or looking for a job. 14.8 million of those individuals are unemployed. Dividing 14.8 million by 155 million, you get a 9.6% unemployment rate.

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