A Thinker's Thoughts
Sunday, August 28, 2011
What My Mentors Taught Me
Tuesday, August 23, 2011
What is Utility?
Friday, August 12, 2011
The Ten Principles of Economics: Part II, Principles 5 - 7
As conceived by Dr. Gregory Mankiw
For Jessi and Tim
You specialize in repair, I in landscaping. Florida makes oranges, California makes computers. China makes toys, the U.S. makes medicine. More value is created when we specialize and trade.
Every step of this process is crucial to the formation of the end product. But almost no one said "I am doing my job because I want to build a pencil." The market functioned as a sort of "invisible hand" that guided laborers, factory owners, shippers, and investors into the right places at the right time to produce what people needed. It works because people realize they can make money whenever there is a market for transportation, wood, machines, trucks, or whatever. Supply chases after demand. Then, when there are "just enough" in one industry (like the pencil industry) the profit dries up because demanders aren't desperate for suppliers anymore (so the suppliers cut prices until they are earning just enough to stay afloat).
Thursday, August 11, 2011
The Ten Principles of Economics: Part I, Principles 1 - 4
The Ten Principles of Economics: Part I, Principles 1 - 4
As conceived by Dr. Gregory Mankiw
For Jessi and Tim
1. People face tradeoffs
Many of the emergent orders we see in economics arise because people are trying to play this delicate balancing game. People face tradeoffs between work and leisure, saving money and spending it, eating well and living long, reaping reward and minimizing risk. Very few things are free. When people, firms, or policy-makers do things... there is always something given up.
2. Cost is what you give up
Costs are not money. They are lost opportunities. For instance, what is the biggest cost of college? Certainly not dorms or food... you would have had to buy housing and food anyway. The biggest cost of college is almost always the wages you sacrifice by going to school, and not working. Similarly, firms incur costs when they operate, costs that have nothing to do with labor, materials, or overhead. They are opportunity costs, the opportunities sacrificed by the firm when it devotes its resources to plan A and not plan B. In this way, accountants view profit differently than economists do.
3. Think on the margin
Imagine you run a store, but the economy isn't so hot, so people just aren't shopping much anyway. You're losing money. But quite often, it will be rational for you to stay open, despite generating a loss, even before the economy picks back up. This is because there is a difference between the margin and the totality. If you thought about the totality, you would say, "in total, my costs exceed my revenues... I'm losing money... I should leave the market." But the margin is the edge. Marginal means "just one more."
So, you look at the "marginal" profit of staying open just one more day. Sure, you're losing money, but that's because you pay rent, purchase inventory, and pay for insurance. Those costs are the same whether you keep your doors open or not. On the margin, the costs of you keeping the doors open just one more day (some labor hours and the electricity bill) are less than the revenues from staying open that day. In total (for right now) you are losing money. On the margin, you are making money (therefore making the total loss a bit less).
4. People Respond to Incentives
When a behavior is rewarded (becomes less costly or more profitable), it is encouraged. When punished, it is discouraged. The idea is simple, but profound, and we often neglect its implications. When you tax income, you punish labor. When you provide welfare, you encourage not working. When firms receive patents to products they invent, they invent more products. When professors stand to risk losing their jobs for expressing radical ideas, they are discouraged from expressing them. When stand no risk of losing their jobs for being lazy (if they have tenure), they are encouraged to be lazy. When you force people to wear seatbelts, lowering the risk of death in case they are in a wreck, you encourage them to drive less carefully.
Lots of very, very stupid economic policies come from politicians and laymen not thinking very clearly about the rewards and punishments they met out with their policies, and what consequences those will have.
These principles deal with how people think and behave by themselves. The others will deal with phenomena that occur when they interact with one another.
Wednesday, August 10, 2011
Universal Entrepreneurship
Jean Baptiste Say coined the term, giving us our classical conception of the entrepreneur as an independent businessman, an "intermediatory between capital and labour." According to Say, the entrepreneur managed his workers and his equipment in order to provide goods and services to the market. So far, so good, right?
But if that's all an entrepreneur is, why does Stanford regularly invite economists, rappers, authors, presidential advisors, and presidents of charities to speak at its "Entrepreneurial Thought Leaders" seminars? If Say's definition was exclusive, how come drug dealers, lawyers, and stock brokers don't burst into mind when we think 'entrepreneur'? Something is missing.
Maybe we need to reenvision what it means to be an entrepreneur.
The overriding theme of entrepreneurial culture today is innovation. The entrepreneur who follows in someone else’s footsteps, with someone else's business plan, selling someone else's idea, isn't. That's great; innovation drives the economy and the world forward. The creative entrepreneur stretches his mind into the future, dragging it into the present's grasp.
Here's another commonality among entrepreneurs: they start small. Large firms spin off huge subsidiary corporations with hundreds of millions of dollars of initial capital. Entrepreneurs focus a relatively small pool of resources onto a single goal with brilliant intensity. What they create is a scalable start-up, that is, one that can be transformed into a mammoth institution down the road. The great capitalists of America, guys like Jobs, Gates, and Zuckerburg , started as entrepreneurs. They became CEOs, presidents, and chairmen. But CEOs, presidents, and chairman don't operate small, scalable start-ups--they aren't entrepreneurs anymore.
The marriage between innovation and starting small is by no means accidental. If an idea is truly innovative, it's probably risky. It's untested. It would be stupid to dedicate relatively large amounts of resources to what may crash and burn. So the start-up is an experiment; if it burns, you cut your losses and try something else. If it thrives, you attract more resources and grow it into something great--an Apple, a Pixar, or a Facebook.
Now that we've narrowed the entrepreneur to a creative innovator, who starts small, and scales up, we find one thing missing: any mention of profit. The entrepreneur is not restricted to the business world. Why should he be? Why should a creative genius be restricted to pleasing stockholders when the world needs innovation in so many more domains? Suddenly, entrepreneurialism as a way of life opens wide: it grows to encompass every meaningful human endeavor.
Intellectual entrepreneurs like Duncan Black began entire schools of thought ( like Black's Public Choice Theory), outside any preexisting academic disciplines. Others, like Alfred Nobel or Richard Wurman, created new institutions for encouraging, advancing, and disseminating new ideas (the Nobel Prize and the TED conference, respectively).
Evangelical entrepreneurs create innovative ways to spread the Gospel and cultivate spiritual growth. My old church was a start-up; they met in a movie theater, answered texted-in questions during service, and published a weekly webcast to address anything they didn't have time to answer on Sunday. Even outside the church doors, it's hard not to find entrepreneurs at every turn whenever people do God's will. The YMCA & YWCA, the boyscouts, and the small-group phenomenon all meet start-up criteria.
Social entrepreneurs are motivated more by altruism than profit. Some finance poor entrepreneurs, and create trade channels for craftsmen. Others, like George Washington Carver, were inventors--Carver designed hundreds of technologies using agricultural products that wouldn't deplete soil as severely as cotton. He only ever applied for three patents.
Different people. Different passions. Different goals. But innovators, all. Entrepreneurs, all.
Having reenvisioned the entrepreneur, maybe we should seriously consider reenvisioning life itself. We could call the new framework "Universal Entrepreneurship." The idea? Simple--make everything a start-up, and treat life like the playing field where one after another, start-ups are built and sent onto their eventual paths. Why think this way? Because there's no good reason why life has to be lived the way we normally live it. Let's stop pretending that everybody needs a linear, one-track career, or that life has to occur in 'stages,' (college, careers one, two, and three, followed by retirement) like the life cycle of an insect.
Kids will ask what they should "be" when they group up. Now there's a new answer we can give them--a universal entrepreneur. "Find the things you love, the things you're meant to do, and do them all. Build charities, start companies, invent technologies, and create platforms for people to share ideas." When they ask how they'll be able to do so much, we can tell them to treat their start-ups like legos: discrete units, separately formed, stacked one on top of another to form the composite structure of life. The art of entrepreneurship is to form the lego; the art of life is too stack them together beautifully.
Maybe it's not for everyone. Of course specialization is a great thing. But maybe there's some kid out there, equally passionate about physics and anthropology as he is about ministry and music, who was made for this sort of life. Maybe telling him or her to bottle up half a dozen genuine passions and interest for the sake of a single career is a really terrible idea. Maybe we've already confined dozens of those individuals into our shoddy expectations, without knowing it.
Now, if you were a kid who wanted to do all things awesome in the world, wouldn't that be the coolest thing ever? Wouldn't that motivate you to learn and grow as a person? The more I think about it, the more I suspect that our poorly thought out, half-baked cultural and economic norms have a lot to do with why some kids don't grow up. Maybe if we gave them better reasons, they would actually grow up with gusto.
The Economy as an Emergent Order
You both seem to enjoy studying economics this year. And I am sure you both know how happy this makes me. I'm not just excited because I think econ is cool and I will have more of an opportunity to talk with you guys about it. I'm excited—no, exhilarated—because you're discovering a beautiful field of study, as sublime as it is under-appreciated. But some parts of economics are boring, ugly, and crude. I want to shed some light on why some of it seems so crude, and the rest so elegant.
As it relates to economics, one of the most important emergent orders is the market, the arena of buying and selling that determines how much stuff is made and what price it sells at. When millions of people and companies (I'll call them 'firms' from now on) compete for dollars and resources, these lines called supply and demand materialize. They aren't mere abstractions; these entities have real effects on society. The large-scale properties of this emergent order cannot be ascribed to any of its constituent parts (although it is their behaviors which give rise to it).
Wednesday, January 19, 2011
Don't Love America (There's a Reason)
Life is good, as is love. The sun, beautiful, warm and life-sustaining, is good. The light that comes out of the lamp beside me is good. America, however, is not good.
Goodness is a property that comes from something intrinsically noble and lovely. Life, love, happiness, and justice do not appeal to any higher authority to validate their goodness. They are in and of themselves good.
But a nation? Why on earth would we ascribe it such a label? It's easy to see why, actually. This nation has done some pretty impressive things. A founding document centered on the ideal of inalienable rights is pretty impressive. And who could forget that awesomely epic revolution we fought against a tyrannical Britain?
But it's still absolutely crucial that we don't misunderstand that history to believe that America is somehow good. Here's why.
Many of the things that America has done are good, and we ought rightly to be proud of those virtuous fragments of our heritage. We can rightly take pride in what our country has done right, but the moment we assume that rightness to rub off on the nation itself (which is nothing more than a landmass plus a government) we lose sight of the dark times in our past. We put on shades that bias our view of the past, present, and future.
In other words, it's not only absurdly false, but dangerous. When you view a country in and of itself as inherently noble, you look favorably upon its past transgressions, no matter how grievous. After our treatment of Native Americans in the nineteenth century, both sides' war crimes during the civil war, our terrible discrimination against the Chinese in the industrial revolution, and our mistreatment of blacks throughout the twentieth century, America has serious blood on its hands. I don't hate America for that, but I recognize that those evils happened. When you put on these rose-tinted glasses and look at the past with an "America is beautiful" frame of mind, you will try to scrub those transgressions away. You will rationalize them, try to ignore them, be discomforted by them, repress them, and irrationally deride anyone who acknowledges America's past sins. Your reactionary vitriol will be unappeasable—you'll call the truth-teller an unpatriotic, America-hating liberal before he even has time to blink.
But your view of the past won't matter nearly as much as your view of the present, which is shaped and colored by your view of the past. You won't think twice about the possibility that we may be wrong in any given war or conflict; whether Iraq, Afghanistan, or the war on drugs, America automatically gets the moral free pass. You'll implicitly care more about the lives of U.S. citizens than you will about the lives of foreigners, as if there was some difference in the inherent value of each human life. You'll ignore the hardships that our trade and immigration policies inflict upon the rest of the world, only focusing on how to line American wallets and alleviate American cultural discomforts. You'll close your ears to any possibility of a wrong deed on America's part.
You will, inch by inch, become blind to injustice.
This nationalistically induced blindness lies at the root of much of the world's present and past hardship. The Germans allowed the Nazi atrocity to march forward in one of the most terrible onslaughts of evil in human history, precisely because they believed in their country. The Confederate States of America was largely motivated not only by racism and greed, but the southern nationalistic view that they had to keep pure their southern way of living. Why? Because the "south" was inherently good.
To love one's country is only the collective, political extension of very human sins—pride and self-centeredness. Why should a corrupt, sinful human not extend his pride and egoism to his country? And it is also pervasive into the will and emotions. We feel uncomfortable, at first, detaching ourselves from something we so dearly cherish. It hurts to lay down our pride of the nation, just as much as of the self. But it must be done.
History tells tales of tragedy when this lesson is ignored, and our current political, diplomatic, and economic policies are largely contingent upon the degree to which we can abandon nationalism, and view all humans of all nations as equal. If we cannot get this mindset straightened out, I fear that we have a future awaiting us full of more needless suffering… only because, as a nation, we wanted to feel absolutely great.
It needn't be so.