So, needless to say, as a first-year college student, I'm decidedly not the most qualified person to discuss education policy. But, since it seems that most people discussing policy matters online are routinely just as unqualified, I figure I might as well give it a go, nevertheless. Here, as such, is the first of a few policy problems on the education front that I've been pondering, lately.
1. Free Market Solutions in an Anti-Free Market Area - In Adam Smith's Wealth of Nations, the veritable grandpappy of free market economics essentially rejected the idea of free education, on the grounds that, as soon as you take teachers' payment out of the hands of parents and students, you lose all hope of quality control. If the teachers are in charge of administration, he says, they'll inevitably band together and reduce their workload as much as possible, while, if a non-teacher is put in charge, they'll likely be incapable of effectively managing teachers, not being one, themselves. As such, he concluded that even working class parents ought to pay at least some pittance to send their children to school.
This is particularly striking because two of the most constantly repeated policy proposals on the education front essentially rely on the magical powers of the invisible hand - performance pay for teachers and "school choice" programs. In the former case, we assume that added financial incentive will result in a superior work ethic for teachers, whereas, in the latter, we attempt to make the federal and state money attached to the individual child's attendance have an effect equivalent to a private payment on the parent's part.
It's entirely possible, of course, that both of these programs would work just as their proponents insist they would, and it's likely that only actual application and analysis of the proposals would give us the beginnings of a straight answer either way. But, regardless, the ease with which these suggestions are put forward, as if they were obviously theoretically sound, strikes me as decidedly wrongheaded. Why, after all, should we expect free market solutions to have the desired effect in a system almost entirely cut off from the free market?
Take school choice, for instance. (And suppose, for the moment, that this means a policy in which parents are free to send their child to any school within the public school system.) An advocate of this plan might tell you that free market forces will result in parents sending their children to better schools, rather than worse, which will, in turn, starve the poor schools for funding and force the system to either improve or replace them.
But this is hardly intuitively obvious. On the contrary, there's good reason to suspect that the majority of parents would, thanks to transportation restrictions, prove unable to send their child to the school of their choice, still, even if they found time to discern which of the local schools was best. The ability to take advantage of the higher quality, public schools, as a result, would likely be limited to those families with the time and money to make such detours. (These families, in turn, are the most likely to already be in areas with superior public schools.) Moreover, this supposedly free process will still be boxed in by enrollment limits - we can't reasonably expect a good school to remain good, if it's flooded by more students than it can maintain. For the same reason, we cannot expect failing schools to disappear thanks to supposedly "free market" forces, because there will still have to be a school somewhere to handle the children left over.
If, then, we're interested in making life easier for a few more upper-middle class parents, broad school choice might be a great way to go - but I fail to see how it could be a very useful program for an school district as a whole, assuming (reasonably, I think) that implementing such a program has some sort of significant opportunity cost. (And, perhaps, even if it does not.)
Of course, the above is just an abstract discussion of the idea. My point, though, is that people who claim that such "free market" programs in education are, by their very nature, likely to be effective are doing just the same - basing conclusions on abstract hypotheticals about the function of the invisible hand and all that. They fail to take into account how detached the public school system is (and must be) from the free market, and, unless they can provide empirical evidence for their proposals' efficacy or justify their claim that the free market mechanism will function as they expect, they ought to admit that they're just blowing smoke and raising meaningless paeans to the gods of privatization.
Tuesday, December 16, 2008
Thursday, December 11, 2008
Will Someone Please Explain Economics to Us?
So, I just happened across what must be the billionth conservative, elected or not, real-life or resident of the blogosphere, who's talked about how we need to drastically cut the federal budget, so that the U.S. doesn't have to borrow money from abroad. Now, presumably, people say this because they think it's an idea that could sell. The average person knows that he doesn't get to borrow billions from overseas, so why would should he let the feds? And, obviously, the vast majority of politicians would rather remain elected, rather than let themselves be wiped out for what they take to be the greater good.
What's baffling, though, is that this plan is blatantly, objectively bad. Keep in mind, this isn't a question of government spending vs. tax cuts. We already run ginormous deficits, so it's really an issue of government spending versus not government spending with the revenue we already have. That revenue, in turn, will be lower than normal, thanks to the recession - which is, in turn, caused to a great extent by people not spending. So, when the government drastically scales back spending, the recession gets worse, revenues fall, the government scales back more, the recesson gets worse, revenues fall...repeat to your liking. And it gets even worse when you consider that federal spending cuts would almost certainly cut aid to the states, which almost never have the option to run deficits themselves. So, we'd see the same, vicious cycle at state-level.
The baffling thing about this isn't that people fall for it. The average person doesn't have time to think about economics. It isn't even that there are people advocating for it - since there are people who fall for it, that's to be expected, in politics. What's horrifying is that no one is out in the public media explaining what an awful idea it is. No one has, to put in the vernacular, the balls to stand up and defend fiscal policy that's founded in reason instead of puffy-cloud, ideological hallucinations about what ought to work.
I see no reason to believe that, if you put a reasonable, educated person out there and had them explain the basic cycle through which major spending cuts would hurt everyone's pocketbooks, Americans would persist in believing this silliness. The only problem is that Americans don't discuss policy anywhere near the mainstream media, and so no one ever does that.
What's baffling, though, is that this plan is blatantly, objectively bad. Keep in mind, this isn't a question of government spending vs. tax cuts. We already run ginormous deficits, so it's really an issue of government spending versus not government spending with the revenue we already have. That revenue, in turn, will be lower than normal, thanks to the recession - which is, in turn, caused to a great extent by people not spending. So, when the government drastically scales back spending, the recession gets worse, revenues fall, the government scales back more, the recesson gets worse, revenues fall...repeat to your liking. And it gets even worse when you consider that federal spending cuts would almost certainly cut aid to the states, which almost never have the option to run deficits themselves. So, we'd see the same, vicious cycle at state-level.
The baffling thing about this isn't that people fall for it. The average person doesn't have time to think about economics. It isn't even that there are people advocating for it - since there are people who fall for it, that's to be expected, in politics. What's horrifying is that no one is out in the public media explaining what an awful idea it is. No one has, to put in the vernacular, the balls to stand up and defend fiscal policy that's founded in reason instead of puffy-cloud, ideological hallucinations about what ought to work.
I see no reason to believe that, if you put a reasonable, educated person out there and had them explain the basic cycle through which major spending cuts would hurt everyone's pocketbooks, Americans would persist in believing this silliness. The only problem is that Americans don't discuss policy anywhere near the mainstream media, and so no one ever does that.
Sunday, October 19, 2008
A Quick Lesson on Demand Elasticity and Revenue!
(All graphs shown below were drawn by me, using GIMP's grid and straight line tools. Yay, me.)
In a conversation I was having elsewhere, some issues relating to demand elasticity and revenue came up, and it occurred to me that it would likely be much easier to actually show the relevant graphs than to just keep trying to explain things with plain text. Hence, this post. Now, let's start by pointing out a few things. Some of these will probably be obvious, but it's good to make everything clear, to begin with, so bear with me.
1. When I say "demand," I really mean "effective demand" - that is, not how much of an item we want but how much of an item we actually can and will pay for. Obviously, if we were just talking about desire without follow through, none of this would matter at all, in real life.
2. "Quantity of demand" simply means the number of units of an item demanded. For instance, if, at a certain price, two hundred cartons of cigarettes are bought, the quantity of cigarettes demanded is 200 cartons.
3. When price goes up, quantity of demand goes down, in most cases. There are some exceptions - one of which we'll briefly show below - but this generally holds true.
Now, when we want to put this effect down on paper, we can do it with a graph. The graph below, for instance, has two axes, the vertical axis showing the price of some good and the horizontal axis showing the quantity of the good demanded. The black line sloping downwards between the two axes is the "demand curve," and each point on the curve corresponds to a certain combination of price and quantity demanded.
In a conversation I was having elsewhere, some issues relating to demand elasticity and revenue came up, and it occurred to me that it would likely be much easier to actually show the relevant graphs than to just keep trying to explain things with plain text. Hence, this post. Now, let's start by pointing out a few things. Some of these will probably be obvious, but it's good to make everything clear, to begin with, so bear with me.
1. When I say "demand," I really mean "effective demand" - that is, not how much of an item we want but how much of an item we actually can and will pay for. Obviously, if we were just talking about desire without follow through, none of this would matter at all, in real life.
2. "Quantity of demand" simply means the number of units of an item demanded. For instance, if, at a certain price, two hundred cartons of cigarettes are bought, the quantity of cigarettes demanded is 200 cartons.
3. When price goes up, quantity of demand goes down, in most cases. There are some exceptions - one of which we'll briefly show below - but this generally holds true.
Now, when we want to put this effect down on paper, we can do it with a graph. The graph below, for instance, has two axes, the vertical axis showing the price of some good and the horizontal axis showing the quantity of the good demanded. The black line sloping downwards between the two axes is the "demand curve," and each point on the curve corresponds to a certain combination of price and quantity demanded.
For instance, if we look at point A on the curve, we see that, when the price of the good is $20, 10 units are demanded. When price falls to $10 at points B, the quantity demanded rises to 20 units. (These numbers are merely given for the sake of illustration. We'll get into exactly how much a change in price changes quantity demanded, below.)
Now, let's consider the slope of the demand curve. The slope of a line, as we all know from math class, is equal to the change in the value graphed along the y-axis divided by the change in the value graphed along the x-axis between two points on the line. So, for the demand curve, the slope of the line is the change in price divided by the change in quantity demanded, between two points on the curve. We call the slope, in this case, the "elasticity of demand." The elasticity of demand tells us, roughly, how much the quantity demanded will change if the price increases or decreases.
(The definition of elasticity given above is actually somewhat simplified. In reality, since the numerical values of price and quantity of demand will almost always be presented on different scales, elasticity is really the percent change in the total price divided by the percent change in the quantity of demand. However, for ease of reference, I've used identical scales for both price and quantity of demand for all the relevant examples, below, so this distinction doesn't matter, for our purposes. Keep in mind, however, if you encounter graphs with differing scales.)
To illustrate, let's look at a special, ideal case, which we call "perfectly inelastic demand." For a perfectly inelastic demand curve, the slope of the line is nonexistent. That means that, in practice, the quantity of demand is exactly the same, no matter what price the product sells for. In the graph below, for instance, consumers demand ten units of the good at both point A and point B, even though the price at A is $10 higher.
This is also a great chance for us to talk about total revenue. Now, obviously, how much money someone makes from selling a product is equal to the number of units he sells times the price that he charges. For instance, at point A, above, we're selling 10 units for $20 each, so we're making $200 in total revenue. At point B, we're only making $100 in revenue, because price is lower.
This is reflected in the size of the rectangles formed from the red lines drawn between the points and the axes. In fact, the area of the rectangle colored in orange is equal to the revenue we'd get at point B, while the area of the orange rectangle plus the area of the green rectangle equals the revenue we'd get at point A. The rectangle for A is larger than the rectangle for B because we'd make more revenue at A than at B.
In most cases, though, we're not dealing with perfect inelasticity. Instead, we have either "relatively inelastic" or "relatively elastic" demand. "Relatively elastic demand," shown on the graph immediately below, means that the change in quantity of demand between two points is greater than the change in price - or, in mathematical terms, that the absolute value of the slope of the line is less than 1.
Let's consider the revenue we can make off of a relatively elastic product, at different prices. As you can see just by eyeballing the rectangles sketched in red on the graph above, we make more revenue at point B, when price is lower, than at point A, when the price is higher. (If you don't trust your eyes, here, quick multiplication will confirm this.) So, it's in our best interest, if we're the seller, for the price to be lower - we make more money, that way.
"Relatively inelastic" demand is just the opposite - it's when price changes more than quantity of demand, between two points on the curve. In mathematical terms, that means that the absolute value of the slope of the line is greater than 1. The graph below displays a relatively inelastic demand curve.
Finally, let's consider how revenue works, when we have relatively inelastic demand. It's easy to see that the rectangle for point A is much larger than the rectangle for point B - hence, we make more revenue when price is higher than when price is lower, and it's in our best interest to increase price rather than to decrease it.
A FINAL CAVEAT: the demand curves we've presented above are somewhat simplified. In most cases, demand curves will not be lines but actual curves. This means that there will be a part of the curve where demand is relatively inelastic, part of the curve where demand is neither relatively inelastic nor relatively elastic, and part of the curse where demand is relatively elastic. The real difference between elasticity of demand curves is how much of the curve falls into a certain type of elasticity. Hence, when we say a good has relatively inelastic demand, we usually mean, in reality, that the price range for which the good has relatively inelastic demand is larger than the price range for which the good has relatively elastic demand.
But, in general, if you're just talking in simple terms, it's fine to use the line graphs shown above, in order to avoid a headache.
Saturday, October 11, 2008
On Hating America
I think what most astonishes me about the over-heated rhetoric employed against Obama, of late, is the extent to which it ignores the masses of people who support him.
By any objective standard, one must acknowledge, Obama is ahead in the race for the presidency, at the moment. All the national tracking polls have him comfortably ahead, and the various, electoral projections have him either exceedingly close to or past the magic number of electoral votes, while Senator McCain languishes behind. Now, unless one assumes that all of these polls, which, in a broad sense, agree with one another, are all wrong, the obvious conclusion is that more people presently support Senator Obama than support Senator McCain.
Now, from the right, we're hearing a lot of talk about Obama's supposedly radical connections. We hear that he's super-liberal, that he's a Muslim, that he's a socialist, etc. Most vocally, though, we've heard the claim that Senator Obama is a terrorist or a terrorist sympathizer or a friend to terrorists. Moreover, the assertion from the right is that these claims are obviously true. No one is saying that if we dug in deep into Obama's past that we might find out that he has terrorist ties - they're saying that we already know for a fact that he does.
No one seems willing to carry these assertions to their logical conclusion, however, even though that conclusion, if true, would be quite shocking and serious. If you believe that it is public knowledge that Obama is a friend to terrorists and you acknowledge that the polls show he is widely ahead in the race, you must believe that all of his supporters either are also friends of terrorists or do not care if the person they vote for is a friend of terrorists. There are no other options. If we Obama supporters could easily learn what the extreme McCain supporters supposedly know, we would have to be either violently anti-American or completely disconnected not to do so and then promptly turn against him.
Why does no one say this explicitly, on the right? Well, because it's obviously untrue. It's absurd to imagine that the majority of people plugged into the American presidential race hate America and support terrorism or just don't care. There is no rational underpinning for such a belief, and it would be laughed out of the halls of public discourse if it ever grew brave enough to give voice to itself. After all, this argument essentially amounts to accusing the majority of likely, American voters of hating America.
There is, of course, one alternative path these extreme McCain-types can take. They can claim that the information about Obama's terrorist sympathies have been hidden and distorted by the media. Under that claim, we honestly don't know whether or not Obama <3's terrorists, because the facts have been kept away from us. The logical problem here is even more obvious - if we don't know the facts, it's impossible to conclude that Obama is a terrorist sympathizer, just as it is impossible to conclude that he is not one. (The complete lack of evidence of any such cover-up is another problem, but I'm really only aiming to point out the internal flaws in these arguments.)
In short, those extreme conservatives accusing Senator Obama of being anti-American are not only being intellectually dishonest, but they are also expressing either an incredibly deep cynicism or (more likely, I think) complete contempt for their fellow citizens.
By any objective standard, one must acknowledge, Obama is ahead in the race for the presidency, at the moment. All the national tracking polls have him comfortably ahead, and the various, electoral projections have him either exceedingly close to or past the magic number of electoral votes, while Senator McCain languishes behind. Now, unless one assumes that all of these polls, which, in a broad sense, agree with one another, are all wrong, the obvious conclusion is that more people presently support Senator Obama than support Senator McCain.
Now, from the right, we're hearing a lot of talk about Obama's supposedly radical connections. We hear that he's super-liberal, that he's a Muslim, that he's a socialist, etc. Most vocally, though, we've heard the claim that Senator Obama is a terrorist or a terrorist sympathizer or a friend to terrorists. Moreover, the assertion from the right is that these claims are obviously true. No one is saying that if we dug in deep into Obama's past that we might find out that he has terrorist ties - they're saying that we already know for a fact that he does.
No one seems willing to carry these assertions to their logical conclusion, however, even though that conclusion, if true, would be quite shocking and serious. If you believe that it is public knowledge that Obama is a friend to terrorists and you acknowledge that the polls show he is widely ahead in the race, you must believe that all of his supporters either are also friends of terrorists or do not care if the person they vote for is a friend of terrorists. There are no other options. If we Obama supporters could easily learn what the extreme McCain supporters supposedly know, we would have to be either violently anti-American or completely disconnected not to do so and then promptly turn against him.
Why does no one say this explicitly, on the right? Well, because it's obviously untrue. It's absurd to imagine that the majority of people plugged into the American presidential race hate America and support terrorism or just don't care. There is no rational underpinning for such a belief, and it would be laughed out of the halls of public discourse if it ever grew brave enough to give voice to itself. After all, this argument essentially amounts to accusing the majority of likely, American voters of hating America.
There is, of course, one alternative path these extreme McCain-types can take. They can claim that the information about Obama's terrorist sympathies have been hidden and distorted by the media. Under that claim, we honestly don't know whether or not Obama <3's terrorists, because the facts have been kept away from us. The logical problem here is even more obvious - if we don't know the facts, it's impossible to conclude that Obama is a terrorist sympathizer, just as it is impossible to conclude that he is not one. (The complete lack of evidence of any such cover-up is another problem, but I'm really only aiming to point out the internal flaws in these arguments.)
In short, those extreme conservatives accusing Senator Obama of being anti-American are not only being intellectually dishonest, but they are also expressing either an incredibly deep cynicism or (more likely, I think) complete contempt for their fellow citizens.
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