My research

I just found out last week that the abstract I submitted to the National Conference for Undergraduate Research was approved.  I’ll be presenting “Externalities and systemic failure: a common law and property rights based solution.” I am honored to have this opportunity. A little about my research:

This research primarily focuses on what economists call “Externalities.” An externality is a cost or benefit that occurs outside the market transaction. This is best described or explained by example. Imagine that you live in a pollution-free neighborhood. A wood product company comes into town upwind from your neighborhood. You don’t buy wood products from this company, but the smoke produced during the manufacturing process is spread out all over – including over your formerly pollution-free neighborhood. That smoke is a cost to you. You are not the producer or consumer, so you are external to the market transaction.

This cost that you bear – the externality – is typically seen as a failure of the market. This is where I take issue with the textbook definition of market failure.

A market is made up of buyers and sellers operating within a framework of social norms set by society, laws and legal precedents set by courts, and rules and regulations set up by legislative bodies. The most important factor in determining whether individual rights and property rights are respected and protected is the treatment by governing or legal bodies of cases where these rights are infringed.

In the case where your neighborhood is filled with smoke and ash, you should be able to seek full restitution under the law for any property damage or diminished health you experience; a cease and desist order should be issued to the violator, as well as an assessment of any applicable criminal or civil penalties.

Granted that this example is clear cut and simple, the same principles apply to all others. First, property rights must be clear and well defined. Second, the legal system must be able to help sort through details and have power of enforcement. Last, the rules of the game must favor the one with first claim to the property or resource.

The government’s role is to protect the established rights of individuals. If torts are sustained and not justly compensated, don’t blame the market for failure – it’s not the market’s job to protect rights. That’s the proper role of the government.

This brief is not comprehensive by any means. I will post my final presentation when it is ready.

A couple of projects: things that interest me

Well, as school is getting crazier, I have less and less time to blog. But I thought I’d let you in on some projects I’ve been working on, some things that interest me, and some thoughts I’ve had.

I’ve been working this semester with a couple of econ professors researching whether or not there has been an increase in the prevalence of interdisciplinary research. The government has, over the last several years, offered preference in research funding to those who have interdisciplinary teams. But has that incentive been effective in actually creating more interdisciplinary research?

Last semester I did a research project on controlling point-source pollution, and the benefits of deregulating the waste management industry. This is a more complicated concept than I have time to go into right now. I will, however, at some point in the near future post my findings. I presented my research in a poster and a podium presentation at the Boise State Undergraduate Research Conference.

I have read some articles recently on the topic of social mobility. It seems that the US and UK are the two least socially mobile societies. Why? I have some ideas as to what makes some people more mobile than others. This is research I’d like to do this summer and fall.

This semester, I’m taking a class called “The Sociology of Work.” I hate the class (mostly because it’s really just a forum for pushing a Marxist agenda). We were tasked with writing a paper for our final, on any topic relating to the sociology of work. This is my opportunity to apply my economic analytical ability and show in concrete objective details the effects of labor legislation. I don’t think it’ll be received well, but it will be impossible to refute on objective grounds.

One last thing: I was chosen as on of only thirty undergraduate students to participate in a week long summer colloquium for undergraduates hosted by PERC.org and The Liberty Fund. I’m excited to attend and learn more about free market environmentalism.

As my time frees up in the summer, I’ll write more. Thanks for reading!

What does all this matter anyhow?

I guess many of you (actually the very few who read and understand this blog) might be wondering why any of this matters.  Right now I’m laying some foundational concepts for what my philosophical view of economics and human action looks like.  My view may change over time as I learn more, and I hope to keep this blog updated.  Please feel free to follow along, or don’t.  This blog is a great way for me to sound out my ideas.  One day, I’d like to write some principles level economics books, and hope that this might help give me a road map to doing so.

Incentives, Disincentives and the Cost of Action

Early on in my learning of economics, I read that among many other things, economics is the study of incentives and disincentives – or that we can see causal relationships of incentives and disincentives and certain actions.  Sometimes action causes them, sometimes it is reaction to them.  This was well illustrated by Thomas Sowell in Applied Economics: Thinking Beyond Stage One.  This is a great book for learning to think like an economist should (I say should becuase there are a ton of Paul Krugman’s out there).

Modern economics doesn’t give much credence to incentives and disincentives.  I’m not sure why because  those are vital to the full understanding of the subject.   I much prefer the broader study of human action of which Ludwig von Mises describes economics as a specialized part called Praxaeology.  Economics is defined in praxaeological theory as the study of human action under the conditions of scarcity.

Scarcity implies some kind of cost.  What is scarcity, and how does it affect our lives?  Scarcity is all around us.  Even the Sultan of Brunei, one of the world’s wealthiest people experiences scarcity.  While he might be able to purchase just about anything you can think of, he must make choices as to how he will spend his time.  Time preference is an important part of praxaeological theory.  Time is scarce regardless of wealth.  This factors into the cost one perceives to any action.

What, then, is the cost of action?   How much does one action cost?  The amount you give up to pursue it.  That is called opportunity cost. We can consider the purchase of movie tickets and popcorn vs. three games of bowling with shoe rental.  We like “two good models” becuase they limit the in-reality limitless choices we have.  We shall say that the cost of each is the same.  What, then does the movie and popcorn cost?  Three games of bowling with a shoe rental.  What’s the cost of three games of bowling with shoe rental?  The movie and popcorn.  This is a typical analysis using opportunity cost.

How do we know the real cost of one action for a person?  Can we study this?  To some extent, yes.  We can indeed measure that a person has spent an amount of money, and that an amount of labor was spent earning that money, and that their labor must have been at least equal in value to them as the action taken.  But then again, subjectivity enters in and makes a quantatative analysis of individual cost almost impossible.  We don’t know what their time-preferences are, and there are usually many more than “two goods” under consideration, and many more factors that go into decision making than we can conceive in models (such as income, consumer preferences, and all the other factors of individual demand).   We might say that one good is “at least as good or better” than another when we choose it, but by how much, to what degree, or why?  Really, there is no empirical science that can accurately measure the individual cost of action.  Concrete analysis is not possible because we cannot really quantify these factors – even by comparison.  How do you compare one unmeasurable factor to another?

Likewise, measuring benefits derived from action is subjective and impossible to quantify.  In a truly free market economy, we know that the benefits expected from any action must be at least equal to the costs.  But often, the benefits are either greater or lesser than expected, and we do not know easily whether or not benefits outweigh costs, by how much, or in what way.  While we can observe some costs and benefits, a true CBA (Cost-Benefit Analysis) is impossible from a third person perspective.  When costs and benefits are accounting costs and potential profits, it’s easy to do.  When we are considering costs and benefits that rely on a personal value set, there’s no way we could actually measure these factors.

While we cannot observe the true costs and benefits of many actions, we can observe some very important and interesting decision making factors.  The circumstances surrounding the actor create incentives and disincentives, and the actions themselves can create incentives and disincentives.  There’s not an empirical science devoted to this, but it is a priori reasoning applied by rational individuals that detects them.  We can put ourselves into the shoes of the individual(s) who take action and, assuming we have good information, figure out what incentives and disincentives affected their decision making.  Incentives and disincentives play a starring role in decision making.  Individual decision making – human action – is the heart and soul of economics.  You cannot realize the impact of any decision, or understand the how an individual arrived at a particular decision if you separate out these basic factors.

Often, incentives and disincentives are either revealing, or are revealed when action is studied.  There are several great examples of this in Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (P.S.).  Steven D. Leavitt and Stephen J. Dubner observe several different situations in which incentives, disincentives, and secondary consequences play a huge role in decision making.  Check out the book.

Time Crunch

Well, school has started again.  I’m currently enrolled in 12 credit hours (four classes).  It wouldn’t seem like so many, but I do work around 50 hours per week, and have a family.  It’s actually quite exhausting.  I built almost 30 feet of shelving in my garage this week too (thanks in no small part to the many labor hours of my father-in-law).  My time is strapped, and I will be blogging infrequently.  With school, my time is split heavily between classes, studying, work and family.  Extemporaneous activities (such as blogging) are only participated in on a “as time permits” basis, which is to say seldom.  But I’m hoping that I can continue to build this blog up to a valuable resource for the future.  This blog will serve for me as a way to communicate economic ideas in layman’s terms, and also as a dump for the constant ideas that sprint through my mind.  I’m taking a health economics class, and anticipate blogging quite a bit about that.  So much to blog, so little time.  As there’s not much readership on this blog yet (and I don’t anticipate that until I’ve built a bit of a library), I can’t imagine I’ll be disappointing too many people.  Please e-mail me if there’s anything you’d like to see on here: aaronbatteen@u.boisestate.edu.

Values

In the last post, I illustrated economics as a tool for analysis with some examples.  I wrote that there must be three aspects for analysis to take place: a value, an end goal, and a method of attainment.  I should elaborate on values.

Your value system is part of your personal set of preferences.  These are typically conceptual principles rather than actions or things.  Thrift, efficiency, harmony, peace, equality, fairness (and so on) are examples of these types of values.

On a microeconomic level (that is, on the personal level), these will greatly influence both the ends and the means you pursue.  Most people don’t think through their value system before acting or chasing some goal, they just do it.  These actions and goals can be revealing as to what their values might be.  Human action is the only connection we have between thought and reality.  An action is thought brought to life, made real, and is therefore the only way to find some meaning of the thoughts of others.  It should also be noted that the only reason we might be able to attach meaning a posteriori to the actions of others is because of our own experiences in life.  We judge the thoughts of others on an a priori basis.  Their actions are meaningful to us only because of our own experiences with action.

Analysis can be both personally meaningful and useful and socially useful and meaningful.

On a personal level, we do this all the time.  We gauge the attitude or thoughts of another person based on body language.  We find revealing the reactions or interactions of others.  Whether consciously or subconsciously, we also react and interact according to our thoughts and our values, and others will observe and make some analysis accordingly.

Psychologists, sociologists, and most importantly economists do this as well.  This is called the science of Praxaeology.  Economics is only a part of this science, though I find it to be the most interesting and most useful one (and yes, that’s totally subjective!).  Economics claims to be valueless, which – again – as a set of analytical tools is true, but is not necessarily true in practice.  The analysis is useful in several aspects:

1) Public policy analysis.  It’s always interesting to find in public policy the underlying values.  The fault I find with most public policy is that of short-sightedness.  Rarely are secondary and tertiary consequences of policy analyzed or thought through completely.  Much of the time we find the true values of public policy in total disarray.  Universal health care, social security, and other entitlement programs are most often favorable for some special interests, and the values that society holds are not actually supported in the legislation, or are directly trampled on by the secondary or tertiary effects of the legislation.

2) Individual action analysis.  Again, we do this all the time.  I am mostly referring, however, to the analysis of some public figures and what their actions might tell us about their values.  Are they consonant with their words, or not?  Are they aligned with the promises they’ve made along the campaign trail?

3) Actions allow us to gain some insight as to what another person values in interpersonal relationships.  Some of this is done intrinsically, but much of this must be done consciously.

Not all of this sounds very economic, but it is the very basic of economic analysis.  There’s no sure-fire way to know what another’s exact values might be, but we gain insight.  This may allow us to analyze whether or not everything lines up – whether decisions or actions are economical or not.  That is the most basic use of economics as a tool.

An Illustration of Economics as a Tool

My last post described economics as a tool – a measuring stick for action as a tool for analysis.  I should give some more illustrated examples of this, so as to make the idea more clear.

First, let’s pick a value, mean, and end.  Let’s say we value Public Welfare.  Our end will be higher wages, and our means will be minimum wage laws.  If we truly value public welfare, we should be concerned about what secondary or tertiary effects our policy might have.  We are trying to maximize public welfare by raising the minimum legal wage to some level.  The logic here is that low wage earners will receive higher pay than they did before, making them better off.  But is it economical?  In other words, do we really achieve higher wages for working poor, making them better off by raising the minimum wage?  Let’s look at a supply/demand graph for the labor market of unskilled labor (those who will be earning low wages):

Labor Market with Minimum Wage

At the market clearing wage – the wage at which supply=demand – the equilibrium wage creates a full employment scenario.  All those who wish to be employed will find employment.  Though it’s clear that many will find employment at a wage below the minimum, they will find some way to earn a living.  Raising the wage rate arbitrarily from We to Wm (Wage minimum) creates unemployment as the quantity supplied moves from Qe (Quantity equilibrium) to Sm (Supply at minimum).  The demand however is lower at Sm (Supply at minimum).  When the supply for unskilled labor increases and the demand for unskilled labor decreases, there’s a surplus of unskilled labor in the form of unemployment.

It’s simple enough to see this, and we can to some degree quantify these data when we have the numbers.  But numbers only tell part of the story.  Minimum wage laws do not make the labor of someone worth more.  Leaving out the argument that in the long run it might not matter because minimum wage laws create inflation, there are certain groups who are impacted more directly than most others.  The first to become unemployed are the young and inexperienced (teenagers), the disabled, the elderly, and other groups who may be able and willing to provide labor at a lower wage, but are legally not allowed to do so.

Many point the finger at business and accuse them of being greedy, not wanting to pay higher wages.  But the fact is that the market for unskilled labor is highly elastic and perfectly competitive.  One worker might be easily substituted with another.  No laborer in that market is irreplaceable.  It would only be rational for a profit maximizing business to seek out the best qualified job applicants at the new wage level.  Why would we bemoan them for doing so?  This is why at this time it’s been much more difficult for the above listed groups to get jobs.  Not only did we enter a recession, we raised minimum wage rates, making it more difficult for the unskilled, uneducated to find gainful employment.   Yet the uninformed masses keep blaming business and the free market when government policy is causing problems.  We’re not so much telling businesses that they cannot hire someone at a lower wage as we’re telling those willing to work for a lower wage that they can’t.

So where did this fallacy come from, anyhow?  It should not be interesting that the cry of many labor union is one of helping the working poor by raising the minimum wage.  If, as we see, this policy does not help the working poor, then who does it help?  Well let’s look at a scenario in which you are contracted to build a fence that will surround a business facility.  You will end up needing several miles of fencing.  There are two ways to get this done.  First, you can hire a host of unskilled labor to come and dig post holes, set the posts, and assemble the fence.  Or you can hire one union laborer with a post hole digger, and a few other union laborers to assemble the fence.  While it might been more cost effective to use union labor before the minimum wage, it is now much more attractive at least, or caused union labor to become the more cost effective option.  Special interests strike again.

Let’s get another less politically charged example.  I value thrift.  My end is satisfying my hunger, the means by which I do this is going to the China Grand Chinese Buffet.  The China Grand Buffet charges $8 per person for lunch, and I can eat a lot of food.  It would definitely cost more for me to make all that food, and the China Grand is capitalizing on economies of scale.  Was this a good deal for me?

There are a lot of factors here.  I could have gotten a filling and healthier meal for less.   While my means and ends met up just fine, my values were violated.  I could just have easily gotten a $5 footlong from Subway, or gone home and made a couple sandwiches for $2.  I think that this was a poor way to satisfy my hunger if my value is thrift.  If my value was different – say enjoying a multi-cultural dining experience (I was outnumbered by Hispanic patrons, and most of the wait staff was Chinese) – then this was a fantastic method of doing so.  This serves to illustrate why all three of parts must be met to find an economizing solution to a problem.  Had I gone to the China Grand Buffet and not satisfied my hunger, the means would not have been sufficient for the end goal, or at least were poorly executed; had I set an end goal of not over-eating, doing lunch at a buffet would have been a poor way to ensure that.   In my mind, having lunch at the China Grand Buffet was too expensive, though it was convenient and the variety is particularly good.  Obviously I value variety and convenience as well, which made it a fine choice.  We’ll talk about the China Grand Buffet in future posts, I’m sure, as there’s a wealth of economic activity happening there.

This sort of analysis can be applied almost universally to human action.  We can analyze human behavior and make educated guesses as to values, motivations, or other intrinsic factors that influence behavior.  We can analyze economizing methods of meeting goals, or whether or not the goals themselves are in line with our values.  We can foresee possible problems with decisions or actions we make before they happen.  Not everything can be lined up on a supply/demand graph, but almost everything can be seen from the perspective of values, means, and ends.  While there are those who say “the ends justify the means,” we can then ask them, “but what are the underlying values?”  We don’t have to simply accept that people (politicians) try to do good things and have good values.  That’s no longer enough.  We must demand that the means and ends align, and that our values are not violated.  This is how good policy is made.  This is how good decisions are made.

Next time, we’ll discuss what values our society might have, and how those values might – or should – shape decisions of policy makers.  Later, we’ll talk about how the values of policy makers might influence their own decisions, and how the decisions they make reveal their values.

A Basic View of Economics

Economics is traditionally defined as the social science that analyzes the production, distribution, and consumption of goods and services (wikipedia: economics). It’s the study of the use of scarce resources in an environment of unlimited wants. But it’s so much more than just that. Reading the book Freakonomics was the first glimpse I got of the potential of the science. I recommend it.

As a field of study economics has no values or moral position. It has no more political implication than does any other science. It alone cannot make judgments or decisions, and has no idealism to which it may ascribe itself. Studying economics does not make one more moral, smarter, or anything except more discerning. Just as a hammer makes a person more able to drive a nail, so does economics make a person more able to analyze causal relationships and means-end relationships. With an understanding of economics we are more able to gauge whether the values we wish to achieve are accomplished by whatever means we employ in pursuing some end we wish to gain. That is, we can know whether our means are harmonious with our ends, or that our choices are consummate with our goals. We can also look at cause-and-effect in an analytical way using economic tools.

Let’s illustrate means-end relationships with an example. For instance if we value resource-use efficiency, we can use economic tools to determine whether or not our method of resource use in pursuit of some end good or service was indeed efficient. If our value is efficiency and our end is economic welfare, we can measure the efficacy of our efforts to that end. We are able to use economic reasoning to determine if our values are aligned with our means, and if our means achieve our end. This is useful for making decisions about future action.

For an economist to judge future action, he or she needs a value, a means or method and an end. The most basic of tools can be deployed for many of these judgments to be made. Results of analyses like these are usually cut-and-dried. But these tools can also be used to analyze cause-and-effect relationships. That analysis comprises much of what modern economists do.

Causal relationships are more often looked at from an outside perspective. It is an economist searching for a relationship between cause and effect, or cause and supposed effect. This is not a perfect method of analysis, but it may lead to greater information.

Ideally, someone interested in understanding particular decisions, actions, historical events, etc. would employ several different methods of analysis to determine true causal relationships. Too often, most visibly in the political arena, we find those guilty of embracing economic fallacies because analysis was not properly executed, was short sighted, or the results of which were found to be inconvenient. A study of history is not enough to simply deem public policy as good or bad. Again, economics cannot tell us whether something is “good” or “bad,” only whether or not our methods achieve the ends we want and respect the values we have.

Knowing the values of any society is an important part of understanding how economizing their public policies are. This will lead us to a somewhat philosophical discussion of societal values and norms. While I believe that all societies differ in some respects, we find that because we all have the same basic needs, we all have similar basic values. It is upon these values and assumptions that I will offer much of my analysis.

Laymanomics

I just made up the word “Laymanomics”.  It’s economics interpreted for the layman, the non-expert, or the student.  As I am myself a student of economics, I will do my best to interpret some of the complex, or abstract ideas of economics into more understandable ideas.  Also, I will be debunking myths and fallacies that are rampant in economics and political-economy.

I make no apology for taking a free-market approach.  As we move forward with this endeavor, you shall see that the free market offers the best solutions for pretty much everything – from environmental protection to health care to even schools and roads.  I don’t profess to know everything about economics, and so I will be often using the ideas of those much more knowledgeable than I.  I will list my resources as I use them.  Check the right hand side of this page to get the links to some of my preferred resources.

If you have objective counter-points, I welcome your input.  Debate is often productive and insightful.  I welcome arguments based on fact and reality, but I will reject any based on subjective positions or “should-be” altruism.  Please feel free to comment on anything you see here.

Last, I am most knowledgeable on the topics of environmental and health care economics.  I will likely address those topics much more than any other (and the former much more than the latter).  However, if you can ask me questions, or hate mail, send it to aaronbatteen@u.boisestate.edu.