Economists Do It With Models

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Apparently This Is What Economics Does To People…

February 8th, 2010 · 10 Comments
Econ 101 · Just For Fun

This video made me happy…and a little nostalgic. I would have to guess that these are the sorts of things that people say behind my back…

Very cute. But you didn’t really think that you were going to get away without some sort of edumacation, right? So the professor mentions comparative advantage (not to be confused with competitive advantage) as the rationale for labor specialization. You can learn more about comparative advantage and the gains from trade here:

And here…

Another choice excerpt from the video is the quote “What the heck is marginal utiltity anyway?” Well…marginal utility is the additional happiness you get from consuming one more of something. Let’s take an example from the Superbowl party I was at last night. I had had three slices of pizza, and the marginal utility of the fourth slice of pizza was the additional happiness that the fourth slice gave me above and beyond what the first three had provided. (In my case, I would argue that the fourth slice had negative marginal utility, since it just made me feel too full rather than any happier.)

The second half of the video gets into a bit of a grey area with the globalization bit…now, it is true from an economic standpoint that, under certain assumptions, free trade is efficient (where “efficient” means “creating the biggest economic pie”), but it’s not necessarily an equitable outcome for everyone, since less competitive domestic producers lose while consumers win (when free trade leads to foreign imports) or vice versa (when free trade leads to domestic exports). Economists make the argument that, because the winners in this scenario win more than the losers lose, it’s possible for the winners to somehow compensate the losers and make everyone better off. Unfortunately, I have yet to see that part be accomplished in practice. So when the girl in the zebra tank top argues that it’s unfair that jobs are outsourced, she’s not necessarily wrong, she’s just arguing a different point than the one that economists typically make.

In case you were curious, you can find the Economic Freedom of the World report here, and yes, the Smoot-Hawley tariff was kind of a debacle, largely because it caused other countries to put retaliatory tariffs in place. Who would’ve thought that other countries wouldn’t just be okay with us taxing their goods and them not taxing ours? Hmph.

By the end, the video drifts off into a bit of unsubstantiated libertarianism territory- for the record, there are benefits to licensing that may outweigh the costs, and you can ponder this next time your upstairs neighbor hires an unlicensed plumber. There is also mixed evidence on the effect of a minimum wage, which I find to be particularly surprising. (The most well-known counterintuitive evidence is from a study by David Card and Alan Krueger- you can find a summary here.) The takeaways at the end are a bit of a bastardization of what economists actually have to say about the role of government, since very few economists would argue that less government is ALWAYS better. (If you don’t believe me, see public goods, externalities, etc.) That said, I don’t see economists heading up the Progressive Club any time soon, either.

Tags: Econ 101 · Just For Fun

10 responses so far ↓

  • 1 Michael Riley // Feb 8, 2010 at 6:18 pm

    Oh snap, is that Rustici?

  • 2 Michael L. // Feb 8, 2010 at 6:46 pm

    Funny video! Unfortuately your accessment of the minimum wage and globalization is a little flawed.

    Globalization indeed has helped those who “lose”. US price indexes for clothing has fallen in the past 10 years thanks to globalization. Factory towns are beginning to have significant improvements in their economies as well.

    As for the Krueger study, the statistical methods used were subpar at best. You can’t take results a month before the minimum wage goes into effect and expect it to be revelant.

    Besides that, I’m glad to see other young people (not to mention the attractive female kind!) taking such a passion in economics. Keep up the good work!

  • 3 econgirl // Feb 8, 2010 at 8:23 pm

    @ Michael #1: I believe so, yes.

    @ Michael #2: I mostly agree with your critique of the Card and Krueger study, but past experience has shown that if I don’t mention it I just get people saying “but what about the Card and Krueger study?” So I will leave it as a bit up in the air for the sake of my own sanity. (It’s also the case that if the minimum wage were taken away, employment would go up but wages would be lower such that the government was paying out more in welfare and such, so the issue is actually far from simple from a policy standpoint.)

    With globalisation, of course it is the case that the producers who lose in some markets gain in some others simply due to the fact that producers are also consumers. Despite that fact, however, we can’t assume that globalisation automatically results in a net benefit for everyone. It’s hard to tell the guy who no longer has an income that he’s better off because the stuff that he can’t buy is cheaper. =P That said, it is quite possible that there are creative policy solutions that could result in a net benefit for everyone, I just haven’t heard of any yet.

  • 4 Mudkip lover // Feb 8, 2010 at 10:45 pm

    Boo capitalist propaganda!

  • 5 Michael L. // Feb 8, 2010 at 10:50 pm

    1) Good point about Krueger but if your critical of it, why not come out and say it? Also, the minimum wage has been shown not to hurt people that would receive welfare but young teens who are inexperienced and need job training, especially among African Americans.

    2) Of course not everyone is better off in the short run when globalization takes it’s course. Almost everyone benefits in the long run. John Stossel actually ran a special on this if you care to watch:

    Seriously, thanks for starting this website! I enjoy talking to someone my age about economics! I thought I was the only 20-something that liked economics with a passion.

  • 6 Timothy // Feb 9, 2010 at 9:28 am

    Great post! Makes me miss my college days.

  • 7 Burge // Feb 10, 2010 at 2:53 pm

    Loved the video!

    I’ve always seen outsourcing as similar to the textbook case of container shipping. When barges moved to container shipping, thousands of dock workers got laid off.

    As a result of container shipping, all imported goods got cheaper, ships took only a few days vs a few weeks to unload thus less perishable goods would spoil, and a much greater amount of goods could potentially be shipped.

    Like container shipping- outsourcing reduces the factors of production, thus increasing supply! That is, if, you are a believer in supply side economics… And this isn’t a perfect analogy, but the best i got for right now…

  • 8 Tim Cullen // Feb 14, 2010 at 2:02 am

    Hiring an unlicensed plumber without talking to others living in group housing is completely different from the licensing hairdressers. That seems to be more of a property rights or externality issue and less of a concern about the general qualifications of plumbers. Although I’ll give you the same benefit of the doubt I give the video’s producers, given that neither a 3 minute video or a half page blog post is going to be able to give more than a superficial view of licensing, which I believe they portrayed accurately with regards to many transactions that only affect the person engaging in them often involving relatively trivial and completely understandable goods.

    Also, if we are going to get into normative issues; while it is true that in the short run and maybe even the long run some producers might not be made better off through free trade, it isn’t clear that anyone has the right to be employed producing a certain good and to have people buy it. By that logic we could criticize any new market entrant who puts some one out of business on a different side of town or in a different town, county, region, or state. I don’t see the protectionists complaining about competition between the states, largely because it is much easier to criticize foreigners even though that many states have different wage rates and labor laws. Buy American applies just as much to Canada and Western Europe as it does to China, and I suspect that Michigan’s labor laws are more similar to those nations than they are to right to work states.

    We already have a progressive tax code, and as a “less pure” libertarian I am open to state and especially local social programs provided the federal government gets out of the way; and such programs could serve to provide a social safety net to trade’s losers. If one looks at the average size of the various “social democracies” I really can’t understand why we must have so much economic regulation and wealth transfers at the federal level.

  • 9 What is comparative advantage? | Weakonomi¢s // Mar 10, 2010 at 1:13 pm

    […] more about comparative advantage and its implications/applications on the world stage, check out the hottest economist on the planet and her two-part video on the subject. […]

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