Mankiw Chapter 10

Chapter 10  National Income

Employment is dependent on the health of the national economy.  The GDP applies to the economy of the nation.  People inside the system do not change the GDP directly.  GDP is more important in a discussion of international trade, and it affects workers and producers relative to that.  It is a group number for the nation, and it is used to show the health of a whole nation.  Products that move from intermediate status (paper) to final (a card) increase the value of the good and influence GDP.Being paid of giving a haircut sees another transfer that increases GDP.  When things are produced outside the country, it does not raise GDP in this country.  Other things are also considered in the overall well-being of a nation.  GDP is more interested in the final product that goes to market.  Imports, exports also manipulate the numbers

Consumer spending affects the overall GDP, even for goods manufactured outside the country.  Some trends deflate the value of goods.  GDP does not measure all the positives within a country.  :Poorer countries have much lower GDPs.

The chapter helps bring into perspective the complex relationships between the things we produce and sell, and what we do as individuals.

Mankiw: Chaper 8, 9 Taxes, International Trade

The eighth chapter features the controversial raising of revenues with taxes.  When a tax is levied, who actually pays the tax, the seller or the buyer.  A program such as welfare has an effect on the economy.  Neither the buyer nor the seller benefits from the tax, but the government does.  It effects issues such as elasticity, supply, and demand because it is a deadweight.  It effects issues such as retirement and changes taxpayers' choices.  Sometimes people circumvent the tax with an underground market.  The raising of taxes also changes from place to place, making equality rather complex.  When Reagan lowered taxes, revenues dropped, although some claimed that the lowering would actually raise taxes as a byproduct of growth.  Bill Clinton reversed the trend by raising taxes, increasing the revenues, and building government surpluses.

The chapter argues indirectly against taxes by demonstrating its adverse effect on buyers and sellers.  However, it does not address the issue of the citizen who cannot contribute to the economy because of a myriad of reasons from age to disability.  Their welfare must also be part of the argument.

Chapter 9

The principle of comparative advantage has led the business world to export many American jobs.  To win in the international trade area, a business must make a profit, by maximizing the profits with labor and products of lowest cost.  When a country exports, it loses resources, but gains money.  If an item is exported, the good increases in price at home.  The importing nation receives a good at an economical price, but loses its money.  Somewhere the welfare of the positive must overtake the negatives in order to make it useful.  (By logic, this means that the loss of jobs could be a definite negative far worse than any profit made by a company that goes international.)  In order to promote home production, a tariff could be used.  The tariff, however, and also raise prices at home because the item entering the country costs more, and domestic supplies are not adequate.  (Strange law that American flags must be made domestically.) The tariff causes deadweight, and affects the buyer and seller again, just like a tax.  Quotas can manipulate the supply entering the country.  This can also work against the buyer and seller.  International trade, if left free and open, keeps prices low and reduces deadweight.  Of course, that does not benefit the government.

Jobs are affected.  National security can be affected.  People are unemployed, and the manufacture of essential goods is now in the hands of a foreign nation.  If the country favors a domestic industry (cars) it works against the profit incentive.  Some countries can have an unfair advantage.  The country can manipulate other countries, in a way that promotes one and harms the other, leading to conflict.  So the country enters free trade agreements, equalizing a whole region.  The WTO attempts to make the trade fair for all, allowing for bargaining and other communications to reduce conflict.

These two chapters have done a great deal to explain to me why the country is undergoing some very powerful changes.  According to the principles in them, to make a profit, a business needs a great deal of flexibility to do whatever is necessary to make a profit.  These will be modified by the governments, who will manipulate the system in a number of ways including taxes, tariffs, and economic policies designed to lower unemployment, raise revenue, and build domestic economic strength.  I felt that much the discussion seems to make the disadvantaged citizen a victim to the economic interests, because the business is unwilling to share the wealth with an outside entity, be it the government or be it a social program.

Mankiw economic circle

Chapter 7

A inbuilt animosity seems apparent between the seller, the producer, and the consumer.  Surpluses and shortages affect the various parts of the circle.  A low price and cause a surplus.  A seller may want to hold back until a better price occurs.  A surplus can occur anywhere in the circle.  Surpluses affect the prices.  The whole circle benefits when the surplus is controlled.  A good example--ticket price, especially from scalpers.

Mankiw: Elasticity

Chapter 5:

A person may need to tie his income the elasticity of the supply and demand realities of his chosen means of earning a living.  One would need to understand the nature of necessities and of luxuries.  Items can be affected by substitute for a commodity.This helps to define the market, where it ends. Cyclical demand shifts can force the change of value for a commodity.  Ideally a seller would like to know a middle point for the prices, so that he can charge the right amount of money.  This has ramifications  for almost all sectors of the economy.  Even knowing how much for a ticket for an event must correlate with these types of fluctuations.  Overcharging can seriously impact the desire for making a profit.

The chapter goes through a number of mathematical exercises to compute these types of fluctuations.
Graphs are developed to show short and long term consequences and to discover trends. Actually a good year for farmers can cause a bad year for prices.  The chapter investigates the OPEC manipulations of the 1970s, and discovers the reason why the group could not maintain the high prices.  They collapsed because of the whole supply and demand coupled with elasticity.  The relationship with drug trafficking and government programs demonstrates some of the same economic elasticity issues.

This fifth chapter has enlightened me about the frustration of trying to alter prices artificially.  It may work short term, but it will eventually backfire.  The price will find its own level.  This remind me a great deal of concepts in Ayn Rand's books.

Chapter 6  The effects of the Government

Price controls have consequences.  A price ceiling will affect the market.  During the 1970s the government did try to manipulate OPEC with decisions concerning oil products.  (I was in Europe.  The Germans had no-drive Sundays.  These Sundays put together greatly impacted the supply of gasoline in the country, and gave the Germans considerable leverage with OPEC.)  The chapter even investigates the effects of a drought.  Of course 2012 will be a case study in the future, and will undoubtedly be used tin the future to clarify that type of effect.  It destroys some crops, driving the prices up because of the supply demand relationship.  In this the government has considerable connection because of ethanol production.  We have seen gasoline in 2012 around 4 dollars--caused by a number of factors including the drought.
Just as there is a ceiling there is also a floor to consider.

A big city like New York can attempt to control rent prices.  If taken too far, rentals will disappear, or the renters may look elsewhere.  The chapter takes on minimum wages.  If the government forces the rise, it may affect some business owners to let go of some their employees.  Such a hike will affect some parts of the economy positively and some rather negatively. Entry level employees are especially affected, often as teens trying to enter the work force.  Some are so determined to enter that they will do internships.  These are not paid by the business--if paid at all it comes from the government.  The government has a constant discussion on whether the minimum wage helps or hinders poverty, because it affects numerous other issues.  Labor goes up and the price of things compensate.

Governments raise revenues through taxes.  Depending on the rates, the businessman must adjust his labor and production rates.  Both the buyer and the seller must meet the tax.  Government uses payroll taxes for the revenues collected for employee benefits.  (I do not like the word entitlement for something that an employee pays as an investment in his own welfare as in old age or in health.)  In reality, both the firm and the employees are affected.  It lowers the income of the employee.  (Fine, but that same employee needs to get over immediate self-gratification.)  Elasticity also enters this picture.  (Consider the current anger over reducing benefits and raising ages for employees because of the weak economy and the aging boomer populations.)

Then comes the luxury tax.  Who does that hurt?  Those who build second homes, yachts, diamonds, etc.  It destabilizes parts of the economy and specific markets.

This chapter takes a mostly neutral position on taxes, but it does show the adverse effects of some decisions to raise certain taxes.  I felt this was mostly taken from business's point of view.  It must also consider the well being of a human being.  This is one of those arenas where both must work together.

These two chapters are going to cause me to think a great deal about the current national squabbles about the middle class, taxes, and the unemployment realities.  I don't buy trickle down, but I am not sold on super-stimulus experiments either.  I did not like Bush's direct checks to the taxpayers--too gimmicky.  I admire Obama for his interventions with the car industry.  Time will tell the ultimate effect of that manipulation.  National self interest and ethical treatment of the less fortunate are part of the equation.  But Obama's national infrastructure ready to dig ideas?  True, I'd like to see people work.  But I don't like increasing national deficits.  Wild cards like military and national security play roles.  We have two dominant and competing beliefs in this country.

Mankiw: Interdependence (Economics)

This 3rd chapter begins with the parable of the rancher with meat and the farmer with potatoes.  If each wants to eat meat and potatoes, they must agree on the value for each to make the trade equitable.  Numerous scenarios can occur in order for both to have the desired meal, even if they choose not to deal with each other.  By formulating deals that the other likes, they can come up with a profitable exchange for both.

One or the other can have an advantage in the exchange, depending on the concepts of supply and demand. With low competition, one or the other can have a prestigious position in the exchange and enhance his values.  Adam Smith makes the proposition that one should calculate the costs of home manufacture or production against the cost to simply buy from another.  If it isn't worth it, don't do it.  Another example, should Tiger Woods mow his own lawn.  The answer is no, if he can make 10,000 during the same time on the course.  The same thing can apply to having other nations produce goods for consumption here.  Comparative advantage is this principle of economic consumption.  Should a country do it.  The book says yes.

Chapter 4  Supply and Demand

Prices shift according to how much is on the market for consumption.  Competition with sellers improves the buying ability of the public.  Monopolies threaten that.  Factors affect the ability to buy--ie, employment, income, comparisons, personal tastes, etc.  Increasing prices eliminate buyers.

Prices can manipulate the number who smoke.  However, there could be trade offs--for example, drug use in its place.  So simply altering the dynamic between supply and demand can have a down side.  Shifting the prices can have huge effects--sales can work.  A seller looks for an equilibrium, beneficial both to himself and the buyer.  External changes like weather can affect the value and shift the equilibrium.


These two chapters explain why we trade and how to fix the prices.  What I have garnered is a little more understanding why the US has a perceived trade imbalance.



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Economic principles and their effect on the nation

I am currently skimming through a few of a friend's economic textbooks.  My own background came at a time when I attended college, studying political science and history--so, I wasn't particularly interested in the topic, and I was somewhat bored with the Adam Smith reading passages.

Principles of Macroeconomics.  Mankiw

Chapter 1  Principle 3 margins

Rational people think on the margins.  The economy isn't black/white, rather a wide assortment of grays.  This allows for individuals to weigh the costs of what they will do.  This principle all too often forgotten.


p 10
Adam Smith and the invisible hand.  This picks up the great economist's ideas about a public synergy that accompanies many people free to follow economic goals.

Principle 7 Goverments can improve the economic state of a country.  And hinder.

Principle 9  Inflation comes from overprinting of money.

Principle 10 Short-time boost from trade-off between unemployment and inflation.

Chapter 2
Thinking like an economist

Approach like a scientist.

Not a natural science, so there is a need for underlying assumptions--thus models

Circular Flow Model:  How money runs through the community


The Production Possibilities Frontier  Model:  Where to make the trade-offs

Microeconomics and Macroeconomics:  Understanding the level of the economy, whether close or distant.

The economist must deal with a lot of opinions, and he must weigh the costs of proposed manipulations.

Includes an appendix that illustrates how graphs display data to determine trends and patterns that can help make decisons concerning economics.


These first 2 chapters illustrate the need for a rational study of the field of economics, using real data, despite the wrangling that goes on concerning the economic trend or the perceptions of people.

to page 46

George Soros : Super-Bubble Hypothesis

Soros begins this chapter with the pronouncement that history does not repeat itself.  He lists a string of collapses from the past 30 years that follow a pattern of disasters, but not the harbingers of a new Great Depression.  Rather he calls the 2008 collapse the end of an era, that the markets must change.  Soros calls attention to new factors that influence American markets, especially the arrival of China and India into world economic pictures.

A first bubble to study is the US housing market, which has enormous consequences due to its immense size.  Because of the exponential growth of the market from 2002 to 2008, a enormous bubble grew very uncontrollably.  Rules broke down, and people financed huge amounts without any collateral.  Even Citibank warned that immense consequences could occur.  A few shakes occurred, and the Fed simply stabilized them.

Reagan called these odd little bubbles and the ways of stabilizing them "magic."  But reality says differently.  Such men heralded the whole system as laissez-faire.  Soros says that the perception was flat false.  Three separate trends combined to drive the bubble.  Part was the assumed fundamentals learned from the Great Depression on how to act against problems in the economy.  Another problem feeding in was the globalization movement. And there is a pattern of disparities.

Globalization corrections came with the 1970 oil crises.  Markets tried to respond to the way the oil crises of that era interrupted economies around the world, especially America and Europe.  The US manipulated the world complications deliberately, and continued to do so afterwards.  Sometimes these manipulations delivered the US with immense deficits.  One way to stabilize markets was to get Japan to invest (now China) to even out the swings.  Countries who were saving were called on to let loose their savings.  In 2008 the markets hit a tipping point.  The US would hit the wall, and it will need to change its approach to such crises.  One can follow Japan since the 1980s to see the concerns.

Soros says that we must not follow Reagan's strategies because they do not fix things, because they are not magic  His methods were short term, and they complicate the long term.

The theory of reflexivity accounts for the mess.  We must see the reality, and adjust to it to stay away from future super bubbles.  The long held "laws" of economy no longer work.  The reality will not allow them to continue as laws, because they are not laws.  Soros wants to look and current developments as new history. We should expose and work with the realities.

This particular chapter stands very critical against Keynsian principles, and strongly against the magical views of the Reagan administration.  True, pumping money into the system helped reverse the troubles of the 1970s, but it only created a new form of crises in the face of its underlying absurdities--namely bubbles.  Soros suggests that the markets must fix the problem, that of finding another way of propping up the economy in times of financial crises.

Whereas Soros tends to support the Obama administration--one that is using Reaganesque methods to prop up the economy, how does theory of reflexivity translate into a solution for the crisis of 2008?

Reflexivity in Financial Markets--George Soros

Soros attempts to make his philosophy less abstract.  The philosophy basically argues against equilibrium theory as a false paradigm.  Soros argues that studies like economics do not follow natural laws like equilibrium or as he said earlier in a Greek dialectic paradigm.  He said that the proofs provided to support equilibrium are self referential in the sense that they are methodological rather than scientific.  The best argument against this is the reality that men act on their perspectives rather than on pure knowledge.  People make mistakes.

Depending on how much the public buys into a perception can equate into real historical dilemmas, such as the Great Depression, when millions accepted the apparent break down.  In reality, the reasons for the economic slowdowns centered on some false belief that people eventually had to accept.  Banking systems having no collateral, phoney money book keeping, and other gimmicks eventually catch up with the nation that allows them or misunderstands them.  In the 1960s many investors began to make enormous conglomerates.  The big mistake was that the companies had to be bigger.

Real estate investors made similar mistakes, manipulating the values of mortgages and values.  Because of the manipulations and misunderstandings, the market went bust.  Banks in the 1980s made real estate artificially high, misunderstanding that they had made their own bubble that would eventually burst.  A quick look at the fundamentals made it simple to understand, but people refused to do it.

Real estate values tend to have their basis in perceptions than real values.  Therefore, the markets require regulators to protect them.  However, those who hold to equilibrium paradigms do not understand the realities, much like pre-Copernican notions of science.  They will eventually fail.  Too many use scientific method to disprove economic trends--proof that paradigms accepted by so many do not rest on reality.

Reflexivity compensates for the fallibility of economists and their faulty perceptions.  Regulators, using real data, can maintain the integrity of the system.  The current turmoil is a result of realities smacking into what people have erroneously accepted about economics

I find these concepts refreshinbg as they explain the tremendous economic problems surrounding 2008.  The manipulations of the Department of the Treasury and business in collusion and their subsequent decisions with Bush and Obama correctives have not led the nation out of all the troubles.  In fact, it may be just making a new bubble.  I find it interesting,  that up to this point, Spros has not mentioned Keynes, and he has not addressed the reactionary concepts of conservatism. I might suppose that he doesn't think it matters.  Regardless of the business-economic system that a nation uses, whether laissez-faire or Communist, the system will falter if it does not find and react in tandem with reality.  I still see his concept of reflexivity as a healthy form of skepticism.  He doesn't seem to be much of a politician, so I find it strange that he is viewed by so many as the Koch equivalent within the liberal world.  Perhaps the remainder of the text will explain this.  

Soros--Chapter 3 Theory of Reflexivity

This contains the theory of reflexivity that George Soros formulated after several years of thinking and studying.  People have to deal with fallibility because the ability to have all the knowledge does not exist.  People must rely on imperfect human processes to understand the world, so they must rely on metaphors, similes, figurative language, and other imperfect tools to come to understandings.  People must also understand that they participate in the system at the same time--there is no opportunity just to observe.  Success must rely on our imperfect facility with words.

Soros says that the man must differentiate between subjective and objective perceptions about reality.  We react to our observations.  Dealing with markets, those who function, must also deal with a group buy-in of the rules.  Reflexivity gives a person the ability to correlate the belief systems and reality.  Reflexivity explains how participants who think will act in the face of events, the group interpretation, and the actual reality.

Soros explains how this philosophy works against Western thinking, going back to notables like Plato.  More recently, the theory stands strongly against principles of the Enlightenment and thinkers like Descartes.  As time passed, several philosophers saw the optimistic errors of the Enlightenment--such men as Popper and Russell.  Wittgenstein pursued some of the paradoxes, and abandonned an attempt to find a pure language.  He maintained we stay with the language as it is.  Soros calls the problem "fertile fallacy".  It describes the hopeful tendency to promote movement when knowledge is missing.

Karl Popper made a break from this.  He proposed a streamlined scientific method.  Prediction, explanation, and testing became his model.  He maintained that we can't verify; we can only falsify.  If a hypothesis cannot be falsified, then it is useful.  Soros learned that going against strongly held public opinions tends to lead to the greatest successes.

Reflexivity helps a person to throw out the least useful.  The purpose of politics is to stay in power, so he uses that in formulating his plans.  Unlike politics, one must unearth the misconceptions in order to succeed, and if possible get them established in politics.  This caused Soros to inspect the unintended negative results of the War on Terror after September 11 and the oddities of financial world based on false material before 2008.  We must find the false beliefs and replace them with the truth.  The false beliefs destroy.

Soros relates a Bush administration pronouncement that reality is the construct of the people because of how they think.  He hints that the origin was Karl Rove.  Truth is what they would make it, and the people would follow it.  But reality caught up with it. Politics is interested in power, not truth.    A good society must pursue truth and reality.  It should not be manipulated to maintain a power base.  The search for truth has been manipulated, so truth and reality must be brought in.

People must realize that the idea of absolute truth is too dangerous.  People must seek the reality.  Beware the false metaphor:  The War on Terror.

This chapter has enlightened me as to why the GOP fears and loathes Soros.  I don't know how the Democrats view him.  It also calls us all to use our heads, to study what really is taking place and to discard commonly maintained beliefs unless they can be substantiated.  I really don't know if I really believe he has engineered anything new.  It sounds like old fashioned skepticism to me, but with a twist.  His views are not pessimistic or nihilistic.  I see possibilities.  I think it practical enough to use outside the economic arena--for example in literature, or in writing.

George Soros--"Autobiography of a Failed Philosopher"

Chapter 2 of The Crash of 2008 and What it Means...  George Soros

Soros explains his long-time interest in classical philosophy.  His personal views felt the impact of the Nazi uprising in Germany.  He explains how his father became a prisoner of the Nazis and how he and others made a daring escape from their captors.  Not only did he negotiate the German war machine, but also the perils of the Russian Revolution and other pitfalls of the age.

Soros became acquainted with Karl Popper in London in the 1940s.  He became disillusioned with the concept of an ultimate truth, as conveyed by Popper, whom he at first strongly admired.  The doctrine of the Unity of Method particularly disturbed Soros.  Popper, a naturalist, accepted ultimate truth, but did not address the uncertainties of social realities.

Soros developed a new construct.  Reflexivity describes the function of reality in conjunction with the development of his world view and the anomalies he encountered.  In 1987 he wrote The Alchemy of Finance in a study of his developing economic theories. Even his publishers knew he would push back, but no one could dispute his success as a money manager.

One reality he expresses in his book described those who would turn almost fanatical in devotion to economic ideas that did not work in reality, making them more cultists than effective philosophers. Soros uses the Orwellian classic 1984 as a central example of government propaganda that colors the perceived realities of the great majority.  The absurdity of a government agency name "Ministry of Truth" underscores a division between reality and a scenario that the government has manufactured. This led Soros to change his notions about accepting a principle that "the purpose of reason is to produce knowledge."  Soros believes that any honest person must tack on the reality of manipulation.  This manipulation creates a new reality that is not a reality at all, just a trick to control.

This new insight has caused Soros to reject the common notions of economic theory in the light of outside manipulative factors.  The prefers to seek the reality underlying the forces that the prevalent theory tends to cover up.

In a day of political and economic propaganda, a call to study the ethics of the economic world hits a perspective of economics from an angle that the public should examine.  When economists become such devout adherents of a prevailing trend as to not examine possible con-artistry, they set themselves up as stooges to the manipulators.  Soros reveals a strong independence of thought, that has allowed him to make some very effective investments and to avoid some of the more troubling developments in globalism.  I begin to see a pragmatism in his approach that paradoxically could unravel his acceptance in his own reflexive construct, but it allows for a correction if he discovers a problem.  Not an economist at all, I think his ideas effective in other arenas, such as literary analysis and composition theory.  I see some advantages in his paradigm.

Soros--The Core Idea

George Soros (The Crash of 2008 and What it Meant;  the New Paradigm For Financial Markets) begins with the axiom that life is imperfect.  Man attempts to function in this imperfect world using a set of principles, and he tries to make an impact.  Generally a person attempts to operate with both approaches simultaneously.  Reflexive situations occur as a person encounters reality.  The notion that all transactions follow a supply and demand relationship does not always function.  Uncertainty messes up the easy paradigm and demands a correction in the equation.

Too much of economic theory has a self referential paradox.  It imposes itself upon itself, and may not always depict reality.  Reflexivity attempts to correct the erroneous in the social relationships.  Ideologies can lead people into the wrong places.

I find this new theory of economics worth inspection.  Certainly nations have found themselves terribly caught up in enormous panics as the majority becomes disillusioned.  Holding on stubbornly to a paradigm that fails only engenders more failure.  

I not only want to study Soros's new paradigm, but I want to see how others see it.  

George Soros (Continued)

Soros.

"Setting the Stage"

The moment of collapse:  Aug 6, 2007 with the bankruptcy of American Home Mortgage.

By Aug 9, European institutions begin to collapse.

Aug 16, Countrywide slides down.

The Fed and Central Banks release cheap money to stop the trend.

American housing loans and subprime loans collapse, creating a huge problem.

Hedge funds step in.

Bubble inflating rapidly.

Pressures grow on the banking community.

Residential real estate under intense pressure.

Soros explains how the give and take of borrowing and the behavior of entities such as the Fed have caused the bubble to inflate even more, reaching a point where the usual methods of control fail.  By not intervening properly the whole financial world plunges in 2008.

This is a descriptive history of the events that led to the Great Recession, and how the insistence of maintaining the usual methods for repairing the deficits has made the situation far more dire. 

George Soros.  The Crash of 2008 and what it Means; the New Paradigm for Financial Markets.  2008-2009.

Introduction in the book:  Soros says that the US no longer functions on the traditional economic system, that the superboom of the past 25 has ended.  The financial markets do not reflect underlying realities.  What often emerges has distortions.  The distortions tend to impact the market prices.  Soros says he started his career with a strong background based on ideas of Karl Popper.  Soros forwarded a theory of reflexivity, that many dismissed.  His views led him to become a wealthy hedge fund manager.  Perception and reality strongly influence what takes place in the markets.  The prime example is seen with bubbles.  Soro calls the housing market a bubble, but he also speaks of a super bubble, far more complicated than the housing bubble. 

Soros interests me.  Almost every person I have spoken with has dismissed him, but the same people admit they have never read his ideas.  I'm the kind of person that must find out for myself.  In this introduction I see that Soros is rejecting the generally accepted notions of economics, claiming that too many variables are at play, and that a person must look at the economy on a deeper level to find clarity. 

Purpose Statement

I enjoy reading others' observation about life, whether philosophical or entertaining.  As I read, I hope to write a few ideas in review, and perhaps drop a few of my own insights.