The Economics of Death, Episode #30

We have entered a new phase of Crash Course Economics and Crash Course Criticism.  Episode 30 marks the first episode without one of our co-hosts, Mr. Clifford.  If you recall, Mr. Clifford was a co-host most dedicated to “textbook economics,” while the other co-host, Adriene Hill, was more focused on practical application and real world examples of economics in action.

Last week in the episode 29, the hosts announced that it was “the end of their textbook economics episodes,” which means that now we are going to get involved with subjects only tangentially related to economics.  Let’s see how the first one turned out:

After watching the first episode, it appears that this new phase of Crash Course Economics will deal more with the “how-to” of being an adult, and preparing the audience with some of the most challenging subjects of life.  Despite still being called “Crash Course Economics,” there’s not much economics in this episode, but let’s do what we can.

Income vs. Age

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In 2010, an upper income man in the US was expected to live to age 89. The same lower income man would live to 76. And this shortened lifespan has a big economic impact.

In effect, the rich receive a lot more government benefits over the course of their lives.  That 89 year old upper-income man would collect an average of $522,000 dollars in government benefits during his life, while the lower-income man would only collect an average of $391,000 dollars.

This wouldn’t be a Crash Course episode without left-leaning commentary and unexplained statistics.  Following this part of the episode, Crash Course moves to a completely new subject without tying these statistics together or explaining them, so we’ll try to do that here.

Disclaimer: I could not corroborate these numbers from my research.  I tried to find where Crash Course got these figures, but I could not find them through Google, and they do not list them in the video description, so I’m just going to accept them as fact.

If rich people live longer, then they have more of an opportunity to reap the benefits of Social Security and Medicare, which generally start paying out in your 60’s.  The longer you can stay alive past your mid-60’s, the more time you will have to receive a check every month from Social Security, and the more opportunities you will have to get health care, which is covered by Medicare.

It appears that the rich receive more in government benefits over the course of their lives because they live longer.  If left at that, the viewer is to the think “What a rip off!  The rich live longer and they take more from the government?  After they complain so much about the poor taking so much in welfare?!  The rich are the real welfare recipients!”

What’s not mentioned in this episode is a comparison to how much the rich contribute to taxes over the course of their lives.  With this in mind, it no longer appears that the rich get the most out of these government programs, considering they pay much more than they receive.  The lower income level of Americans, while they receive less in total benefits, likely contribute much less than they receive.

Old Age and the Economy

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So how do our on average longer lives affect the economy?  Well, economic thought about this stuff varies.  Some economists argue that increased lifespans are, in a very basic sense, good for the economy.  When people live longer, they have more years to consume stuff, contributing to economic growth.  On the other hand, long life tends to come with more health problems, and memory-related illnesses have become much more prevalent[…]

Note: This is a very strange non sequitur.  If the question was about how long lives affect the economy, why does Crash Course start talking about the personal struggles of growing older?  What does this have to do with the economy in general?

Economically-speaking, the part in bold above shows a clear bias towards the Keynesian (or any spending-centric) Economic School of Thought.  We talk about this a lot on Crash Course Criticism, so I won’t go into it again, but Spending (as opposed to Saving) does not necessarily benefit the economy.

But if it did, shouldn’t Crash Course say what a great benefit it is to the economy that the United States health care system is so expensive?  That money would otherwise be stagnant in some old person’s bank account, but now it’s being spent!

However, it could still be argued that longer lives could improve the economy in a different way.  With people living longer, each person would have more time to produce things for the economy, whether its by retiring at a later age or by taking up a new interest in retirement.  In either scenario, stuff would get produced where it otherwise would not have happened.

Conclusion

This week’s post is on the short side, since (ironically) Crash Course Economics does not give a lot for an economist to analyze.  The episode in general, however, seemed like a great opportunity to have the mostly young audience of Crash Course start thinking about a serious challenge in life, and despite the economic lacking and obvious political bias, the episode seemed to have very good message: plan for your own death.  It’s a hard subject to think about, especially for Crash Course’s target audience, but doing it will save your family a lot of trouble.

Thanks for reading, and you can look forward to a new episode reviewed every Thursday! And don’t forget to join our newsletter and our facebook group, and comment below!

The Economics of Healthcare: Episode #29

This week’s episode on Crash Course Economics deals with the United States Healthcare System.  The episode didn’t really have much economics in it; it was more a series of fun facts about health care numbers.

It’s a shame because the US Healthcare System is a perfect subject to talk about how public policy and economics have responded to one another in the past 60 years or so.  What an opportunity here for Crash Course!  Unfortunately, Crash Course did not take advantage of these great examples, but we will here on Crash Course Criticism.  Let’s do it:

United States Healthcare Assumptions

When talking about the US Healthcare System, Crash Course assumed a lot of things about the US system simply exist and have always existed, offering no explanation for how these phenomena came about or how economics could explain them.  Let’s look at them now.

People Use Healthcare Insurance, and it’s Usually Paid by Your Employer

Insurance in general has been around for thousands of years, but it’s only recently that health insurance has been common.  The first modern health insurance plan in the United States emerged in the 1930’s, but few used it.  Until the 1940’s, people would pay doctor and hospital expenses out of pocket, and patients wouldn’t go bankrupt because of it.

During World War II, the government restricted employers from increasing the pay of their employees.  As a natural economic reaction to get around these rules, employers instead would offer employees more benefits, including health insurance.  This soon became the standard, and today many employers pay for their employees’ health insurance.

Healthcare Costs are Expensive

This was not always the case.  Take a look at this graph:

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As any media pundit will tell you, health care costs in the United States have exploded in recent decades, but the initial rise started in late 1960’s.  What would make healthcare providers charge more for their services?

Medicare and Medicaid were both introduced in the mid-60’s, and Crash Course may have alluded to how this increases health care costs:

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This is because the US doesn’t have a unified system that can aggressively negotiate with doctors, pharmaceutical companies, and other providers. They point out that Medicare and Medicaid often get a significant discount compared to small insurers.

In other words, Medicare and Medicaid do get a discount from providers, while normal insurers do not.

In another natural economic reaction, healthcare providers have to increase the price to normal insurers to cover the cost of providing the care at a discount rate to Medicare and Medicaid.

Economists might point to other restriction in the supply of healthcare, from the restrictions on the number of medical schools in the country to the restriction of hospital development through the Certificate of Need requirements.

Crash Course Gets it Right

On the other hand, Crash Course does recognize some major factors toward the increase in healthcare costs:

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So why does the US spend so much more than other countries? Well, some argue that it’s due to high quantity of care per person. Since insurance companies, rather than patients pay providers, patients might want more care, like tests, procedures and treatments than necessary.  It’s like an all-you-can-treat buffet. You know you shouldn’t go back for that fourth General Tso’s X-Ray, but it’s just so delicious!

When all healthcare costs are covered, and the patient doesn’t need to pay regardless of how much he consumes, the patient is going to get more treatments and tests than he otherwise would.  This increases the demand for healthcare, thus increasing the price, and as we discussed earlier, most of the price increases will happen to those who are privately insured.

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Another reason for the high costs is the blizzard of paperwork generated by the interaction between dozens of insurers and thousands of providers. Both the insurer and the provider have to employ a team of unhappy people in cubicles to haggle over the reimbursement rate for an appendectomy. These teams add to the administrative costs of healthcare.

Simply put, the more distance you put between the patient and the health care provider, the more costly it will be.  Health Insurance in general creates a lot of costly bureaucracy, and with almost two-thirds of healthcare covered by government, there is a lot of bureaucracy to go around.

The Affordable Care Act

Crash Course disappointed me in their analysis of the ACA and its effects on cost:

The Affordable Care Act also has provisions meant to deal with costs.  And that’s a little more difficult to assess.  The act rewards doctors for cutting costs, and requires greater price transparency.  It also mandates a move to electronic record-keeping.

That’s the end of their comment on costs.  Was this episode recorded in 2010?  Is there no comment on if the ACA has or has not cut the costs of health insurance or healthcare costs?

The Affordable Care Act has not reduced the high costs of US Healthcare System.  In fact, the rate of cost increases has not reduced since the Act was passed in 2010.  Similarly, insurers have increased premiums and are projecting sharp increases in premiums in the near future.

Sadly, Crash Course’s political bias shows through in their analysis of the Affordable Care Act.  While they show did note the law’s effect on the number of people insured, they did not comment on its effect on costs.

Crash Course Going Forward

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Adriene: So, that’s the American healthcare system, which is weird and expensive, and necessary.  That’s also the end of our textbook economics episodes.

Jacob: And so I’m moving to Canada to write a textbook and enjoy some of that sweet, sweet, subsidized health care.
Adriene: And I’m going to stick around and talk about the economics of things like immigration, and social security, and happiness.

So it looks like the textbook section of Crash Course Economics has come to a close, and the show will now be focusing on more topic-specific or behavioral economics subjects, which are not as exciting from my point of view.

Will Crash Course Criticism close its doors?  Find out next Thursday!

Okay, the answer is no.  I’m in it until the end, even if the subjects are no so economics-y.

Thanks for reading, and you can look forward to a new episode reviewed every Thursday! And don’t forget to join our newsletter and our facebook group, and comment below!

Behavioral Economics, Episode #27

This week on Crash Course Economics was not so much…economics.  In this economist’s view, behavioral economics is more akin to psychology or sociology, despite having the “economics” in the name.  Nonetheless, we are going to talk about some of the points that Crash Course did make on economics in this weeks episode.

The Big Picture: Predicting Behavior

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When economists make their models, they generally assume that people are rational and predictable.  But when we look at actual human beings, it turns out that people are impulsive, shortsighted, and, a lot of times, just plain irrational.

People often point to the existence of human irrational behavior to argue against economic truths that they might not like.  For example, if you are arguing through economic logic that price controls make an economy worse off, a position that economists from all sides of the spectrum agree with, you might hear a response like “well, that assumes that people are acting rationally in their own self-interest, or with perfect information, but that isn’t always the case.”

While this might be true (there isn’t always perfect information, and people aren’t always rational) it doesn’t disprove any economic theories.  What it does support, however, is that economics is very difficult to predict empirically.  Let’s look at an example from this week’s episode:

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Some grocery stores in the Washington DC tried to decrease the use of disposable plastic bags by offering five cent bonuses if customers brought reusable bags.  The policy didn’t do that much. Later they tried a five-cent tax on plastic bags, and, this time, people used fewer disposable bags.

While empirical economists would be wrong in their predictions of the effects of the bag bonuses, those economists who shy away from empirical predictions (namely from the Austrian School) would only predict that there would be fewer plastic bags used than before, which is likely true.

In short, Crash Course’s big picture look at behavioral economics shows us how all those brilliant economists working for different government agencies and universities manage to get things wrong.  The problem is not the theory, but the empiricism.

Lack of Information

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Classical economics assumes that consumers have perfect information when making choices. That is, they know or at least can quickly access information about prices and quality, but, in reality, they often don’t.  Sure, the consumer could ask around or call their friends to see if they’ve tried that type of ice cream but they’re probably not gonna do that. In this situation, consumers may act on the limited information they have, a suspiciously low price, which means either the ice cream is a great deal or it tastes like mayonnaise.

The way markets work is that the supply, demand, and price work out over time.  Consumers might be cautious to any product at first, but as more people try the product and share the information about it (whether it’s on cnet, yelp, or amazon), the market tends to work itself out, even when it’s a little rocky at first.  As Crash Course points out correctly, perfect information doesn’t happen all at once, but the market does move toward perfection as time goes on.  As for the ice cream example, if the ice cream had a suspiciously low price but tasted like high quality ice cream, over time demand would meet the market’s expectations, although it might not happen at first.  Ever heard of two buck chuck?

Nudging

Crash Course talked about a fantastic and recent theory in behavioral economics called Nudge Theory.  Best explained in the book Nudge: Improving Decisions about Health, Wealth, and Happiness, Nudge Theory recommends an opt-out system of public policymaking, where the preferred choice is made easier or more visible to to the consumer, while still allowing the consumer to choose the less desired choice:

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[Behavioral Economists] wanted to see if they could get children to eat healthier by rearranging school cafeterias.  They put healthier food like fruits and vegetables on eye-level shelves and less healthy foods, like desserts, in less convenient places. Classical economic theory suggests that this idea wouldn’t work since rational people would pick the brownie.  But it turns out, students choose the healthier foods. Nudge theory works and it’s changing how we implement public policy.

What Crash Course failed to mention, however, is that policymakers choose to impelement Nudge theory because it is particularly libertarian.  If schools really wanted kids to stop eating unhealthy foods, they could just ban them entirely.  Instead, Nudge Theory retain’s the consumers’ freedom to choose, while still encouraging them to make the healthy choice.

Bubbles are Caused by Animal Spirits?

 

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Many economists used to believe that assets, like stocks and real estate, would stay at or near their real value because cold, calculating investors would buy undervalued assets and sell overvalued assets. But that doesn’t explain bubbles: In real life, investors aren’t always cold and calculating. They can get worked up and irrational sometimes.  

This helps explain bubbles. From the Dutch Tulip Mania of the 17th century, to the 2008 financial crisis.  Investors became irrationally exuberant, and were driven not by logic, but by what economist John Maynard Keynes once called, “Animal Spirits.”

This is very strange, since back in episode 7 on bubbles and episode 12 on the 2008 financial crisis, Crash Course explained bubbles quite differently.  Back then, bubbles were created by complex financial products and lack of regulation, but maybe those were only the environments to create the bubble, and it was actually the animal spirits that created the bubble all along.

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If you, as an economist, are going to stop your analysis of bubbles at “animal spirits,” you might be doing your audience an injustice.  People blame a lot of different things for creating the 2008 bubble (legal incentives to encourage bad lending, poor credit-rating by agencies, monetary policy), but you can’t just dust off your hands and say “it just happens”  Bubbles of 2008’s magnitude don’t happen with animal spirits alone.  The spirits might do the popping, but bubbles are created by other factors.

Thanks for reading, and you can look forward to a new episode reviewed every Thursday! And don’t forget to join our newsletter and our facebook group, and comment below!

Game Theory and Oligopoly: Episode #26

This week’s episode is a little better than last week’s.  Crash Course does a good job of defining different kind of product markets out there, but could improve when talking about collusion and market substitutes.  Let’s get started:

The Prisoner’s Dilemma

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Suppose Stan and I are arrested for scrawling in wet cement outside the YouTube studios.  We’re being interviewed separately. If we both confess, we’ll both have to pay a $10,000 fine. If neither of us confesses, we’ll get off scot free. And If I take a deal and confess, but Stan doesn’t — I’ll walk away and Stan will owe $20,000. And vice versa.

This is not an appropriate example to show game theory.  In game theory, the result of confessing when your accomplice doesn’t confess should be greater than if neither of you confess.  If we were to tweak Crash Course’s example to make it work, if Adriene confessed and Stan didn’t, she would go free AND get $5000, making it a true dilemma between risking your freedom to get money.  In Crash Course’s scenario as is, neither prisoner would confess, since there is no extra incentive.

This is particularly strange because Crash Course actually gives a perfect example of the prisoner’s dilemma later in the episode when talking about bread pricing, which we’ll get to later.

Pricing and Product Differentiation

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If Craig lowers his price on Crash Course nesting dolls, Phil will likely compete by dropping his prices as well. In the end they’re gonna continue to share customers equally, and earn less money.

If Craig understands game theory, he knows there’s no reason to change his price. Instead he focuses on providing knick-knacks that differentiate his kiosk from Phil’s. This can help explain why prices in oligopolies tend to get stuck and why companies focus so much on non-price competition.

Crash Course often talks about price as if its determined arbitrarily by whims of the entrepreneur.  Businesses determine their price based on supply and demand, and are limited by a major factor: cost.  If Craig and Phil are selling the exact same good, and Craig can afford to sell his good at a lower price while Phil cannot, Phil needs to sell a different good, which in the hypothetical, is exactly what Phil does.

This is what Crash Course means when talking about non-price competition.  Companies often distinguish themselves by portraying their product to be original and having no substitute.  Think about how Apple markets the iPhone.  For a lot of Apple users, Android would not give them the same comfort and familiarity, and they are willing to pay more because they feel that they are getting more.  Android products give them a different (and to them, worse) experience that they won’t substitute for the iPhone.

Collusion

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What if Craig and Phil don’t compete at all? What if instead, they agree to charge the same high price, conspiring to form what economists call a cartel?  Again they split the customers 50/50, but now they make even more profit — benefiting at the expense of consumers.  This is called collusion, and it’s illegal in the US. There are strict antitrust laws designed to prevent it. But that doesn’t mean companies don’t figure out other ways to raise prices.

Some economists argue that collusion would not occur in the free market, since it would not benefit the companies as Crash Course implies.  Absent any government restrictions on entering the market, if all the companies agree to raise their prices together, it creates a greater incentive for a new competitor to enter the marketplace and charge a lower price. Those former market leaders might benefit in the short term (before the new competitor emerges), but they might not.  People might buy substitutes if the price is too high.

Crash Course makes this exact point, although much later in the episode:

Even if they collude and agree to price high, they both have an incentive to cheat on that agreement.  So collusion and cartels are often unstable. They can only last if the agreement is monitored and strictly enforced.

Price Leadership

Price leadership is when one company changes its prices, and its competitors have to decide if they’re going to follow suit. Since they’re not actively colluding, it’s technically legal.  But it can be hard to tell the difference.

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Look at airline baggage fees.  When some airlines started charging fees for checked bags, other airlines quickly joined them. And when one big airline changes their baggage fee, the others tend move to the same price point.  Are they colluding, or is this a case of price leadership?  Well, the Justice Department’s looking into it.

Why would all of the airlines agree to raise their prices at once?  Any potential gains in profit would likely be offset by the decline in the number of people priced out of the market.  Does Crash Course think airlines arbitrarily chose luggage as their outlet for charging more for no reason?  Could Crash Course give any other alternative explanation?

As we mentioned before, cost is a significant limitation in pricing.  If one passenger is creating less cost for the airline, the airline would be able to give them a cheaper price.  This is the case for luggage; it’s not that everyone with luggage has to pay more, but instead, airlines are separating the luggage cost from the ticket price, allowing some people to opt-out of paying for their luggage cost.  Previously, luggage costs were priced into the ticket, making the overall ticket price higher.  Do you recall which were the first airlines to charge for luggage?  They were budget airlines like Spirit and Frontier, those who market the most towards having a low price.

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Other countries’ laws differ, and cartels do exist. The best example is OPEC — The Organization of Petroleum Exporting Countries. It’s an international cartel made up of 12 oil-producing countries that manipulate oil supplies to control prices. They control 80% of the world’s known oil reserves and nearly half of the world’s crude oil production.

OPEC collusively raises prices (and sometimes, lowers their prices) to their own peril.  It takes longer for competitors and substitutes to enter the marketplace in energy markets, and OPEC may have benefitted at the outset, but the result was new competitors entering the markets (namely the fracking boom in the United States) as well as substitutes (more energy-efficient and electric cars were sold).  OPEC’s artificially high prices hurt both the consumers and OPEC itself, but the market adjusted to better meet the needs of consumers.

How Businesses Compete

The highlight of the episode is when Crash Course gives a perfect example of why businesses are incentivized to charge the lowest price for their goods.  As Crash Course explains, prices are determined by the predicted profit:

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If Brandon prices high, Stan’s best response is to price low and if Brandon prices low than Stan’s best response is, again, to price low. That’s called having a dominant strategy: it always gives the best available outcome, no matter what the other guy does.  For Brandon, pricing low is his dominant strategy too: regardless of what Stan does, pricing low always results in a better outcome.

Thanks for reading, and you can look forward to a new episode reviewed every Thursday! And don’t forget to join our newsletter and our facebook group, and comment below!

Revenue, Profits, and Price: Crash Course Economics #24

After last week’s more theoretical discussion on the what-ifs of the US education system, Crash Course comes back to hard textbook economics in week 24.  What’s even better is that this week’s topic falls within microeconomics, which is the most agreeable and least controversial area of economics.

Crash Course doesn’t make any objectionable comments in this video, but there are some points I’d like to flesh out, especially because I know it’ll be helpful when reviewing future episodes.  Let’s get to it:

Opportunity Costs

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Let’s say a lawyer stops practicing law and decides to open up a pizza parlor. Let’s say his total revenue from selling pizza is $50,000 and he has to pay $20,000 to cover stuff like the ingredients, the oven, rent, and wages. Now, an accountant would calculate his profit, the revenue minus the costs, as $30,000. Not bad. But an economist recognizes that there‘s a cost missing: the opportunity cost. Our pizza entrepreneur loses the income he would have earned by being a lawyer, let’s say $100,000. If you factor that in, he is actually losing $70,000.

The concept of opportunity costs is so fundamental to economics, it cannot be overstated.  Crash Course’s example is spot on here with the example of a private business owner.

However, this principle of opportunity cost might be even more important in public policy work.  When a government spends tax revenue on a particular project, it’s easy to look at the project and say “Wow, how great is this!  We didn’t have this thing before, and now we do!  Thanks government!”

The problem occurs when you think about all the other places the money could have gone.  For example, instead of building an expensive statue in town square, the city government could have built shelters for the homeless, fix the potholes in the street, or subsidize a local medical clinic.  Or even better (to many economists), the money could be left in the hands of taxpayers, and then they can decide where to spend their money (spoiler: it probably wouldn’t be on a statue).

This problem of opportunity costs for public projects only gets bigger if you look at larger governments.  For example, the US federal government spent $3 million to research obesity rates for lesbians.  Do you think that, maybe, the money could be better spent on just about anything else?

No economist does a better job at explaining opportunity cost than Frederic Bastiat in his Parable of the Broken Window.  If you aren’t familiar with it, do yourself a favor and check it out.  It’s still changing the way many people think about spending and opportunity cost, and it’s 150 years old.

Businesses and Marginal Cost

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Businesses use this same logic. They calculate their potential revenue and their costs of production, including implicit costs, to make informed decisions […] eventually, they’ll get to a point where hiring another worker only adds one more pizza to their hourly total. Now, the marginal cost of that last pizza is huge. And, it’s likely to be higher than the additional revenue the company is gonna get from selling that pizza.

Crash Course then moves on to talk about a different subject without reaching the obvious conclusion: the business would not hire that additional worker.

This principle of marginal cost will be very important when talking about the minimum wage, which will have its own episode.  Crash Course has already stated in a previous episode that some universal economic principles do not apply when talking about the minimum wage, so we’ll see how they reconcile their lessons on marginal cost and price floors with the minimum wage when we get to it.

Economic Profit, Normal Profit, and Competition

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So there’s actually two types of profit. Accounting profit, which is revenue minus just explicit costs, those traditional out-of-pocket costs you think of when you run a business. And there’s Economic profit which is revenue minus explicit and implicit costs — which is those indirect opportunity costs.

The idea of the two-profit system was a little confusing to me at first, and I still think it causes more confusion than helpful understanding of economics.  Basically, economic profit occurs when a business creates or dominates a market before other competitors enter the market to take away profit share.  Economic profit is zero when you have a competitive market, since it is theorized that normal profit will equal the opportunity cost of doing something else.  This is all pretty theoretical and not very helpful since it’s tough to think about a business’s opportunity cost (although it may be easy to determine a person’s opportunity cost), and the term “economic profit” is not used too frequently from what I’ve read.

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Competition will lower the price and reduce your sales.  New vendors will continue to enter until all that extra profit disappears […]

But remember, this is only in very competitive markets that have low barriers for entry. If it’s hard for other companies to enter a market than a business can earn economic profit.

Another great economic principle that Crash Course is citing here is that businesses will enter markets with good profitability.  Markets with good profitability are those will a sustainable demand for the goods, so if enough people buy a particular good, potential businesses will see the increased demand in the market and try to move in to compete for those profits.

But unlike Crash Course might be suggesting, this can also happen in markets with high capital barriers to entry.  For example, creating and manufacturing smart phones is very capital intensive, but yet there are currently numerous competitors in the market, each fighting for a share of the profit.  On the other hand, high regulatory barriers to entry are much harder to overcome and will reduce the number of competitors in the market.

This was a pretty great episode for Crash Course.  The rest of the episode on economies of scale, sunk costs, and marginal return are spot on and don’t require further comment.  This week was pretty unobjectionable, which is a relief for us at Crash Course Criticism.

Thanks for reading, and you can look forward to a new episode reviewed every Thursday! And don’t forget to join our newsletter and our facebook group, and comment below!

Economics of Education, Episode #23

If last week’s episode was meek, this week’s was a giant.  There is a lot to unpack when talking about Education in general, and this episode goes from preschool to graduate school, all in one 10-minute lesson.

Unfortunately, this episode contained a lot of conclusions that were not backed up by full arguments (then again, you can only do so much in 10 minutes), and we’ll talk about some of these conclusions.   There’s a lot to say about this episode, and we’ll be nailing the important points in this blog post.  Let’s get started:

Education vs. Public Schooling

Crash Course begins this episode with a comment about how every country needs public schooling:

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Why do governments spend billions funding universal public education? Why not just let profit seeking businesses handle it? Many argue that if education was entirely privatized it’s likely that some children would be excluded, and that would make society, as a whole, worse off.

We mentioned this in Episode 21, but there is no way anyone could make this conclusion on anything but speculation.  The existence of a “free” primary and secondary school option pushes private competition out of the market, so when predicting a vastly different schooling market, economists don’t have much data to work with besides their own imagination.

Let’s also look at the numbers (given by Crash Course themselves): Public schooling costs about $12,500 per student per year.  In comparison, the average private elementary school costs $7,770 per student, and private high schools cost an average of $13,030.

So public school costs about as much (or more) to provide than private school, yet generally speaking, provides worse education for the students.  This is why many economists promote the idea of school vouchers, where parents can spend the tax revenue that would have gone toward public schools on the private school of their choice.

Equivocation of “Education”

Immediately after talking about the need for public schooling and its positive externalities, Crash Course talks about the benefits of education in general, including mentioning that it…

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also benefits society as these individuals create art, invent cool stuff, cure diseases, and make interesting conversation at parties. More education increases productivity, GDP, and standards of living.

All of this is true, although this isn’t really an argument for state-funded education, but more for education in general.  Is the public school system better at educating students in art, invention, or medicine?

Inequality

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The US has some serious problems with its education system. One of the biggest is inequality. Students from low income families tend to have lower math and reading test scores than those from higher income families. African American, Latino, and Native American students are much more likely to drop out of high school than their White or Asian counterparts.

When talking about the problems with the education system, I was surprised to see such a major focus on inequality in this Crash Course episode, especially since they already dedicated a full episode to it.  I thought that Crash Course would focus on the problems with the education system (falling test scores, lack of preparation for the real world, rising tuition) and not on the racial/economic divide.

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For some economists, the best way to level the playing field is to focus on funding.  They argue that the government should pay for early education programs, and provide extra money for disadvantaged and low-income students.

First, economists and sociologists are very torn on whether there’s any correlation between pre-schooling and later academic achievement, and I’m surprised that Crash Course wouldn’t mention that this is highly debated.

Second, how would sending all kids to preschool solve the inequality problem?  Doesn’t the US already send all kids to school from grades K – 12, and the inequality problem still exists?  Can anyone please explain how government-funded preschool solves this problem?

It’s clear that the first step to improving equality is to invest in primary and secondary education.

Crash Course has isolated the educational performance data in a box.  They are surprised by how students of different races/income levels succeed at different levels, and the only solution they see is for the government to put money somewhere, anywhere in the school system.

Could it be that there are other things besides education funding that could contribute to why kids of different races/incomes are performing differently?  Could it be, for example, all other life circumstances, or that parents with greater income will send their kids to private schools?  It’s incredible that Crash Course doesn’t consider these other factors to be an influence on educational achievement.  Keep this mind for later in the video.

As a side note, the only problem with the US education system that Crash Course mentions is one of inequality.  It’s not really an economist’s place to talk about the problems of the US school system, but I think most people can think of some problems other than inequality.

College and Higher Education

Crash Course starts off their discussion about college by mentioning that those who attend college are generally self-selected privileged people:

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First, it takes a modicum of intelligence and dedication to even get into college. Second, you have to receive a fairly good primary and secondary education to be able to keep up with college work.  Third, the students who attend college are more likely to come from well-off families with educated parents who have the time and energy to help encourage their success.

I’m not going to guess that ages of the co-hosts of the show, but as anyone who has attended college in the past 10 years can tell you, there are not filled with only smart people, and even if you don’t come from a well-off family (as many are not), you can still go to college with government loans.

But here is the real kicker:

The fact that college graduates make more money isn’t just about college. It’s also about life circumstances.

Why couldn’t Crash Course use this exact explanation when talking about difference in academic achievement between races/incomes?  In other words, life circumstances are the best predictor of academic/financial success, not college degrees or preschool education funding.

Human Capital vs. Signaling

Does college actually increase your productive capacity, or does it just give you a nice thing to put on your resume for others to see?  Crash Course tries to explain it here:

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They have compared the earnings of people who have earned 7 ½ semesters worth of college credits but didn’t graduate, to people who finished and got a degree. Both groups received about the same amount of education, so if the Human Capital theory is correct, they should earn about the same amount of money. If the Signaling theory is correct, those with degrees should earn noticeably more, and they do.