All The Small Things That Make Me Thankful

           I recently got back from spending Christmas in England!  It was a blast and as I was flying back across the Atlantic, I was struck with inspiration for my post about emergent order.   Now I want to share the particular moment from the flight where the thought hit me.  I was just relaxing and watching The Big Bang Theory, which is a series that came highly recommended to me from my old college RA.   Then all the sudden, it hit me (I must have implicitly remembered this video) that I was sitting in a chair 30,000 feet in the air, moving along at 550 miles per hour, and just watching a TV show (while eating a Twix bar).  When I stopped being awestruck by that fact, I took a minute to unpack everything that went into crafting this wonderful moment. I do not hesitate to submit to you that the work of millions of people allowed me to have this experience.  Let me show you how.  For the flight, we have the captain and his co-pilot to thank for the flying itself.  We have the flight attendants to thank for making sure that everything else was running smoothly (and making sure I got a Twix).  We should probably also thank the actors who make Big Bang Theory so that I could be entertained on that long flight.  So that’s a couple dozen people who made a contribution to my flying-high-and-watching-TV moment.  It’s a far cry from millions.  But if we stop here, we’ll be missing a lot of others who made crucial contributions.  In television and in flying, the main players that you see are accompanied by support staff that you don’t see.  There are ground control workers, baggage workers, air traffic controllers, airline chefs, mechanics and engineers who make repairs, etc.  In television is the same thing: gaffers, cameramen, directors, prop managers, makeup artists, editors, producers, promoters, the people who made licensing agreements with the airline that allowed BBT to be shown on my flight, and others who in absence, the show would not go on.  In light of that, it makes us want to respect the ground crew or the prop man more.  Though less visible, their impact would be felt if they were gone. 

Perhaps you are saying, “Well, this is a lot, but surely not millions.”  But wait, there’s more!  Think of the plane itself.  A Boeing 777 is not just two wings attached to a fuselage.  It’s a pretty complex machine.  It had to be designed by engineers and built by other workers who specialize in making planes.  I have one friend who actually presses airplane turbine engines for a living.  That’s pretty impressive!  So there’s a lot more people who design and assemble the plane.  But there’s still more!  Airplane parts don’t grow on trees, they have to be made from raw materials that are made by other companies, who themselves employ even more workers.  Think of the cameras, computers, microphones, and all other equipment used in the production of a TV show.  They had to be designed and made by still more people.  Think of the fuel that powered the plane.  It got from the ground to the tank because of the labor of more people.  Think of my Twix bar, it was made somewhere else by some other people.  Do you believe me now when I say that millions of people made my soaring over the ocean possible? 

When you think of flying like this, you realize it’s a miracle that such a thing could exist.   After all, there was no central planner that dictated some people work for some company or another.  There was no aviation czar telling the president we need to have x number more planes this year and allocate these resources for it.  No, the economy does not have a central planner and yet we see incredible collaboration by the whole workforce, millions upon millions of individuals.  Everyone plays a part to support everyone else, producing this or that so that everyone else can focus on producing something else.  It is because of this collaboration that we make each others’ lives better.  I got to travel across an ocean in comfort because of our economy.  This is something that was impossible a thousand years ago and impractical for most until the rise of commercial aviation in the last century. 

This all comes from one moment that I lived in the modern world.  Apply this train of thought to anything from your cup of coffee, to your car, to a university, and you’ll see that our world that could be chaotic is actually incredibly orderly.  All the things great and small work together to allow us to enjoy the life we do.  That’s why I’m thankful.

Tune in next time to learn about the force that causes everyone to work together.

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Pennies!!

Here's an interesting video about pennies. I must admit they do have sentimental value, but probably not enough that they'd be worth keeping. That's just my two cents worth.

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Economies of Scale

Adam Smith wrote about and interesting topic in his Wealth of Nations, the idea of specialization and trade.  There was, as the time, a prevailing worldview that said it would be better for countries to be self-sufficient rather than being interdependent with each other.  The rationale behind that was that if two countries went to war with each other and one was dependent on the second for their export of some good then the second country would have power over the first.  So the idea of a trading relationship would become a liability in the event of a war.  So there was relatively little trade during that time.  Smith wrote that it is better if countries traded because different countries were better suited to the production of different things.  Florida is better suited to making oranges and exporting them to the rest of the world and importing its cars from Japan, its DVD players from China, and its cheese from France.  Of course, those different countries would be better off importing their oranges from Florida than trying to grow that crop themselves.  This achieves several things besides the fact that different countries are better suited to making different goods (and thus can produce those goods more efficiently than other places).  One of things is called “economies of scale” and it is a subset of efficiency.  “Economies of scale” is the idea that when a larger quantity of something is produced, it costs less to produce them. 

            Every once in a while, when I have free time, I do projects for fun.  I made an iPod case and it took a couple months.  It had a frame made from copper pipes and had leather sewn onto it.  The reason it took so long was because it was so complex, with a lot of specific processes. Unlike most projects, where I only make one, I made to this time: one for myself and one for my friend.  Since I was making two instead of one, it took less time on average to make each one.  Instead of having to go through the whole process twice, I only had to do it once and was able to just execute the steps on twice as many materials.  I would take the drill out and cut holes in two pipes rather than just one and saved time over making once completely and then doing it all over again.  Say it took 20 hours to make one by itself and 30 hours to make two.  (This sounds about right.)  On average, it only took 15 hours to make each case when I made two, which is a 25 percent increase in efficiency over just making one.  That is economies of scale working on a small scale and it is basically a long explanation of what is a really intuitive concept if you think about it.

            The gains from an economy of scale are best seen on a large scale.  Think about a clothing factory.  When a person makes his own clothing individually, it is very expensive.  Say it costs 1000 dollars to make that first shirt between the machine, electricity, fabric, and the cost of the time spent on it.  Then when the second shirt comes out it costs much less because the machine is already there, so it only costs as much as the electricity and fabric.  The third and fourth and so on are the same.  The average cost (taking the price of the sewing machine into account) goes down with each shirt that is produced.  It still take a long time for one man with one machine to make a shirt, but the cost does go down over the course of time.  Now think of a factory that can make thousands of shirts every day.  The factory itself is really expensive to start up and it costs a lot to hire all of the workers.  But after a while, it costs an average of very little for each shirt to be made.  So the factory can make a thousand shirts much faster than a thousand tailors and for substantially cheaper than hiring a thousand tailors to make them.  Now when it costs less, the savings are passed on to consumers who can buy shirts for just a few dollars depending on the kind.  Even more expensive shirts cost substantially less than they would if they had to be custom made.  With the savings, more of a person's money is freed up for him to buy other things that he wants.  

            Finally, think of how great it is that just about everything we use, from laptops to clothes and food to automobiles are mass produced with technology that makes it inexpensive and by people who are good at making those things.  Now think of how it would be if we each had to make everything ourselves or get it custom made.  We would probably go back to being hunter-gatherers.

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RIP OWS

Occupy Wall Street is gone...for the time being.  In the mean time, enjoy this gem from one of the protestors. 

Regularly scheduled programming from this blog will return over Thanksgiving break when I hopefully have enough time to write a post.

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Harmoniously Confused

This will probably be short and definitely take a more personal tone than is usual for this site, but I wanted to share it anyways. I just got back from a small group retreat to Maine this afternoon and while I was there, one of the girls in the group gave me a pack of gum with a quote from Alexander Pope on it saying that it reminded her of me. (I had mentioned something about emergent order in a conversation prior to that.) 

"Where order in variety we see, and where, though all things differ, all agree."

Now, here's the rest of the section for some context.

Here earth and water, seem to strive again;
Not Chaos like together crushed and bruised,
But as the world, harmoniously confused:
Where order in variety we see,
And where, though all things differ, all agree.

Since it comes from a poem, the interpretation is obviously subjective but I pulled from it the concept of order in what would otherwise be a disordered world.  The idea itself is called "Emergent Order" and was started by Adam Smith in his Wealth of Nations book but was developed over the course of an entire career by F.A. Hayek.  Perhaps my next post will be a longer explanation of how emergent order works, but for the time being, contemplate on the fact that there are billions of people all over the world who have as many different tastes, preferences, skills, levels of intelligence, kinds of intelligence, experiences, knowledge, memories, etc.  Note that each of the people personally only interact with an infinitesimally small percentage of the rest of the people.  Consider that everyone makes life choices both big and small based on their personal characteristics mentioned above as well as other factors. 

Finally: realize that humanity has progressed so much over the course of its history in such ways that require incredible feats of cooperation between millions and billions of people.  The wondrous way that the world is today was achieved without some ruler of humanity dictating individuals' actions for thousands of years.  And do my question is, "How is this possible? How was all the cooperation achieved?"

Tune in next time.

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Occupy Wall Street v. Tea Party

It's something to think about.  I'm planning on writing about the Occupy Wall Street movement at some point. 

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We Need More Jobs...Or More Like Him

            Anyone who has used the internet, read the news paper, listened to the radio, turned on the TV, or talked to anyone who has in the past 24 hours has doubtlessly heard that Steve Jobs passed away.  In a country where the super rich as a whole are demonized by society for their wealth, he enjoyed incredible popularity in his time.  While we all praise his numerous inventions and the steps he took to make the computer accessible to the common people (apparently he innovated the mouse and cursor in computers), I’d like to take a minute to appreciate his life from an economic standpoint.

            When we look at where he came from, Jobs started as a man with an idea.  Through the founding of Apple Computer, he became an entrepreneur in a class he shared only with Bill Gates.

            I will refrain from going into further detail about all the things he designed and the Apple Empire because everyone already knows what he’s done.  So instead of Jobs the inventor, I’d like to look at Jobs the entrepreneur and what people like him mean for the economy.

            But before going there, I’ll spend a bit on economic growth.  How does the economy “grow”?   That is a long discussion and there are many ways of measuring it.  A general way is to measure the output of an economy as a result of physical and human capital.  Physical capital would be buildings, factories, machines, roads, etc.  Human capital would be hands, feet, brains, brawn, etc.  Human capital does work and designs technology while physical capital facilitates the production of goods and services.  So by working together, humans and machines produce the things we use today. A nice way to grow an economy is to build more physical capital.  This allows for the employment of more people as well as higher volume of output.  But at some point a country reaches the point where it isn’t worth it to build more.  Take a farmer, for example, if he has no tractor, getting a tractor will be a huge boon to his farm.  If he gets a second tractor, he can maybe hire someone else to drive it and farming will go even faster.  But it doesn’t make as big of a difference as the first one did.  Say he keeps on buying more and more tractors.  At some point, it just isn’t worth it to buy more. This is the Law of Diminishing Returns and you can see it everywhere.  At some point, Intel only presses so many chips that it isn’t worth it to build more factories.  Ford only makes so many cars that investing in more plants isn’t worth it.  So what happens when a country has reached the limit of physical capital’s potential?  Is it not able to grow anymore?

            Luckily there is a second way that an economy can grow: through innovation.  People can invent things and come up with new technologies that allow us to produce more value with the same amount of physical capital.  Consider the evolution of the written word over the course of human history.  Writing was first done on stone tablets.  People would spend hours and hours engraving words into stone and only the very skilled could do it.  But then at some point, papyrus and ink were invented.  All of the sudden, writing became much faster so people were able to write much more in the same amount of time and more people could be trained to do it.  Fast forward again to Gutenberg: the inventor of movable type printing.  He was able to produce the printed word both quickly and at a large quantity relatively quickly compared to writing on papyrus.  Consider how typewriters changed the game for writing again!  All of the sudden, a skilled person could write dozens of words every minute.  The most skilled, like my grandmother when she was a secretary, could type 95 words per minute on a typewriter.  Then those evolved into computers such as the one I’m writing on now which allow just about anyone to write even more!

            In the long-run, economic growth comes from new ideas, from innovation that allows us to produce more with the same or less amount of physical resources as before.  We see this happening in writing and in just about every industry from lighting to textiles and automobiles to telephones.   This is just the kind of growth that came about through the efforts of Steve Jobs. 

            Because we live in a free market, Jobs had the ability to design something, sell it for profit, and use the money he earned to fund future development/innovation as well as personal gain.  Essentially, the Apple 1 that Jobs and Wozniak (his underappreciated co-founder) built in 1976 allowed eventually for the creation and sale of over 250 million iOS devices (iPod Touches, iPhones, and iPads), plus hundreds millions more of computers, peripherals, other iPods, and software.  Furthermore, Apple employs thousands of engineers, designers, lawyers, public relations managers, sales representatives, and others.  The manufacture of Apple’s goods provides employment to thousands more in the United States and abroad.  Plus we can’t even begin to appreciate the body of work that has been accomplished through the use of Apple products.  All this growth came from a man who had some ideas and introduced them to the world.

            So when our economy is stagnating, the way to make it grow in the long-run isn’t by the government hiring people to build bridges and roads and schools but rather to encourage innovation and invention.  That is why I said in the beginning: we need more Jobs.  

 from the Apple frontpage

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Capitalism: A Real Love Story

This is a piece that I wrote a long time ago and posted on Facebook.  If you saw it there, consider this a second edition: slightly different, expanded, edited for clarity, etc. 

            I have a friend/acquaintance who, for some reason, is not down with capitalism.  She takes as many opportunities as she can to bash it or in some way make it seem bad.  She even once called a particular inefficiency in the student government “pure capitalism”.  As an economist, it makes me sad to hear such misdirected remarks.  If I were to respond to her, and to people in general who don’t like capitalism (like Michael Moore, the man who made the documentary “Capitalism: A Love Story”), I might say something like this.

            Why bite the hand that feeds you?  Don’t you know that your standard of living is a gift of the free market?  The very core of capitalism is free people who do what they want that end up making everyone else better off.  Answer me this: why did Steve Jobs start Apple?  Why did he invent the iPod?  He wanted to make money.  That greedy SOB had the audacity to want to gain wealth for himself (something that is highly frowned upon by the more noble communist and socialist economic systems).  Question: was he enriched immensely as a result of all of his inventing?  Absolutely.  Who was even more enriched?  Everyone else.  Steve Jobs and Apple, though not the only mp3 manufacturer in the world, almost singlehandedly gave people a way to listen to music on the go.  Only a few decades ago, people had to be near a large record player or in a concert to hear music, but now everyone has immediate access to all their music regardless of where they are because of innovators like Jobs and others like him.  I would also like to point out that this innovation leads to ever increasing standards-of-living such as the world has never seen before.  Realize that John Rockefeller, possibly the richest man ever, didn’t even have the option to carry his music around like any common person can do today.  That’s a phenomenon of capitalism.  Matt Ridley points out in his excellent book, The Rational Optimist, that luxuries like refrigeration, electric lighting, televisions, and others that even the poorest people in America have access to are luxuries that Cornelius Vanderbilt and the other richest men in history didn't have.

            Let’s move on to another way that the free market makes us better off.  Consider fruit for an example.  Where does it come from?  For me it comes from the cafeteria but originally it comes from orchards, vineyards, etc from all over the world.  It came to within walking distance of where I live by a lot of people who coordinated with each other to pick it from the trees, load it into trucks and boats, sell it to the grocery stores, and be bought by Gordon College before finally being brought to the cafeteria ready to be purchased by me.  By the way, and this is a really big deal, notice that I have a choice of several fruits year round.  There’s another trick called refrigeration.  When in history have people ever had continuous access to non-seasonal fruit besides this modern age?  The true miracle here is that all of this was done without government coercion.  People simply did it because they wanted to make money.  So I end with the “pure capitalism” that my friend missed; this is a quote from Adam Smith’s The Invisible Hand, “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest.”  This is a heavy subject and perhaps the topic of another essay, but for now I highly recommend considering the spontaneous coordination of millions of individuals in "I, Pencil."  This is quite possibly the biggest miracle of the modern world. 

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Tragedy of the Commons Comic

Today's XKCD, presented for your enjoyment without commentary. Enjoy!

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Supply & Demand

Today's topic is supply and demand. Have an awesome Sunday!

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Incentives!

Again, ignore my face and learn about incentives.

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What I found while looking for econ posters

So I was looking for wall decorations tonight and found one called eCOWnomics, which I'll probably get at some point.  But these other ones here were pretty much the best I could find.  I'm really impressed that the Richmond Fed figured out how to engage young students by teaching basic economic principles based on their (the students') drawings.

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Video Blog 1 What is Economics?

Forget the face that I'm making in this still and learn what economics is!

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Intro

Well, I'm making a blog! It'll probably be mostly about economics and current affairs because I love those subjects so much. Having said that, I'm also aware that not everyone thinks that econ is as fascinating as I do.  In fact, someone once said, "talking about economics is like peeing on yourself: you're the only one who thinks its hot". Now perhaps the reason I'm writing this as my first post and including that picture is to preemptively keep myself humble.  Hopefully I don't get carried away thinking that I'm a great economist and everyone is dying to hear what I have to say next.  It might be better, then, to say that this blog is written for myself, to keep track of my thoughts and writings.  I might even post content from other people that I want to remember and/or thought was worth of sharing. If someone else happens to see my page, then he is free to enjoy it, agree, disagree, comment, be educated, or take whatever he wishes to take from it.  If that person is you, congratulations! I hope to hear from you soon. 

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