The first reading assignment. I, Pencil by Leonard E. Reed is a thrilling tale of how a pencil is made.
Actually I found this story very interesting as it describes how our economic system is not run by just one person and is based on self-sufficiency. Instead I, Pencil describes how a pencil is created by several people in a society where we all work together. There is no master mind.
I always thought that pencil companies would know how to make a pencil, but upon reading Reed's paper, I realized that the company only knows how to get the materials to the people who can make the pencil. The companies get the graphite from Asian mines and the wood from western USA. The materials come together at factories where different people are dipping the wood in lacquers and making the rubber erasers. I never really realized the complexity of our economy.
That was the intuitive part of Reed's paper. The fact that he used a pencil, not a car or a complex item, to get his point across. He showed that the pencil is created not by a master mind, but by the invisible hand. I was amazed out Reed's ability to explain this idea that guides our economic system. How the coal miners and lumberjacks exchange their goods and abilities for money so the next part of the pencil making process can continue. It just happens and it seems as if it happens with such ease and very little motivation.
However, questions remain about Reed's story. Why did he bring up the mail department and the governments control of it? It seems to contradict the pencil idea for a little. Also, it seems as by writing this, Reed has done sufficient research and it seems that if someone wanted to they could create a pencil they could. This story was written over 50 years ago so can someone make pencils today and what is the economic effect of that? And finally, why has no one tried to monopolize the pencil industry? Despite legal restrictions of monopolies, it seems that if a company really wanted to, they could monopolize the entire pencil industry and each process involved, in a very Rockefeller form.
The idea of I, Pencil may have purely been to introduce the ideas of Adam Smith's invisible hand in a way that makes sense; he used a simple item. Personally, I feel like I understand the whole community process of our economy because Reed used a pencil and not a more complex item, and I am starting to believe that our economy is truly run by an invisible hand. The whole idea that there was an exchange of coal and lumber and rubber to make the pencils seemed so smooth and flawless that an invisible hand must have been doing it. This whole community idea is very interesting. The only other point that I, Pencil may have had was to challenge it's readers to make a pencil. Challenge accepted!
Saturday, September 10, 2011
Wipeout. Worth it?
On ABC, there is a show called Wipeout, widely known for giant red balls. But on this show contestants maim and nearly kill themselves to cross a finish line paved with $50,000.
The incentive of $50,000 seems pretty good. We all would like some extra money and it is scarce. So I quickly go through my expected benefits and costs. The benefits are a chance at $50,000, a TV appearance, and an adrenaline rush. The costs are that I will get hurt and that I might die. I personally think that it would be fun to go on this show and that I would probably win. However, sitting on my couch at home, I can always hear my dad say "why would anyone ever do this?"
To be honest Dad, I don't know. This arcticle: ( http://articles.cnn.com/2009-11-12/entertainment/tom.sparks.death.wipeout_1_wipeout-pre-existing-condition-endemol?_s=PM:SHOWBIZ ) describes a contestants death in 2009. This makes it seem like the costs of dying and definitely a trip to the hospital (that might actually cost more than $50,000) is not worth the 5 minutes of fame.
Why does this show still exist and how does it still have competitors? How would an economist think about this?
Do the TV producers actually gain that much revenue that the expected benefit of money and popularity outweigh the cost of people dying? Apparently.
The incentive of $50,000 seems pretty good. We all would like some extra money and it is scarce. So I quickly go through my expected benefits and costs. The benefits are a chance at $50,000, a TV appearance, and an adrenaline rush. The costs are that I will get hurt and that I might die. I personally think that it would be fun to go on this show and that I would probably win. However, sitting on my couch at home, I can always hear my dad say "why would anyone ever do this?"
To be honest Dad, I don't know. This arcticle: ( http://articles.cnn.com/2009-11-12/entertainment/tom.sparks.death.wipeout_1_wipeout-pre-existing-condition-endemol?_s=PM:SHOWBIZ ) describes a contestants death in 2009. This makes it seem like the costs of dying and definitely a trip to the hospital (that might actually cost more than $50,000) is not worth the 5 minutes of fame.
Why does this show still exist and how does it still have competitors? How would an economist think about this?
Do the TV producers actually gain that much revenue that the expected benefit of money and popularity outweigh the cost of people dying? Apparently.
Class 4 - If My Shirt Doesn't Wrinkle, The People at Wegmans Are Screwed
Our forth class taught us the definition of economics. Economics is the study of emergence of order and wealth creation and the consequences of the choices made as part of the extended over of human cooperation.
Basically the definition means that with every decision, there is a trickle effect that affects every business in the world. For example: a wrinkle free shirt will give the dry cleaners less money. They will then have less money to spend on groceries. The people at Wegmans will then have less money to spend on a haircut. This vicious cycle continues until someone can't afford the wrinkle free shirt or until someone goes out of business.
For the rest of class we discussed the differences of Macro and Micro economics. Macro is the individual decisions affecting society (dis-equilibrium) while Micro is just the individual decisions and price theory. The president of America has little power over the economy. The economy is run by 311 million people making decisions everyday.
Ronald McDonald doesn't make people fat. The cheap food causes people to eat causing people to become fat. In this same way Obama doesn't make people poor or rich. People make their own decisions and when 311 million people do this, it is too crazy to control.
We then finished class by talking about how intentions don't lead to the expected results: how a law to save birds in North Carolina has actually killed more birds because people just up and kill the annoying woodpecker because they can't legally touch it. Sometimes intentions do lead to the expected results, but I have found that more often than not they don't. The road to Hell is paved with good intentions.
Basically the definition means that with every decision, there is a trickle effect that affects every business in the world. For example: a wrinkle free shirt will give the dry cleaners less money. They will then have less money to spend on groceries. The people at Wegmans will then have less money to spend on a haircut. This vicious cycle continues until someone can't afford the wrinkle free shirt or until someone goes out of business.
For the rest of class we discussed the differences of Macro and Micro economics. Macro is the individual decisions affecting society (dis-equilibrium) while Micro is just the individual decisions and price theory. The president of America has little power over the economy. The economy is run by 311 million people making decisions everyday.
Ronald McDonald doesn't make people fat. The cheap food causes people to eat causing people to become fat. In this same way Obama doesn't make people poor or rich. People make their own decisions and when 311 million people do this, it is too crazy to control.
We then finished class by talking about how intentions don't lead to the expected results: how a law to save birds in North Carolina has actually killed more birds because people just up and kill the annoying woodpecker because they can't legally touch it. Sometimes intentions do lead to the expected results, but I have found that more often than not they don't. The road to Hell is paved with good intentions.
Class 3 - There's No Scarcity in Heaven (there's also no economists)
In our third class, Rizzo defined economics in 4 words: man act with purpose. This means exactly what it says. But the reason behind this is that the world is characterized by scarcity.
Scarcity is the condition where there is an unlimited want for limited goods and we must choose. There's not enough rare coins for everyone in the world to have. There's also not enough Vince Lombardi trophies for the Bills, Jets, or Eagles. But everyone wants one. We live in a world full of scarcity.
But in heaven there is no scarcity. If I want a bear riding a unicycle as a pet I can snap my fingers and it appears. The unlimited want is matched by unlimited goods in heaven.
But how do us mortals deal with scarcity? We economize. We use rationality and compare expected benefits with the expected costs. However, the values and costs are individualized. Rizzo used sky diving as an example. I personally would love to pay for sky diving. I have the expected benefit of being able to sky dive, and the expected cost of about $200. Rizzo on the other hand would need to be paid to sky dive. He has the expected benefit of getting money. And the expected cost of dying. Each person is different when it comes to dealing with scarcity.
Economics deals with so many factors, not only financial costs and benefits, but also popularity and ethics.
Rizzo then talked about incentives again in describing England sending prisoners to Australia. The captains were paid before the prisoners arrived so the prisoners were not treated well. However, when they switched the payment to being based on how many prisoners lived, then the survival rates improved. The sailors had to try and keep the prisoners alive so they would get paid. The sailors didn't try and keep the prisoners alive because they didn't care and it would cost them money. Whether or not this posses an immoral situation on the sailors may be a problem, but I'm more scared for the kangaroos who have to deal with prisoners trying to steal their Joeys.
Scarcity is the condition where there is an unlimited want for limited goods and we must choose. There's not enough rare coins for everyone in the world to have. There's also not enough Vince Lombardi trophies for the Bills, Jets, or Eagles. But everyone wants one. We live in a world full of scarcity.
But in heaven there is no scarcity. If I want a bear riding a unicycle as a pet I can snap my fingers and it appears. The unlimited want is matched by unlimited goods in heaven.
But how do us mortals deal with scarcity? We economize. We use rationality and compare expected benefits with the expected costs. However, the values and costs are individualized. Rizzo used sky diving as an example. I personally would love to pay for sky diving. I have the expected benefit of being able to sky dive, and the expected cost of about $200. Rizzo on the other hand would need to be paid to sky dive. He has the expected benefit of getting money. And the expected cost of dying. Each person is different when it comes to dealing with scarcity.
Economics deals with so many factors, not only financial costs and benefits, but also popularity and ethics.
Rizzo then talked about incentives again in describing England sending prisoners to Australia. The captains were paid before the prisoners arrived so the prisoners were not treated well. However, when they switched the payment to being based on how many prisoners lived, then the survival rates improved. The sailors had to try and keep the prisoners alive so they would get paid. The sailors didn't try and keep the prisoners alive because they didn't care and it would cost them money. Whether or not this posses an immoral situation on the sailors may be a problem, but I'm more scared for the kangaroos who have to deal with prisoners trying to steal their Joeys.
Class 2- Myans Can't Economize
In our second class (yes I was sitting in the front row and no I didn't catch any money) Rizzo put a number up on the board: 531 billion. After a few minutes of guessing, we determined that this was how many gallons of available oil existed. Then a new number appeared, 16.5 billion, the amount of oil we use per year. This meant that in 32.2 years we will be out of oil. I didn't know how I was going to tell my parents that in 30 years they wouldn't be able to use their old people motor scooters that we are all secretly jealous of.
But Rizzo dismissed my fears and exclaimed that we will NEVER run out of oil. This is because people economize. These stats for oil were actually from 1970, meaning we are going to run out of oil in 2012. This is the data the Myans used to foretell the end of the world. However, Myans can't economize. Today we actually have 3 times as much available oil and use twice as much oil every year. HOW?
To explain this, Rizzo used the Pistachio example. There's a room full of pistachios and we can all eat them and do whatever we want to them, but we have to leave the shells. Eventually it is hard to find the pistachios and almost not worth getting the ones on the bottom. But if a Pistachio company is planning on giving you $100 for the next pistachio you find, then the nut is worth getting. Suddenly people are racing around finding nuts, going to other countries for nuts, and doing anything they can to find nuts to sell for such a high price. But if pistachios are too expensive, people will stop eating them and will switch over to peanuts. Everyone is reacting. This whole example models our oil industries.
The rising oil prices cause drilling companies to try harder to find oil. However, the rising oil prices also cause everyone else to react, to economize. People start to invent ways to find oil. People start to find alternative fuels. People won't drive or heat their homes as much. We all react to rising oil prices. We all economize.
But Rizzo dismissed my fears and exclaimed that we will NEVER run out of oil. This is because people economize. These stats for oil were actually from 1970, meaning we are going to run out of oil in 2012. This is the data the Myans used to foretell the end of the world. However, Myans can't economize. Today we actually have 3 times as much available oil and use twice as much oil every year. HOW?
To explain this, Rizzo used the Pistachio example. There's a room full of pistachios and we can all eat them and do whatever we want to them, but we have to leave the shells. Eventually it is hard to find the pistachios and almost not worth getting the ones on the bottom. But if a Pistachio company is planning on giving you $100 for the next pistachio you find, then the nut is worth getting. Suddenly people are racing around finding nuts, going to other countries for nuts, and doing anything they can to find nuts to sell for such a high price. But if pistachios are too expensive, people will stop eating them and will switch over to peanuts. Everyone is reacting. This whole example models our oil industries.
The rising oil prices cause drilling companies to try harder to find oil. However, the rising oil prices also cause everyone else to react, to economize. People start to invent ways to find oil. People start to find alternative fuels. People won't drive or heat their homes as much. We all react to rising oil prices. We all economize.
Class 1 - I Should Have Skipped Breakfast
What I've learned in college: I should have skipped breakfast.
While the draw of an unlimited meal plan enticed me into getting an early meal on my first day of college classes, I wish that I had skipped breakfast. However, I decided my morning coffee and Lucky Charms were more important than a front row seat for Professor Rizzo.
I walked into class, sat somewhere in the middle of 100+ students, and was suddenly being pelted with coins. While I did catch a measly dime, I soon realized I should have exchanged my breakfast for a front row seat as the students in the front row were able to catch (or rather steal) 5 and 10 dollar bills from Rizzo.
This was Rizzo's lesson on incentives. Basically, people respond to incentives. The girl in the front row who took a ten out of Rizzo's hand responded to incentives. The kid who dove down 3 stairs to catch a quarter responded to incentives. And even I responded to incentives. Not only did I immediately wish that I had skipped my breakfast so I could have gotten money from Rizzo, but I also sat in the front row for the the next 2 weeks, praying that money would fly down on me.
But something in this game of flying money made me think. Why didn't the kid in the back corner run up to get money? Why didn't anyone make any attempt to try and catch the pennies? I realized it was because the incentives weren't great enough. Had Rizzo been giving out hundred dollar bills, I feel like everyone would have mobbed him. A higher valued incentive would have outweighed the awkwardness of the whole class staring at "that weird kid who tackled Rizzo for a fifty." I began to think in other ways too: if this game happened every day or if people knew about the game before class, would people be sleeping out in tents the night before and killing each other for front seats? Ok, Rizzo's class is starting to sound like a Bruce Springsteen concert.
After this game, Rizzo then taught us life lessons. Most of these lessons ended with a: "Is this true? It's unclear." However, I did learn that I should not spend time looking for a wife. If I end up lonely, at least I can always thank Rizzo for it.
Finally our class ended with an open question. Do you respect anyone who holds a non-religious belief opposite yours? I soon realized my strongest non-religious beliefs are about sports. So this question actually asked: "Do I respect any Yankee fans?" The answer is no.
While the draw of an unlimited meal plan enticed me into getting an early meal on my first day of college classes, I wish that I had skipped breakfast. However, I decided my morning coffee and Lucky Charms were more important than a front row seat for Professor Rizzo.
I walked into class, sat somewhere in the middle of 100+ students, and was suddenly being pelted with coins. While I did catch a measly dime, I soon realized I should have exchanged my breakfast for a front row seat as the students in the front row were able to catch (or rather steal) 5 and 10 dollar bills from Rizzo.
This was Rizzo's lesson on incentives. Basically, people respond to incentives. The girl in the front row who took a ten out of Rizzo's hand responded to incentives. The kid who dove down 3 stairs to catch a quarter responded to incentives. And even I responded to incentives. Not only did I immediately wish that I had skipped my breakfast so I could have gotten money from Rizzo, but I also sat in the front row for the the next 2 weeks, praying that money would fly down on me.
But something in this game of flying money made me think. Why didn't the kid in the back corner run up to get money? Why didn't anyone make any attempt to try and catch the pennies? I realized it was because the incentives weren't great enough. Had Rizzo been giving out hundred dollar bills, I feel like everyone would have mobbed him. A higher valued incentive would have outweighed the awkwardness of the whole class staring at "that weird kid who tackled Rizzo for a fifty." I began to think in other ways too: if this game happened every day or if people knew about the game before class, would people be sleeping out in tents the night before and killing each other for front seats? Ok, Rizzo's class is starting to sound like a Bruce Springsteen concert.
After this game, Rizzo then taught us life lessons. Most of these lessons ended with a: "Is this true? It's unclear." However, I did learn that I should not spend time looking for a wife. If I end up lonely, at least I can always thank Rizzo for it.
Finally our class ended with an open question. Do you respect anyone who holds a non-religious belief opposite yours? I soon realized my strongest non-religious beliefs are about sports. So this question actually asked: "Do I respect any Yankee fans?" The answer is no.
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