A model developed by Hyman Minsky is used to interpret the financial crises in the United States, Great Britain, and other market economies. The pro-cyclical changes in the supply of credit. During the expansion phase investors became more optimistic about the future and they revised upward their estimates of the profitability of a wide range of investments and so they became more eager to borrow. At the same time, both the lenders' assessments of the risk of individual investments and their risk averseness declined and so they became more willing to make loans, including some for investments that previously had seemed too risky.
When the economic conditions slowed, the investors became less optimistic and more cautious. At the same time, the loan losses of the lenders increased and they became much more cautious.
Minsky believed that the pro-cyclical increases in the supply of credit in good times and the decline in the supply of credit in less buoyant economic times led to fragility in financial arrangements and increased the likelihood of financial crisis. The instability in the supply of credit.
Minsky argued that the events that lead to a crisis start with a "displacement", some exogenous, outside shock to the macro system. The boom in the Minsky model is fueled by an expansion of credit.
The nature of the shock varies from one speculative boom to another. If the shock is sufficiently large and pervasive, the anticipated profit opportunities improve in at least one important industry sector.
The boom in the Minsky model is fueled by an expansion of credit. He argued that the growth of bank credit has been very unstable. One central policy issue centers on the control of credit from banks and from other suppliers of credit.
Three types of finance---hedge finance, speculative finance, Ponzi scheme. Hedge finance: anticipated operating income is more than sufficient to pay both the interest and scheduled reduction in its indebtedness.
Speculative finance: anticipated operating income is sufficient so it is abe to pay the interest; but the firm has to use cash from new loans to repay part or all of the amount due on maturing loans.
Ponzi finance: its anticipated operating income is not likely to be sufficient enough to pay the interest on its indebtedness on the scheduled due date; to get the cash the firm must either increase its indebtedness or sell its assets.
When the economy slows, the original hedge finance firms may be in speculative finance group, and the initial speculative finance firms may fall into the Ponzi finance category.
The term Ponzi scheme now is a generic term for the non-sustainable finance patterns.
12/25/2012
12/22/2012
Financial crisis-a hardy perennial
Most of the bank failures in the 1980s and 1990s were systemic and involved all or most of the banks and financial institutions in a country. These crisis and bank failures resulted from the implosion of the asset price bubbles or from the sharp depreciation of national currencies in the foreign exchange market. They happened in three different waves: 1980s, beginning of 1990s and second half of 1990s.
Cycle of manias and panics results from the pro-cyclical changes in the supply of credit; the credit supply increases relatively rapidly in good times, and then when economic growth slackens, the rate of growth of credit has often declined sharply.
Non-sustainable patterns of financial behavior: asset prices today are not consistent with asset prices at distant future dates.
Bubble involves the purchase of an asset, usually real estate or a security, not because of the rate of return on the investment but in anticipation that the asset or security can be sold to someone else at an even higher price.
The term mania describes the frenzied patterns of purchases, often an increase in prices accompanied by an increase in trading volumes, individuals are eager to buy before the prices go further.
The dilemma of government intervention upon smoothing out mania and bubbles is moral hazard. That is, if central banks function as the last resort of lender, investors may be less cautious in investing.
The monetarist view is that the mania would not occur if the rate of growth of the money supply were stabilized or constant.
Cycle of manias and panics results from the pro-cyclical changes in the supply of credit; the credit supply increases relatively rapidly in good times, and then when economic growth slackens, the rate of growth of credit has often declined sharply.
Non-sustainable patterns of financial behavior: asset prices today are not consistent with asset prices at distant future dates.
Bubble involves the purchase of an asset, usually real estate or a security, not because of the rate of return on the investment but in anticipation that the asset or security can be sold to someone else at an even higher price.
The term mania describes the frenzied patterns of purchases, often an increase in prices accompanied by an increase in trading volumes, individuals are eager to buy before the prices go further.
The dilemma of government intervention upon smoothing out mania and bubbles is moral hazard. That is, if central banks function as the last resort of lender, investors may be less cautious in investing.
The monetarist view is that the mania would not occur if the rate of growth of the money supply were stabilized or constant.
12/18/2012
Analysis on The price of inequality
The failure of the market stems from lack of institution to protect the property right.
I don't agree with Professor Stiglitz's argument that "unemployment is the worst failure of the market, the greatest source of inefficiency, and a major course of inequality." Just think about the cost and benefit of looking for jobs. People spend time and effort looking for jobs that match them better, and this is the cost them would like to bear for expectation of future well-being. (This is the so called frictional unemployment) Besides, the technology is ever-changing and thus relative sectoral significance changes as society moves on. Structural unemployment as a result is inevitable because it is the implication of a ever evolving society. So a normal rate of unemployment is not only acceptable but also healthy. A mere focus on elimination of unemployment rate can lead to stagflation. (Short run and long run Philip curve)'
I have doubts on Professor Stiglitz's opinion that protests delivers the message that market once again need to be tamed and tempered. Stiglitz argued that minimum wage law, competition law passed in Progressive Era were good for people because they guided market toward better equilibrium, but I argue the contrast. Now people have a reverence of government policy and whenever there is problem in the market, they call for another law to eliminate the problem and protect their interest. The market fails because it is bound by rules and red tapes rather because it is free and amoral.
Professor Stiglitz said that markets, even when they are stable, often lead to high level of inequality. I have a question here on the definition of "inequality" Does that mean every person should get the same amount of money? Or does it mean that cronyism is eroding the justice system? For me, equality implies equal access to chance and fair process of gaining success, not equal ending.
A good point Stiglitz made is that part of the reason for big magnitude of inequality in America is the market distortion, with incentive directed not at creating new wealth but at taking it from others. (patent war can be an example)
In the mid-2000s, before the onset of the Great Recession, people in the bottom 80 percent were spending around 110 percent of their income. (This resulted from government's stimulation in housing and a loosen rule of loan. Ricardian equivalence failed because many people are on credit constraint. Tax distortion exists.)
I don't deny that government can ameliorate poverty among a certain group of people, like the old, what I doubt is that government can ameliorate poverty among all groups. (Broken window fallacy)
I don't agree with Professor Stiglitz's argument that "unemployment is the worst failure of the market, the greatest source of inefficiency, and a major course of inequality." Just think about the cost and benefit of looking for jobs. People spend time and effort looking for jobs that match them better, and this is the cost them would like to bear for expectation of future well-being. (This is the so called frictional unemployment) Besides, the technology is ever-changing and thus relative sectoral significance changes as society moves on. Structural unemployment as a result is inevitable because it is the implication of a ever evolving society. So a normal rate of unemployment is not only acceptable but also healthy. A mere focus on elimination of unemployment rate can lead to stagflation. (Short run and long run Philip curve)'
I have doubts on Professor Stiglitz's opinion that protests delivers the message that market once again need to be tamed and tempered. Stiglitz argued that minimum wage law, competition law passed in Progressive Era were good for people because they guided market toward better equilibrium, but I argue the contrast. Now people have a reverence of government policy and whenever there is problem in the market, they call for another law to eliminate the problem and protect their interest. The market fails because it is bound by rules and red tapes rather because it is free and amoral.
Professor Stiglitz said that markets, even when they are stable, often lead to high level of inequality. I have a question here on the definition of "inequality" Does that mean every person should get the same amount of money? Or does it mean that cronyism is eroding the justice system? For me, equality implies equal access to chance and fair process of gaining success, not equal ending.
A good point Stiglitz made is that part of the reason for big magnitude of inequality in America is the market distortion, with incentive directed not at creating new wealth but at taking it from others. (patent war can be an example)
In the mid-2000s, before the onset of the Great Recession, people in the bottom 80 percent were spending around 110 percent of their income. (This resulted from government's stimulation in housing and a loosen rule of loan. Ricardian equivalence failed because many people are on credit constraint. Tax distortion exists.)
I don't deny that government can ameliorate poverty among a certain group of people, like the old, what I doubt is that government can ameliorate poverty among all groups. (Broken window fallacy)
11/08/2012
Summay of Benjamin Franklin
Throughout his life, he took palpable pride in his ability to organize cooperative endeavors and public-spirited projects.
The reason why Josiah Franklin didn't send Benjamin to Harvard was that he thought Benjamin was not suited for the clergy. Benjamin was skeptical, puckish, curious, irreverent. Franklin excelled in writing but failed math, a scholastic deficit he never fully remedied and that, combined with his lack of academic training in the field, would eventually condemn him to be merely the most ingenious scientist of his era rather than transcending into the pantheon of truly profound theorists such as Newton.
One aspect of Franklin's genius was the variety of his interests, from science to government to diplomacy to journalism, all of them approached from a very practical rather than theoretical angle.
Two books that influenced Franklin a lot:
1). John Bunyan's Pilgrim's Progress
Thesis: progress, the concept that individuals, and humanity in general, move forward and improve based on a steady increase of knowledge and the wisdom that comes from conquering adversity.
2). Plutarch's Lives
Thesis: individuals endeavor can change the course of history for the better
History is a tale, not of immutable forces but of human endeavors.
Benjamin was influenced by Mather's idea that call on members of the community to form voluntary associations can benefit the society.
After some debates with his friends, Benjamin began to tailor for himself a persona that was less contentious and confrontational. He concluded that being disputatious was a very bad habit because contradicting people produced disgusts and perhaps enmities. He preferred Socrate's method of query. (gentle indirection rather than confrontation in making his arguments)
One of Benjamin's maxim: So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for everything one has a mind to do.
His most notable trait was a personal magnetism: he attracted people who wanted to help him.
Franklin easily made casual friends, intellectual companions, useful patrons, flirty admirers, and circles of genial acquaintances, but he was less good at nurturing lasting bonds that involved deep personal commitments or emotional relationships, even within his own family.
Franklin never developed into a rigorous, first-rank philosopher, he was more comfortable exploring practical thoughts and real-life situations than metaphysical abstractions or deductive proofs.
Plan for future conduct:
1. It is necessary for me to be extremely frugal for some time, till I have paid what I owe.
2. To endeavor to speak truth in every instance; to give nobody expectation that are not likely to be answered, but aim at sincerity in every word and action--the most amiable excellence in a rational being.
3. To apply myself industriously to whatever business I take in hand, and not divert my mind from my business by any foolish project of suddenly growing rich; for industry and patience are the surest means of plenty.
4. I resolve to speak ill of no man whatever.
One of the fundamental sentiments of the Enlightenment was that there is a sociable affinity, based on the natural instinct of benevolence, among fellow humans, and Franklin was an exemplar of this outlook.
Four questions:
(1) do you ever disrespect for any current member?
(2) do u love mankind in general regardless of religion or profession?
(3) do u feel people should ever be punished because of their opinions or mode of worship?
(4) do u love and pursue truth for its own sake?
Franklin concluded that it is useful to believe that a faith in god should inform out daily actions, but he was devoid of sectarian dogma, burning spirituality, deep soul-searching, or a personal relationship to Christ. The fundamental tenet of Benjamin's morality is " the most acceptable service to God is doing good to man".
The reason why Josiah Franklin didn't send Benjamin to Harvard was that he thought Benjamin was not suited for the clergy. Benjamin was skeptical, puckish, curious, irreverent. Franklin excelled in writing but failed math, a scholastic deficit he never fully remedied and that, combined with his lack of academic training in the field, would eventually condemn him to be merely the most ingenious scientist of his era rather than transcending into the pantheon of truly profound theorists such as Newton.
One aspect of Franklin's genius was the variety of his interests, from science to government to diplomacy to journalism, all of them approached from a very practical rather than theoretical angle.
Two books that influenced Franklin a lot:
1). John Bunyan's Pilgrim's Progress
Thesis: progress, the concept that individuals, and humanity in general, move forward and improve based on a steady increase of knowledge and the wisdom that comes from conquering adversity.
2). Plutarch's Lives
Thesis: individuals endeavor can change the course of history for the better
History is a tale, not of immutable forces but of human endeavors.
Benjamin was influenced by Mather's idea that call on members of the community to form voluntary associations can benefit the society.
After some debates with his friends, Benjamin began to tailor for himself a persona that was less contentious and confrontational. He concluded that being disputatious was a very bad habit because contradicting people produced disgusts and perhaps enmities. He preferred Socrate's method of query. (gentle indirection rather than confrontation in making his arguments)
One of Benjamin's maxim: So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for everything one has a mind to do.
His most notable trait was a personal magnetism: he attracted people who wanted to help him.
Franklin easily made casual friends, intellectual companions, useful patrons, flirty admirers, and circles of genial acquaintances, but he was less good at nurturing lasting bonds that involved deep personal commitments or emotional relationships, even within his own family.
Franklin never developed into a rigorous, first-rank philosopher, he was more comfortable exploring practical thoughts and real-life situations than metaphysical abstractions or deductive proofs.
Plan for future conduct:
1. It is necessary for me to be extremely frugal for some time, till I have paid what I owe.
2. To endeavor to speak truth in every instance; to give nobody expectation that are not likely to be answered, but aim at sincerity in every word and action--the most amiable excellence in a rational being.
3. To apply myself industriously to whatever business I take in hand, and not divert my mind from my business by any foolish project of suddenly growing rich; for industry and patience are the surest means of plenty.
4. I resolve to speak ill of no man whatever.
One of the fundamental sentiments of the Enlightenment was that there is a sociable affinity, based on the natural instinct of benevolence, among fellow humans, and Franklin was an exemplar of this outlook.
Four questions:
(1) do you ever disrespect for any current member?
(2) do u love mankind in general regardless of religion or profession?
(3) do u feel people should ever be punished because of their opinions or mode of worship?
(4) do u love and pursue truth for its own sake?
Franklin concluded that it is useful to believe that a faith in god should inform out daily actions, but he was devoid of sectarian dogma, burning spirituality, deep soul-searching, or a personal relationship to Christ. The fundamental tenet of Benjamin's morality is " the most acceptable service to God is doing good to man".
11/06/2012
None of us can carefully inspect the evidence for most of the beliefs that we hold and out of convenience we simply adopt the most easily available ideas.
An important cause of the belief that things are going poorly, and that the future outlook is gloomy, is the type of comparisons that a person makes.
Apparently it is built into our mental systems that no matter how good things become, our aspiration level ratchets up so that our anxiety level declines hardly at all, and we focus on ever-smaller actual dangers.
One of the problems in understanding modern life are the implicit comparisons to the past (often a nonexistent past) that people often make.
An important cause of the belief that things are going poorly, and that the future outlook is gloomy, is the type of comparisons that a person makes.
Apparently it is built into our mental systems that no matter how good things become, our aspiration level ratchets up so that our anxiety level declines hardly at all, and we focus on ever-smaller actual dangers.
One of the problems in understanding modern life are the implicit comparisons to the past (often a nonexistent past) that people often make.
Populationa growth and economic performance
The increase in productivity that result from the larger scale of industry, and from the additional knowledge contributed by additional people, are very important in analyzing the population and economic development. Developed countries with faster rates of population growth initially fall behind in per capita income, but only very slightly. Later they do better than those with lower rates of population growth, usually in 30 to 80 yrs. Though an increment of population initially has a small negative effect upon economic welfare, after a few decades the effect becomes positive, and large.
Immigrants pay much more in taxes than the cost of the welfare services and schooling that they use. In fact, the average immigrant family uses less welfare services and pays more taxes than the average native family. This is because immigrants are not old, tired and without skills. Rather, they are on average in the early prime of their work lives. And they are about as well educated as the native labor force, with a much larger proportion of professional and technical persons such as doctors and engineers.
Immigrants directly raise productivity with the new scientific and technical ideas they invent. Immigrants not only take jobs, but with their earnings which they then spend, they make as many jobs as they take. Furthermore, they make additional new jobs with the new businesses that they open.
Additional children influence the lower developed countries economy by inducing people to work longer hours and invest more, as well as by causing an improvement in the social infrastructure, such as better roads and communication systems. Additional population also induces economies of scales in other ways. The upshot us that although additional children cause additional costs in the short run, a moderate rate of population growth in poor countries is more likely to lead to a higher standard of living in the long run rather than either zero population growth or a high rate of population growth.
Immigrants pay much more in taxes than the cost of the welfare services and schooling that they use. In fact, the average immigrant family uses less welfare services and pays more taxes than the average native family. This is because immigrants are not old, tired and without skills. Rather, they are on average in the early prime of their work lives. And they are about as well educated as the native labor force, with a much larger proportion of professional and technical persons such as doctors and engineers.
Immigrants directly raise productivity with the new scientific and technical ideas they invent. Immigrants not only take jobs, but with their earnings which they then spend, they make as many jobs as they take. Furthermore, they make additional new jobs with the new businesses that they open.
Additional children influence the lower developed countries economy by inducing people to work longer hours and invest more, as well as by causing an improvement in the social infrastructure, such as better roads and communication systems. Additional population also induces economies of scales in other ways. The upshot us that although additional children cause additional costs in the short run, a moderate rate of population growth in poor countries is more likely to lead to a higher standard of living in the long run rather than either zero population growth or a high rate of population growth.
11/05/2012
Population and environment
Although there may be some short-run increase in pollution due to population increases, the additional pollution is relatively small. And in the long run, pollution is likely to be significantly less due to population growth.
Along with higher income and its consequent greater supply of pollutant comes a greater demand for cleanup, plus an increased capacity to pay for it and greater technical ability to execute the cleanup.
Along with higher income and its consequent greater supply of pollutant comes a greater demand for cleanup, plus an increased capacity to pay for it and greater technical ability to execute the cleanup.
Population and land
Though more land per person was available in the past than at present, people did not farm all the land available to them for 2 reasons:
(1) people were physically unable to farm larger areas than they actually farmed
(2) farmers in the past had little motive for farming more land
Reduction in the amount of land available to the farmer causes little hardship if previously he was not farming at all the land that was available. When farmers need more land they make more land. People create land--agricultural land--by investing their sweat, blood, money, and ingenuity in it.
Data show that the absolute number of farm workers is going down, and consequently the absolute amount of land per farm worker is going up.
Job "destruction" is a confusing label for the very essence of economic progress--making a given amount of goods with fewer people.
In the poorer agricultural countries the creation of new land has been the source of most of the long-run increase in agricultural output which has kept up with population growth. As the available land for crops becomes more and more costly to transform into cropland, farmers will instead crop their existing land more intensively. The use of traditional farmland is no longer the only way to produce food.
The idea that population growth breeds war has been used to justified national policies to "control birth rate". But it doesn't apply in modern society. Additional territory nowadays generally has no value to a nation.
(1) people were physically unable to farm larger areas than they actually farmed
(2) farmers in the past had little motive for farming more land
Reduction in the amount of land available to the farmer causes little hardship if previously he was not farming at all the land that was available. When farmers need more land they make more land. People create land--agricultural land--by investing their sweat, blood, money, and ingenuity in it.
Data show that the absolute number of farm workers is going down, and consequently the absolute amount of land per farm worker is going up.
Job "destruction" is a confusing label for the very essence of economic progress--making a given amount of goods with fewer people.
In the poorer agricultural countries the creation of new land has been the source of most of the long-run increase in agricultural output which has kept up with population growth. As the available land for crops becomes more and more costly to transform into cropland, farmers will instead crop their existing land more intensively. The use of traditional farmland is no longer the only way to produce food.
The idea that population growth breeds war has been used to justified national policies to "control birth rate". But it doesn't apply in modern society. Additional territory nowadays generally has no value to a nation.
11/04/2012
Economies of scales
The phenomenon called learning by doing is surely a key factor in the improvement of productivity in particular industries and in the economy as a whole. The idea: the more units produced in a plant or an industry, the more efficiently they are produced, as people learn and develop better methods.
Population
Population growth clearly leads to an improved transportation system, which in turn stimulates economic development and further population growth.
The most important economic effect of population size and growth is the contribution of additional people to our stock of useful knowledge.
It is impossible for the arts and sciences to arise, at first, among many people unless that people enjoy the blessing of a free government...An unlimited despotism...effectually puts a stop to all improvements, and keeps men from attaining...knowledge.---David Hume
The competition fostered by independence allowed people considerable freedom from monarchs and bureaucracy. This afforded them economic opp to use their talents, make advances, and profit from their efforts.
There are two kinds of inventions:
(1) invention-pull: those that are adopted as soon as they are proven successful in that they increase production with no more labor
(2) population-push: those at first require more labor, and hence will not be adopted until demand from additional population warrants the adoption.
Productivity increases faster when population is larger.
A larger population influences the production of knowledge through both supply and demand mechanisms.
Supply side: a larger population implies a larger amount of knowledge being created, all else being equal, as a result of there being more people to have new ideas.
Demand side: more people means there are higher demand for consumption in the short run. Prices rise, and induce entrepreneurs and inventors to step to get profit.
The most important economic effect of population size and growth is the contribution of additional people to our stock of useful knowledge.
It is impossible for the arts and sciences to arise, at first, among many people unless that people enjoy the blessing of a free government...An unlimited despotism...effectually puts a stop to all improvements, and keeps men from attaining...knowledge.---David Hume
The competition fostered by independence allowed people considerable freedom from monarchs and bureaucracy. This afforded them economic opp to use their talents, make advances, and profit from their efforts.
There are two kinds of inventions:
(1) invention-pull: those that are adopted as soon as they are proven successful in that they increase production with no more labor
(2) population-push: those at first require more labor, and hence will not be adopted until demand from additional population warrants the adoption.
Productivity increases faster when population is larger.
A larger population influences the production of knowledge through both supply and demand mechanisms.
Supply side: a larger population implies a larger amount of knowledge being created, all else being equal, as a result of there being more people to have new ideas.
Demand side: more people means there are higher demand for consumption in the short run. Prices rise, and induce entrepreneurs and inventors to step to get profit.
11/03/2012
Demographic
Population has not been constant or steady over the long sweep of time.
The tool-using and tool-making revolution kicked off the rapid rise in population around 1 million B.C.E. The aid of various implements "gave the food gather and hunter access to the widest range of environments." But when the productivity gains from the use of primitive tools had been exploited, the rate of population growth fell, and population size again settled down near a plateau.
The next rapid jump in population started perhaps ten thousand years ago, when people began to keep herds and cultivate the earth, rather than simply foraging for wild plants and game.
These two facts imply that the present rapid population growth, starting 300 or 350 yrs ago, may abate when the benefits of the new industrial and agricultural and other technical knowledge that followed the early scientific and industrial revolutions begin to peter out.
In the long-run view population size adjusts to productive conditions rather than being an uncontrolled monster. Constant geometric growth does not characterize human population history. Population growth to some extent represents economic success and human triumph, rather than social failure.
Population size and growth are influenced by political and economic and cultural forces, and not only by starvation and plague due to changes in natural conditions.
The main cause of the rapid increase in population during the past two centuries is the decrease in the world's population rate.
The tool-using and tool-making revolution kicked off the rapid rise in population around 1 million B.C.E. The aid of various implements "gave the food gather and hunter access to the widest range of environments." But when the productivity gains from the use of primitive tools had been exploited, the rate of population growth fell, and population size again settled down near a plateau.
The next rapid jump in population started perhaps ten thousand years ago, when people began to keep herds and cultivate the earth, rather than simply foraging for wild plants and game.
These two facts imply that the present rapid population growth, starting 300 or 350 yrs ago, may abate when the benefits of the new industrial and agricultural and other technical knowledge that followed the early scientific and industrial revolutions begin to peter out.
In the long-run view population size adjusts to productive conditions rather than being an uncontrolled monster. Constant geometric growth does not characterize human population history. Population growth to some extent represents economic success and human triumph, rather than social failure.
Population size and growth are influenced by political and economic and cultural forces, and not only by starvation and plague due to changes in natural conditions.
The main cause of the rapid increase in population during the past two centuries is the decrease in the world's population rate.
Three ways to organize waste disposal
(1) commanding
(2) guiding by tax and subsidy
(3) leaving it to individual and the market
A good way for garbage:
Each homeowner contacts with any one of the private haulers who works in the area. They gauge their charges according to how much garbage homeowners put out, the standard rate being augmented by special charges for special hauling. Homeowners can change the haulers at the end of each month if they are not satisfied with the service. The haulers make a deal with a private landfill operator.
Two drawbacks to recycling:
(1) it costs taxpayers more money (opp cost)
(2) it usually injects an element of coercion which is antagonistic both to human values as well as to the efficient working of a free-market system.
(2) guiding by tax and subsidy
(3) leaving it to individual and the market
A good way for garbage:
Each homeowner contacts with any one of the private haulers who works in the area. They gauge their charges according to how much garbage homeowners put out, the standard rate being augmented by special charges for special hauling. Homeowners can change the haulers at the end of each month if they are not satisfied with the service. The haulers make a deal with a private landfill operator.
Two drawbacks to recycling:
(1) it costs taxpayers more money (opp cost)
(2) it usually injects an element of coercion which is antagonistic both to human values as well as to the efficient working of a free-market system.
Externalities
The key short-run issue is government policy with respect to energy. The programs called by environmentalists combine support for "alternative" sources of energy such as wind and solar, taxation of fossil fuels to reduce their use, and raising all possible obstacles to the use of nuclear power.
Energy accounting has great intellectual charms but of course if society were to follow an energy-economizing rule, we could not have modern life,
Energy accounting has great intellectual charms but of course if society were to follow an energy-economizing rule, we could not have modern life,
Why do people worry so much about wastes
(1) Lack understanding of how an economic system responds to an incerased shortage of some resource:
People tend to underestimate the likelihood that people and organizations will make characteristically human adjustments to daily life and society.
(2) Lack of technical knowledge or imagination
Many people who do not already know a technical answer to a given problem don't try to discover the possible solutions, and not do they imagine that others can dream up solutions. A "technical fix" is the entire story of civilization. The combination of technical imagination plus a free-enterprising system constitutes the crucial mechanism for dealing with waste.
(3) The moral feeling about recycling
People tend to underestimate the likelihood that people and organizations will make characteristically human adjustments to daily life and society.
(2) Lack of technical knowledge or imagination
Many people who do not already know a technical answer to a given problem don't try to discover the possible solutions, and not do they imagine that others can dream up solutions. A "technical fix" is the entire story of civilization. The combination of technical imagination plus a free-enterprising system constitutes the crucial mechanism for dealing with waste.
(3) The moral feeling about recycling
Conservation
We can clarify conservation issues by distinguishing among the following:
(1) unique resources, which are one-of-a-kind or close to it, and which we value for aesthetic purposes (Mona Lisa, MJ's basketball game)
(2) One-of-a-kind resources that we value as historical artifacts, (original U.S. Declaration of Independence)
(3) Resources that can be reproduced or recycled or substituted for, and that we value for their material uses (wood pulp, trees, copper, oil, and food)
Category 3 are resources for which we can calculate whether it is cheaper to conserve for future use, or use now and obtain the services they provide. A question is whether as individuals and as a society we should try to use less of these materials than we are willing to pay for. Answer:apart from considerations of national security and international bargaining power, there is no economic rationale for special efforts to avoid using the resources.
You should turn off the light if the money cost of he electrical energy is greater than the felt cost to you of taking a few steps to the light switch and flicking your wrist. It is rational for us to avoid waste if the value to us of the resource saved is more than the cost to us of achieving the saving.
There is much confusion between physical and economic conservation. To "save water" by not flushing the toilets is not rational economics.
Worst-case thinking may be appropriate for safety engineers, but it is not appropriate for most everyday planning.
The conservationists do not believe that consumers will react rationally to changes in resource availabilities and prices.
Where costs do not settle the issue, the decision about what is conserved, and how much, is a matter of tastes of values.
Recycling is one thing when it is economically worthwhile for the person who is doing the recycling but another thing when it is done purely for symbolic purposes. People voluntarily recycle valuable resources and throw away less valuable items that take more effort to recycle than they are worth. Coercive recycling is actually more wasteful than throwing things away. It wastes valuable labor and materials that could be put to better use--creating new life, new resources, and a cleaner environment.
(1) unique resources, which are one-of-a-kind or close to it, and which we value for aesthetic purposes (Mona Lisa, MJ's basketball game)
(2) One-of-a-kind resources that we value as historical artifacts, (original U.S. Declaration of Independence)
(3) Resources that can be reproduced or recycled or substituted for, and that we value for their material uses (wood pulp, trees, copper, oil, and food)
Category 3 are resources for which we can calculate whether it is cheaper to conserve for future use, or use now and obtain the services they provide. A question is whether as individuals and as a society we should try to use less of these materials than we are willing to pay for. Answer:apart from considerations of national security and international bargaining power, there is no economic rationale for special efforts to avoid using the resources.
You should turn off the light if the money cost of he electrical energy is greater than the felt cost to you of taking a few steps to the light switch and flicking your wrist. It is rational for us to avoid waste if the value to us of the resource saved is more than the cost to us of achieving the saving.
There is much confusion between physical and economic conservation. To "save water" by not flushing the toilets is not rational economics.
Worst-case thinking may be appropriate for safety engineers, but it is not appropriate for most everyday planning.
The conservationists do not believe that consumers will react rationally to changes in resource availabilities and prices.
Where costs do not settle the issue, the decision about what is conserved, and how much, is a matter of tastes of values.
Recycling is one thing when it is economically worthwhile for the person who is doing the recycling but another thing when it is done purely for symbolic purposes. People voluntarily recycle valuable resources and throw away less valuable items that take more effort to recycle than they are worth. Coercive recycling is actually more wasteful than throwing things away. It wastes valuable labor and materials that could be put to better use--creating new life, new resources, and a cleaner environment.
11/02/2012
Pollution
The worst pollutions of the past were diseases caused by microorganisms, and spread by contaminated drinking water and by airborne germs and insects. In the rich countries we have been so successful in sanitary operations and preventive medicine that infectious diseases are no longer even thought of when pollution is discussed, though in poor countries these diseases still are mass killers.
The next worst pollutions of past and present are dust particulates from burning fossil fuels.
Finally, there are the trivial pollutions and downright false alarms.
Economics theory views natural resources and pollution as the opposite sides of the same coin. The key conceptual difference between a natural resource and pollution is that the goods we call "natural resources" are largely produced by private firms, which have a strong motive--profit--for providing what consumers want. In contrast, the good we call "absence of environmental pollution" is largely produced by public agencies through regulation, tax incentives, fines, and licensing.
Another difference between natural resources and pollution is that natural-resource transactions are mostly limited in impact to the buyer and the seller, whereas one person's pollution is "external" and may touch everybody else.
Economists conceptualize the reduction of pollution as a social good that can be achieved technologically but costs resources.
The combination of affluence and improved tech tends toward greater cleanliness.
After thousands of years of almost no improvement, in the past two hundred years in the rich countries there has been a long upward climb in life expectancy; in poor countries, life expectancy has increased extraordinarily sharply during the latter half of the century.
Serious deterioration in some aspects of environmental quality did take place between 1840 and 1940... Since 1940, however, the quality of the environment has in some respects markedly improved. Rivers have been cleaned of their grossest floating materials.
The next worst pollutions of past and present are dust particulates from burning fossil fuels.
Finally, there are the trivial pollutions and downright false alarms.
Economics theory views natural resources and pollution as the opposite sides of the same coin. The key conceptual difference between a natural resource and pollution is that the goods we call "natural resources" are largely produced by private firms, which have a strong motive--profit--for providing what consumers want. In contrast, the good we call "absence of environmental pollution" is largely produced by public agencies through regulation, tax incentives, fines, and licensing.
Another difference between natural resources and pollution is that natural-resource transactions are mostly limited in impact to the buyer and the seller, whereas one person's pollution is "external" and may touch everybody else.
Economists conceptualize the reduction of pollution as a social good that can be achieved technologically but costs resources.
The combination of affluence and improved tech tends toward greater cleanliness.
After thousands of years of almost no improvement, in the past two hundred years in the rich countries there has been a long upward climb in life expectancy; in poor countries, life expectancy has increased extraordinarily sharply during the latter half of the century.
Serious deterioration in some aspects of environmental quality did take place between 1840 and 1940... Since 1940, however, the quality of the environment has in some respects markedly improved. Rivers have been cleaned of their grossest floating materials.
11/01/2012
Oil
1. Energy is the most important of natural resources because
a. the creation of other natural resources requires energy
b. with enough energy all other resources can be created
2. The most reliable method of forecasting the future cost and scarcity of energy is to extrapolate the historical trends of energy costs.
3. The history of energy economics shows that in spite of troubling fears in each era of running out of whichever source of energy was important at that time, energy has grown progressively less scarce, as shown by long-run falling energy prices.
4. The cause of the increasing plenty in the supply of energy has been the development of improved extraction processes and the discovery of new sources and new types of energy.
5. These new developments have not been fortuitous, but rather have been induced by increased demand caused in part by rising population.
6. For the very long run, there is nothing meaningfully "finite" about our world that inevitably will cause energy to grow more scarce and costly. Theoretically, the cost of energy could either go up or down in the very long run. But the trends point to a lower cost.
7. Forecasts based on technical analysis are less persuasive than historical extrapolations of cost trends. Furthermore, the technical forecasts of future energy supplies differ markedly among themselves.
8. A sure way to err in forecasting future supplies is to look at current "known reserves" of oil, coal and other fossil fuels.
9. An appropriate technical forecast would be based on engineering estimates of the amounts of additional energy that will be produced at various price levels, and on predictions of new discoveries and technological advances that will come about as a result of various energy prices.
10. Some technical forecasters believe that even very much higher prices will produce only small increases in our energy supply, and even those only slowly. Others believe that at only slightly higher prices vast additional supplies will be forthcoming, and very quickly.
11. Causes of the disagreements among technical forecasters are differences in
a. scientific data cited,
b. assessments of political forces,
c. ideology,
d. belief or nonbelief in "finiteness" as an element of the situation,
e. vividness of scientific imagination
12. The disagreement among technical forecasters makes the economic extrapolation of decreasing historical costs even more compelling.
The statistical history of energy supplies is a rise in plenty rather than in scarcity. The price of oil fell because of technological advance.
A preposterous but commonly accepted notion is that energy situation can be predicted with the aid of " known reserves". "Known reserves" are much like the food we put into our cupboards at home. The amount of food in cupboards tells little or nothing about the scarcity of food in our communities, because as a rule it doesn't reveal how much food is available in the retail stores.
a. the creation of other natural resources requires energy
b. with enough energy all other resources can be created
2. The most reliable method of forecasting the future cost and scarcity of energy is to extrapolate the historical trends of energy costs.
3. The history of energy economics shows that in spite of troubling fears in each era of running out of whichever source of energy was important at that time, energy has grown progressively less scarce, as shown by long-run falling energy prices.
4. The cause of the increasing plenty in the supply of energy has been the development of improved extraction processes and the discovery of new sources and new types of energy.
5. These new developments have not been fortuitous, but rather have been induced by increased demand caused in part by rising population.
6. For the very long run, there is nothing meaningfully "finite" about our world that inevitably will cause energy to grow more scarce and costly. Theoretically, the cost of energy could either go up or down in the very long run. But the trends point to a lower cost.
7. Forecasts based on technical analysis are less persuasive than historical extrapolations of cost trends. Furthermore, the technical forecasts of future energy supplies differ markedly among themselves.
8. A sure way to err in forecasting future supplies is to look at current "known reserves" of oil, coal and other fossil fuels.
9. An appropriate technical forecast would be based on engineering estimates of the amounts of additional energy that will be produced at various price levels, and on predictions of new discoveries and technological advances that will come about as a result of various energy prices.
10. Some technical forecasters believe that even very much higher prices will produce only small increases in our energy supply, and even those only slowly. Others believe that at only slightly higher prices vast additional supplies will be forthcoming, and very quickly.
11. Causes of the disagreements among technical forecasters are differences in
a. scientific data cited,
b. assessments of political forces,
c. ideology,
d. belief or nonbelief in "finiteness" as an element of the situation,
e. vividness of scientific imagination
12. The disagreement among technical forecasters makes the economic extrapolation of decreasing historical costs even more compelling.
The statistical history of energy supplies is a rise in plenty rather than in scarcity. The price of oil fell because of technological advance.
A preposterous but commonly accepted notion is that energy situation can be predicted with the aid of " known reserves". "Known reserves" are much like the food we put into our cupboards at home. The amount of food in cupboards tells little or nothing about the scarcity of food in our communities, because as a rule it doesn't reveal how much food is available in the retail stores.
Water, lumber
Usable water is like other resources in being a product of human labor and ingenuity. People "create" usable water, and there are large opportunities to discover and utilize new sources.
Water for residential use will never be a long-run problem in itself because even at the cost of the most expensive means of production--desalination--the cost of water used by households is small relative to households budgets in rich countries. The desalinated price may be much less as tech improves and the price of energy falls. Furthermore, homes reduce their use of water as the price goes up.
The most important fact for consumer water supply is that most water is used in agriculture. The reason that there are cases of absolute shortage and rationing is that price is not allowed to respond to market conditions, but rather is fixed at a low subsidized price in many agricultural areas. Another difficulty is that agricultural and municipal rights to use water from rivers are complex legal structures that often do not fit modern needs.
Many trees are planted in order to be cut down--especially for paper. Indeed, 87 percent of all paper in the United States is produced from trees planted and grown for that purpose by the paper industry.
Why does the public believe that forests in Europe are declining when they are actually increasing? Part of the explanation is that researchers invalidly infer general effects from partial biological data.
More lumber is purposely planted. Higher productivity enables an increasing number of trees grow on a shrinking area. Conservation efforts due to higher prices, and research on wood and wood substitutes.
Water for residential use will never be a long-run problem in itself because even at the cost of the most expensive means of production--desalination--the cost of water used by households is small relative to households budgets in rich countries. The desalinated price may be much less as tech improves and the price of energy falls. Furthermore, homes reduce their use of water as the price goes up.
The most important fact for consumer water supply is that most water is used in agriculture. The reason that there are cases of absolute shortage and rationing is that price is not allowed to respond to market conditions, but rather is fixed at a low subsidized price in many agricultural areas. Another difficulty is that agricultural and municipal rights to use water from rivers are complex legal structures that often do not fit modern needs.
Many trees are planted in order to be cut down--especially for paper. Indeed, 87 percent of all paper in the United States is produced from trees planted and grown for that purpose by the paper industry.
Why does the public believe that forests in Europe are declining when they are actually increasing? Part of the explanation is that researchers invalidly infer general effects from partial biological data.
More lumber is purposely planted. Higher productivity enables an increasing number of trees grow on a shrinking area. Conservation efforts due to higher prices, and research on wood and wood substitutes.
Food production
The record of food production entirely contradicts the scary forecasts.
A long and broad view of food production found continuous improvement with no end in sight. Any country that gives farmers a free market in food and labor, secure property rights in the land, and a political system that ensures these freedoms in the future will soon be flush with food, with an ever-diminishing proportion of its work force required to produce the food.
The rise in food output was so great as to cause grain to become cheaper despite the large increase in demand. (agricultural knowledge gained from research and development induced by the increased demand, the increased ability of farmers to get their produce to market on improved transportation systems.
Superficially it might seem that farmers benefit from the overall government program because of the subsidies. But close analysis shows that most of the subsidies finally come to rest in the hands, not of the cultivators, but of the owner of the land in the form of proceeds from land sales at price made high by the value the subsidies confer.
Another set of beneficiaries of government programs are the government officials.
Modern technological capacities in league with modern transportation capacities, harnessed to farmers' ingenuity when offered a chance to make money, have vastly reduced the likelihood of a major disturbance in our food supplies.
The most important fact about the world's agricultural land is that less and less of it is needed as the decade pass. The reduced economic importance of land is shown by the long-run diminution in the proportion of total tangible assets that farmland has represented in various countries.
The definition of "arable" changes as tech develops and the demand for land changes. Hence, any calculation of "arable" land should be seen for what it is-- a rough temporary assessment that may be useful for a while but has no permanent validity.
The combination of increased productivity per acre of good land, and increased use of equipment adapted to flat land, has made it unprofitable to farm some land that formerly was cultivated.
Though the stock of usable land seems fixed at any moment, it is constantly being increased by the clearing of new fields or the reclamation of wasteland. Land also is constantly being enhanced by increasing the number of crops grown per year on each unit of land, and by increasing the yield per crop with better farming methods and with chemical fertilizer. And land is created anew where there was none.
A long and broad view of food production found continuous improvement with no end in sight. Any country that gives farmers a free market in food and labor, secure property rights in the land, and a political system that ensures these freedoms in the future will soon be flush with food, with an ever-diminishing proportion of its work force required to produce the food.
The rise in food output was so great as to cause grain to become cheaper despite the large increase in demand. (agricultural knowledge gained from research and development induced by the increased demand, the increased ability of farmers to get their produce to market on improved transportation systems.
Superficially it might seem that farmers benefit from the overall government program because of the subsidies. But close analysis shows that most of the subsidies finally come to rest in the hands, not of the cultivators, but of the owner of the land in the form of proceeds from land sales at price made high by the value the subsidies confer.
Another set of beneficiaries of government programs are the government officials.
Modern technological capacities in league with modern transportation capacities, harnessed to farmers' ingenuity when offered a chance to make money, have vastly reduced the likelihood of a major disturbance in our food supplies.
The most important fact about the world's agricultural land is that less and less of it is needed as the decade pass. The reduced economic importance of land is shown by the long-run diminution in the proportion of total tangible assets that farmland has represented in various countries.
The definition of "arable" changes as tech develops and the demand for land changes. Hence, any calculation of "arable" land should be seen for what it is-- a rough temporary assessment that may be useful for a while but has no permanent validity.
The combination of increased productivity per acre of good land, and increased use of equipment adapted to flat land, has made it unprofitable to farm some land that formerly was cultivated.
Though the stock of usable land seems fixed at any moment, it is constantly being increased by the clearing of new fields or the reclamation of wasteland. Land also is constantly being enhanced by increasing the number of crops grown per year on each unit of land, and by increasing the yield per crop with better farming methods and with chemical fertilizer. And land is created anew where there was none.
10/30/2012
Grand theory
What are the key patterns that maintained us and increased our numbers?
Humans are, on net balance, builders rather than destroyers. The evidence is that the civilization which our ancestors have bequeathed to us contains more created works than the civilization they were bequeathed.
If one notices only the using-up and destructive activities of humankind, without understanding that constructive patterns of behavior must have been the dominant part of our individual-cum-social nature in order for us to have survived to this point, then it is not surprising that one would arrive at the conclusion that resources will grow scarcer in the future.
High fertility leads to increased chances of survival of the group. High fertility leads to resource problems which then lead to solutions to the problems which usually leave humanity better off in the long run than if the problems had never risen.
The concept of the second law of thermodynamics underlies a vision of the human condition as inexorably sliding toward the worse in the long run. The concept of entropy is unquestionably valid and relevant for a closed container in the lab. It may also be relevant for any larger entity that can reasonably be considered a closed system. But the earth is not a closed system because both energy (from sun) and matter (cosmic dirt, asteroids, debris from many planets) constantly rain down on the earth. With respect to energy there is no practical boundary surrounding any unit of interest to us, and without such a boundary, the notion of entropy in the large is entirely irrelevant to us.
Humans are, on net balance, builders rather than destroyers. The evidence is that the civilization which our ancestors have bequeathed to us contains more created works than the civilization they were bequeathed.
If one notices only the using-up and destructive activities of humankind, without understanding that constructive patterns of behavior must have been the dominant part of our individual-cum-social nature in order for us to have survived to this point, then it is not surprising that one would arrive at the conclusion that resources will grow scarcer in the future.
High fertility leads to increased chances of survival of the group. High fertility leads to resource problems which then lead to solutions to the problems which usually leave humanity better off in the long run than if the problems had never risen.
The concept of the second law of thermodynamics underlies a vision of the human condition as inexorably sliding toward the worse in the long run. The concept of entropy is unquestionably valid and relevant for a closed container in the lab. It may also be relevant for any larger entity that can reasonably be considered a closed system. But the earth is not a closed system because both energy (from sun) and matter (cosmic dirt, asteroids, debris from many planets) constantly rain down on the earth. With respect to energy there is no practical boundary surrounding any unit of interest to us, and without such a boundary, the notion of entropy in the large is entirely irrelevant to us.
Infinite natural resources
Natural resources cannot be measured and thus they are infinite. The supply of natural resources is not finite in any economic sense, which is one reason why their cost can continue to fall indefinitely.
Increased scarcity causes the development of its own remedy. This is the key process in the supply of natural resources throughout history.
Improved efficiency of copper use not only reduces resource use in the present, but effectively increases the entire stock of unused resources as well.
Principle: more people, and increased income. cause resources to become more scarce in the short run. Heightened scarcity causes price to rise. The higher prices present opportunities and prompt inventors and enterpreneurs to search for solutions.Many fail in the search, at cost to themselves. But in a free society, solutions are eventually found. And in the long run the new developments leave us better off than if the problems hadn't risen.
Discoveries of improved methods and of substitute products are not just luck. They happen in response to an increase in scarcity--a rise in cost. Even after a discovery is made, there is good chance that it will not be put into operation until there is need for it due to rising cost. Scarcity and technological advance are not two unrelated competitors in a Malthusian race; rather, each influences the other.
A conceptual quantity is not finite or infinite in itself.
The concept of diminishing rate of return applies to situations where one element is fixed in quantity and where the type of technology is also fixed. But neither of these factors applies to mineral extraction in the long run. Whether the cost rises or falls in the long run depends on the extent to which advances in tech and discoveries of new lodes counteract the tendency toward increasing cost in the absence of the new technology.
Increased scarcity causes the development of its own remedy. This is the key process in the supply of natural resources throughout history.
Improved efficiency of copper use not only reduces resource use in the present, but effectively increases the entire stock of unused resources as well.
Principle: more people, and increased income. cause resources to become more scarce in the short run. Heightened scarcity causes price to rise. The higher prices present opportunities and prompt inventors and enterpreneurs to search for solutions.Many fail in the search, at cost to themselves. But in a free society, solutions are eventually found. And in the long run the new developments leave us better off than if the problems hadn't risen.
Discoveries of improved methods and of substitute products are not just luck. They happen in response to an increase in scarcity--a rise in cost. Even after a discovery is made, there is good chance that it will not be put into operation until there is need for it due to rising cost. Scarcity and technological advance are not two unrelated competitors in a Malthusian race; rather, each influences the other.
A conceptual quantity is not finite or infinite in itself.
The concept of diminishing rate of return applies to situations where one element is fixed in quantity and where the type of technology is also fixed. But neither of these factors applies to mineral extraction in the long run. Whether the cost rises or falls in the long run depends on the extent to which advances in tech and discoveries of new lodes counteract the tendency toward increasing cost in the absence of the new technology.
Why engineering forecast fuck up
The approach of the engineering analysts who rely on physical
principles is as follows. They estimate quantities and
"qualities" of resources in the earth, assess the present methods
of extraction, and predict which methods of extraction will be
used in the future. With those estimates they then calculate the
amounts of resources that will be available in future years, at
various costs of extraction (in the better forecasts) or just at
the present cost (in the less-thoughtful forecasts).
At the root of this material-technical view of natural
resources is the assumption that a certain quantity of a given
mineral "exists" in the earth and that one can, at least in
principle, answer the question: How much (say) copper is there?
Too often we view natural resources as we view the operation of a single copper mine: Dig some ore, and less is left.
There is one resource that has shown a trend of increasing scarcity rather than increasing abundance, human beings. Yes, there are more people on earth now than ever before. But if we measure the scarcity of people the same way that we measure the scarcity of other economic goods--by how much we must pay to obtain their services--we see the wages and salaries have been going up all over the world. This increase in the price of people's services is a clear indication that people are becoming more scarce even though there are more of us.
Material-technical forecasts of resource exhaustion often go wrong for two reasons. (1) No matter how closely defined, the physical quantity of a resource in the Earth is not known at any time, because resources are sought and found only as they needed. (2) Even if the physical quantities of particular closely defined natural resources were known, such measurements would not be economically meaning, because we have the capacity to develop additional ways to meet our needs. Thus, the existing "inventory" of natural resources is operationally misleading; physical measurements do not define what we will be able to use as future supplies.
Reserves are but a small part of the resources of any given commodity. Reserves and resources are part of a dynamic system and they cannot be inventoried like cans of tomatoes on a grocer's shelf. New scientific discoveries, new tech, and new commercial demands or restrictions are constantly affecting amounts of reserves and resources. Reserves and resources don't exist until commercial demand puts a value on a material in the market.
Too often we view natural resources as we view the operation of a single copper mine: Dig some ore, and less is left.
There is one resource that has shown a trend of increasing scarcity rather than increasing abundance, human beings. Yes, there are more people on earth now than ever before. But if we measure the scarcity of people the same way that we measure the scarcity of other economic goods--by how much we must pay to obtain their services--we see the wages and salaries have been going up all over the world. This increase in the price of people's services is a clear indication that people are becoming more scarce even though there are more of us.
Material-technical forecasts of resource exhaustion often go wrong for two reasons. (1) No matter how closely defined, the physical quantity of a resource in the Earth is not known at any time, because resources are sought and found only as they needed. (2) Even if the physical quantities of particular closely defined natural resources were known, such measurements would not be economically meaning, because we have the capacity to develop additional ways to meet our needs. Thus, the existing "inventory" of natural resources is operationally misleading; physical measurements do not define what we will be able to use as future supplies.
Reserves are but a small part of the resources of any given commodity. Reserves and resources are part of a dynamic system and they cannot be inventoried like cans of tomatoes on a grocer's shelf. New scientific discoveries, new tech, and new commercial demands or restrictions are constantly affecting amounts of reserves and resources. Reserves and resources don't exist until commercial demand puts a value on a material in the market.
10/29/2012
Scarcity
The appropriate measures of scarcity - the costs of natural resources in human labor, and their
prices relative to wages and to other goods - all suggest that natural resources have been becoming less scarce over the long run,
right up to the present.
The real population problem, then, is not that there are too many people or that too many babies are being born. The problem is that others must support each additional person before that person contributes in turn to the well-being of others.
A baby is a durable good in which someone must invest heavily long before the grown adult begins to provide returns on the investment.
There is an intuitive difference between how we get Hula-Hoops and copper. Copper comes from the earth, whereas a Hula-Hoop does not seem to be a "natural" resource.
Hula-Hoops and dental care and radios seem different from copper because most of the cost of a radio, a Hula-Hoop, or dental care arises from human labor and skill, and only a small part arises from the raw material.
Over the course of history, up to this very moment, copper and other minerals havebeen getting less scarce, rather than more scarce as the depletion theory implies they should.
At the end of this confrontation between theory and fact, we shall be compelled to reject the simple Malthusian depletion theory, and to offer a new theory.The revised theory will suggest that natural resources are not finite in any meaningful economic sense.
Price, together with related measures such as cost of production and share of income, is the appropriate operational test of scarcity at any given moment.
Some people believe that we are now at a long-run turning point, and the past is not a guide to the future. Therefore we ask: How should one judge whether a historical trend is a sound basis for a forecast? Specifically, how can we judge whether the data from the many decades in the past showing declines in raw-material costs are a good basis for prediction? Prediction is always a leap of faith; there is no scientific guarantee that the sun will come up tomorrow. The correctness of an assumption that what happened in the past will similarly happen in the future rests on your wise judgment and knowledge of your subject matter.
A prediction based on past data is sound if it is sensible to assume that the past and the future belong to the same statistical universe, that is, if you can expect conditions that held in the past to remain the same in the future.
The most important elements in raw-material price trends have been (1) the rate of movement from richer to poorer ores and mining locations - that is, the phenomenon of "exhaustion", and (2) the continued development of technology, which has more than made up for exhaustion. Hence if the past differs from the future, the bias islikely to be in the direction of understating the rate at which technology will develop, and therefore underestimating the rate at which costs will fall.
The real population problem, then, is not that there are too many people or that too many babies are being born. The problem is that others must support each additional person before that person contributes in turn to the well-being of others.
A baby is a durable good in which someone must invest heavily long before the grown adult begins to provide returns on the investment.
There is an intuitive difference between how we get Hula-Hoops and copper. Copper comes from the earth, whereas a Hula-Hoop does not seem to be a "natural" resource.
Hula-Hoops and dental care and radios seem different from copper because most of the cost of a radio, a Hula-Hoop, or dental care arises from human labor and skill, and only a small part arises from the raw material.
Over the course of history, up to this very moment, copper and other minerals havebeen getting less scarce, rather than more scarce as the depletion theory implies they should.
At the end of this confrontation between theory and fact, we shall be compelled to reject the simple Malthusian depletion theory, and to offer a new theory.The revised theory will suggest that natural resources are not finite in any meaningful economic sense.
Price, together with related measures such as cost of production and share of income, is the appropriate operational test of scarcity at any given moment.
Some people believe that we are now at a long-run turning point, and the past is not a guide to the future. Therefore we ask: How should one judge whether a historical trend is a sound basis for a forecast? Specifically, how can we judge whether the data from the many decades in the past showing declines in raw-material costs are a good basis for prediction? Prediction is always a leap of faith; there is no scientific guarantee that the sun will come up tomorrow. The correctness of an assumption that what happened in the past will similarly happen in the future rests on your wise judgment and knowledge of your subject matter.
A prediction based on past data is sound if it is sensible to assume that the past and the future belong to the same statistical universe, that is, if you can expect conditions that held in the past to remain the same in the future.
The most important elements in raw-material price trends have been (1) the rate of movement from richer to poorer ores and mining locations - that is, the phenomenon of "exhaustion", and (2) the continued development of technology, which has more than made up for exhaustion. Hence if the past differs from the future, the bias islikely to be in the direction of understating the rate at which technology will develop, and therefore underestimating the rate at which costs will fall.
10/25/2012
What is law
The existence of law means that certain kinds of human conduct are no longer optional, but in some sense obligatory. Obligation is the essence of law. How do law and legal obligation differ from, and how are they related to, orders backed by threats.
Just as a legal system obviously contains elements closely connected with the simple cases of orders backed by threats, so equally obviously it contains elements closely connected with certain aspects of morality.
Law is better understood as a 'branch' of morality or justice and that its congruence with the principles of morality or justice rather than its incorporation of orders and threats is of its 'essence'. But theories that make this close assimilation of law to morality seem, in the end, often to confuse one kind of obligatory conduct with another, and to leave insufficient room for differences in kind between legal and moral rules and for divergences in their requirements.
Both those who have found the key to the understanding of law in the notion of orders backed by threats, and those who have found it in its relation to morality or justice, alike speak of law as containing, if not consisting largely of, rules. But what are rules? What does it mean to say that a rule exists?
It is to say that a rule exists means only that a group of people, or most of them, behave ' as a rule' in a specified similar way in certain kinds of circumstances. But mere convergence in behavior between members of a social group may exist and yet there may be no rule requiring it.
Three recurrent issues:
(1) How does law differ from and how is it related to orders backed by threats?
(2) How does legal obligation differ from, and how is it related to, moral obligation?
(3) What are rules and to what extent is law an affair of rules?
Solve these problems to decipher the 'nature' of the law.
Just as a legal system obviously contains elements closely connected with the simple cases of orders backed by threats, so equally obviously it contains elements closely connected with certain aspects of morality.
Law is better understood as a 'branch' of morality or justice and that its congruence with the principles of morality or justice rather than its incorporation of orders and threats is of its 'essence'. But theories that make this close assimilation of law to morality seem, in the end, often to confuse one kind of obligatory conduct with another, and to leave insufficient room for differences in kind between legal and moral rules and for divergences in their requirements.
Both those who have found the key to the understanding of law in the notion of orders backed by threats, and those who have found it in its relation to morality or justice, alike speak of law as containing, if not consisting largely of, rules. But what are rules? What does it mean to say that a rule exists?
It is to say that a rule exists means only that a group of people, or most of them, behave ' as a rule' in a specified similar way in certain kinds of circumstances. But mere convergence in behavior between members of a social group may exist and yet there may be no rule requiring it.
Three recurrent issues:
(1) How does law differ from and how is it related to orders backed by threats?
(2) How does legal obligation differ from, and how is it related to, moral obligation?
(3) What are rules and to what extent is law an affair of rules?
Solve these problems to decipher the 'nature' of the law.
10/17/2012
State legitmacy
During the 1980s, while the majority of top state elites still believed in the ideological legitimacy of the regime, most students and Beijing residents evaluated the state mainly for its economic and moral performance. In the course of movement, the students challenged the government ideologically and morally, and the larger society sympathized with the challenges. On the other hand, the government either relied on ideological or legal dimensions of state authority to deal with the movement, which only antagonized Beijing students and residents, or made limited concessions, which could not satisfy the radicals. In the end, the only viable alternative appeared to be military repression, on which the government could still rely because most top state elites, a group that included military leaders, had joined the CCP long before the communists came to power and still perceived state power as ideologically legitimate.
10/16/2012
1989
Under imperialist pressure, Chinese intellectuals during the late Qing dynasty and the Republican era persistently sought a strong state that could defend the nation, an action that finally led to the rise of communism. Yet the communist state, the strong sate of which intellectuals had dreamed, became a problem because the state performed less well in economic modernization than it did in implementing political repression. The painful experience of intellectuals during Mao's era pushed them to fight for democracy. Still, the intellectuals themselves also inherited Maoist legacies: the unchecked state power under Mao had frightened Chinese intellectuals and drove them to take democracy as the prerequisite of Chinese modernization; the long-standing Marxist mode of education had given them a utopian vision (a linear worldview and a strong desire for social engineering on a grand scale); Mao's mass mobilization had nourished a populist understanding of democracy; and 30 years of repression and isolation had created an educated class with a great info deficiency and with opportunistic attitudes. All these factors contributed to the dominance of idealism, opportunism and radicalism among Chinese intellectuals, forming an ethos which in turn shaped intellectuals discourses during the 1980s and facilitated the rise of the 1989 movement.
Hua Guofeng's new leap forward (four modernization) required big science and high tech. Thus the roles of intellectuals was greatly emphasized. The mutual reinforcement of state policy and social demands led to a great expansion of higher education. Between 1977 and 1985, both the number of universities and general university enrollment increased rapidly. The greatest increases in enrollment occurred in the social sciences and humanities.
The four modernization proved to be unsustainable. Deng Xiaoping changed the policy, which emphasized the role of market. Chinese students and intellectuals were ambivalent toward this change. Their pro-Western pretensions led them to strongly support the new policy, but they were unhappy about their economic status under it. They thought that a market economy would bring the country prosperity, but they never expected that market forces would also degrade the prestige and privileges that intellectuals in traditional societies had enjoyed. Besides, even though Chinese government put great emphasis on higher education, its increases in funding lagged far behind the growth of enrollment.
Four obvious periods:
(1) 1978-1978 study fever
(2) 1980-1982 studied a less hard than had the Cultural Revolution cohort, but overall enthusiasm for study was still very high
(3) 1983-1986 diploma fever affected by the urban economic reform that had started in 1984
(4) 1987-1988 tired of study
The university in an underdeveloped nation tends to be a foreign institution with few indigenous roots. It teaches a foreign culture and is an engine for forced modernization and against tradition.
While a few radical activists did take democracy as a primary goal, most students participated in the movement in reaction to China's rising market economy. They didn't trust the state and didn't understand the market economy. They believed that the reform would bring intellectuals more benefits, and when it turned out that the opposite was true, they were very angry. To this population, democracy remained more a "borrowed language" than a clearly understood political program.
The decline of political control system had a great impact on the rise of the 1989 movement. The weakening of political control was mainly a result of the declining ideological legitimation of the state and of changing channels of status attainment.
The social problems that had the greatest impact on the Chinese and were most directly related to the rise of the 1989 Movement were rampant corruption, high inflation, and increasing income disparities.
rent-seeking Under the newly introduced dual-track price system for raw materials, state enterprises still received their yearly quota at the lower subsidized prices, but enterprises of other sectors had to buy raw materials at the market price. (Arbitrage chance)
The high inflation was a combined result of the financial deficit, the overheated economy, rampant corruption, price reforms and the decreasing confidence of the general public in the state.
Hua Guofeng's new leap forward (four modernization) required big science and high tech. Thus the roles of intellectuals was greatly emphasized. The mutual reinforcement of state policy and social demands led to a great expansion of higher education. Between 1977 and 1985, both the number of universities and general university enrollment increased rapidly. The greatest increases in enrollment occurred in the social sciences and humanities.
The four modernization proved to be unsustainable. Deng Xiaoping changed the policy, which emphasized the role of market. Chinese students and intellectuals were ambivalent toward this change. Their pro-Western pretensions led them to strongly support the new policy, but they were unhappy about their economic status under it. They thought that a market economy would bring the country prosperity, but they never expected that market forces would also degrade the prestige and privileges that intellectuals in traditional societies had enjoyed. Besides, even though Chinese government put great emphasis on higher education, its increases in funding lagged far behind the growth of enrollment.
Four obvious periods:
(1) 1978-1978 study fever
(2) 1980-1982 studied a less hard than had the Cultural Revolution cohort, but overall enthusiasm for study was still very high
(3) 1983-1986 diploma fever affected by the urban economic reform that had started in 1984
(4) 1987-1988 tired of study
The university in an underdeveloped nation tends to be a foreign institution with few indigenous roots. It teaches a foreign culture and is an engine for forced modernization and against tradition.
While a few radical activists did take democracy as a primary goal, most students participated in the movement in reaction to China's rising market economy. They didn't trust the state and didn't understand the market economy. They believed that the reform would bring intellectuals more benefits, and when it turned out that the opposite was true, they were very angry. To this population, democracy remained more a "borrowed language" than a clearly understood political program.
The decline of political control system had a great impact on the rise of the 1989 movement. The weakening of political control was mainly a result of the declining ideological legitimation of the state and of changing channels of status attainment.
The social problems that had the greatest impact on the Chinese and were most directly related to the rise of the 1989 Movement were rampant corruption, high inflation, and increasing income disparities.
rent-seeking Under the newly introduced dual-track price system for raw materials, state enterprises still received their yearly quota at the lower subsidized prices, but enterprises of other sectors had to buy raw materials at the market price. (Arbitrage chance)
The high inflation was a combined result of the financial deficit, the overheated economy, rampant corruption, price reforms and the decreasing confidence of the general public in the state.
10/13/2012
Property system and what Marx missed
The lifeblood of capitalism is capital.
Today, to a great extent, the difference between advanced nations and the rest of the world is that between countries where formal property is widespread and countries where classes are divided into those who can fix property rights and produce capital and those who cannot.
Marx didn't grasp that formal property was not simply an instrument for appropriation but also the means to motivate people to create real additional usable value. He didn't see that it is the mechanisms contained in the property system itself that give assets the labor invested in them the form required to create capital. Nor was he able to foresee to what degree legal property systems would become crucial vehicles for the enhancement of exchange value.
Marx lived in a time when it was probably too soon to see how formal property could, through representation, make those same resources serve additional functions and produce surplus value. (Though he saw that capital is more a transcendent concept than a physical good) Thus he could not see how it would be in everyone's interest to increase the range of the beneficiaries of property. Property titles were only the visible tip of a growing formal property iceberg. The rest of the iceberg is now an enormous man-made facility for drawing out the economic potential of assets. Potential capital is no longer the privilege of the few. The world is not filled with true proletarians but with extralegal entrepreneurs.
But property systems can also be used for theft. But it is not the reason to ban, just like we would ban automobiles or computers just because some people may use them to commit crimes.
Formal property is more than just ownership. It has to be viewed as an indispensable process that provides people with the tools to focus their thinking on those aspects of their resources from which they can extract capital.
Formal property is more than a system for titling, recording, and mapping assets---it is an instrument of thought, representing assets in such a way that people's minds can work on them to generate surplus value.
The reason why formal property must be universally accessible: to bring everyone into one social contract where they can cooperate to raise society's productivity.
A good property system puts assets into a form that lets us distinguish their similarities, differences, and connecting points with other assets. It collects dispersed information and makes capitals fungible.
The value of things can be increased by reducing the costs of knowing them and transacting with them. (Ronald Coase)
In Plato's famous analogy, we are likened to prisoners chained in a cave with our backs to the entrance so that all we can know of the world are the shadows cast on the wall in front of us. This means that many things that guide our destiny are not self-evident. (Hayek) That is why civilization has worked hard to fashion representational systems to access and grasp the part of our reality that is virtual and to represent it in terms we can understand. (Margaret Boden)
Representational systems such as math and integrated property help us manipulate and order the complexities of the world in a manner that we can all understand and that allows us to communicate regarding issues that we could not otherwise handle. prosthetic extensions of the mind.
Today, to a great extent, the difference between advanced nations and the rest of the world is that between countries where formal property is widespread and countries where classes are divided into those who can fix property rights and produce capital and those who cannot.
Marx didn't grasp that formal property was not simply an instrument for appropriation but also the means to motivate people to create real additional usable value. He didn't see that it is the mechanisms contained in the property system itself that give assets the labor invested in them the form required to create capital. Nor was he able to foresee to what degree legal property systems would become crucial vehicles for the enhancement of exchange value.
Marx lived in a time when it was probably too soon to see how formal property could, through representation, make those same resources serve additional functions and produce surplus value. (Though he saw that capital is more a transcendent concept than a physical good) Thus he could not see how it would be in everyone's interest to increase the range of the beneficiaries of property. Property titles were only the visible tip of a growing formal property iceberg. The rest of the iceberg is now an enormous man-made facility for drawing out the economic potential of assets. Potential capital is no longer the privilege of the few. The world is not filled with true proletarians but with extralegal entrepreneurs.
But property systems can also be used for theft. But it is not the reason to ban, just like we would ban automobiles or computers just because some people may use them to commit crimes.
Formal property is more than just ownership. It has to be viewed as an indispensable process that provides people with the tools to focus their thinking on those aspects of their resources from which they can extract capital.
Formal property is more than a system for titling, recording, and mapping assets---it is an instrument of thought, representing assets in such a way that people's minds can work on them to generate surplus value.
The reason why formal property must be universally accessible: to bring everyone into one social contract where they can cooperate to raise society's productivity.
A good property system puts assets into a form that lets us distinguish their similarities, differences, and connecting points with other assets. It collects dispersed information and makes capitals fungible.
The value of things can be increased by reducing the costs of knowing them and transacting with them. (Ronald Coase)
In Plato's famous analogy, we are likened to prisoners chained in a cave with our backs to the entrance so that all we can know of the world are the shadows cast on the wall in front of us. This means that many things that guide our destiny are not self-evident. (Hayek) That is why civilization has worked hard to fashion representational systems to access and grasp the part of our reality that is virtual and to represent it in terms we can understand. (Margaret Boden)
Representational systems such as math and integrated property help us manipulate and order the complexities of the world in a manner that we can all understand and that allows us to communicate regarding issues that we could not otherwise handle. prosthetic extensions of the mind.
10/11/2012
The mystery of legal failure
The reason that governments worldwide have failed to open up their property systems to the poor is that they usually operate under five basic misconceptions:
(1) all people who take cover in the extralegal or underground sectors do so to avoid paying taxes
(2) real estate assets are not held legally because they have not been properly surveyed, mapped, and recorded
(3) enacting mandatory law on property is sufficient, and gov.t can ignore the costs of compliance with that law
(4) existing extralegal arrangements or "social contracts" can be ignored
(5) you can change sth. as fundamental as people's convention on how they can hold their assets, both legal and extralegal, without high-level political leadership
Most people do not resort to the extralegal sector because it is a tax haven but because existing law does not address their needs or aspirations.
Operating in the underground is hardly cost-free. (basic application of demand-supply curves) Being free from the costs and nuisance of the extralegal sector generally compensates for paying taxes.
The widespread undercapitalization, informal squatting, and illegal housing throughout the non-Western world are hardly caused by a lack of advanced information and mapping technology.
Property is not a primary quality of assets but the legal expression of an economically meaningful consensus about assets and law is the instrument that fixes and realizes capital.
Property is not the assets themselves but a consensus between people as to how those assets should be held, used and exchanged.
Assets themselves have no effect on social behavior: they don't produce incentives, they make no person accountable, no contract enforceable. Assets are not intrinsically "fungible"--capable of being divided, combined, or mobilized to suit any transactions. All of these qualities grow out of modern property law. It is law that detaches and fixes the economic potential of assets as a value separate from the material assets themselves and allows humans to discover and realize that potential. It is law that connects assets into financial and investment circuits. And it is the representation of assets fixed in legal property documents that gives them the power to create surplus value.
(1) all people who take cover in the extralegal or underground sectors do so to avoid paying taxes
(2) real estate assets are not held legally because they have not been properly surveyed, mapped, and recorded
(3) enacting mandatory law on property is sufficient, and gov.t can ignore the costs of compliance with that law
(4) existing extralegal arrangements or "social contracts" can be ignored
(5) you can change sth. as fundamental as people's convention on how they can hold their assets, both legal and extralegal, without high-level political leadership
Most people do not resort to the extralegal sector because it is a tax haven but because existing law does not address their needs or aspirations.
Operating in the underground is hardly cost-free. (basic application of demand-supply curves) Being free from the costs and nuisance of the extralegal sector generally compensates for paying taxes.
The widespread undercapitalization, informal squatting, and illegal housing throughout the non-Western world are hardly caused by a lack of advanced information and mapping technology.
Property is not a primary quality of assets but the legal expression of an economically meaningful consensus about assets and law is the instrument that fixes and realizes capital.
Property is not the assets themselves but a consensus between people as to how those assets should be held, used and exchanged.
Assets themselves have no effect on social behavior: they don't produce incentives, they make no person accountable, no contract enforceable. Assets are not intrinsically "fungible"--capable of being divided, combined, or mobilized to suit any transactions. All of these qualities grow out of modern property law. It is law that detaches and fixes the economic potential of assets as a value separate from the material assets themselves and allows humans to discover and realize that potential. It is law that connects assets into financial and investment circuits. And it is the representation of assets fixed in legal property documents that gives them the power to create surplus value.
The missing lesson of U.S. history
The transition to integrated legal property system had little to do with technology; instead, the crucial change had to do with adapting the law to the social and economic needs of the majority of the population.
The mystery of political awareness
For better or for worse, people outside the West are fleeing self-sufficient and isolated societies in an effort to raise their standards of living by becoming interdependent in much larger markets. A legal failure that prevents enterprising people from negotiating with strangers defeats the division of labor and fastens would-be entrepreneurs to smaller circles of specialization and low productivity.
Property obeys what is known as Metcalfe's law: the value of network is roughly proportional to the number of users squared.
Many of the problems of non-Western markets today are due mainly to the fragmentation of their property arrangements and the unavailability of standard norms that allow assets and economic agents to interact and government to rule by law.
Political blindness consists of being unaware that the growth of the extralegal sector and the breakdown of the existing legal order are ultimately due to a gigantic movement away from life organized on a small scale toward one organized in a larger context.
The existence of prosperous enclaves in a sea of poverty conceals an abysmal retardation in a nation's capacity to create, respect and make available formal property rights to the majority of its citizens.
Throughout the Third World, extralegal activities burgeon whenever the legal system imposes rules that thwart the expectation of those it excludes.
Property obeys what is known as Metcalfe's law: the value of network is roughly proportional to the number of users squared.
Many of the problems of non-Western markets today are due mainly to the fragmentation of their property arrangements and the unavailability of standard norms that allow assets and economic agents to interact and government to rule by law.
Political blindness consists of being unaware that the growth of the extralegal sector and the breakdown of the existing legal order are ultimately due to a gigantic movement away from life organized on a small scale toward one organized in a larger context.
The existence of prosperous enclaves in a sea of poverty conceals an abysmal retardation in a nation's capacity to create, respect and make available formal property rights to the majority of its citizens.
Throughout the Third World, extralegal activities burgeon whenever the legal system imposes rules that thwart the expectation of those it excludes.
10/07/2012
The mystery of capital
Dead capital exists because we have already forgotten that converting a physical asset to generate capital requires a very complex process.
Why assets can be made to produce abundant capital in the West but very little in the rest of the world is a mystery.
In medieval Latin, "capital" appears to have denoted head of cattle or other livestock, which have always been important sources of wealth beyond the basic meat they provide.
The term "capital" does two jobs simultaneously: capture the physical dimension of assets (livestock) and their potential to generate surplus value (mike, hides, meat, fuel and reproduction)
Modern definition: part of a country's assets that initiates surplus production and increases productivity.
For accumulated assets to become active capital and put additional production in motion, they must be fixed and realized in some particular subject which lasts or some time at least after that labor is past.
Capital is not the accumulated stock of assets but the potential it holds to deploy new production. Creating capital also requires a conversion process.
Capital is first an abstract concept and must be given a fixed, tangible form to be useful.
The additional value people obtain from the resources is not a value of the resources themselves, but rather a value of the man-made process entrinsic to the resources.
Bringing capital to life requires us to go beyond looking at our assets as they are to actively thinking about them as they could be.
What creates capital in the West is an implicit process buried in the intricates of its formal property systems.---The formal property system
Any asset whose economic and social aspects are not fixed in a formal property system is extremely hard to move in the market.
The formal property systems produce six effects that allow citizens to generate capital.
(1) fixing the economic potential of assets
property is not the stuff itself but an economic concept about the stuff, embodied in a legal representation
(2) integrate dispersed information into one system
The integration of all property systems under one formal property law shifted the legitimacy of the rights of owners from the politized context of local communities to the impersonal context law.
(3) make people accountable
Freed from primitive econ activities and burdensome parochial constraints, citizens could explore how to generate surplus value from their own assets. People lose anonymity in the system.
Formal property's role in protecting not only ownership but the security of transactions encourages citizens in advanced countries to respect titles, honor contracts, and obey the law.
(4) make assets fungible
Why assets can be made to produce abundant capital in the West but very little in the rest of the world is a mystery.
In medieval Latin, "capital" appears to have denoted head of cattle or other livestock, which have always been important sources of wealth beyond the basic meat they provide.
The term "capital" does two jobs simultaneously: capture the physical dimension of assets (livestock) and their potential to generate surplus value (mike, hides, meat, fuel and reproduction)
Modern definition: part of a country's assets that initiates surplus production and increases productivity.
For accumulated assets to become active capital and put additional production in motion, they must be fixed and realized in some particular subject which lasts or some time at least after that labor is past.
Capital is not the accumulated stock of assets but the potential it holds to deploy new production. Creating capital also requires a conversion process.
Capital is first an abstract concept and must be given a fixed, tangible form to be useful.
The additional value people obtain from the resources is not a value of the resources themselves, but rather a value of the man-made process entrinsic to the resources.
Bringing capital to life requires us to go beyond looking at our assets as they are to actively thinking about them as they could be.
What creates capital in the West is an implicit process buried in the intricates of its formal property systems.---The formal property system
Any asset whose economic and social aspects are not fixed in a formal property system is extremely hard to move in the market.
The formal property systems produce six effects that allow citizens to generate capital.
(1) fixing the economic potential of assets
property is not the stuff itself but an economic concept about the stuff, embodied in a legal representation
(2) integrate dispersed information into one system
The integration of all property systems under one formal property law shifted the legitimacy of the rights of owners from the politized context of local communities to the impersonal context law.
(3) make people accountable
Freed from primitive econ activities and burdensome parochial constraints, citizens could explore how to generate surplus value from their own assets. People lose anonymity in the system.
Formal property's role in protecting not only ownership but the security of transactions encourages citizens in advanced countries to respect titles, honor contracts, and obey the law.
(4) make assets fungible
10/06/2012
Capitalism with Chinese characteristics
China is a crony capitalism built on systemic corruption and raw political power.
Property rights are not secure, a politically connected entrepreneur, with the full backing of the coercive power of the state, could simply expropriate the value from ordinary people.
4 kinds of capitalism:
(1) state-guided capitalism: government sets industrial policies and directs investment
(2) oligarchic capitalism: empowers and enriches the few at the expense of the many
(3) big-firm capitalism: accentuates the dominance of big firms and suppress innovation
(4) entrepreneurial capitalism: small and innovative businesses drive growth
On the surface, it does not seem to matter whether Chinese capitalism is entrepreneurial or state-led.
But it does matter:
(1) social opp--arrangements for health care and education--contracted during the fast GDP growth period of the 1990s.Rising illiteracy is probably the most monumental legacy of the policy model of the 1990s.
(2) personal income per capita grow much more slowly than GDP per capita
(3) it is well established that China today is among the most unequal societies in the world. Certain groups or individuals are privileged over others to grab a larger share of the economic gains.
Property rights are not secure, a politically connected entrepreneur, with the full backing of the coercive power of the state, could simply expropriate the value from ordinary people.
4 kinds of capitalism:
(1) state-guided capitalism: government sets industrial policies and directs investment
(2) oligarchic capitalism: empowers and enriches the few at the expense of the many
(3) big-firm capitalism: accentuates the dominance of big firms and suppress innovation
(4) entrepreneurial capitalism: small and innovative businesses drive growth
On the surface, it does not seem to matter whether Chinese capitalism is entrepreneurial or state-led.
But it does matter:
(1) social opp--arrangements for health care and education--contracted during the fast GDP growth period of the 1990s.Rising illiteracy is probably the most monumental legacy of the policy model of the 1990s.
(2) personal income per capita grow much more slowly than GDP per capita
(3) it is well established that China today is among the most unequal societies in the world. Certain groups or individuals are privileged over others to grab a larger share of the economic gains.
What's wrong with Shanghai?
The story of Shanghai is of two extreme. At one extreme, Shanghai is viewed as a model of economic development and as a symbol of a rising and prosperous China. At the other extreme, there is virtually no real knowledge about this city.
Much of the admiration for Shanghai is based on visual evidence. Although it is true that Shanghai has had excellent GDP performance, much of this performance seems to have only moderately improved the living standards of the average Shanghainese. A huge portion of Shanghai's GDP accrues not to Shanghai's households as personal income but rather to the government in the form of taxes and to corporations in the form of profits. Corporations in Shanghai are either heavily controlled by the government or their control rights are shared with foreign investments. The exalted GDP numbers translate into only modest levels of household income in Shanghai.
In the 1990s, Shanghai's GDP growth was not pro-poor and since the late 1990s, its growth has been sharply anti-poor.Whereas Shanghai households enjoy the highest wage level in the country, they earn very little money from their asset ownership.
There is no hard evidence that Shanghai is innovative. Despite a rich history of business creation and risk-taking, entrepreneurship is almost completely missing in Shanghai today.
Shanghai is rich but an average Shanghainese is not. A huge share of the economic gains go to the government and the state-controlled businesses. In 1980s, when Shanghai's GDP per capita declined against the rest of the country, the income of its average residents was actually gaining, and this was especially true for its rural residents. A state-controlled economy can grow without improving the economic well-being of its average residents.
Shanghai's per capita property income is very low (the sources of property income are comprised of interest and dividend payouts or income from property rentals)
Many observers believe that Shanghai experienced a Renaissance in the 1990s, but the truth is that for Shanghai's average households, the massive growth brought about very little in wealth creation.
The incomes from interest and dividend payouts represent the incomes derived from the savings set aside by households in previous years. That Shanghai's property income is so low indicates that there is a very low savings rate.
The growth in joblessness took an extreme form in Shanghai. In the 1990s, not only did employment grow at a slower rate than GDP, the size of employment actually contracted.
Shanghai started out as a leader in patents in the 1980s but ended as a laggard in the 1990s. Shanghai was showered with resources from the central government.
The Shanghai model has four integral components.
(1) a highly interventionist state
(2) a systematic and deep anti-rural bias in its economic policies
(3) a biased liberalization in favor of foreign capitalists at the expense of indigenous capitalists
(4) Shanghai is favored by the central government and might have been showered with massive resources
The Shanghai model, formulated in the last five years of the 1980s, was a precursor to China's anti-rural bias and repression of small-scale and labor-intensive entrepreneurship in the 1990s. The Pudong project, which in its essence ks built on a massive taking of land from rural incumbents, has had a powerful demonstration effect and was widely emulated in the rest of China beginning in the late 1990s. The Pudong model contributed to rising land grabs in China as many local governments sought to create their own versions of urban miracles. The tactics include forcible evictions of long-term residents, large-scale demolitions of existing housing stock, collusions with corrupt real estate developers, and below-the-market-price land requisitions.
Because of its privileged position in Chinese politics in the 1990s, Shanghai was able to amass a huge amount of financial resources supplied from the rest of the country.
In the 1990s, as the Chinese central state was investing heavily in a few urban metropolis such as Shanghai and Beijing, the same central government under-funded rural health and education.
Shanghai is the quintessential state-led capitalism.
Much of the admiration for Shanghai is based on visual evidence. Although it is true that Shanghai has had excellent GDP performance, much of this performance seems to have only moderately improved the living standards of the average Shanghainese. A huge portion of Shanghai's GDP accrues not to Shanghai's households as personal income but rather to the government in the form of taxes and to corporations in the form of profits. Corporations in Shanghai are either heavily controlled by the government or their control rights are shared with foreign investments. The exalted GDP numbers translate into only modest levels of household income in Shanghai.
In the 1990s, Shanghai's GDP growth was not pro-poor and since the late 1990s, its growth has been sharply anti-poor.Whereas Shanghai households enjoy the highest wage level in the country, they earn very little money from their asset ownership.
There is no hard evidence that Shanghai is innovative. Despite a rich history of business creation and risk-taking, entrepreneurship is almost completely missing in Shanghai today.
Shanghai is rich but an average Shanghainese is not. A huge share of the economic gains go to the government and the state-controlled businesses. In 1980s, when Shanghai's GDP per capita declined against the rest of the country, the income of its average residents was actually gaining, and this was especially true for its rural residents. A state-controlled economy can grow without improving the economic well-being of its average residents.
Shanghai's per capita property income is very low (the sources of property income are comprised of interest and dividend payouts or income from property rentals)
Many observers believe that Shanghai experienced a Renaissance in the 1990s, but the truth is that for Shanghai's average households, the massive growth brought about very little in wealth creation.
The incomes from interest and dividend payouts represent the incomes derived from the savings set aside by households in previous years. That Shanghai's property income is so low indicates that there is a very low savings rate.
The growth in joblessness took an extreme form in Shanghai. In the 1990s, not only did employment grow at a slower rate than GDP, the size of employment actually contracted.
Shanghai started out as a leader in patents in the 1980s but ended as a laggard in the 1990s. Shanghai was showered with resources from the central government.
The Shanghai model has four integral components.
(1) a highly interventionist state
(2) a systematic and deep anti-rural bias in its economic policies
(3) a biased liberalization in favor of foreign capitalists at the expense of indigenous capitalists
(4) Shanghai is favored by the central government and might have been showered with massive resources
The Shanghai model, formulated in the last five years of the 1980s, was a precursor to China's anti-rural bias and repression of small-scale and labor-intensive entrepreneurship in the 1990s. The Pudong project, which in its essence ks built on a massive taking of land from rural incumbents, has had a powerful demonstration effect and was widely emulated in the rest of China beginning in the late 1990s. The Pudong model contributed to rising land grabs in China as many local governments sought to create their own versions of urban miracles. The tactics include forcible evictions of long-term residents, large-scale demolitions of existing housing stock, collusions with corrupt real estate developers, and below-the-market-price land requisitions.
Because of its privileged position in Chinese politics in the 1990s, Shanghai was able to amass a huge amount of financial resources supplied from the rest of the country.
In the 1990s, as the Chinese central state was investing heavily in a few urban metropolis such as Shanghai and Beijing, the same central government under-funded rural health and education.
Shanghai is the quintessential state-led capitalism.
10/05/2012
A great reversal
Politically, the post-Tiananmen conservative leadership mounted a nationwide crackdown on China's private sector. The prevailing economic policy in the 1990s was to favor the urban areas over the rural areas and to favor foreign capitalists--FDI--over indigenous capitalists.\
Fittingly, 1989 marked both the decadal and policy turning points.
In the 1990s, China reversed many of its productive policies of the 1980s, with real consequences.
The barriers to entry or to expansion of rural entrepreneurship increased profits to incumbent businesses, thus explaining why non-farm business income increased in the 1990s.
The TVEs succeeded in the 1980s and failed in the 1990s for exactly the same reason--- that they were substantially private. It was the national policy environment that changed between the two decades.
Fittingly, 1989 marked both the decadal and policy turning points.
In the 1990s, China reversed many of its productive policies of the 1980s, with real consequences.
The barriers to entry or to expansion of rural entrepreneurship increased profits to incumbent businesses, thus explaining why non-farm business income increased in the 1990s.
The TVEs succeeded in the 1980s and failed in the 1990s for exactly the same reason--- that they were substantially private. It was the national policy environment that changed between the two decades.
10/04/2012
Renewable resources
Renewable sources of energy are not green and the nuclear industry should make a product beside electricity.
A few decades ago, some visionaries dreamed of an all-electric society. Today people convert about 35–40% of all primary fuel to electricity. The fraction will rise, but now even electricity enthusiasts (as I am) accept that finally not much more than half of all energy is likely to be electrified. Reasons include the impracticality of a generating system geared entirely to the instant consumption of energy and lack of amenability of many vehicles to reliance on electricity. Surrendering the vision of an all-electric society is a minor nuclear heresy.
In the USA and much of the rest of the world, including Canada, renewables mean dammed rivers. Almost 80% of so-called US renewable energy is hydro, and hydro generates about 60% of all Canada’s electricity.
The demand for electricity varies widely from hour to hour, day to day, and month to month. Electricity demand is typically highest during the daytime hours and lowest at night. It tends to be very high on unusually hot or unusually cold days and is lowest at night on mild spring and fall days. Demand typically reaches its highest levels during only a few hours each year. There is also a minimum “base” aggregate demand that is sustained through the entire year.
Electricity is the ultimate “just in time” manufacturing process, where supply must be produced to meet demand in real time.
A few decades ago, some visionaries dreamed of an all-electric society. Today people convert about 35–40% of all primary fuel to electricity. The fraction will rise, but now even electricity enthusiasts (as I am) accept that finally not much more than half of all energy is likely to be electrified. Reasons include the impracticality of a generating system geared entirely to the instant consumption of energy and lack of amenability of many vehicles to reliance on electricity. Surrendering the vision of an all-electric society is a minor nuclear heresy.
In the USA and much of the rest of the world, including Canada, renewables mean dammed rivers. Almost 80% of so-called US renewable energy is hydro, and hydro generates about 60% of all Canada’s electricity.
The demand for electricity varies widely from hour to hour, day to day, and month to month. Electricity demand is typically highest during the daytime hours and lowest at night. It tends to be very high on unusually hot or unusually cold days and is lowest at night on mild spring and fall days. Demand typically reaches its highest levels during only a few hours each year. There is also a minimum “base” aggregate demand that is sustained through the entire year.
Electricity is the ultimate “just in time” manufacturing process, where supply must be produced to meet demand in real time.
10/02/2012
The entrepreneurial decade
China in the 1980s witnessed an explosion of indigenous, completely private entrepreneurship, but almost all of this entrepreneurship occurred in the rural areas of the country. It was not an agricultural phenomenon.
Township and village enterprises spearheaded China's massive rural industrialization.
In the 1980s, Chinese peasants experienced the most rapid income gains in history. Per capita rural income between 1978 and 1981 grew at a real rate of 11.4 percent, the urban/rural ratio of the purchase of consumer goods fell from 10 to 1 in 1978 to 6 to 1 in 1981. According to a rural survey, rural per capita income more than doubled between 1978 and 1984, and real rural per capita consumption increased by 51percent between 1978 and 1983.
The consensus view is that rural reforms accounted for the largest segment of the income gains.
Chinese capitalism is heavily rural in origin. Rural entrepreneurship was also virtuous because it emerged first and developed fastest in the poorest regions of China.
Many of the largest manufacturing private-sector firms hail from backward, predominantly agricultural provinces of China.
The Cultural Revolution might have laid the foundation for the post-reform takeoff of rural entrepreneurship.
In the 1980s, there were two cross-cutting dynamics in the income distribution trends. One was a rise of within-rural inequality; the other was a decrease in rural/urban inequality.
Township and village governments assumed controls of private firms as a matter of political prerogative rather than on the basis of their share of capital contributions. In 1980s, China did not have a legal framework to accommodate large-size private firms. The logic of township control had nothing to do with economics; it was deeply political.
The very reason for the failure of township and village enterprise is that the business environment for rural entrepreneurship turned dramatically adverse in the 1990s.
Are TVEs really public?
The TVE label owes its origins to the commune and brigade enterprises created during the Great Leap Forward. But the cast majority of TVEs had nothing to do with the Great Leap Forward. Instead, they completely new entrants during the first half of the 1980s.
Enterprises sponsored by townships and villages are the collective TVEs. The rest of the firms under the TVE label are all private businesses or entities.
In general, the developed parts of China were more state-owned.
The initial triggers of growth can often be "humble" in nature. These reforms amount to nothing more than some relaxation of existing constraints on the private sector. No fundamental institutional reforms--those aiming at property rights protection, for example-- are needed.
Property rights protection in China, now or in 1980s, is very poor, but relative to the Cultural Revolution period, the marginal improvement was huge. Directional liberalism was the source of Chinese incentive to go into entrepreneurship. (Directional liberalism describes the idea of an economy that lacks many key features of liberal capitalism, but is nevertheless moving in that direction with sufficient speed to reassure investors that they’ll be able to keep their gains.)
The price of directional liberalization: property rights is not institutionalized.
Township and village enterprises spearheaded China's massive rural industrialization.
In the 1980s, Chinese peasants experienced the most rapid income gains in history. Per capita rural income between 1978 and 1981 grew at a real rate of 11.4 percent, the urban/rural ratio of the purchase of consumer goods fell from 10 to 1 in 1978 to 6 to 1 in 1981. According to a rural survey, rural per capita income more than doubled between 1978 and 1984, and real rural per capita consumption increased by 51percent between 1978 and 1983.
The consensus view is that rural reforms accounted for the largest segment of the income gains.
Chinese capitalism is heavily rural in origin. Rural entrepreneurship was also virtuous because it emerged first and developed fastest in the poorest regions of China.
Many of the largest manufacturing private-sector firms hail from backward, predominantly agricultural provinces of China.
The Cultural Revolution might have laid the foundation for the post-reform takeoff of rural entrepreneurship.
In the 1980s, there were two cross-cutting dynamics in the income distribution trends. One was a rise of within-rural inequality; the other was a decrease in rural/urban inequality.
Township and village governments assumed controls of private firms as a matter of political prerogative rather than on the basis of their share of capital contributions. In 1980s, China did not have a legal framework to accommodate large-size private firms. The logic of township control had nothing to do with economics; it was deeply political.
The very reason for the failure of township and village enterprise is that the business environment for rural entrepreneurship turned dramatically adverse in the 1990s.
Are TVEs really public?
The TVE label owes its origins to the commune and brigade enterprises created during the Great Leap Forward. But the cast majority of TVEs had nothing to do with the Great Leap Forward. Instead, they completely new entrants during the first half of the 1980s.
Enterprises sponsored by townships and villages are the collective TVEs. The rest of the firms under the TVE label are all private businesses or entities.
In general, the developed parts of China were more state-owned.
The initial triggers of growth can often be "humble" in nature. These reforms amount to nothing more than some relaxation of existing constraints on the private sector. No fundamental institutional reforms--those aiming at property rights protection, for example-- are needed.
Property rights protection in China, now or in 1980s, is very poor, but relative to the Cultural Revolution period, the marginal improvement was huge. Directional liberalism was the source of Chinese incentive to go into entrepreneurship. (Directional liberalism describes the idea of an economy that lacks many key features of liberal capitalism, but is nevertheless moving in that direction with sufficient speed to reassure investors that they’ll be able to keep their gains.)
The price of directional liberalization: property rights is not institutionalized.
Sports market outcomes: leagues, team location, expansion, and negotiations
Leagues enable owners to pursue economic goals and objectives that they cannot pursue as successfully acting alone, such as setting a season schedule, organizing championships, and implementing rule changes.
Single-entity cooperation defines the actions that owners must take to make league play happen in the first place.
(1) setting the schedule: Balanced scheduling, home and away, is essential to the success of the league. Leagues need to act in their single-entity capacity to include all teams in the schedule. To generate widespread fan interest and league growth, stronger teams must play weaker teams as well as other strong teams in order to cultivate broad fan interest.
Another important element is the season length.
(2) Setting the rules: Rules are changed to attract fans.
(3) Cooperation and championships: Determining a champion is very economically valuable. Adding playoffs does 2 things: it extends the season and fan interest for a few teams; it reduces the returns to buying talent.
Joint venture cooperation: The economics of league behavior
Once owners act together in pro leagues to set the stage for competition on the field, they may also act together to raise profits for member owners. All cooperative actions that do not make play happen are called joint ventures. In a joint venture, all owners in the league surrender part of their autonomy to allow the league to act on their behalf. Joint ventures are cooperative acts aimed at increasing profits relative to acting individually.
(1) The definition and protection of individual owner territory. The league is allowed through franchise agreements (a contract between the league and an owner that clearly specifies what it means to own a pro sports team) to define a territory and ensure that no other members locate within that territory.
This managed absence of substitutes allows individual teams to maximize profits as monopolies in their sport in their territory.
(2) Quantity restrictions: 2 indicators
a. rival leagues do form occasionally, indicating that the previous league size was too small in the eyes of the fans of the rival league
b. every time a league announces that it plans to expand, a long line of candidate-owners forms in the hope of becoming the newest addition to a league.
,
Single-entity cooperation defines the actions that owners must take to make league play happen in the first place.
(1) setting the schedule: Balanced scheduling, home and away, is essential to the success of the league. Leagues need to act in their single-entity capacity to include all teams in the schedule. To generate widespread fan interest and league growth, stronger teams must play weaker teams as well as other strong teams in order to cultivate broad fan interest.
Another important element is the season length.
(2) Setting the rules: Rules are changed to attract fans.
(3) Cooperation and championships: Determining a champion is very economically valuable. Adding playoffs does 2 things: it extends the season and fan interest for a few teams; it reduces the returns to buying talent.
Joint venture cooperation: The economics of league behavior
Once owners act together in pro leagues to set the stage for competition on the field, they may also act together to raise profits for member owners. All cooperative actions that do not make play happen are called joint ventures. In a joint venture, all owners in the league surrender part of their autonomy to allow the league to act on their behalf. Joint ventures are cooperative acts aimed at increasing profits relative to acting individually.
(1) The definition and protection of individual owner territory. The league is allowed through franchise agreements (a contract between the league and an owner that clearly specifies what it means to own a pro sports team) to define a territory and ensure that no other members locate within that territory.
This managed absence of substitutes allows individual teams to maximize profits as monopolies in their sport in their territory.
(2) Quantity restrictions: 2 indicators
a. rival leagues do form occasionally, indicating that the previous league size was too small in the eyes of the fans of the rival league
b. every time a league announces that it plans to expand, a long line of candidate-owners forms in the hope of becoming the newest addition to a league.
,
Team cost, profit and winning
Under the profit maximization hypothesis, owners make decisions about their venues, players, and media contracts in order to maximize the difference between total revenues and total costs.
In the short run, elements of the team production are fixed. This includes anything covered by contractual obligation in force during production. For sports teams, the primary fixed inputs are talent, on and off the field, and the facility in which team plays. To clarify, if any of the resources used to produce winning are fixed, the owner is in short-run situation. Whenever all elements of the process are variable, then the long run is under consideration.
The essence of the short run is that some decisions about putting winning in front of fans have already made.
Short run total costs= total fixed costs + total variable costs
Better teams will have a higher total fixed costs because they will choose to put together a more expensive set of player during a given season. Total variable costs might rise at a decreasing rate over some low range of output, but once diminishing returns set in, total variable costs must begin to increase at an increasing rate.
Long-run total cost is the relationship between winning percent and the cost of obtaining it.
Long-run total costs are simply the sum of the player costs(salaries) as more stars are added and winning percent increases. It is the cost of winning percent that the team owner seeks to find.
As teams choose higher winning percents, in the long run total costs rise. Tension between winning and costs. The more an owner wants to win, the more it is going to cost.
In the long run, if costs eventually rise faster than revenues, then profit maximization constrains owners in their pursuit of winning.
Profit variation can harm balance.
The competitive imbalance doesn't necessarily mean that small market teams are not profitable.
Profit-maximizing owners will beef up on talent if they believe that doing so will raise revenues at a greater rate than the costs of making it happen. Only if the last owner made horrible mistakes or has the same vision as the new ownership but no money should we expect the new owner to alter the level of team quality.
In the short run, elements of the team production are fixed. This includes anything covered by contractual obligation in force during production. For sports teams, the primary fixed inputs are talent, on and off the field, and the facility in which team plays. To clarify, if any of the resources used to produce winning are fixed, the owner is in short-run situation. Whenever all elements of the process are variable, then the long run is under consideration.
The essence of the short run is that some decisions about putting winning in front of fans have already made.
Short run total costs= total fixed costs + total variable costs
Better teams will have a higher total fixed costs because they will choose to put together a more expensive set of player during a given season. Total variable costs might rise at a decreasing rate over some low range of output, but once diminishing returns set in, total variable costs must begin to increase at an increasing rate.
Long-run total cost is the relationship between winning percent and the cost of obtaining it.
Long-run total costs are simply the sum of the player costs(salaries) as more stars are added and winning percent increases. It is the cost of winning percent that the team owner seeks to find.
As teams choose higher winning percents, in the long run total costs rise. Tension between winning and costs. The more an owner wants to win, the more it is going to cost.
In the long run, if costs eventually rise faster than revenues, then profit maximization constrains owners in their pursuit of winning.
Profit variation can harm balance.
The competitive imbalance doesn't necessarily mean that small market teams are not profitable.
Profit-maximizing owners will beef up on talent if they believe that doing so will raise revenues at a greater rate than the costs of making it happen. Only if the last owner made horrible mistakes or has the same vision as the new ownership but no money should we expect the new owner to alter the level of team quality.
9/30/2012
Demand and sports revenue
The absolute level of quality simply refers to the level of quality, for example, the difference between minor and major leagues. The relative level of quality describes the competitiveness of a team once the absolute level is determined.
Uncertainty of outcome hypothesis:
fans want their teams to win in close games, and when it comes to postseason, fans expect a reasonable chance that their team will appear, not every year, but often.
The more fans in a given location are willing to pay for quality, the higher the quality of the team they will get to enjoy. Demand shifters: preferences; fan income; the price of other goods; expectation, population
Quality is one of the more important preference elements in the determination of demand.
Nearly all of the money in sports comes from fans.
In sports, market power is derived from the fact that teams occupy exclusive geographic territory.
Uncertainty of outcome hypothesis:
fans want their teams to win in close games, and when it comes to postseason, fans expect a reasonable chance that their team will appear, not every year, but often.
The more fans in a given location are willing to pay for quality, the higher the quality of the team they will get to enjoy. Demand shifters: preferences; fan income; the price of other goods; expectation, population
Quality is one of the more important preference elements in the determination of demand.
Nearly all of the money in sports comes from fans.
In sports, market power is derived from the fact that teams occupy exclusive geographic territory.
9/28/2012
China at the death of Mao
China's post-Mao transition to a market economy is particularly intriguing given that the post-Mao reform was by no means the first time China had tries to restructure its socialist economy.
It was the Long March that began to remake the Chinese Communist Party as a native Chinese party and forged its independence from Moscow.
A striking and ironic feature of socialism is its inherent anti-population. Unlike the democracy, which is forced to be responsive to the average voter, socialist governments can afford to ignore and even harm the interest of the majority, often justifying these actions under some grand but empty banner.
Although Mao crushed the market in ideas and monopolized the realm of thought, he was never a support of centralization in administration. As an unintended consequence of decentralization, Mao could reach provincial government directly, without going through the bureaucracy of various ministries in Beijing. With Mao calling for speedy economic development, local authorities were now well positioned to begin the Great Leap Forward.
Under the commune system, all assets were taken away from households and managed as collective goods. A glittering and disastrous invention that swept rural China in 1958 was the commune canteen.
Administrative decentralization was unfortunate (decentralization without protection of checks and balance is more disastrous) and pushed the Chinese economy back to the central planning.
Some structural flaws in the administrative decentralization of 1958:
(1) anti-market mentality
(2) strict control of domestic migration
(3) state monopoly of media
(4) radical anti-intellectualism
A market economy assumes two deep epistemic commitments: acknowledgement of ignorance and tolerance of uncertainty.
Unlike the Great Leap Forward when the political elites were largely sheltered from the disaster, the Party veterans were squarely at the center of the political struggle during the Cultural Revolution.
It was the Long March that began to remake the Chinese Communist Party as a native Chinese party and forged its independence from Moscow.
A striking and ironic feature of socialism is its inherent anti-population. Unlike the democracy, which is forced to be responsive to the average voter, socialist governments can afford to ignore and even harm the interest of the majority, often justifying these actions under some grand but empty banner.
Although Mao crushed the market in ideas and monopolized the realm of thought, he was never a support of centralization in administration. As an unintended consequence of decentralization, Mao could reach provincial government directly, without going through the bureaucracy of various ministries in Beijing. With Mao calling for speedy economic development, local authorities were now well positioned to begin the Great Leap Forward.
Under the commune system, all assets were taken away from households and managed as collective goods. A glittering and disastrous invention that swept rural China in 1958 was the commune canteen.
Administrative decentralization was unfortunate (decentralization without protection of checks and balance is more disastrous) and pushed the Chinese economy back to the central planning.
Some structural flaws in the administrative decentralization of 1958:
(1) anti-market mentality
(2) strict control of domestic migration
(3) state monopoly of media
(4) radical anti-intellectualism
A market economy assumes two deep epistemic commitments: acknowledgement of ignorance and tolerance of uncertainty.
Unlike the Great Leap Forward when the political elites were largely sheltered from the disaster, the Party veterans were squarely at the center of the political struggle during the Cultural Revolution.
9/27/2012
The business of sports
Sports are business. Reasons: (1) owners manage the teams based on profit maximization (2) Owners would rather pressure state and local governments to root the bill of stadiums. If sports are not business, wealthy owners could just give the players what they wanted, let fans into stadiums for free, and every one would be happy. Part of the return may be in terms of his love of sports, but there is an undeniable business aspect to the investment as well.
Although overpayment may be in the eye if the beholder, there is no doubt that athletes make a lot of money. Team revenues continue to grow, providing the basis for such demands in the first place.
Two hypotheses that have been important and fundamental to research in the area:
(1) competitive balance:
fans prefer their team to win but they also prefer close game outcomes and season finishes to blowouts.
(2) invariance principle:
player drafts and "the player reserve system" then in place did nothing to competitive balance. Instead, these mechanisms simply redistributed the value of talent away from players and toward owners.
Although overpayment may be in the eye if the beholder, there is no doubt that athletes make a lot of money. Team revenues continue to grow, providing the basis for such demands in the first place.
Two hypotheses that have been important and fundamental to research in the area:
(1) competitive balance:
fans prefer their team to win but they also prefer close game outcomes and season finishes to blowouts.
(2) invariance principle:
player drafts and "the player reserve system" then in place did nothing to competitive balance. Instead, these mechanisms simply redistributed the value of talent away from players and toward owners.
Labor relations in pro sports
Players don't want real economic competition any more than owners do. For example, unions have never supported completely unrestricted free agency.
Collective bargaining means that players are allowed to act as unit and owners are obliged by law to recognize that right.
The National Labor Relation Act guarantees three essential rights for labor:
(1) The right of labor to organize and form unions
(2) The right of labor to bargain collectively through representatives of their own choosing
(3) The right of labor to use pressure tactics such as strikes and picketing
Appeals of unfair labor practices go to the National Labor Relations Board for a ruling. Bargaining in good faith means that opponents must be striving to reach an agreement rather than striving to drive a wedge in negotiations.
The essence of collective bargaining is that both owners and players have relinquished some of their individual bargaining rights to their representatives, leagues, and unions.
In a nutshell, the goal of unionization is to offset owner power over MRP in order to drive payment closer to the level that would be determined under a competitive situation.
Salary exploitation= (MRP-Salary)/MRP
Obstacles to Organization
Although some players may immediately recognize the value of organization, not all will. Therefore, the potential union incurs start-up education costs.
Free-riding, owner retaliation, political sentiment and illegal league behavior
The logic of collective action:
(1) rational ignorance: on any given policy issue, details are left to team representatives and leadership. As a result, any given player knows nearly nothing about almost everything that the union does. Rational ignorance is fueled by the fact that it is difficult for any individual players to tell how any given choice will affect them. It is also expensive to discover any particular representative's role in any given policy. Thus it is rational for players to be ignorant about union policy because it is expensive to be informed.
The players who are not rationally ignorant are those who stand to gain or lose the most from union choices and have lower participation costs--a characterization of established veteran stars.
Union leadership will produce concentrated benefits (concentrated in the sense that they are large relative to the small group of star players who receive them) and dispersed costs (dispersed over the majority of nonstar players in the league)
powerful players control the fate of union officials
Collective bargaining means that players are allowed to act as unit and owners are obliged by law to recognize that right.
The National Labor Relation Act guarantees three essential rights for labor:
(1) The right of labor to organize and form unions
(2) The right of labor to bargain collectively through representatives of their own choosing
(3) The right of labor to use pressure tactics such as strikes and picketing
Appeals of unfair labor practices go to the National Labor Relations Board for a ruling. Bargaining in good faith means that opponents must be striving to reach an agreement rather than striving to drive a wedge in negotiations.
The essence of collective bargaining is that both owners and players have relinquished some of their individual bargaining rights to their representatives, leagues, and unions.
In a nutshell, the goal of unionization is to offset owner power over MRP in order to drive payment closer to the level that would be determined under a competitive situation.
Salary exploitation= (MRP-Salary)/MRP
Obstacles to Organization
Although some players may immediately recognize the value of organization, not all will. Therefore, the potential union incurs start-up education costs.
Free-riding, owner retaliation, political sentiment and illegal league behavior
The logic of collective action:
(1) rational ignorance: on any given policy issue, details are left to team representatives and leadership. As a result, any given player knows nearly nothing about almost everything that the union does. Rational ignorance is fueled by the fact that it is difficult for any individual players to tell how any given choice will affect them. It is also expensive to discover any particular representative's role in any given policy. Thus it is rational for players to be ignorant about union policy because it is expensive to be informed.
The players who are not rationally ignorant are those who stand to gain or lose the most from union choices and have lower participation costs--a characterization of established veteran stars.
Union leadership will produce concentrated benefits (concentrated in the sense that they are large relative to the small group of star players who receive them) and dispersed costs (dispersed over the majority of nonstar players in the league)
powerful players control the fate of union officials
9/25/2012
Microfinance
Micro-lenders are not established merely through the need of poor people,
but by the decision-making of donors who first identify a social or
developmental objective.
Some lenders specifically target microcredit at women. Women are usually seen as economically less independent than men in the same social group, and benefits from their economic empowerment are argued to extend more directly to their children. Therefore, women are often seen as more desirable lenders, from a social equity point of view, than men, and there is a large number of microlenders who explicitly aim at women empowerment.
Another important group is young people. Alternative target groups may comprise rural people, because they are seen as unable to benefit from development and employment creation in cities and towns. Finally, other social criteria for selecting a target group may be factors such as ethnicity or nationality, or factors of social disadvantage like a physical disability.
Targeting specific sections of the population has not only social but also economic implications. There are two sides to it: first, different groups may be variably efficient in utilising micro-loans in creating viable enterprises, and second, different groups typically have different repayment patterns, thus impacting on the sustainability of microlenders.
A clear distinction between various groups of microlenders: those who provide a business service in an infant industry situation, and thus focus on economic viability, and those who see themselves as a comprehensive development and empowerment agency, and thus emphasise social change. With appropriate arguments, both approaches can be justified. However, many donors and microlenders hold on to unreasonably optimistic hopes of being able to combine the best of business mindedness and charity and compassion. Therefore, donors as well as lenders evade some hard choices; this may explain why many microcredit schemes promise to deliver on conflicting objectives.
Some lenders specifically target microcredit at women. Women are usually seen as economically less independent than men in the same social group, and benefits from their economic empowerment are argued to extend more directly to their children. Therefore, women are often seen as more desirable lenders, from a social equity point of view, than men, and there is a large number of microlenders who explicitly aim at women empowerment.
Another important group is young people. Alternative target groups may comprise rural people, because they are seen as unable to benefit from development and employment creation in cities and towns. Finally, other social criteria for selecting a target group may be factors such as ethnicity or nationality, or factors of social disadvantage like a physical disability.
Targeting specific sections of the population has not only social but also economic implications. There are two sides to it: first, different groups may be variably efficient in utilising micro-loans in creating viable enterprises, and second, different groups typically have different repayment patterns, thus impacting on the sustainability of microlenders.
A clear distinction between various groups of microlenders: those who provide a business service in an infant industry situation, and thus focus on economic viability, and those who see themselves as a comprehensive development and empowerment agency, and thus emphasise social change. With appropriate arguments, both approaches can be justified. However, many donors and microlenders hold on to unreasonably optimistic hopes of being able to combine the best of business mindedness and charity and compassion. Therefore, donors as well as lenders evade some hard choices; this may explain why many microcredit schemes promise to deliver on conflicting objectives.
Racial discrimination in basketball players' compensation
Since basketball players are more highly visible (both on the court and on the bench) to fans than players in other sports, customer discrimination may well be more prevalent in basketball than elsewhere, especially in view of the relative scarcity of white player.
In customer discrimination, the consumer is willing to pay a premium for white workers. Although blacks have made major gains in professional basketball, unexplained racial salary differentials are of a similar order of magnitude as for the rest of the economy.
All else equal, white representation on a team contributes to home attendance, providing evidence consistent with the idea of customer discrimination. On the other hand, we do not find evidence of discrimination in the draft selection process.
By greatly reducing employer monopsony power, the free-agency system appears to have led to a rapid escalation of salaries.
A variety of specifications and statistical techniques indicate that, ceteris paribus, black NBA players earn significantly less than white players by about 20%. In addition, ceteris paribus, home attendance is a positive func- tion of white representation on the team. Such findings are consistent with the notion of customer discrimination. On the other hand, our results for draft position do not indicate discrimination in hiring.
Our results suggest that customer (fan) discrimination may be the ultimate cause of the black shortfall. As long as fans prefer to see white players, profit-oriented teams will make discriminatory salary offers.
In customer discrimination, the consumer is willing to pay a premium for white workers. Although blacks have made major gains in professional basketball, unexplained racial salary differentials are of a similar order of magnitude as for the rest of the economy.
All else equal, white representation on a team contributes to home attendance, providing evidence consistent with the idea of customer discrimination. On the other hand, we do not find evidence of discrimination in the draft selection process.
By greatly reducing employer monopsony power, the free-agency system appears to have led to a rapid escalation of salaries.
A variety of specifications and statistical techniques indicate that, ceteris paribus, black NBA players earn significantly less than white players by about 20%. In addition, ceteris paribus, home attendance is a positive func- tion of white representation on the team. Such findings are consistent with the notion of customer discrimination. On the other hand, our results for draft position do not indicate discrimination in hiring.
Our results suggest that customer (fan) discrimination may be the ultimate cause of the black shortfall. As long as fans prefer to see white players, profit-oriented teams will make discriminatory salary offers.
The myth of golden age of player loyalty
There is a trade-off between a stable roster that fans like and eventual declines in winning percents that fans won't stand for. All this really means is that there is a profit-maximizing level of roster stability.
Has the duration of roster stability changed since free agency? NO
Reasons:
(1) players move at about the same rate with just a slight increase in the quality of players who do move.
(2) prior to free agency, the period fans ironically refer to as the golden age of roster stability, there was no such thing as player loyalty because it was impossible for players to exercise loyalty at all. Even with the introduction of free agency, many free agents are involuntary because the original teams don't want them.
So it is only the very few superstar free agents who have any chance to exhibit what fans think of as loyalty to their team.
Has the duration of roster stability changed since free agency? NO
Reasons:
(1) players move at about the same rate with just a slight increase in the quality of players who do move.
(2) prior to free agency, the period fans ironically refer to as the golden age of roster stability, there was no such thing as player loyalty because it was impossible for players to exercise loyalty at all. Even with the introduction of free agency, many free agents are involuntary because the original teams don't want them.
So it is only the very few superstar free agents who have any chance to exhibit what fans think of as loyalty to their team.
The history of player pay
Pro owners would certainly pay less if they could and pocket the extra revenue. This would require making the market for player services less competitive. \
The first step to reducing pay involves the entry of new talent into the pro ranks. The reverse-order-of-finish draft was established. (The draft used by NBA)
The impact of draft: part of the value of talent that would have gone to recruiting and signing compensation is preserved for the league.
(All competition over incoming talent is eliminated since incoming players have no choice in signing their first contract)
But the amount preserved for the league seems to be diminishing:
(1) training has become a year-round activity
(2) most of the incoming athletes are simply worth too much to let their services slide for a year
The value that is preserved for the league goes to the owners of the weakest teams in the league.
Typically, weak teams are weak because that is the best that their fans will support (Rottenberg's invariance principle)
The draft reduces competition over players as they enter the league. The second step to reducing pay is the reduction of competition over talent after it has been drafted.
1922, the Federal Baseball decision simply meant that it would be nearly impossible to challenge the reserve clause because the Supreme Court had failed to rule against it.
Free agency actually is limited free agency in all pro sports.
One measure of the amount of player MRP that was kept by owners when the reserve clause was in force is called player exploitation.
formula: (MRP-Actual Salary)/MRP
With dramatic escalation in salaries brought by free agency, risk drove owners and players to long-term contracts.
Shirking actually is an old economic issue falling under the heading of principal-agent problems.
The economic remedies:
(1)monitoring effect
(2)strategic player effect (合同年效应) incentive-compatible mechanisms like performance incentives and contingency payments.
Invariance principle: the distribution of talent in a league is invariant to who gets the revenues generated by players; talent moves to its highest valued use in the league whether players or owners receive players' MRPs.
But restrictions on competition do reallocate payments away from players toward smaller-revenue market owners.
The invariance principle predicts that the better players will move to better teams, even if a draft is installed. Larger-revenue market owners will compensate smaller-revenue market owners for talent rather than find the talent on their own. If there were no draft, the players would get the money because they would simply go directly to the teams in higher-revenue markets and collect the returns in terms of higher staring salaries and signing bonuses.
Trading down draft picks: a team actually trades higher draft picks for lower draft picks. Reason: an owner may not be able to afford to pay signing bonuses.
The first step to reducing pay involves the entry of new talent into the pro ranks. The reverse-order-of-finish draft was established. (The draft used by NBA)
The impact of draft: part of the value of talent that would have gone to recruiting and signing compensation is preserved for the league.
(All competition over incoming talent is eliminated since incoming players have no choice in signing their first contract)
But the amount preserved for the league seems to be diminishing:
(1) training has become a year-round activity
(2) most of the incoming athletes are simply worth too much to let their services slide for a year
The value that is preserved for the league goes to the owners of the weakest teams in the league.
Typically, weak teams are weak because that is the best that their fans will support (Rottenberg's invariance principle)
The draft reduces competition over players as they enter the league. The second step to reducing pay is the reduction of competition over talent after it has been drafted.
1922, the Federal Baseball decision simply meant that it would be nearly impossible to challenge the reserve clause because the Supreme Court had failed to rule against it.
Free agency actually is limited free agency in all pro sports.
One measure of the amount of player MRP that was kept by owners when the reserve clause was in force is called player exploitation.
formula: (MRP-Actual Salary)/MRP
With dramatic escalation in salaries brought by free agency, risk drove owners and players to long-term contracts.
Shirking actually is an old economic issue falling under the heading of principal-agent problems.
The economic remedies:
(1)monitoring effect
(2)strategic player effect (合同年效应) incentive-compatible mechanisms like performance incentives and contingency payments.
Invariance principle: the distribution of talent in a league is invariant to who gets the revenues generated by players; talent moves to its highest valued use in the league whether players or owners receive players' MRPs.
But restrictions on competition do reallocate payments away from players toward smaller-revenue market owners.
The invariance principle predicts that the better players will move to better teams, even if a draft is installed. Larger-revenue market owners will compensate smaller-revenue market owners for talent rather than find the talent on their own. If there were no draft, the players would get the money because they would simply go directly to the teams in higher-revenue markets and collect the returns in terms of higher staring salaries and signing bonuses.
Trading down draft picks: a team actually trades higher draft picks for lower draft picks. Reason: an owner may not be able to afford to pay signing bonuses.
9/24/2012
The value of sports talent
On top of salaries, many players earn substantial endorsement income.
How can athletes be worth so much?
Marginal revenue product: MRP(W)=MP(W)*MR(W)
MP(W) is marginal product, or the player's contribution to winning percent. IN sports, where market power leads to downward sloping demand functions, MR decreases with output. MRP is the input's contribution to the revenues earned by the team owner.
Experience-earnings relationship: MRP on all jobs starts low, increases rather quickly, tops off, and then may decline as skill diminishes or health declines with wage.
If a player and team owner cannot reach an agreement in the their year, then the decision may go to an independent arbitrator, who must choose either the amount the player is asking or the amount offered by the owner. (Arbitration) The effect is dramatic INCREASE in salary.
Along with competitive imbalance, there will also be payroll imbalance as long as MRs are not equal.
The larger-revenue market team has a higher winning percent than the smaller-revenue market team.
MRP theory dictates that players can only earn more if (1) they become more productive (i.e., MP increases) or (2) fans increase their willingness to pay for the result. If it is the case that MR increases, it means that players are more valuable than they used to be in the eyes of the fans. This means that owners will raise prices because fans are willing to pay more. Then, player pay will rise as long as there is competition for the players' services between teams. If salaries caused ticket prices to change, then they should almost always be moving in the same direction. But the empirical fact doesn't show that.
Some other competing explanations for how sports stars get paid:
(1)winner's curse
the over-bidding for the players
(2)bidding wars
essentially, a bidding war ensues when coming in second place is very costly
(3)the winner-take-all explanation
golf, tennis
Discrimination in pay and hiring:
3 factors that may explain variation in pay among individuals
(1) innate ability: all else constant, those with greater ability contribute more of what fans pays to see and are, therefore, expected to earn more
(2) training and experience:
variation in willingness to train or gained experience will contribute to variation in income
(3) statistical discrimination (rules of thumb)
Fan discrimination: fan preferences result in lower pay and reduced hiring by race and gender only because of race and gender rather than ability.
Discrimination can be difficult to identify.
Talent supply side:
(1) opp cost of time
(2) worker job preferences
How can athletes be worth so much?
Marginal revenue product: MRP(W)=MP(W)*MR(W)
MP(W) is marginal product, or the player's contribution to winning percent. IN sports, where market power leads to downward sloping demand functions, MR decreases with output. MRP is the input's contribution to the revenues earned by the team owner.
Experience-earnings relationship: MRP on all jobs starts low, increases rather quickly, tops off, and then may decline as skill diminishes or health declines with wage.
If a player and team owner cannot reach an agreement in the their year, then the decision may go to an independent arbitrator, who must choose either the amount the player is asking or the amount offered by the owner. (Arbitration) The effect is dramatic INCREASE in salary.
Along with competitive imbalance, there will also be payroll imbalance as long as MRs are not equal.
The larger-revenue market team has a higher winning percent than the smaller-revenue market team.
MRP theory dictates that players can only earn more if (1) they become more productive (i.e., MP increases) or (2) fans increase their willingness to pay for the result. If it is the case that MR increases, it means that players are more valuable than they used to be in the eyes of the fans. This means that owners will raise prices because fans are willing to pay more. Then, player pay will rise as long as there is competition for the players' services between teams. If salaries caused ticket prices to change, then they should almost always be moving in the same direction. But the empirical fact doesn't show that.
Some other competing explanations for how sports stars get paid:
(1)winner's curse
the over-bidding for the players
(2)bidding wars
essentially, a bidding war ensues when coming in second place is very costly
(3)the winner-take-all explanation
golf, tennis
Discrimination in pay and hiring:
3 factors that may explain variation in pay among individuals
(1) innate ability: all else constant, those with greater ability contribute more of what fans pays to see and are, therefore, expected to earn more
(2) training and experience:
variation in willingness to train or gained experience will contribute to variation in income
(3) statistical discrimination (rules of thumb)
Fan discrimination: fan preferences result in lower pay and reduced hiring by race and gender only because of race and gender rather than ability.
Discrimination can be difficult to identify.
Talent supply side:
(1) opp cost of time
(2) worker job preferences
Leagues and competitive balance
2 downsides of exclusive territories: the possibility of rival leagues, competitive imbalance.
A league suffers from competitive imbalance if, year after year, there are very strong and very weak teams, and the mix of these strong and weak teams doesn't change. (Rottenberg's empirical research) Competitive imbalance can reduce fan interest in the league product and individual team profits.
Uncertainty-of-outcome hypothesis: fans prefer closer games to blowouts and a changing mix of teams in postseason play.
If the hypothesis is right, competitive imbalance would drive fans of losing teams that nearly never appear in postseason play away from watching home games. The teams lose the reason of existence and the spillover effect to the remaining owners would reduce the entire league's economic well-being.
Revenue disparity drives competitive imbalance in all leagues. Exclusive territories do provide market power positions for owners, but they lead to competitive imbalance.
winning percent is the owner's long-run choice of team quality on the field.
Winning percent equilibrium:
(1) marginal revenues are equal across teams
(2) revenue imbalance causes competitive imbalance
(3) revenue imbalance causes payroll imbalance
There is a limit on talent purchases by the larger-revenue market owner. The larger-revenue market owner will not buy all the great talent because, eventually, the marginal unit of talent is more valuable to the small-revenue owner.
The larger-revenue market team has a higher winning percent than the smaller-revenue market team. If that market will pay the most for a high-quality team, the owner buys the talent to make it so. Only then can the owner collect the high level of revenues from fans at the gate and from TV right fees.
The larger-revenue market owner spends more on talent than does the smaller-revenue market owner. The larger the revenue imbalance, the larger the competitive imbalance.
Important application of the model: when a good team leaves, the marginal revenue function for the bad team shift leftward, thus enhancing the team quality and net value from winning, the larger-revenue team is worse off, because of team quality drops and payroll rises (the price of talent increases in the inelastic portion, and net value of winning decreases)
There will be competitive imbalance and payroll imbalance as long as owners have unequal earning power and that competitive imbalance worsens, the more imbalanced revenues become.
It is actually the unequal revenue potential in different geographic locations that drives both payroll imbalance and competitive imbalance.
Joint venture remedies for competitive imbalance claimed by leagues include national TV revenue sharing, local revenue sharing, luxury tax and salary cap. Theory suggests that national TV revenue sharing, local revenue sharing, and player drafts will have no impact whatsoever on competitive balance. However, they will redistribute money from players to the owners of weaker teams.
A league suffers from competitive imbalance if, year after year, there are very strong and very weak teams, and the mix of these strong and weak teams doesn't change. (Rottenberg's empirical research) Competitive imbalance can reduce fan interest in the league product and individual team profits.
Uncertainty-of-outcome hypothesis: fans prefer closer games to blowouts and a changing mix of teams in postseason play.
If the hypothesis is right, competitive imbalance would drive fans of losing teams that nearly never appear in postseason play away from watching home games. The teams lose the reason of existence and the spillover effect to the remaining owners would reduce the entire league's economic well-being.
Revenue disparity drives competitive imbalance in all leagues. Exclusive territories do provide market power positions for owners, but they lead to competitive imbalance.
winning percent is the owner's long-run choice of team quality on the field.
Winning percent equilibrium:
(1) marginal revenues are equal across teams
(2) revenue imbalance causes competitive imbalance
(3) revenue imbalance causes payroll imbalance
There is a limit on talent purchases by the larger-revenue market owner. The larger-revenue market owner will not buy all the great talent because, eventually, the marginal unit of talent is more valuable to the small-revenue owner.
The larger-revenue market team has a higher winning percent than the smaller-revenue market team. If that market will pay the most for a high-quality team, the owner buys the talent to make it so. Only then can the owner collect the high level of revenues from fans at the gate and from TV right fees.
The larger-revenue market owner spends more on talent than does the smaller-revenue market owner. The larger the revenue imbalance, the larger the competitive imbalance.
Important application of the model: when a good team leaves, the marginal revenue function for the bad team shift leftward, thus enhancing the team quality and net value from winning, the larger-revenue team is worse off, because of team quality drops and payroll rises (the price of talent increases in the inelastic portion, and net value of winning decreases)
There will be competitive imbalance and payroll imbalance as long as owners have unequal earning power and that competitive imbalance worsens, the more imbalanced revenues become.
It is actually the unequal revenue potential in different geographic locations that drives both payroll imbalance and competitive imbalance.
Joint venture remedies for competitive imbalance claimed by leagues include national TV revenue sharing, local revenue sharing, luxury tax and salary cap. Theory suggests that national TV revenue sharing, local revenue sharing, and player drafts will have no impact whatsoever on competitive balance. However, they will redistribute money from players to the owners of weaker teams.
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