Monday, April 30, 2007

Chapter 11 Homework

Key Quesiton 4
a) Equilibrium: $300 Billion. It is not neccesarily the full employment level of output, because the output has to be compatible with the demand.
b) These price levels will not be equilibrium because the amount of real GDP demanded and supplied do not match.
c) Some factors of aggregate demand are;
- consumer wealth,
- taxes,
- consumer expectations
- real interest rates

Key Question 5
a) Productivity

Thursday, April 26, 2007

Save Your Money At 4.25% - Charles Schwab's Formula To Success

Going after 'lazy money' with 4.25% checking

In his article, Mr. Charles Schwab has offered consumers an incredible deal; to deposit their money in his bank with 4.25% interest, no ATM costs, and free checking. Good deal, right? But as the article points out, "With the average interest-checking account now yielding only 2 percent, you wouldn't think Schwab would have to double that to make a splash."

Schwab identified that there is a lot of "lazy money" in the market: money that people want to invest, and watch 'grow'. With his interest rate at twice that of the average, he is attracting a lot of this money.

Consumers have two options;
1) Place the money in the bank (like Schwab's) and gain profits on the interest, or
2) Invest the money stocks and bonds and risk profit or loss or invest in capital.

The opportunity cost of putting the money in the bank is that you forego a potentially higher return in the stock market or wherever you have invested the money. The opportunity cost of investing the money is that you forego the stable, assured interest rate return.

Looking at the graph, where "The Y-axis represents the real interest rate, and since an increase in the real interest rate makes households and firms want to place more money in the bank (and more money in the bank means more money to loan out), there is a direct relationship between real interest rate and Supply of Loanable Funds," (Mr. Welker's Blog (Welker's Wikinomics)).

The direct relationship between the real interest rate and the Supply of Loanable Funds means that as the real interest goes up, as has happened in this article, so will the amount of money that people place in the banks. In other words, the higher interest rate means that people would rather place their money in Mr. Schwab's bank, than invest it. In addition to the costumers gained as transfers from other banks, due to the higher interest rate, this can account for Charles Schwab's success.

Wednesday, April 25, 2007

Infinite Growth Cannot Occur In A Finite Environment

In his recent posting, Mr. Welker made a reference to Julian Simon, an economist who claimed that infinite growth can occur in a finite environment due to constant technological progresses. This is in direct contradiction to several laws of physics, as we are already quickly approaching the limits of nano-technology, where nano-chips will become the size of atoms. Surely a piece of technology cannot be much smaller than an atom? Without getting into the details of science and technology, it is safe to say that E.F. Schumacher was correct in saying that "the illusion of unlimited powers, nourished by astonishing scientific and technological achievements, has produced the concurrent illusion of having solved the problem of production." (From his book "Small Is Beautiful"; Chapter 1, The Problem Of Production) He previously attempted to explain our obsession with technological advancements by stating the obvious which is seldom taken acknowledged or taken into consideration; "modern man does not experience himself as a part of nature but as an outside force destined to dominate and conquer it."
I could continue quoting Schumacher on his well-presented and argued ideas on how with nature "we are dealing with [irreplaceable] capital and not with income", and that we should allocate more time and attention to "improve 'the quality of life' and not merely ... increase the quantity of consumption." But this would only touch on the larger problem, a problem which, I feel, Mr. Welker has, knowingly or not, hit at its core.

"As Marco says, “we should not only perceive the world in terms of economics”. On this point I could not agree with him more. Indeed, economics may not provide you or me with answers to life’s most basic questions, like where I’ll go when I die; but one question this imperfect science will help answer is how will my basic needs be met while I’m here on this earth burdened with the curse of scarcity? The answer? Markets. Alas, the invisible hand of which Smith spoke may not be that of God, rather that of the Almighty Dollar."

Mr. Welker here claims that man's basic needs need to be met, and that markets solve this problem. True, markets have been around since the beginning of time, back to the Mesopotamians trading fish. But consider that man's basic needs; shelter, food, the various psychological needs of man, and their self-esteem, are not always tended to by the profit-maximizing methods of today. With large businesses following Adam Smith's principle of specialization, self-esteem is attacked. With corporations setting up shop in the less-developed world, they are still doing no favours for the people's self-esteem, and their exploitation is hurting the basic needs of the other three. Indeed, poor nourishment is not uncommon among sweatshop workers, as is lack of proper housing. That's right, a shanty town is not proper housing. And remind me again where the profits go?

Looking at much of the so-called 'developed world' (believe it or not, there is starvation and lack of proper shelter in the USA.), we have already achieved our basic needs. We also sustain-ably maintain them. What do we do now? The emerging trend is that of material accumulation. We have now become obsessed with how much we have. It cannot be articulated much better than E.F. Schumacher himself, who writes "It is no accident that successful businessmen are often astonishingly primitive; they live in a world made primitive by this process of reduction [where the sole goal in life is profit]," in the chapter "Socialism" of his book "Small Is Beautiful".

This is the problem that economics has created. It does not take into account whether "a particular action is conducive to the wealth and well-being of a society, whether it leads to moral, aesthetic, or cultural enrichment." Given, many governments attempt to maintain a certain degree of aesthetic beauty by giving scholarships to artists, and banning the destruction of old buildings, but the reason why the government intervention is necessary is that otherwise people would only pursue profits. True, government will always be necessary, I am not that naive, nor inclined to think that way. But the amount of purely profit-seeking activities going on in the world is really astonishing. Perhaps it shows not something wrong with economics as a field of study, but perhaps it highlights something inherently wrong with the way economics is being used, and thus the society of today, where we abuse everything we can to make money.

Quote Of The Day (April 25, 2007)

"Man, if you had a modem that was faster than 16 Kb/seconds, you were THE SH*T!!!"
-Mr. Welker, speaking about investment, and the technological advancements that result from it.

You can see Mr. Welker's blog at

Monday, April 9, 2007

Class Discussion Continued

I would just like to make a few points on the discussion we were having in class.
As we were talking about cultural diversity, good environment, health, education and so on, comments were made on the realm of economics, and how economists should not be concerned with these things because economics is about money.

Is the study of economics not a study of the way our world deals with its problems? If this is indeed the case, it implies that we learn from these mistakes, taking them into account as we create models for dictating how one should act when future problems arise. Naturally, we must then place values on certain things in order to have a goal for the models to achieve. The problem is then that we have placed value precisely on that; things. Material things. There is an 'under-allocation' of value towards the finer things in life, as outlined when we talked about the short-comings of GDP.
This certainly does not make the study of economics redundant, but merely temporarily lost. Lost in the sense that we have lost sight of what is really important to us, what we truly value. Let's face it, the way economics has placed value on money and profits has led to increasingly Machiavellian and deceptive ways of living, the exact opposite of those virtues we used to value. Paradoxically, therefore, the more the present economic theories are used to maximize profits, the more the integrity of the study of economics is undermined.
In other words, no study of any sort should find good in a system such as "[t]he modern private enterprise system [which] ingeniously employs the human urges of greed and envy as its motive power," (Schumacher) such as we see today.

Needless to say, as a social study, economics studies society and the world around us. However, that does then not mean that we should only perceive the world in terms of economics, and economics today connotes profit maximization. Perhaps economics should find a new direction and set of values by learning from Aristotle's idea of metaphysics, cultural and religious values and human and physical geography.

Sunday, April 8, 2007

Homework: Due Monday, 9 April, 2007

1) The CIA director should take into account that GDP does not record the "underground economy". The "underground economy" is largely comprised of illegal activities, activities which the CIA likes to keep tabs on. It could be problematic for America's Intelligence Agency if they are not able to see this.

2) Prostitution, gambling, and some types of drug use are part of what has been labelled the "underground economy" in the previous question. It therefore stands to reason that countries that allow these activities take them into account when calculating their GDP, therefore making it seem larger than that of a country that does not allow such activities.


a) Out
b) Out
c) In
d) In
e) Out
f) Out