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    A New Way to See Friction

    Jan 4 • Economic Thinkers, Innovation, Labor • 331 Views

    Thinking about friction, most people picture 2 surfaces rubbing together. As economists, we should instead think of the Nobel Prize.

    Friction is one reason that Dale Mortensen won the 2010 Nobel Prize in Economics.

    Discussing unemployment, Dr. Mortensen says that “friction” is one source of 9.8% joblessness. Hunting for a job, people experience friction when they complete paperwork, make phone calls, and wait on lines. Creating delays and frustration, friction is even more cumbersome when a worker tries to switch industries if the worker and the job have to find each other.

    The Economic Lesson

    Referring to unemployment in The New Yorker, James Surowiecki discusses the debate over whether unemployment is cyclical or structural. Is it because of the business cycle which means people are losing jobs because of diminishing production. Or, does high unemployment reflect a fundamental shift in the economy which has led to a mismatch between jobs and workers? You can see that both cyclical and structural unemployment involve friction.

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    Productivity Matters

    Jan 3 • Economic History, Innovation, Labor, Macroeconomic Measurement • 367 Views

    Sometimes new technology increases productivity.

    “Sushi making robots” at Kura, a restaurant chain in Japan, have replaced chefs while conveyer belts take the food to diners. By using less labor and more capital, in a tough economy, the firm is profitable.

    In 1913, Henry Ford decided to “take ‘the work to the man’ instead of ‘the man to the work'” with a moving assembly line. Implemented during October, by December, average Model T labor time for assembling the chassis decreased from 12 hours 28 minutes to 2 hours and 38 minutes (Chandler, p. 26).  

    Sometimes, though, attempts to be more efficient just do not work out.

    Hoping to save $3 million annually, Toledo, Ohio tried to implement a high-tech garbage system. Automating the pick-up with pincer equipped trucks, the new system, as described by one resident, doesn’t “…take all the garbage, they drop it everywhere, and you have to clean it up…”

    The Economic Lesson

    Defined as more output per labor hour, productivity results from more inputs (land, labor and/or capital), better inputs, and/or a more effective combination of inputs.

    You can see why productivity matters. As described in a Teaching Company Lecture by Dr. Robert Whapples (#4), greater productivity fuels economic growth. After recessions, typically, productivity increases because output is not entirely offset by lay-offs. Recent U.S. productivity, at an average annual rate of 6.2%, surged during 2009. During 2010, though, it slowed and even contracted for one quarter.


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    Passing the Euro Test

    Jan 2 • Developing Economies, Economic History, Government, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy • 332 Views

    Having just entered the euro zone, the Estonian kroon will be replaced by 194 million euro coins and 45 million bank notes. The process will take 2 weeks as the new currency replaces the old. Here are some pictures of Estonian euro coins and a picture and history of euro banknotes.


    To be accepted, Estonia had to pass the “euro” test. Composed of five categories, the test focuses on euro zone targets for 1) inflation, 2) the deficit, 3) debt, 4) long-term interest rates and 5) exchange rate stability requirements. Estonia gets high marks for her debt (8% of GDP) and deficit (1% of GDP) but a lower grade for inflation (10.8% during 2008).


    Fully aware of euro zone problems, Estonia says it wants to join as nation #17 because alone, it is too small to have its own monetary policy. As its finance minister said, “It is a small step for the euro zone and a big step for Estonia.” (A slightly familiar quote)


    The Economic Lesson

    This interactive map of the euro zone illustrates its history.


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    A New Year’s Resolution

    Jan 1 • Thinking Economically • 293 Views

    If one of your New Year’s resolutions is to “think economically,” please remember this top ten list:

    10. Whatever the question, always answer, “There’s no such thing as a free lunch.”

     9. Defend a decision by declaring, “It was worth the opportunity cost.”

     8. Whether you like or dislike government, point to, “The power of the market.”

     7. Explain a love of low prices with, “It’s the law of demand.”

     6. Explain high prices with, “It’s the law of supply.”

     5. Preface a position with, “on the one hand…but on the other…”

     4. Justify your Thai T-shirt, Japanese camera, and Sumatran coffee beans by repeating, “comparative advantage, comparative advantage…”

     3. When asked, “How are we doing?” just cite the GDP, CPI, and S&P.

     2. Know that the size of the pie has nothing to do with food.

     1. And finally, the most dependable way to “think economically” is to remember that, no matter what the topic, “It’s about the economy…”


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    Austerity and Harry Truman

    Dec 31 • Behavioral Economics, Businesses, Economic Debates, Economic History, Economic Thinkers, Government, Households, International Trade and Finance, Labor, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 386 Views

    What are people saying about austerity, the 2010 word of the year?

    According to Dr. Econ at the San Francisco Federal Reserve, households are demonstrating austerity by saving more and borrowing less. On the one hand, living within our means is good. But on the other, called the paradox of thrift, when everyone spends less, the economy tends to contract.

    Characterized by small businesses borrowing less, banks lending less, and multinationals hiring abroad rather than at home, austerity helped businesses buoy profits. On the other hand, though, we need the Keynesian “animal spirits”  that are starting to surface for economic growth and less joblessness.

    Finally, just mention government borrowing and the word austerity pops up. Greece needs to cut back. Ireland needs to cut back. German austerity should be copied. As for the U.S., though, austerity was synonymous with debate. On the one hand, continuing to increase the deficit can mean unmanageable debt and future inflation. But on the other hand, cutting back too much, too soon, could reverse our economic recovery.

    The Economic Lesson

    Our last economic lesson of 2010 returns us to Harry Truman saying, “Give me a one-handed economist. All my economists say, “On the one hand…on the other…”


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