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    Clandestine Competition in China

    Jan 24 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Labor, Regulation, Thinking Economically • 602 Views

    By Mira Korber, guest blogger.

    If you asked an American government official if you owned the teeth in your mouth, you would probably get some very strange looks.

    But, imagine hearing “no” as the answer to your question. The year would be 1978, and you would be living in communist China, where, in fact, a farmer was told his teeth belonged not to him, but to the collective.

    On such collectives, farmers worked public land together, and at the end of the season, everyone received the same government-determined ration of the final harvest. No matter how much a farmer worked, he received the same as his neighbor.

    And there was never enough food.

    In this fascinating NPR podcast/article, you learn why. As all the farmers received the same amount, regardless of the effort they exerted to work, they had no incentive to produce more output. The community of Xiaogang suffered from hunger because people were not motivated to grow enough food to subsist.

    That is, until a group of farmers met in secret to draw up a contract. To ameliorate the hunger problem, the document assigned private plots of land to each farmer. If each farmer grew enough food, he got to keep some for his family. (This illegal contract was hidden away in the bamboo of someone’s roof.)

    At harvest time, the farmers gathered a bounty greater than the previous 5 years put together. And because the government happened to embrace their ideas, they formed the basis of a new Chinese economic model.

    The bottom line? By giving each farmer his own plot of land, he began to farm in his own self-interest, and was therefore incentivized to produce more food. By engaging in secret competition with one another, the farmers were able to produce more individually than they would working as a collective.

    The Economic Lesson

    The story of Xiaogang village reminds us of William Bradford, Plymouth colony governor, and the Pilgrims of early America. In “Of Plymouth Plantation,” written by Bradford, we see a similar shift from collective to individual farming:

    “the Govr…gave way that they should set corve every man for his owne perticuler, and in that regard trust to them selves; in all other things to goe on in the generall way as before. And so assigned to every family a parcell of land…This had very good success; for it made all hands very industrious…much more torne was planted then other waise would have bene by any means the Govr…The women now wente willingly into the feild…”

    An Economic Question: Keeping incentives in mind, how do you think the present-day American government might manipulate its citizens’ behavior in one way or another?



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    Steve Jobs and Manufacturing Jobs

    Jan 23 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Innovation, International Trade and Finance, Labor, Macroeconomic Measurement • 611 Views

    A friend recently said to me, “The U.S. just doesn’t make anything anymore.”

    But we do. It’s just harder to see it.

    To observe contemporary U.S. manufacturing, you could go to Greenville, South Carolina. At an auto parts factory making precision parts, the typical skilled worker uses a computer to run a machine, knows calculus, trigonometry, algebra and programming language. To be hired, he also needed formal technical instruction and previous on-the-job experience. By contrast, having had minimal training and education, the unskilled worker interviewed in this Planet Money podcast placed parts in molds and then removed them.

    The bottom line? Employing more high technology and fewer people, U.S. manufacturing output is steadily growing. However, if the operation is insufficiently cost effective, it will leave.

    This takes us to Apple. When Steve Jobs had dinner with President Obama during 2011 and told him that Apple’s jobs in China will never return, his message was a reality check.  Skilled workers will earn more and work more here while the opportunities for the unskilled move beyond U.S. borders.

    The Economic Lesson

    In “Race Against the Machine,” MIT researchers Eric Brynjolfsson and Andrew McAfee explain the structural change that the U.S. economy is undergoing.

    Currently 9% of the U.S. labor force, the number of manufacturing jobs has plunged since 1999.

    In 1960, the 3 largest U.S. employers and the number of people who worked for them were:

    • General Motors (595,200)
    • the Bell System/aka AT&T (580,400)
    • Ford Motor (260,600)

    During 2010, the top U.S. employers and their employees:

    • Walmart (2,100,000)
    • Kelly Services/office temps (538,000)
    • IBM (426,751)

    An Economic Question: Comparing 1960 to 2010, what type of fundamental, structural change has the U.S. economy experienced?

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    Tuition Intuition

    Jan 22 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Government, Households, Macroeconomic Measurement, Thinking Economically • 573 Views

    With tuition and student loans skyrocketing, the Obama Administration has urged colleges to charge less and Congress to lower the cap on monthly payments.

    Maybe though, they are targeting the wrong solution.

    One Bloomberg View columnist suggests that government subsidies are distorting the market. At an all time high, soaring enrollment rates represent an increase in demand that elevates price.  Typically though, markets work through higher prices. In corn markets, for example, when price soared, more farmers planted cropland and prices dipped. For education, it just doesn’t work that way. By subsidizing student loans through grants, tuition tax credits, default funding, state school support…we could go on and on…government is fueling the increases they are trying to prevent. When tuition rises, so too does the subsidy.

    You can see that this takes us to some unintended consequences. By increasing what students could pay, government enabled colleges to charge more. Just as crop subsidies can elevate the price of farmland, might tuition subsidies lift the price of higher education?

    The Economic Lesson

    This Federal Reserve report on credit is fascinating. Looking at their graphs, you can see that student loans, in many states, are second in size to mortgage credit and currently total close to $850 billion. The report also shows which states have the greater proportion of student loans.

    An Economic Question: On a supply and demand graph, how might you illustrate the impact of government tuition subsidies?

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    Breaking An Environmental Law

    Jan 21 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Environment, Government, Households, Innovation, Macroeconomic Measurement, Regulation, Thinking Economically • 775 Views

    Asked by the Pew Center for the People and the Press to rank 21 issues in terms of their significance, global warming was #21. Similarly pessimistic about climate change initiatives, one researcher asked, “How can one seriously suggest that the village kid in India should give up her hopes of prosperity, education, and health care today, in order to prevent rising ocean levels many years down the road?”

    What can an environmentalist do?

    Maybe… connect current economic benefit to future climate results. Then, the iron law of climate policy is no longer an obstacle.

    Described in the NY Times, a recent Science article suggests 14 policies that would have a beneficial economic impact now and also diminish the future global warming that the paper’s authors predict. One proposal would involve farmers in developing nations draining rice paddies more frequently to increase their yield while simultaneously reducing methane emissions.

    Described in “Climate Pragmatism,” climate and health care concerns converged in a 2009 Congressional proposal for reducing black carbon soot. Two of the bill’s sponsors were environmentalists while a third sponsor questioned climate change but wanted the health benefits of cleaner air. 

    The Economic Lesson

    Edwin Mansfield, a University of Pennsylvania economist (1930-1967) who studied the impact of innovation concluded that smaller innovations such as new industrial thread had a much greater social rate of return than products and processes that sound more dramatic. Recent suggestions to mitigate global warming also imply that “less is more.”

    An Economic Question: How might rice paddy drainage be comparable to the smaller innovations that Dr. Manfield said were so effective?

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    An Environmental Law

    Jan 20 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Environment, Macroeconomic Measurement, Regulation, Thinking Economically • 514 Views

    Asked if they want lower gasoline taxes that make more driving affordable, people typically say, “Yes.” Told that the only electricity for a village in India is from coal-fired plants, most people will say it’s okay.

    When making decisions about driving and electricity, we tend to observe the iron law of climate policy. Choosing between economic growth and reducing emissions, we take growth. Or, as a Chinese climate negotiator said during a Peking University speech, “I cannot accept someone from a developed nation having more right than me to consume energy…We do not want to pollute as they [the Americans] did, but we have the right to pursue a better life.” Correspondingly, The Economist asked people in the U.S. how much they would be willing to spend, per household, per year, on a climate bill. While $80 got majority support, $170 did not, and, at $770, opposition was overwhelming.

    As The Climate Fix author, University of Colorado professor Roger A. Pielke said, “The iron law of climate policy says that even if people are willing to bear some costs to reduce emissions, they are willing to go only so far.”

    How then to break the “iron law?” We will look at proposals tomorrow.

    The Economic Lesson

    Entering the realm of behavioral economics, science writer Jonah Lehrer suggests that we are less willing to select alternatives that provide short term loss and long term gratification. His example, in How We Decide, was people’s credit card excesses and how “…our emotions…tend to overvalue immediate gains (like a new pair of shoes) at the cost of future expenses (high interest rates).

    An Economic Question: How does Jonah Lehrer’s credit card example relate to climate change policy?

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