Timeless economics

Still makes sense.. and we’ll always have Paris..

A nice little post on the author of the Penguin History of Economics

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Just a link.  Read on.

Written by Orlando Roncesvalles

January 24, 2010 at 10:33 PM


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What is Money?

This question seems so elementary and self-evident.

Money is, after all, the colored pieces of papers issued by the government that we have in our pockets. But is that it? Even if one were to accept that as a satisfactory answer, what exactly are those pieces of paper for? Are they themselves the “money” or do they represent something else that is the “money?” and where do those pieces of paper come from, and are those pieces of paper considered money as opposed to anything else? We all want money, and devote our lives to getting it.

Let’s start to a textbook definition of money and from there, we proceed. Most definitions include only two parts, some add a third. According to them, money is:

Ø a medium of exchange

Ø a store of value

Ø a unit of account

If you look closely at the first two definitions, you will see that money exists in the minds of those who use it. This is partially true for the third definition as well. (note: “For all of you monetary theory geeks out there, please relax! These are deliberate simplifications designed to make the ideas accessible to a general audience and not a detailed exposition of precise financial models. Heheh”)

Ø I can exchange my money for stuff…

Ø I can exchange my money for stuff later…

Ø I can exchange my money for a predictable amount of stuff later…

Let’s think about what is happening right now. Money has value because people will exchange or give you stuff for it, both now or in the future. But why will they do that? They have to believe that they can trade it onward in turn for stuffs they want. So the utility value of money is based on a set of collective beliefs – what Carl Jung referred to as the Collective Unconscious. This is the set of beliefs that are widely held by a group of people at a deep level and upon which they will act without thinking about it. One can think of this as the unstated assumptions of a society. In the United States, the dollar has had a stable or relatively stable value for so long that few would ever consider NOT accepting it in exchange for stuff. The dollar as money is a deeply embedded part of our Collective Unconscious, both here and around the world.

Though there are many who are beginning to question the value of the dollar as money, the number is still miniscule as a percentage of society. Even if a person were to cease to believe in the dollar as money in their own mind, they would still accept it as long as they believed that others would accept it from them in exchange for goods. So externally, they would act as if the dollar was still money, even if they no longer held that belief. That is what puts the collective in unconscious. At some point, things deteriorate sufficiently that everyone KNOWS that everyone else is just pretending. That is the point of universal hypocracy just before the belief system breaks down.

Printing Dollars Destroy Money?

I agree that money, or better said “moneyness” attached to an issued currency, exist only in the minds of people, but printing dollars does not simply destroy money. Excessive printing may destroy (lower) the standard of value of dollars (inflation) while leaving the liquidity component intact. It is clear that from a purely physical point of view, a central bank can create as much currency either physical or electronic, as it wishes – subject of course to certain practical constraints such as logistics. But money exists solely in the minds of people. It is essentially a matter of faith and faith is not something a government or central bank can print or conjure from thin air. The value of the dollar is the credibility built up over two centuries of the US Treasury always meeting its obligations. The money is the widely held belief that the US government will guarantee that dollar holders will always be able to get things of value in return for their dollars, which is backed by generations of positive experience.

Now, please ask yourself, does creating more currency enhance or damage that belief system? The answer should be self-evident. The very act of creating more dollars ensures that the purchasing power of every existing dollar is diluted. There is only one scenario under which this will not damage the purchasing power of the dollar – if and only if those created dollars can be used to add a roughly comparable amount of value to the pool of available goods and services available for purchase. That is precisely the role of well-functioning credit system: to allocate capital to useful expansions of capacity and new business ventures in order to create that added value. This is why such a credit system can actually create money through credit. Because the act of printing dollars would have no such offsetting value-added, the arbitrary creation of more dollars undermines the faith which is at the root of money’s very existence.

A central bank can print currency but it cannot print belief – which is what money really is.

The great Adam Smith said it well:


(Adam Smith, Paper Money, 1981)




Written by lothielicious

March 24, 2009 at 4:19 PM

The Unsung Hero of the Great Depression

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It was in the profundity of the Great Depression when the economist from Cambridge, England, John Maynard Keynes wrote his opus magnum entitled “The General Theory of Employment, Interest and Money.”

It was his simple solution for the financial crisis in 1929 when the economy was at its low. Keynes’ theory, also called Keynesian Economics, was based on the circular flow money where one person’s spending is another person’s earnings. Consumption motivates production, production creates employment, employment provides income, and income will enable consumption. This cycle will continue as long as people will spend rather than save which was contrary to Keynes’ solution by priming the pump. Keynes simply explains that since people during the Great Depression tends to save rather than spend, this will put the economy at standstill for in Keynes’ words, “..the engine which drives enterprise is not thrift, but profit.”

Keynes also argued that the government should intervene during this economic downturn by either increasing the supply of money or by doing the spending itself and buying goods from the market. This was somewhat a contrary to a preceding economic belief of the laissez-fair where the government should not interfere with the market. Keynes theory rooted to skeptical reactions until the outburst of the World War II where massive spendings on war initiated government to spend and inject money into the economy. And with this Keynes’ prediction came true as foreseen.

Nowadays, people do not know who Keynes was and what a great school of thought he established in economics.

Written by jethrojedsamsoncadiz

March 23, 2009 at 11:57 PM

Why study economics

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Here are some ideas of David Colander, pointed to by Prof. Mankiw.

Colander teaches economics at Middlebury College.

Written by Orlando Roncesvalles

March 22, 2009 at 4:59 PM

COMPARATIVE ADVANTAGE-what happens when you force your self to do something you are not capable of…

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1. you may discover in the process that you can actually do it, but barely; and

2.you will find out in the end that you are wasting your time and effort doing something which others can do on your behalf easier and faster. (even if, you can)

Comparative Advantage is the bottom point of asking that question. This theory was made known to men (and women) by DAVID RICARDO (http://en.wikipedia.org/wiki/David_Ricardo).

He was a member of the parliament during his days, a businessman, a speculator and financier who has amassed a considerable amount of wealth. Like most of us, he was normal, until, he has read a book by Adam Smith, entitled “The Wealth of Nations” while having a vacation with his ailing wife (Priscilla Anne Wilkinson) in Bathes.

So what is comparative advantage?  Comparative Advantage according to David Ricardo happens when a country focuses on producing goods with which they capable of at the lowest rate and with most convenience. and the most relevant story I can think of, is the story of the MONKEY AND THE EAGLE (authored by, the monkey himself). The Monkey lives in “banana republic”, which is soaked with banana trees, banana leaves, banana trunk and banana heart. :D. The eagle lives in “Land of the Free Eagles”  and they abound in metal, and other raw materials needed to produce hi tech pans, ovens, blenders and stoves which were needed by the monkey to cook his banana recipes and goods such as banana chips, banana cake, banana shake and banana balls. For a couple of years, the monkey and the eagle were good friends,EAGLE gives MONKEY the tools and MONKEY gives EAGLE bananas in return and so they were both able to eat banana recipes over the next 30 years. The bananas grew freely in Banana Republic and all that the monkey had to do is wait for them to turn yellowish and harvest. Same with Land of the Free Eagles, where metals and other materials were flowing freely like a river out of the nowhere. And then one day they had a fight. Monkey hated Eagle and eagle despised Monkey. No more kitchen tools for monkey and no more bananas for eagle. Eagle became boastful because he discovered that the banana seeds out of the bananas the monkey gave him are growing, though barely and monkey became arrogant after finishing a course in the “vocational school for fixing imported tools”… With this in mind they thought they can survive without each other. However, the bananas produced were a lot lesser than the ones in Banana Republic, while the monkey, is now struggling to repair the tools he uses to produce the banana recipes. They were both able to find ways to solve their problems but it cost them both tremendous time and effort doing such. Eagle had to work in the not so productive banana field for 5 hours a day just to produce 10 pieces of bananas where in fact all that the monkey had to do was wait for it to get ripe. The monkey also is taking hours before he can fix a broken button or missing screw in the tools while the eagle simply had to replace it by calling Martwal or Homedeported (popular stores). They grew tired and more exhausted as each month of trying to be independent from one another continued. The eagle’s resources were depleted out of purchasing tons of fertilizers to sustain the barely living bananas he had planted while the monkey, who even barely had resources in the first place is now struggling to keep the machines running, using wooden pegs as replacement of the bolts and screws holding the ovens, pans, and stoves together and needing to pat the top of the of the oven repeatedly and sometimes violently in order for it to start heating up. They eventually gave up and a peacetalk occured, they both asked for pardon and realized they cannot exist without each other.  Trying to produce goods which costs them a lot to maintain will simply make the eagle eventually poor in the long long run, and will make the monkey even poorer after a not so long time. And after that day, they traded happily ever after.

note- just in case you were thinking that bananas could have been eaten raw by the monkey providing him the chance to survive without the eagle’s tools, no he can’t. the author describes the bananas as “inedible unless cooked” otherwise it will become “absolute advantage.  hahaha!

Although it has been explained by other economists in the earlier years, much of what is comparative advantage is about was credited to  David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal. In Portugal it is possible to produce both wine and cloth with less labor than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good that it has comparative advantage in and trading that good for the other. click me for the full text

The significance of comparative advantage is that it has enabled countries to survive and avoid collapse by knowing where to focus and  what to avoid doing. However, this does not necessarily mean we are invulnerable to trade imbalances and deficits. When a country has more demand of the goods it has an advantage of while the other has little demand from the outside of what it is capable of producing, it sparks a problem which also would result an economic crisis. As time has passed, the demand  for certain goods and for what goods are needed by most countries, so has the advantage also. And it resulted to having countries which thinks they and their products are already useless especially if what they produces is not a commodity that other countries would die for just to avail. We have seen how the attention has shifted from the west to the middle east as the world has become addicted to oil. Therefore, Comparative advantage is not just simply focusing on what a nation can produce and settle for it but also adopting to the changes of time and seeing what the world needs. (example of which is the farming practice in the Philippines) – when Filipinos discovered that the land was so fertile for rice production, the country focused on it thereby attaining food sustainability and the capacity to export the excess goods especially during the Spanish time when carabaos and plows were introduced to the farmers. The problem is, after 300 years, we have not yet gone out of the carabao part, and our food productivity simply cannot meet the demand of our own country anymore. This is an example where a supposed to be advantage of a country has disabled from attaining comparative advantage due to technology in relation to productivity and demand.

This theory on my personal point of view is about countries who try to produce goods even if they don’t have the capacity to produce effectively or as competitively as other countries especially if the country “trying” to produce aims to export the products it forcefully produced, because it will be expensive considering that we put labor and capital as the basis of pricing things. Buyers in the international economic scene will always prefer the cheaper one. If there is one thing I learned from David Ricardo that the rest of us should also learn, is the fact that having a protective economy such as the Philippines who try to produce goods it is not designed to produce and/or  failing to enhance our method of production,  will only make us poorer in the long run until we finally cease to survive.

Written by monkeybanana

March 21, 2009 at 11:55 PM

The timeless lighthouse

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(This is a guest blog post from a former student.)

Economics and the Philippines’  Century Old Lighthouses

By Ross Harper Alonso

Over 50 brick lighthouses were built in the Philippines by the Spaniards in the 1800s. This was the time when trade served as the fundamental income generating business for Spanish colonists living in Manila and the Manila Acapulco Galleon Trade being the most lucrative. The lighthouses were needed to light the Spanish trading ship’s way. The Manila Galleon sailed the Pacific for nearly 3 centuries, bringing to Spain then cargoes of luxury goods, economic benefits and cultural exchange but there are no maritime records that say if the Filipinos cashed in on all this by imposing tolls, receiving rent or leasing the land where the lighthouses were built till the Galleon Trade ended in 1821 when the Spanish Crown took direct control of the Philippines. It is possible that this was the reason behind one of the many revolts, since all revolts were triggered by the repressive policies of the Spanish Colonial Government against the native Filipinos. This is all water under the bridge now since they left all their lighthouses behind for us to use when we gained our independence from them in 1898 anyway. Question is, “what did the Philippines do with them all these years?”  

                                                 When a Government Agency Fails

This paper aims to explore the kind of future our Century Old Lighthouses could have had if the Philippines considered some of the policies of the British Lighthouse System.

The Philippine Coast Guard is the oldest and the only humanitarian armed service of the country with functions earlier related principally to the protection of the customs service in safeguarding revenue collections and patrolling the coastline. Since 1901 they were in charge of the Lighthouse Service and their keepers. A Philippine lighthouse is an indispensable public service provided by government that Paul A. Samuelson talked about. Perhaps 115 years ago, lighthouses in the Philippines would not have survived if they were not solely government run but this arrangement should’ve changed 50 years ago.

Unlike the Philippines , the British Lighthouse System had authorities which build and maintain lighthouses. Trinity House, the Commissioners of Northern Lighthouses and the Commissioners of Irish Lights. The expenses of these authorities are met out of the General Lighthouse Fund. The income of this Fund is derived from light dues, which are paid by ship-owners. The actual collection is made by the customs authorities at the ports. (Could have been our very own Coast Guard doing the collection here) The money obtained from the light dues is paid into the General Lighthouse Fund, which is under the control of the Department of Trade. The lighthouse authorities draw on the General Lighthouse Fund to meet their expenditures. The Fund is used to pay for the maintenance of colonial lighthouses and the support of retired lighthouse keepers, their widows and children.

An annual Lighthouse Conference was also held in London to discuss budgets and policies. Given the big role our lighthouses played in our history, one wonders why they were never included in the programs of National Historical Commission.

It is very unfortunate that not a single Philippine government official or economist took the time to study the history of the British Lighthouse system and pick out what we could have used to take care of our Century old lighthouses. This country not only lacks vision and the effort to study alternative institutional arrangements for operating our lighthouse services but also reverence for our past.

                                                        Johnny Come Late    

Lately the Philippine Coast Guard admitted they can no longer maintain our lighthouses. Most of the century old Spanish lighthouses are in ruins. Some partially restored. Three years ago the PCG launched the Adopt a Lighthouse Program, a partnership between the private sector and non-government organization to undertake restoration activities geared toward arresting the deterioration of lighthouses nationwide and preserve their historical significance. Like everything else in this country, the guidelines are vague. No one really knows who makes the final arrangements or the MOA. The PCG or the National Historical Institute?

Times have changed. Ships no longer need the lighthouses to help them navigate. Ships and most water vessels are equipped with high tech GPS now therefore lighthouses no longer serve their purpose but this doesn’t mean they’re totally useless. In fact a private organization can now make a fortune managing an old lighthouse. Bed and Breakfast? Small Inn? Renting it out to historians or honeymooners?

The Americans have been making good use of their old lighthouses. Tourists pay to join their heritage tours and bring home a souvenir. People pay Lighthouse foundations to live as lighthouse keepers for weeks and the money earned is used to maintain and restore their lighthouses. It’s really quite a simple operation. The Americans and other countries with historical sites figured out early that they’re cultural heritage is worth something.

Written by Orlando Roncesvalles

March 21, 2009 at 9:30 PM


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Ronald Coase received the Nobel Prize in 1991 “for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy.” Coase is an unusual economist for the twentieth century, and a highly unusual Nobel Prize winner. First, his writings are sparse. In a sixty-year career he wrote only about a dozen significant papers—and very few insignificant ones. Second, he uses little or no mathematics, disdaining what he calls “blackboard economics.” Yet his impact on economics has been profound. That impact stems almost entirely from two of his articles, one published when he was twenty-seven and the other published twenty-three years later.
Coase conceived of the first article, “The Nature of the Firm,” while he was an undergraduate on a trip to the United States from his native Britain. At the time he was a socialist, and he dropped in on perennial Socialist Party presidential candidate Norman Thomas. He also visited Ford and General Motors and came up with a puzzle: how could economists say that Lenin was wrong in thinking that the Russian economy could be run like one big factory, when some big firms in the United States seemed to be run very well? In answering his own question, Coase came up with a fundamental insight about why firms exist. Firms are like centrally planned economies, he wrote, but unlike the latter they are formed because of people’s voluntary choices. But why do people make these choices? The answer, wrote Coase, is “marketing costs.” (Economists now use the term “transaction costs.”) If markets were costless to use, firms would not exist. Instead, people would make arm’s-length transactions. But because markets are costly to use, the most efficient production process often takes place in a firm. His explanation of why firms exist is now the accepted one and has given rise to a whole literature on the issue. Coase’s article was cited 169 times in academic journals between 1966 and 1980.
“The Problem of Social Cost,” Coase’s other widely cited article (661 citations between 1966 and 1980), was even more path breaking; indeed, it gave rise to the field called law and economics Economists before Coase of virtually all political persuasions had accepted British economist Arthur Pigou’s idea that if, say, a cattle rancher’s cows destroy his neighboring farmer’s crops, the government should stop the rancher from letting his cattle roam free or should at least tax him for doing so. Otherwise, believed economists, the cattle would continue to destroy crops because the rancher would have no incentive to stop them.
But Coase challenged the accepted view. He pointed out that if the rancher had no legal liability for destroying the farmer’s crops, and if transaction costs were zero, the farmer could come to a mutually beneficial agreement with the rancher under which the farmer paid the rancher to cut back on his herd of cattle. This would happen, argued Coase, if the damage from additional cattle exceeded the rancher’s net returns on these cattle. If, for example, the rancher’s net return on a steer was two dollars, then the rancher would accept some amount over two dollars to give up the additional steer. If the steer was doing three dollars’ worth of harm to the crops, then the farmer would be willing to pay the rancher up to three dollars to get rid of the steer. A mutually beneficial bargain would be struck.
Coase considered what would happen if the courts made the rancher liable for the damage caused by his steers. Economists had thought that the number of steers raised by the rancher would be affected. But Coase showed that the only thing affected would be the wealth of the rancher and the farmer; the number of cattle and the amount of crop damage, he showed, would be the same. In the above example, the farmer would insist that the rancher pay at least three dollars for the right to have the extra steer roaming free. But because the extra steer was worth only two dollars to the rancher, he would be willing to pay only up to two dollars. Therefore, the steer would not be raised, the same outcome as when the rancher was not liable.
This insight was stunning. It meant that the case for government intervention was weaker than economists had thought. Yet Coase’s soul mates at the free-market-oriented University of Chicago wondered, according to George Stigler, “How so fine an economist could make such an obvious mistake.” So they invited Coase, who was then at the University of Virginia, to come to Chicago to discuss it. They had dinner at the home of Aaron Director, the economist who had founded the Journal of Law and Economics.

Written by florald

March 21, 2009 at 9:29 PM