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.

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.