After last week’s polarizing (and pretty political) episode on wealth inequality, Crash Course decided to take it easy on us here at CCC by talking about an area of economics that is relatively noncontroversial (at least currently): Microeconomics. This episode was very solid on basic content, but as always, we have some critiques to make. Let’s do it!
Marginal Analysis and Utils
For economists, the word “marginal” is pretty much the same as “additional”. Marginal analysis looks at how individuals, businesses and governments make decisions. Basically, they’re interested in additional benefits and additional costs.
Businesses do the same thing when they decide how many workers to hire. They compare the additional revenue that an additional worker will likely generate for their company, and to the additional cost of hiring that worker: wages and benefits.
I couldn’t have said it better myself. When a person makes a decision, it is assumed in Economics that he weighs the cost and benefits, and a person would never make a decision where he believed the costs outweighed the benefits.
It’s important to note here, that these costs and benefits cannot be measured, since the decision comes down to one person’s action, and what matters to him is his subjective belief of what the costs and benefits are. We, as economists, cannot quantify what a person’s costs and benefits are from what they shouldbe.
Speaking of this subjectivity, let’s talk about Utils:
Economists have even made up a new word to help quantify satisfaction called ‘utils’. Utils are like happiness points and they are completely subjective. So one person might get 100 utils of satisfaction from the first slice of pizza and another person might only get 10 utils.
Some economists, namely from the Austrian School, have problems with the idea of Utils. Economists might be able to guess how much value a person puts on a slice of pizza, but they can never know. In fact, the person himself might not be able to quantify it accurately.
To Austrians, the idea of Utils is helpful for explaining that people have different subjective values for things, but Utils should not be used to quantify the comparative difference between two things. As an observing economist, we can only notice when someone chooses one option over another, but we can’t quantify how much someone prefers one option over another.
This is the problem that one runs into when considering Mr. Clifford’s park example:
Instead, the government looks at the additional benefit or satisfaction generated by the fourth city park and compares that to the additional cost, and here, when we’re talking about cost, we’re talking about the use of city land, and the tax money spent on building the park.
In this case, the government has to guess as to what is the additional benefit or satisfaction generated by the park. The general dollar cost can be predicted (assuming the money has already been collected from taxpayers and is sitting in the treasury), but the benefit must be arbitrarily determined by someone judging how people feel about parks.
Imagine you are grocery shopping for a friend. You might know your friend pretty well, and you probably know what he would generally pick up at the grocery store. However, even though you might get close to what he would buy, it probably would not match what he would have bought had he been shopping.
This is the problem that many economists have with government decisions for spending taxpayers’ money. Although in the end, people might really like the park, we have no idea what they would have preferred to spend the money on.
Diamonds and Water
Crash Course does a great job at extrapolating the idea of marginal utility to the supply and demand curve. For the major examples of how supply affects price, they compare the goods of water (high supply, low price) and diamonds (low supply, high price).
Before we get into a discussion about the De Beers diamond company and how they are artificially keeping the supply of diamonds low, for this example let’s just assume that the natural supply of diamonds is low.
Crash Course pretty much nails it in this segment, although they do slip up in their wording:
It might seem irrational that society values diamonds more than water, but using marginal analysis, it sort of makes sense.
Whoa, whoa. No one is saying society values diamonds more than water, but they do value an additional diamond more than an additional gallon of water. I don’t want to be a nitpicker here, but in this case, there is a big difference and it’s important to keep the terminology consistent.
This episode was pretty spot on (aside from the few hiccups I mentioned), and I would say it’s mostly recommendable for economists from all different schools. Thanks for going easy on us this week, Crash Course!
Like what I wrote? Hate it? Have anything to say about the episode? Drop some feedback in the comments.
This topic had to come up in a course about economics: Monetary Policy and the Federal Reserve. This episode was mostly informative and less opinionated than other episodes, but there were still some major problems that need clarification:
“Decreasing the Money Supply”
Crash Course mentioned that the Fed can increase the money supply through different means in an expansionary policy, but they also said many times that in a contractionary policy, the Fed can decrease the money supply. They even mentioned as an example that in the 1970’s, Fed Chair Paul Volcker decreased the money supply to combat inflation.
A decrease in the money supply would mean that the Fed is literally taking money out circulation and eliminating it, so there are fewer dollars circulating in the economy. This never happens.
What does happen (and what Paul Volcker did) was increase the discount rate so that money was being created at a much slower rate. Since the Fed creates money and lends it to commercial banks at the discount rate, increasing the discount rate would mean that fewer loans are made to banks, so less money is being created.
Crash Course often says that answers to certain economic questions are very complicated, but they don’t seem to have a problem with claiming what prolonged the great depression:
The Fed gets blamed for prolonging the Depression because it didn’t give banks emergency loans, which would have increased the liquidity in banks and the money supply in general.
This is a very big statement about the Great Depression, essentially arguing that the Depression would not have been as bad if the Fed had just bailed out the banks.
This is a highly debatable suggestion to say the least, as economists and historians still disagree about what made the Great Depression so severe, compared to previous slumps. It is very likely a combination of monetary and fiscal policy, and The Austrian School would even suggest that the Fed’s very expansionary policy throughout the 1920’s caused the Great Depression’s severity.
Additionally, since the United States did bail out banks following the 2008 financial crisis, why was the recession so prolonged?
Why Has There Not Been Any Inflation?
If the Fed has been increasing the money supply steadily since 2008, why has the actual inflation rate stayed so low?
Crash Course gives three possible answers to this: 1. Banks are not lending out the money they receive from the Fed, so the dollars are not circulating to increase prices. 2. Uncertainty in Europe, which means foreign investors are holding US Dollars, so again, they are not circulating and raising prices. 3. The economy is still sputtering.
For number 3, why would low inflation be the result of a bad economy? I suppose that Crash Course is saying that too many people are saving instead of spending, so money is not circulating in the economy and pushing prices up. This brings us back to our discussion on Deflation, Saving, and Spending, which I won’t rewrite here.
An alternative explanation that Crash Course did not mentioned is that prices are rising quickly in certain sectors of the economy, namely housing (again) and high-priced luxury goods. If the newly-printed money is only being used in these areas, it will take longer before the prices of normal consumer goods rise.
As I mentioned at the beginning, a lot of this episode was an explanation of what the Fed does, since it’s probably not common knowledge for the normal Crash Course fan. Besides these few (albeit major, especially the first one on decreasing the money supply) errors or opinions, the episode on the whole was pretty informative, and it did a good job at explaning a very difficult concept quite clearly.
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Crash Course’s most recent video on Fiscal Policy and Stimulus has its ups and downs. The show’s hosts acknowledge the controversy surrounding Keynesian economics, but not before treating the ideas favorably. The show equates free market economics with antiquated (and wrong) medical science, and presents only two (both government-centered) economic policies as the potential solutions to national recessions. Let’s start from the beginning:
Recessions vs. Unemployment
Crash Course spends the first few minutes of the video talking about what it means when a country is in a recession, followed by a brief history of recessions in post-WWII United States.
The episode notes that dips in the economy correspond with rising unemployment, and unemployment is linked to a number of other negative societal factors: namely suicide, domestic violence, and social upheaval.
Fortunately, Crash Course also mentions that unemployment is not the only potential monster to the economy. The show gives equal time to discussing the problems with inflation:
High inflation can be just as bad. Rising costs wipe out savings and have been the root of protests and riots around the world…
…Many economists argue that policymakers should intervene in the macroeconomy in order to promote full-employment or reduce inflation.
Without directly saying so (at least not yet), the show implies that large-scale unemployment and inflation happen naturally, and government policy may be necessary to fix these problems.
As I wrote about in last week’s episode on inflation, inflation doesn’t just happen naturally in the market. Widespread price increases happen from new money being created and flowing through the economy. When Crash Course says “many economists argue that policymakers should intervene in the macroeconomy,” they should also clarify that government monetary intervention has already occurred, and now people are considering if fiscal economic intervention is necessary.
To give them credit however, they are correct that unemployment would still occur in a free market. All schools of economic thought would agree that as industries are constantly growing and shrinking, and people get laid off when their industry shrinks. The real question between schools of thought is how a very high unemployment rate occurs, and whether government intervention prevents this from occurring (or causes it to occur).
Before mentioning that what they are about to explain is debated between schools of economic thought, Crash Course explains Keynesian fiscal policy as generally agreed upon by economists. They later use examples from the 2008 recession to illustrate how this method of thinking is practiced in the United States, explaining away common objections to their example:
In 2009 the US government launched a huge stimulus program in response to the financial crisis. Despite that, employment and GDP both fell. That sounds like a failure, but the majority of economists think that the situation would have been far far worse without that stimulus.
I mentioned this in a previous post, but if a scientist declares his hypothesis to be true, and then despite their own contrary experimental results, still declares his hypothesis to be true, there’s no use trying to convince him. They will declare themselves the winner regardless.
Keynesian fiscal theory is based on two main assumptions: decreasing taxes and increasing government spending help the economy (and the reverse hurts the economy). Their own admitted problem is that helping the economy in this way requires the government to increase their debt, which will be paid back in better economic times.
Taxes hurt the economy. This is agreed upon by all economic schools of thought, even the communists. When you take away wealth from a people, what is left is worse off than before.
Government spending helps the economy. Freemarketeers may disagree with me here, but hear me out: government spending, per se, generally helps the economy. The problem is that government spending necessitates taxes in one form or another. Free market theory argues that money is better spent in the market than by governments, not that government spending (again, per se), doesn’t do anything good for anyone.
The problem is, you can’t have government spending without taxes, and while Keynesian expansionary policy may seem like you can have your cake and eat it too, issuing debt in the present is the same as taxing the future. Keynesian economic policy taxes the future for government spending and lower taxes in the present.
Since the increase in present government spending has to come from somewhere, this policy shifts spending from the future market to the current government. Since freemarketeers argue that any shift from the market (present or future) to government necessarily makes the economy worse off, freemarketeers oppose Keynesian fiscal policy.
So what’s up with the video’s comments on Austerity and the Multiplier Effect? Stay tuned for Part 2.
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