• David Ricardo Comparative Advantage

    What Would David Ricardo Say About Your Sneakers?

    Jul 15 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Economic Thinkers, Fashion, Government, Innovation, Labor, Thinking Economically • 128 Views

    While the uniforms, boots and other items worn by the military are supposed to be 100% “Made in the USA,” exceptions are okay if we cannot make what they need. Athletic shoes became one of those exceptions when the Defense Department said it was okay to buy sneakers from foreign manufacturers, .

    Reading about imported sneakers, I started thinking about David Ricardo. But first some background.

    Shoe manufacturing is a textbook example of a shrinking industry. During the 1940s, the industry provided 260,000 domestic jobs, in 1997, 40,000, and now, 14,000. Meanwhile, imported shoes compose 98% of the US market.

    The reasons? It is not worth it for shoelace and eyelet makers to locate here if they do not have a large enough market. As for cost, making shoeboxes is 5 times more expensive here than in China. Ultimately though (below), making sneakers in the USA costs 25% to 35% more than in Asia because it is a labor-intensive task.

    Comparative advantage and sneaker manufacture

    From: WSJ

     

    As you might expect, manufacturers of US made sneakers claim a host of benefits. They start with the flexibility and turnaround time that proximity creates. The New Balance CEO claims that his US plants are twice as productive as his Asian plants. A Tennessee shoe entrepreneur questions the wisdom of shipping $1 billion in US cow and horse hides to China that will return here as $12 billion in leather goods.

    Our story ends, though, with the Defense Department having reconsidered. Just this April, after years of protests from shoemakers in Maine, Massachusetts and Michigan, the Defense Department said they would permit service men and women to purchase US made sneakers. The shoes just have to meet the military’s standards for “cost and durability.”

    Our bottom line: The economist who first explained comparative advantage, David Ricardo (1772-1823) said each nation should make whatever involves the lower opportunity cost. Because we are all doing what we do best, productivity is optimized through specialization and trade. Paying less, consumers (including the Department of Defense) have more money to allocate elsewhere.

    I wonder if it is possible for the US to have a comparative advantage in sneaker manufacture.

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  • Adam Smith, laissez-faire and traffic lights

    Adam Smith and Traffic Lights

    Jul 14 • Demand, Supply, and Markets, Economic Debates, Economic Thinkers, Government, Health Care, Households, Labor, Lifestyle, Thinking Economically • 99 Views

    Located 30 miles from Cape Cod, Massachusetts, the island of Nantucket has no traffic lights. Instead, drivers respond to stop signs, rotaries, and courtesy. More often than not, if a pedestrian, a walker, or a biker needs to cross the street, cars stop. When someone is making a left turn or leaving a parking lot on a busy street, cars stop. As they accept the right-of-way, drivers usually smile and street crossers wave thank you.

    Nantucket’s lack of traffic lights started me thinking about Adam Smith.

    Economic thinker (there were no economists in 1776) Adam Smith suggested that less government was better than more government. Smith believed that human nature was so diverse and policy consequences so unpredictable that no one could possibly know what was best for everyone. All too often, when mandated by government, incentives become distorted.

    Where are we going? Just some thoughts about benevolent behavior that results from a less government.

    In his first major book, The Theory of Moral Sentiments (1759), Adam Smith sought to describe a just society. Building from his first book, in The Wealth of Nations (1776), he then brought order and insight to the seemingly chaotic market system that was spreading through Europe.

    In both books, Smith displayed why the path to a just society started with profit-seeking individuals. He perceived that the orderliness and honesty that business required would spillover into a more virtuous society that is dependent on the interaction of consumers and businesses in markets rather than government.

    And that returns me to traffic lights. i wonder if we need to be careful about government taking over “beneficient” acts. Is a society (and an island) more virtuous when individuals have the opportunity to enjoy doing good?

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  • College Graduation and human capital

    Chart of the Week: To Which Job Will Your College Major Take You?

    Jul 13 • Demand, Supply, and Markets, Economic Growth, Education, Labor • 144 Views

    Our Sunday chart of the week

    Just some human capital facts today…

    Showing the proportion of people from a college major that go to a certain kind of job, the following graphics connect college majors with employment groups. The original interactive graphics are from the Census Bureau.

    Computer, mathematics and statistics majors (STEM: Science, Technology, Engineering, Math):

     

    College majors and employment groups

     

    Engineering majors:

    College and employment

    Physical sciences majors:

    Human capital college majors and jobs

     

    Biological, environmental and agricultural sciences:

    jobs and majors

    Physical Sciences:

    college major and jobs physical science

    Psychology:

    college and jobs opportunities

    Social Sciences:

    Human Capital College majors social sciences.jpg.

    Multidisciplinary studies:

    Human capital jobs and multidisciplinary studies

     

     

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  • everyday economics

    Our Weekly Roundup: From Cupcake Bubbles to Indian Villages

    Jul 12 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Thinkers, Macroeconomic Measurement, Thinking Economically • 174 Views

    An Econlife roundup for the week

    Federal Budget spending categories7.06.14 The tough part of cutting federal spending…more

     

    Indian development and tradeoffs from roads and cars7.07.14 When a village in India got a new road, surprising economic changes quickly unfolded…more

     

    Supply and demand and movie theater competition7.08.14 Who ever thought that a reclining chair could resuscitate a movie theater…more

     

    Everyday Economics and Bubbles cupcakes7.09.14 The Crumbs collapse is a classic bubble…more

     

    Everyday Economics and Productivity from a Checklist7.10.14 More than a memory device, the checklist is about economic productivity…more

     

    Everyday Economics and Cost and benefit for crime from Gary Becker7.11.14 How behavioral economics explains why a town in Norway has almost no crime…more

     

    Our bottom line: The everyday economics of this week’s stories took us to fiscal policy, supply and demand, opportunity cost, and economic development.

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  • Cost and benefit for crime from Gary Becker

    Crime and Punishment in Svalbard

    Jul 11 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Thinkers, Government, Labor, Lifestyle, Thinking Economically • 177 Views

    Two times the size of New Jersey, Norway’s Svalbard territory has a single jail cell that was briefly occupied a year ago. Trying to decide why Svalbard has little crime, some cite its sparse population of 3,000 or the fact that it is an archipelago from which a criminal would have a tough time escaping.

    The best reason, though, seems to be that unemployment and homelessness are illegal. A local newspaper, Icepeople, told of a Portuguese man who was discovered sleeping at a campsite. Jobless and homeless, he was deported. Actually, the only jobless group in Svalbard is retirees who can prove they have enough to support themselves.

    This takes us to how Nobel laureate Gary Becker might have explained Svalbard’s lack of crime.

    One of the first behavioral economists, Gary Becker used cost and benefit analysis to provide insight about everyday decisions. Describing why he looked at crime, Dr. Becker said, “I began to think about crime in the 1960s, after driving to Columbia University for an oral examination of a student in economic theory. I was late and had to decide quickly whether to put the car in a parking lot or risk getting a ticket for parking illegally on the street. I calculated the likelihood of getting a ticket, the size of the penalty, and the cost of putting the car in a lot. I decided it paid to take the risk and park on the street. (I did not get a ticket.)”

    Breaking the law could mean you illegally parked, you robbed a house, or you played loud music. Very different violations, they all have one common denominator. Dr. Becker believed contemplating criminal behavior is a cost and benefit exercise that can involve the probability and severity of the punishment and whether the utility of the time spent breaking the law exceeds the utility of the next best alternative activity. Consequently, society can do its own cost and benefit analysis when it selects deterrents.

    In Svalbard, violating the job and home requirement has a huge cost for an individual (deportation) and almost no cost for the town (just a ticket out that they do not even pay for if the violator has money and a tiny police force). As for other crimes, because all people have a job and a home, they probably perceive that a life of crime would have too great a cost.

    Our bottom line: We can use a behavioral economist’s tools to understand why people commit crime and how society can best deter it.

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