The visible hand in economics

Archive for June 2008

Well, we don’t run a requests service, but never let it be said that we don’t try to give our readers what they want (or what we want them to want, anyway). The Standard asks us to have a chat about this piece in The Economist which discusses endowment effects, so here goes.

The first question to answer is probably, “Endowment effects?! Wot’s that then?” Read the rest of this entry »


The Economist has an excellent piece on inflation expectations (*) (ht Anti-dismal and the Economist blog). In it they mention some of the difficulties of using the inflation expectation measures as a gauge of inflation, namely:

  1. The problem with survey measures: Consumer often mis-interpret inflation, and take increases in the price of certain goods (eg fuel and food) as inflation – ignoring the reduction in the price of other things (appliances).
  2. The problem with market measures: Perceived risk also drives the same measures – implying that there can be biases.

Now I agree in large parts with what they have said, however I think they “over-sold” the first case. Read the rest of this entry »

So the economy shrank 0.3% over the March quarter (or 0.6% if you buy the expenditure measure instead) – the appropriate tables are here (*).

This was bang on expectations. The stock boost we talked about was there, but everything else was sufficiently bad that it landed on expectations anyway 🙂

What concerned me was the GDP deflator (the fourth table) – 5.8% annual growth, highest since June 2001, when our dollar had tanked and inflation was sitting happily outside the target band. The aggregate supply story that I’ve shown my affection for is still running wild (*) (*) – temporary reversals in growth over the coming quarters and rising inflation.

Consumer confidence is in the toilet (*) (*) but this is because of significant price increases in food and fuel – cutting interest rates now will simply lead to bigger increases by reducing the value of the New Zealand dollar. Once lower interest rates do feed into consumer demand (once effective mortgage rates start to fall and exporters are able to change their fixed rate contracts), the drought will be well over, and economic activity will “attempt” to shoot upwards, capacity pressures will reappear, and inflation will be out of the bag. Ohhh well.

Update:  Other New Zealand blogs talk about the figure: The Standard, The Hive.

In an interesting move, Federated Farmers president Charlie Pedersen stated that we should “thank god for the (food) producers” (*) in New Zealand, for providing us with food and/or wealth.  Now I have to admit, I find this attitude a bit ridiculous.

Don’t get me wrong, agricultural products do create a lot of wealth, hell meat and dairy alone accounted for 29% of our exports over the year to April (Source).  However, doesn’t the farmer and the other people involved in the production process extract the surplus from this trade?

They produce these goods out of their own interest – this is the beauty of free exchange.  However, I don’t start praising to the high heavens about people I buy things off.

The idea that farmers are creating wealth for us stems from the “multiplier“, whereby a small increase in a countries wealth turns into a greater return over time, helping everyone.

However, the multiplier idea is borne from the concept that demand creates its own supply – hardly a realistic assertion in economics, which is supposed to be the study of scarce resources.

Also remember that if the land and resources were not used for farming, they could be used for something else – as a result of this opportunity cost from farm production, the reduction in wealth will not be as severe as some may suggest if the farmers decided to stop producing in the face of our “lack of appreciation”.

Ultimately I feel like Mr Pedersen is saying, “farmers own a large number of the resources, and so we should thank god that they use them well” – when I frame it this way the claim seems ridiculous!

Greg Mankiw has an interesting post on what would make a good inflation target (ht CPW). According to work by Ricardo Reis and himself, aiming at the nominal wage is a good way of ensuring the highest degree of price stability – according to models calibrated to recent US data (paper here *).

Using this conclusion he shows a graph of private hourly compensation growth and states that inflationary pressures in the US are not as much of a threat as some analysts are positing.

If the same implication held in New Zealand (which there is no assurance of), how would we be looking:

Source, QES wage data Statistics New Zealand (*)

Not so good it seems 😛

Over at The Standard they are discussing ‘triangular employment situations’ and a bill that is coming in to play that will give employees greater rights in these situations. Now that’s cool, I don’t have any issues with that. If I had to critique the bill I would run with the employee choice argument – if the employee chooses that he wants to work in a scheme where he doesn’t get sick leave etc (as he gets compensated for this) then these schemes provides this opportunity, so removing this opportunity will reduce the welfare of the workers in the scheme.

Still this isn’t my point. I was interested in the fact that Steve Pierson mentioned the surplus value of labour. The wikipedia definition for this is:

Surplus value is a concept created by Karl Marx in his critique of political economy, where its ultimate source is unpaid surplus labor performed by the worker for the capitalist, serving as a basis for capital accumulation.

Now I always found this idea a bit unusual. Fundamentally it states that labour unit creates more value than it is paid by the capitalist, and that excess value is taken by the capitalist and either used to create more capital or for their own consumption. Fundamentally, as capital is in some sense equivalent to savings, which is deferred consumption, the capitalist is taking this surplus away from the labour that created it.

Many contemporary proponents of the theory would not be this extreme – however, they would still fundamentally say that the surplus that the capitalist extracts comes from the exploitation of the worker. As a relatively middle of the road economist this isn’t how I feel:

Read the rest of this entry »

The New Zealand governments biofuel regulation has just come back from select committee. The Hive makes the excellent point that some of the changes to the bill may breach WTO rules. However, my focus here will be on the biofuel regulations impact on prices.

There has been a lot of talk about how mandatory biofuel sales will impact on prices, ranging from a 6c/lt increase to a 4c/lt decrease in prices (*).

Now the first thing to ask when looking at the biofuel regulation and prices is, how will it impact on the fuel companies “marginal cost”. The fuel company will set the price such that it makes the highest profit it can – as a result they will want to set marginal cost (the cost of selling one more unit) equal to the marginal revenue they receive (the return from selling one more). As marginal revenue is falling as we decrease the price there will be some point where they are equal – so the question remains, how could this impact on marginal cost?

I think the answer is that it doesn’t, the marginal cost of selling a litre of petrol will still be the same. Sure having to install a bunch of new infrastructure may be expensive, but this is an increase in fixed costs – the firm will have no incentive to pass this on to consumers, as it should be setting prices at a level that maximises profit.

However, this answer ignores a bunch of extremely important points. Read the rest of this entry »

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