By Stephan Zimmermann, on October 14th, 2008
At a most appropriate time, Sukrit asks:
What is the difference between the Austrian business cycle theory and monetarism, and which one do you think is a more accurate description of how the economy works?
The first part is fairly easily explained, since much material is written on both. The second part is much more difficult and subjective.
By way of background, the Austrian school is generally based on the economic theories of Ludwig von Mises (1881-1973) and Friedrich A. von Hayek (1899-1992). The latter received the Nobel Prize for economics in 1974.
Monetarism, on the other hand, is primarily based on the seminal works of Dr. Milton Friedman (1912-2006) in the Chicago school who received his Nobel Prize in 1976.
All three economists were avid defenders of freedom and capitalism.
In brief, the Austrian schools’ business cycle theory describes fluctuations in an economy based principally on intervention in the country’s money supply, resulting in inflation or deflation. In turn, this occasions recession or growth. Interference in the money supply is reflected in the level of interest rates and directly affects the level of borrowing in the economy. That level of borrowing reflects “rational economics.” Rather than relying on inductive reasoning, the Austrian school depends on deductive thought and a continuous cycle of business. The cycle, however, is not steadily predictable.
Both schools view monetary theory in the maintenance of full employment, inflation, growth and stability.
However, Milton Friedman elaborated further and suggested that money growth should be limited to a relatively stable increase of roughly three to five percent per annum. This directly contradicts the Keynesian assumption that monetary policy should be demand driven, therefore insinuating a direct political solution.
The quantity of money, then, can reasonably predict the growth of production or inflation in an economy according to Friedman. He did not, however, stipulate the Federal Reserve, often opining that central banks err regularly in their attempts to control money supplies.
The key difference between the two schools is that the Austrian school believes in cycles of business and prefers to adjust its monetary policy accordingly. Friedman, on the hand, believes that adherence to steady monetary growth without constant adjustment creates better results on a macroeconomic basis.
Unfortunately, during the last two decades – and especially during the current crisis – the U.S. Federal Reserve failed to follow Dr. Friedman’s theory of monetary aggregates. Instead of following his prescription of stable growth in the neighborhood of three to five percent per year, money was allowed to fluctuate throughout the period. It reached as much as 19% earlier this year, then slowed rapidly to two percent.
The results were pre-ordained and inevitable. Yet responsibility cannot simply be laid at any one individual’s feet.
Alan Greenspan served as chairman of the Fed from 1987 – 2006. Despite his popularity under four successive presidents, from Reagan to George W.Bush, Greenspan – and now successor Ben Bernanke – is largely blamed for the current worldwide liquidity crisis.
Certainly low cost of money and credit fueled both growth and speculation under his chairmanship. However, unforeseen circumstances like the Savings & Loan crisis, the Enron and WorldCom scandals, the World Trade Center attacks, and finally an administration that fostered the wars in Iraq and Afghanistan were destabilizing influences on Fed policy and contributed heavily to the eventual burst of speculative “bubbles.” Greed and fear were as responsible as government policies.
The main fault of Greenspan’s administration of monetary policy was to focus more on growth and inflation rather than on stability. Instead of bowing to the federal and private sector’s headiness for growth and “easy money,” a strict adherence to Friedman’s guidelines might not have led to the spectacular growth achieved. On the other hand, it might have avoided the excessive borrowing or speculation underlying today’s liquidity crisis.
It is hard to envision the Austrian school’s reliance on business cycles as performing any better than simple adherence to Friedman’s monetary policy recommendation. Even with a hard-asset economic base such as gold, speculation and suspension of convertibility during times of war can result in similar dislocations. See a fuller discussion of potential modern gold standard applications in the analysis by Cato Institute’s Lawrence White.
The trouble with both systems – and with economics in general – is that the theories for stability, growth, inflation, currencies, not to mention social issues, assume a fairly strict adherence to established guidelines and principles.
More honored in the breach rather than the observance, those guidelines or principles of an economic theory all too soon fall prey to the vagaries and convenience of politicians and the public will.
Politicians, of course, are generally more concerned with votes than with the correctness of an applied theory.
This election year is no different. The international liquidity crisis makes it a more difficult one, especially with uninformed, acrimonious candidates and an electorate bathed in ignorance and fear. The class division engendered by the euphemisms of “Main Street” versus “Wall Street” would cause a devout Communist to smile with delight! Unfortunately, it reluctantly calls into question the very principle of freedom and democracy, its costs, and its responsibilities.
Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. Read his full bio at and submit your economics-related questions to his post “Got an Economics Question?”
By Stephan Zimmermann, on October 6th, 2008
Several questions during the last few days pointed out the obvious: lost in the media coverage of the American financial crisis and the tail end of the presidential election seems to be the fact that there really is news beyond Wall Street and Main Street.
I could not agree more.
For example, how much attention has been paid to the fact that our closest neighbor, Canada, is having its 40th parliamentary election on October 14?
Neither the Liberal nor Conservative Party has a majority in the parliamentary system.
The economy, of course, is topmost on the agenda.
In the Toronto Star, the paper raised the question whether Canada is likely to experience similar problems in its housing boom. The upsurge in housing lasted for more than ten years, although it has somewhat cooled off even before the Bearn Stearns, Merrill Lynch, Lehman Brothers, and AIG debacles.
According to Jim Adair of Realty Times,
Tighter lending guidelines for developers and a lower level of investor participation have reinforced a more cautious approach among home builders. …Households, for their part, are not over leveraged. Home equity as a share of real estate assets has been steadily building this decade, as price appreciation outpaces the rise in mortgage obligations. Canadian households also have little direct exposure to sub-prime lending, which has accounted for only about five per cent of domestic mortgages in recent years, compared to over 20 per cent in the United States. (www.realitytimes.com)
Reflecting the fears and uncertainties of Wall Street, however, the Toronto stock exchange (TSX) on October 2 saw a fall of more than 800 points, following on the events of Monday, September 29.
Further adding to market malaise,
On October 1, 2008, the United States Securities and Exchange Commission issued Release No. 58703 announcing the extension of the temporary easing of restrictions on issuers repurchasing their securities. Issuers listed on a U.S. national securities exchange (U.S. Exchange) are temporarily exempt from the application of certain share repurchase rules under the Exchange Act Rule 10b-18. TSX has granted and is extending similar temporary relief to TSX listed issuers that are also listed on a U.S. Exchange. (www.tsx.com)
That SEC rule extension virtually encourages Canadian companies to repatriate subsidiaries with U.S. exposure.
Other key items on Canada’s election agenda include the environment, the arts, infrastructure, and the nation’s role in Afghanistan.
Unlike the United States with it two-party political system, Canada’ multi-party parliamentary structure assures that dissident or minority parties’ concerns are widely aired. The dual-language nation also airs its major parties in both French and English debates. Interestingly, while some 30% of Canadians didn’t plan to listen to either the Canadian or the American vice-presidential debates, more than 60% of those polled had planned to watch both. The debates were both aired on October 2.
Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.
By Stephan Zimmermann, on September 30th, 2008
Based on a September 18 Times (UK) report regarding the meeting of Middle Eastern finance ministers, the question was asked about the veracity of a plan for a single currency for the Middle East based on oil.
The answer is both true and false and maybe.
Yes, the immediate goal of the meeting last week was to establish a single currency for the Mideast. In that sense, the new currency would be similar to the euro, where various countries have joined under a common umbrella.
No, there were no (public or published) talks of an oil-based currency, which would effectively replace the U.S. dollar as the principal currency of oil trade.
Maybe? The idea of replacing the US dollar with an oil-based currency is not new. The late Saddam Hussein, various Iranian leaders and others have often broached the idea.
As early as 1987, financier George Soros in his book The Alchemy of Finance outlined just such a plan.
A single, oil-based currency would require the agreement of the various Middle Eastern heads of state as well as further agreement by OPEC.
Recent U.S. financial disasters do not rule out such an eventuality. However, the cumbersome and institutional process required should not add fuel to existing speculation.
The single currency issue addressed (without the use of oil) is planned for slightly more than two years hence. However, instability in world financial markets may prompt more rapid agreement to reach the goal.
The Arab oil ministers meeting agreed in principle to establish a single currency. While there was no mention of oil or another commodity backing the potential currency, there is some speculation that the euro, rather than the U.S. dollar, could be designated for oil trades.
Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.
By Stephan Zimmermann, on September 23rd, 2008
“Necessity is the mother of invention” says one old proverb. What better time than right now to think and plan for new, innovative approaches to problems facing all of us?
Unlike the various candidates trying to garner votes, I am neither a politician nor on a “do good” pedestal.
I am a trained, retired educator who spent the majority of my career teaching college economics. Fortunately, I was also able to consult to entrepreneurial ventures, helping start-ups to avoid the many pitfalls that cause some 90% of ideas to fail.
Among many others, the economic assumption of “maximization” was chief among them.
It is basically unheard of in the American context not to maximize anything, especially profits. The events of last week show graphically the dangers inherent in maximizing as major American institutions failed.
It may be highly idealistic to think that individuals, rather than the federal government, can make effective changes in the approach to American business.
“Satisfycing”
However, individuals are slowly warming to the principle (eloquently coined by Nobel recipient Herbert Simon in 1978) of “satisfycing” rather than “maximizing.” Based on Simon’s writings and lectures, “satisfycing” refers to a decision-making process that seeks a satisfactory answer rather than a maximized solution.
The question, of course, is a philosophical one. Conventional wisdom teaches that maximization is an overall goal of economics.
That was, of course, before the current domino in the financial crisis fell last week.
There are, however, proven positive and realistic applications of “satisfycing,” provided that the basic nature of mankind can be swayed.
One immediate, feasible example lies in the reclamation or restoration of what is less than euphemistically referred to as “slum housing.” Often, these blights of abandoned houses, lots overgrown with weeds and crime-riddled neighborhoods have arisen through economic or social dislocations. Many of those are directly attributable to maximization of profits at the expense of individuals’ livelihoods and their homes.
The reclamation of slum projects is not new.
The most famous and seminal experiment of slum neighborhood reclamation is perhaps Brooklyn’s Bedford-Stuyvesant section. The decline of the neighborhood can be traced to various business and social factors tracing back to the eras following World War II. It was not until the late Senators Robert F. Kennedy and Jacob Javits tackled the problem in 1967 through the formation of the non-profit Bedford-Stuyvesant Restoration Corporation.
However, it took much of the 40 years to succeed since Kennedy and Javits sowed the seeds of the reclamation of Bedford-Stuyvesant.
Despite massive injections of cash and substantial political influence, in the short run, Bedford-Stuyvesant struggled. For most of its 40-year history, slum conditions, including drugs, violence and a generally segregated character of the neighborhood, prevailed. Many critics proclaimed the social experiment a failure.
It was not until after the turn of this century that “gentrification” occurred in the area. Today, Bedford-Stuyvesant has become a thriving, multi-racial neighborhood of New York.
“Gentrification” carries with it its own set of social ills. It generally occurs when middle-class individuals move into a depressed area and displace poorer or racially diverse residents. The Haight-Ashbury area of San Francisco, the haven of hippiedom in the 1960s, was another World War II slum until the hippie movement and later the gay explosion in San Francisco resulted in “gentrification,” restoring it to a culturally diverse neighborhood.
Urban renewal across the nation had various positive and negative effects.
Success, however, took the major portion of half a century. Social criticisms range from big business profiteers, to failure to address the fundamental requirements of poverty, to environmental damage.
Greater immediate success could have been achieved had an understanding and acceptance of the concept of satisfycing, rather than maximizing, been prevalent in economics and business thinking. More importantly, reliance on the individual, rather than on the federal government’s forced income redistribution policies, could provide the necessary fuel to success.
The concept may be idealistic but is certainly not without precedent.
Habitat for Humanity
The “Fund for Humanity,” which achieved fame after former President Jimmy Carter’s involvement in 1984, spurred Habitat for Humanity to international fame. Founded in the 1940’s, the non-profit, non-governmental organization now exists in 90 countries. Branches exist in all of the 50 states of the United States. The organization builds new homes for needy individuals on a non-profit, no interest basis. The privately funded organization proudly points to its record of constructing more than 250,000 homes. It relies heavily on volunteers, together with individual emphasis on pride of home ownership coupled with an established work ethic.
While Habit for Humanity focuses on building new homes for needy families worldwide, a slow trend is emerging in slum reclamation using the various applications of the theory of “satisfycing.”
Individuals who share the philosophical perspective work with private community leaders to provide slum reclamation on a non-profit basis with zero or low interest rates, applying some of the ideas of Habit for Humanity.
Individual experiments are being conducted especially in towns and cities that have experienced lost jobs and economic dislocations before the current financial crisis. Abandoned homes quickly attract the various elements of slum creation.
The positive impact many of these individual experiments are making, however, is hardly headline-grabbing. Individual projects often require close, individual supervision. It may require three to five years for concrete effects to be realized in a particular neighborhood. That timeframe, however, is significantly less than the 30 or more years it took for Bedford-Stuyvesant and others to achieve success.
Moreover, this mode of reclamation of distressed communities does not have to carry with it the inherent pitfalls of social or environmental ills too often resulting from governmental projects.
The private, individual experiments have resulted in social improvement in the community, reduction in high crime areas and the creation of new jobs. Most of the new jobs created are in small business, creating both a new sense of independence and self-esteem to accompany the new status of home ownership.
Acceptance and exercise of the principle of “satisfycing” can result in upgraded and improved sections of the town or city with stable residents who were previously marginally or unemployed “slum residents.” Considerable social and community benefits can be obtained without the stigma of federal government “giveaway” programs at the expense of the taxpayer.
Prescient individuals not tied to conventional economic theories can both create substantial tax write-offs under the satisfycing principle, while creating social benefits directly in their community without a massive federal bureaucracy and the control it invariably entails. More importantly, it can restore the self-worth of individuals who may have been forced, through the effects of profit maximization, to live in less than desirable circumstances.
By Stephan Zimmermann, on September 18th, 2008
Fact, fiction and speculation run rampant in the wake of the Lehman Brothers Chapter 11 bankruptcy filing that shook the worldwide financial community September 15. The impact ranging from Wall Street to London to Hong Kong and beyond was as devastating as the events of 9/11. The end of the continuing saga remains to be unraveled during the next coming months and years. It is bound to be a chief issue in the American presidential campaign.
Seen by many as a potential move to avert further financial panic on the world’s financial exchanges, Treasury Secretary Henry Paulsen agreed to permit the Federal Reserve to issue an $85 billion loan for roughly 80% of the U.S. insurer, American International Group (AIG).
This unexpected decision came immediately on the heels of the government’s refusal to rescue Lehman Brothers, the once venerable 158-year old brokerage firm, this week. More to the point, Paulson said in July, and reiterated as late as this week, “Moral hazard I don’t take lightly.”
“Moral hazard” generally refers to an economic term where insurance coverage against a loss might affect the risk-taking behavior of an insured.
Not Unprecedented
The AIG move is not the first time that the U.S. government has effectively rescued firms in the private sector at taxpayer expense. Recently, investment banker Bear Stearns was rescued by the government to permit its orderly acquisition by JP Morgan.
Similarly, the quasi-governmental companies of Fannie Mae and Freddie Mac were effectively “bailed out” by the federal government. It was felt that collapse of the two companies, which control nearly $5 trillion in mortgages, would be too devastating to the stock and bond markets and ultimately the U.S. and world economy.
But the practice is not new.
In December 1989, Time magazine warned “Further – and Maybe Bigger – Federal Bailouts Ahead.”
The article cautioned that speculator and entrepreneur Charles Keating’s Lincoln Savings & Loan Association’s bankruptcy could cost taxpayers $2.5 billion. It ultimately cost the American taxpayer over $3 billion.
At the time, Senator John McCain was one of the key five senators during the savings and loan scandal who shared more than a million dollars in political contributions and “favors.” The other key senators included Dennis DeConcini of Arizona, the late Alan Cranston of California, John Glenn of Ohio and Don Riegle of Michigan.
While Glenn and McCain were exonerated of wrongdoing in the Keating scandal, both were reprimanded by the Senate Ethics Committee in 1991 for exercising “poor judgment.”
DeConcini was appointed by President Bill Clinton in 1995 to the Board of Directors of the Federal Home Loan Mortgage Corporation. It is the very Freddie Mac now under government control at the taxpayers’ expense.
Key Questions
Will the bailout of AIG set a further precedent to General Motors, the subject of bankruptcy speculation for more than two years? The stock closed at $10.84 on September 16, down from $43.20 over the last 52 weeks.
Should the company be forced to seek Chapter 11 protection, a government bailout is virtually guaranteed. It has ample precedent with the Chrysler plan engineered by Lee Iacocca in 1979.
At the time, Chrysler had 360,000 workers. Lee Iacocca painted the picture of that worker base as potentially unemployed and helped convince Congress to grant him close to the billion dollars he requested. Equally as important, Iacocca, evoking patriotism, pointed to Chrysler as being the largest manufacturer of American tanks.
Ford Motor Company, although considerably more liquid than its rival, is not immune from the effects of the Lehman bankruptcy. Ford has an unfunded credit facility with Lehman Commercial Paper, Inc., of roughly $11 billion. It also enjoys relations with Lehman Brothers Bank, Inc., of $16 billion that support the retail securitization program of Ford Motor Credit Company, LLC. According to Reuters, the two subsidiaries are not included in the Lehman bankruptcy.
A careful review of each potential company large enough to warrant a federal bailout is indicated well ahead of potential bankruptcy proceeding. The state of a company’s liquidity is a good indicator of its potential solvency.
The key questions surely to be discussed and debated are what constitutes the “national interest,” how philosophical, consistent and legally transparent should the leadership of the government be and how willing are U.S. taxpayers to bear the risks of private enterprise?
By Stephan Zimmermann, on September 18th, 2008
Cristian Mitreanu submits this question via email:
I would like to hear your thoughts on the subject of “economic thought vs. business thought.” Is there such thing? If yes, should this distinction be made?
He raises the question in concert with an initiative he is proposing, intended to start a discussion about the current state of business, called, “A Wake-Up Call for the Business Nation.” It ties in very nicely with the focus of economics.
What, if any, is the interrelation between economic and business thought?
In its most basic form, economics can generally be reduced to the study of choices among the uses of limited or scarce resources with unlimited demands.
On the other hand, there is a plethora of definitions for “business.” Broadly, business is generally discussed as people joining together to achieve greater productivity focused on one or more goals, either on a profit or non-profit basis from the American standpoint.
Simply doing something, such as photography or writing, that does not result in a sale is considered as a hobby by the IRS and, thus, does not constitute a “business.”
Dr. Peter Drucker suggests that a business has as its “purpose to create a customer (so that) any business enterprise has two – and only two – basic functions: marketing and innovation.”
Less academic but well-known and regrettably too often misquoted is President Calvin Coolidge’s comment that “the business of America is business.” What the president actually said in 1925 is, “After all, the chief business of the American people is business. …Of course, the accumulation of wealth cannot be justified as the chief end of existence.”
Just as western economics still largely acts on the assumption of the concept of Homo economicus, so does business seem defined and propelled around the economic principle of “maximization.” In most western – and, increasingly, Asian – businesses, that translates to maximization of profits, whether denominated in dollars, yen, rupees, rial, renminbi, or countless others.
“Business” may be thus be considered as carrying out some of the major functions of economics. However, the shortcomings of one translate to the shortcomings of the other.
Is religion or the pure pursuit of science, for example, part of economics? Certainly, since both need to make decisions regarding the use of scarce resources.
Of course, both have been turned into “businesses.” Witness the growth of the Catholic Church and its fueling of empire-building and wealth control over the centuries, or the churches in the United States that can command billions of dollars on television advertising or political campaigns.
Too often, science has been turned from a mere exploration of mankind’s cerebral potential to a dollars-and-cents business. Witness international drug companies, to mention but one example.
The financial fallout from the Wall Street panic of September 15 will, no doubt, have massive worldwide repercussions far from the financial sector. Blame is already cast by politicians and pundits alike.
Unfortunately, few seem to address that the basic fault lies not within specific individuals or institutions or political parties.
The basic fault lies in the fact that neither the teaching of economics nor of business places much emphasis on the nature of man. It focuses entirely too much on the generation and maximizing of profits and how to achieve them rather than on the human application of the benefits or disadvantages that can be achieved through business.
Both the private or governmental sector need to address those very basic questions that are currently largely ignored in favor of ultimate “maximization.”
What do we really need and how do we best achieve and distribute a “satisfycing” amount of the essentials that all human beings require?
The time is ripe for a new theory that effectively integrates natural and human values with mankind’s behavior without the myopic pursuit and maximization of profit.
Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.
By Stephan Zimmermann, on September 4th, 2008
It would be (or maybe is?) an interesting and informative exercise to poll existing undergraduate economic students whether they consider themselves “Homo economicus.”
A second part of the study could be completed with graduate students, about to embark with a plethora of knowledge of economics, ready to face the “real world” of jobs in the workplace.
What better place than to conduct such a study than in the pages of Amateur Economists where we could entertain a question and answer debate?
As part of the exercise the students would, of course, have to discern for themselves the various definitions of the Latin phrase, consider the implications of answering in the negative or affirmative, and provide an honest self-inventory of their personal preferences and self-perceptions.
Do today’s economics students consider themselves “rational, self-centered, perfectly informed individuals who want wealth and avoid unnecessary labor?” as Adam Smith, John Stuart Mill, Vilfredo Pareto, and others discussed the model?
How do people, especially economists, see themselves?
How do they perceive their religious beliefs in light of the “Homo economics” model?
How does conventional European economics differ from its counterparts that espouse different philosophies, yet seek to answer the same questions of finite resources facing an infinite demand?
A discussion, if it occurs, would likely raise the very question of “maximization” as it is generally taught in economics classes and texts.
Moreover, it may be interesting and enlightening to read in a nutshell a synopsis of Islamic economic fundamentals as a start.
In a recent paper two Islamic scholars, Toseek Azid and Mehmet Asutay (Bahauddin Zakariya Universiy, Pakstan, and Durham University, U.K., respectively) point out that Maqasid al-Sharia (Koranic law, including economics and banking), or the objectives of the Shari’ah, aim to fulfill the objectives of human well-being. As a basic premise the authors suggest that “It, therefore, rejects the neo-classical postulate that human beings are in their intrinsic nature self-interest maximizers.”
This, of course, is diametrically opposed to current predominant economic thought. It is perhaps most closely approached by the late Nobel Prize winner, Herbert A. Simon.
Maximization of utility is also rejected by Sharia thought. The authors thus ask quite plausibly “if we suppose that all persons are egoists – they act for personal ends – what sense does it make to speak of ethics?”
While Islamic economics shares the belief that “the agents of the different sets of the economy are inherently selfish” the authors believe that “the attitude is changing towards the social and economic benefits through participation and cooperation.”
“A continuous process of … training of the society is required, which is only possible if we have an ideological system … that should not be biased towards any segment or set of the society and economy.” (Azid, Toseek, and Asutay, Mehmet, “Does ethico-moral coalition complement to economic coalition?” HUMANOMICS 23.3 (2007): 153-173)
Over the last quarter century, much of economics has been influenced by Herbert Simon’s ideas. He questioned the idea of economic behavior that intended to seek only the optimum result for each economic agent. Further, he suggested that individuals or even organizations could not obtain or process the massive information available to reach ultimate rational decisions. Instead, he suggested that decisions only need to be “good enough” to assure reasonable or acceptable results.
The question of “satisfycing,” rather than maximizing, has been a steadily growing trend, not only for philosophers, but for political adherents, as well. This has been especially true of Islamic adherents in Europe.
On September 22, 2007, the first Islamic political party in Europe was formed in Finland, the Finnish Islamic Party (FIP). Municipal elections will occur next month. The new party hopes to qualify to participate in national parliamentary elections in 2011. It currently has valid signatures for roughly a thousand of five thousand signatures required. The party was established by native Finns.
With the growing trend in Islamic populations throughout Europe, it is not inconceivable that Islamic economics and finance, as well as Herbert Simon’s ideas, may find greater acceptance. On the other hand, Islamic concepts may well be more and more co-opted into traditional European and American models.
Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.
By Stephan Zimmermann, on September 3rd, 2008
This week, Chris poses this question:
Is there a dominant economic worldview in the Western society? If so, what is it? If not, what worldviews are the most popular/employed?
With the Democrat and Republican conventions upon us, no doubt we will be hearing more than we want about a “time for change.” Although the words may be different, the essence will be a replay of past conventions of both parties. The call for change has come from all major parties and throughout many decades.
Franklin Delano Roosevelt, using much of the thinking of John Maynard Keynes, moved the country to adopt a greater role for government in its economic decisions.
Ronald Reagan, espousing the ideas of Nobel Prize recipient Milton Friedman, became the effective spokesman for the “me” generation.
Both Democrat and Republican conventions will ceaselessly invoke the religious symbolisms which translate into votes.
All will have an impact on the United States and on the world.
The political conventions, however, should focus amateur (and professional) economists on the intellectual discussions that have been raging in the economic community as to whether men and women are essentially “Homo economicus” or something else. Moreover, the debate needs to point out the inherent contradictions between the principle of “Homo economicus” and the espoused religious beliefs.
Economics as a specific study has been nascent for roughly two centuries, since philosophers and early economists like Adam Smith, David Ricardo, and John Stuart Mill, among others, tried to define and quantify how best mankind could achieve the maximum result from any economic activity. They painted a rational, self-centered, perfectly informed individual who wants wealth and avoids unnecessary labor.
That picture is still held up as the ideal economist, designed to maximize his or her physical well-being.
Incredibly, this model more than contradicts the religious beliefs of the time as well as today.
Certainly a majority of people in the western world, influenced by European thought, subscribe to this view. Unfortunately, mankind is hardly rational nor perfectly informed, yet nearly ninety-five percent of mankind admits to a belief in a deity. Many billions are adherents of the Judeo-Christian-Muslim beliefs system. In not one is the definition of “Homo economicus” held out as an admirable trait.
Why, then, should economics as we know it stress the concept of maximization?
That question has resulted in continuing battles among economists, including Nobel Prize winners Franco Modigliani and Herbert Simon. It is more than a fine distinction between maximum gains derived from economic activities and simple satisfaction. Simon suggests, for example, that most people are not focused on maximizing gains but rather simply on meeting their particular level of satisfaction.
Achieving satisfaction appears more reflective of and beneficial to mankind, especially in the non-western world. Satisfaction, rather than maximization, should be much more emphasized to students of economics.
Does this mean a reevaluation of our concepts of mankind?
Of course!
At a time when the world as a whole is imperiled by the by-products of maximization – pollution, deforestation, continued poverty and starvation – it is perhaps the economist, working hand-in-hand with political and religious leaders on a world-wide basis, to avert continuing problems.
It may also require a much wide acceptance of non-traditional recipients of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.
By Stephan Zimmermann, on August 21st, 2008
The Internet, television, and magazines or newspapers are full of features concerning economics. So is Amateur Economists. The gamut runs from economic philosophy to politics to econometrics and more.
Readers have many questions. Undoubtedly, you will too.
I’ve always subscribed to the maxim that the only stupid question is the one you didn’t ask.
Here’s your chance to prove that you’re not stupid. Ask me.
There are, of course, a few guidelines. Fortunately, you won’t find too many.
Obviously, I want to answer questions about economics, not why the sky is blue.
Of course, I don’t want porn, filth, smut, or anything that our editorial staff or readers will find offensive. Go visit the millions of sites where those things are acceptable.
Try to keep your questions to a sentence or two. Please don’t try to write a question the length of James Joyce’s novels.
I’m not afraid of controversial questions. Just make sure they deal with the economics of an issue.
If you’ve been following the economic talks of the various political candidates during this election year, you should find tons of questions that the normal media doesn’t ask.
Do you have a pet peeve in economics? Maybe I can find an answer for you.
Ever wondered why we grow enough food to feed everyone in this world, yet we don’t? The answer may surprise you.
What’s so “dismal” about the “dismal science”? Nothing, if you know who first coined the phrase.
Do you have to believe in economics even if you’re not a card-carrying capitalist? You bet! Marx or Lenin or Chairman Mao all dealt with the issue in their own way.
My favorite question? What is a widget, anyway?
As the saying goes, if you laid all the economists end to end, they would never reach a conclusion. So it may be with Amateur Economists. Chances are your questions will lead to a lively, stimulating debate. The questions are yours. The answers come back from a real person, not a preprogrammed computer format. Come back often to see how No Widgets Here answered your question.
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Stephan Zimmermann is former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. He was also a private economic consultant for firms ranging from entrepreneurial ventures to multinationals. Stephan studied at the University of California at Berkeley, Cambridge University, and the Monterey Institute of International Studies. He is currently retired and devotes his time to writing both fiction and nonfiction.
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By Stephan Zimmermann, on August 6th, 2008
Since food, together with air and water, is one of the three basic items which all living things require without question, it is an ideal subject for economic discussion. Unfortunately, it is also almost ideal for normative economic judgments. “We should” or “they should” abound from intellectual forums to universities to television shows, often without regard to the potential consequences of any one or a series of actions taken.
Economics has neatly quantified the question of supply and demand. On a factual basis, we can reasonably predict the growth of world population, ceteris paribus. Other sciences have determined a general level of nutrients, usually measured in calories, required for the average human being to exist. Still others can show how much food we can produce, given acreage, climate, and the potential for inclement weather conditions.
The sum of independent, impartial analysis shows clearly that much of the world’s population is more likely to die from disease or war, including nuclear, than from long-term starvation.
Debates ranging from global warming to energy, biotech, poverty, hunger, disease, and education, among others, are too often described as “crises.” This is certainly true of the current recognition that oil is a reasonably predictable finite supply, while existing and future demand can increase or decrease, depending on individual people’s choices.
In the short run, of course, the oil “crisis” will no doubt have a substantial impact on world agriculture. Economics can measure (or predict) what is likely to occur as prices rise or fall, as crops are switched, or as government policies change.
As farmers opt to change to corn production to feed the biofuel craze to help offset global warming, certain other crops usually grown on the same acreage are likely to increase in price. In Germany, for example, the price of barley doubled from 2005 to 2007. Further increases and switches out of barley and hops can be anticipated. Beer in Germany is as much a staple as tortillas are in Mexico. Economic impacts can be easily measured and calculated, down to such items as beer or tortillas.
Grain production, including corn, soybeans, and other cereal grains, have reached record prices and are expected to continue at least through 2009, according to USDA estimates.
The good news for American consumers: the same report indicates that retail prices are likely to be affected with an increase of less than ten percent of the change in corn prices. While there will be an obvious price impact, it is clear that the United States does not face an imminent “food crisis” as so many would-be pundits like to predict.
The same cannot be said for various consumers around the world. Since conventional economic wisdom measures prices in terms of American dollars, it is clear that certain segments of the world’s population, especially farmers in Third World countries, will suffer. Grain prices that might have been marginal before adding the costs of the current crude oil spike are likely to be unsustainable.
It is not the agricultural output of the world that may cause starvation but the simple acceptance of modern economic theories, such as the use of “free enterprise” as a world standard and goal.
Government policy controls fare little better. China’s economic policies during Chairman Mao’s “Great Leap Forward” and “Cultural Revolution” resulted in some twenty to thirty million deaths from starvation. They were largely unreported at the time.
In July, Argentina, one of the world’s top suppliers of soybeans, defeated by one vote a government proposal by President Cristina Fernandez-Kirchner to impose a proposed increase on the tax on its nations’ farmers to 44.1%. That proposal led to a nationwide farm strike in Argentina.
According to RIA Novosti political commentator Andrei Fedyashin, “It became clear in early April that the farmers’ strike in Argentina – soy, maize, and wheat producers – was creating a threat to the world economy. … By the end of March, bread, pasta, poultry, and milk started disappearing from shops in many cities, including Buenos Aires. Beef was almost gone. For a country where more beef is consumed than anywhere else – 74 kg per capita in one year (compared to about 46 kg in the United States and a little over 16 kg in Russia) – this was quite an ordeal.”
Whether individual nations choose to adopt a free enterprise approach or one of government control, it again sheds light on the nature of mankind and its perception.
Economics may quantify certain effects in the private market or government-regulated or dictated policies.
It cannot help to end regional hunger or starvation.
Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. Read his full bio at and submit your economics-related questions to his post “Got an Economics Question?”
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