Tag Archives: economics

Oldie of the Month: Dumb History – Ricardo Was Wrong

The first name that an Economics student is likely to encounter is Adam Smith. The second name is usually David Ricardo, the proponent of Comparative Advantage.

As a quick summary, Comparative Advantage states that even if a country makes every possible good more efficiently than other countries, it should still concentrate on the goods it is best at producing and engage in trade to supply itself with the rest.

The example Ricardo gave was the trade between Portugal and England of Wine and Cloth. Ricardo said that it was easier to produce both wine and cloth in Portugal than it was in England, but it was beneficial to both countries for Portugal to concentrate on wine, while England produced cloth (due to relative costs), and they subsequently could trade with each other. The problem with this theory is that it was 100% wrong.

Continue reading

Get Ready for our New Book!

Yes that’s right! Our book, both new and improved at the same time, will finally be released (soon)!

Yes that’s right! Our new book still hasn’t been released!

So anyway, we figured the best way to keep every up to date would be to just shoot you an email once it is out. Then we thought, hey, if they’re really interested, we’ll let them know ahead of time so they can buy the book at a discount!

So that’s what we’re doing. Just go to www.BringingSexy.com and enter your email address, and we’ll give you early notice so you can buy our new book at a heavy discount*.

www.BringingSexy.com

* Selling or sharing email addresses is definitely NOT sexy, so we won’t engage in any of that sort of behavior.

Breather Post – Who are we?

As a slight break, we want to take this opportunity to introduce ourselves. For those of you who don’t know us, we’re a brother-sister team and when we’re not saving the world, one article at a time, we are based in Portland and Atlanta, working in the destination wedding and legal research industries respectively.

Ocean Gebhardt is based in Portland. He got his Masters in Finance and Fiscal Policy and wrote his thesis on the Dumb Agent Theory (whoa! That’s the name of this website!). He has been blabbering about economics ever since.

Rebecca Gebhardt is based in Atlanta with her husband Giuseppe. Having grown up in Switzerland in the 80′s (whoa! That’s where Ocean grew up too!), she was witness to the dichotomy between Western Europe and Soviet Eastern Europe, and has been an unapologetic free marketer ever since.

We both have other careers and dedicate our spare time to this blog, which is why we bother you from time to time for contributions, advice, or propose awesome swag and enlightening books.

Want to know more? Go here, or ask us anything by mailing us here: Questions@dumbagent.com

Make your own Book

As some of you may know, a second edition of our book is in the works, and before we finalize everything we thought we would check with you. Is there anything you would like included in this book? Are there any articles or posts you read on this website that you would like to see developed more or explored in greater detail? If so, just let us know and we’ll be happy to look into it. If viable, we’ll add it into the book and credit you with bringing it to our attention.

By the same token, if there is an entire topic we have not touched upon at all that you would like added, feel free to let us know as well. In fact, if you want to write something yourself and if we like it we will feature it and consider it for inclusion in the book (this is an “if” guys, so no guarantees!).

So, got something to add? Feel free to comment below or to write us at Articles@dumbagent.com.

Also, since the book edition will be coming out, our old book is now discounted and you can buy it right here!

Do you want to be Smarter?

How would you like to be smarter? How would you like to be the go-to person for every Trivia night at your local watering hole? Or maybe you’d just like to get ahead in life or learn cool new things. Regardless, you can quench this thirst for knowledge right at DumbAgent’s Amazon store, located here: http://astore.amazon.com/dumage-20.

And if you buy books via our store, you pay the same price as always but we receive a commission from Amazon, so you can help us with our expenses (like Becky’s caviar dinners and private helicopter).

We have also written book reviews for many of these books, which you can find here:

If you have any other suggestions for books that make you smarter, feel free to let us know in the comments or by sending us an email!

The Universe is inflationary

Here is a guest post by Arthur Goikhman with a great analogy about inflation. His explanation for student loans is what struck me right away. I still believe this will be our next bubble, and Arthur does a great job in showing how the student loan system makes no sense. Read the whole article, though, if you’d like a simple explanation for inflation. Below the article you will find Arthur’s bio and contact information.

********

When most people think about inflation, they think about commodities such as gold and gas going up in price and currencies eroding in value.

As the speed of inflation picks up, the risk of hyperinflation occurs, with prices in supermarkets changing in front of your eyes as you shop and rotating strike cycles for workers struggling to keep up with those price increases. As workers salaries are raised by paralyzed goods producers, producer margins are squeezed, forcing producers to increase prices, and so it goes, a classic textbook economics case that that has been demonstrated, particularly in the 70s, and well studied. Recent world wide unrest is thought to be at least in part related to the inflationary commodity spikes, by analysts and economists of various stripes (i.e., it’s not meaningfully in dispute), although the Fed insists that such inflationary pressures are “transitory”.

But there’s a different way to think about inflation, and the best analogy is all around us, and it obeys well understood (or at least better understood) laws — it’s our inflationary universe. It may seem a stretch (pun intended), but it’s a great analogy. Once viewed in those terms, bubbles do in fact become more predictable.

How does the inflationary universe work? It’s expanding in all direction but, most of it,quantum foam aside, is completely empty. The interesting stuff tends to happen around sources of mass and energy, and the larger the object, the more interesting stuff happens around it, as it actually causes smaller objects, and space itself, to warp around it.

Back to the world economy. On a macro level, it’s been growing since at least the Sumerians, and just as space warps itself around sources of mass and energy, the economy warps around sources of money. This is perfectly normal, of course: a Walmart feeds over a million workers, numerous small businesses, a large range of medium size businesses, and finally dozens of large businesses (e.g. a Sony or a Kellogg). And, just like the physical universe has “unusual” objects where the laws of nature themselves get warped, such as black holes, or perhaps the even more exotic worm holes, so does the economy — the unusual objects in this case are governments with “fiat currencies”: http://en.wikipedia.org/wiki/Fiat_money.

To create warps in the economy, such governments can go way beyond printing money. They can create incentives and regulations that then rapidly attract (or divert) smaller entities (i.e. people, small businesses, large businesses and even giants). But there’s a price to be paid: this mass of people and companies, instead of being distributed “evenly”, or among naturally occurring gravity wells, streams quicker and quicker towards the source of “free lunch”, or, as another common phrase would put it, OPM or Other People’s Money. Eventually, unless the incentive is eliminated or reduced, a bubble is formed. And, since even governments must obey physical laws, the free lunch eventually ends, and poof, supernova, or worse, everything gets sucked into a black hole.

OK, so far we have a fancy analogy, what are some real world examples?
Here’s a quick list:

1. Housing bubble. Started forming on a combination of artificially low
interest rates and pressure and incentives to lenders to issue
unprofitable loans. The housing deduction in the US is a major
distortion of the market.

2. Student loans. Government mandates and participation in the market
distort the real value of loans. When you open a business and borrow
money from a bank, the rate you get (if you get the money at all) is
based on the risk of your business actually generating sufficient money
to pay it back. How can a degree in English Literature, with an average
starting salary of $30K, be worth the same, to the bank, as a degree in
mechanical engineering which might result in a starting salary of $100K?
The availability of loans, out of proportion to ability to pay,
continues to direct students to more expensive schools and academic
pursuits with dubious employment opportunities, instead of saving $100K
or more by going to a local community college

3. Medical costs. The government ostensibly tries to contain costs by
regulating prices, or at least the rate of price increases. But since
buyers are divorced from the financial impact of their choices, costs
continue to go up.

Numerous other examples abound. Bubbles (and the business cycle) cannot be wished out of existence, or repealed. Fear and greed drive the markets, and speculative excess (early notable example being the Tulip Mania during the Dutch Golden Age) will occur even without fiat currencies. But markets work. When people talk about “free markets failing” in 2007, they didn’t — what failed was the set of economy warping incentives and regulations and the Fed, which inflated the bubble. We continue to be in the “try to tear the Band-aid off slowly” phase now. It’s not going too well, because we have not let markets work.

********

Arthur is a a venture investor, inventor and alchemist. His early stage investment fund, @venture.us, turns ideas jotted down on napkins into gold, and he is building his latest company, Surre.al to give the entire world rose colored glasses.

He hails from suburban New Jersey, where he arrived by way of lucky marriage, Brooklyn, Haifa and Tiraspol, Moldova, which he is quite confident he does not remember. His solid credentials as a card carrying member of the Bourgeois class are cemented by his personal twitter handle, @iamthepoint99pct and his obsession with words and ideas is best exemplified by his Halfbakery account http://www.halfbakery.com/user/theircompetitor, where he is nearing 300 posted inventions.

Earn it

Our attention has recently been captivated with a very interesting article by Theodore Dalrymple. In it he talks about hospitals in parts of East London, and the doctors coming to help out from places such as India and the Philippines and India. It turns out they tend to find the patients in East London worse off than those in many developing countries. Not, of course, in terms of facilities, medicines and treatments. Many of the people have been given public housing and have been allotted money for food and their lives, which would never be possible in many developing countries.

No, the reason they find the patients worse off is their lack of will to survive. One doctor talks of how patients in Africa with heart failure walked 50 miles “in the broiling sun, with panting breath and swollen legs, to obtain treatment—and then walked home again.” In London, on the other hand, people let their yards become overridden with trash and then complain that social services does nothing about it. They then go in and out of the hospital due to alcohol, drugs and being beaten by spouses, all the while cursing the doctors and complaining about the system.
Continue reading

Most Wars have been fought over Economics

The common argument is that more wars have been fought over religion than anything else. There are some other contenders for the main causes (clash of cultures and civilizations, etc.) but if we analyze the causes, it looks like more wars have been fought over economics than anything else. Is this true? Let’s look at a few principal examples:

Let’s start with the War of Troy, probably the most famous war of antiquity. We admittedly know very little about this war (we’re pretty sure a war happened, but that’s about it). However, if you see the position of Ancient Troy on a map, you’ll see that it occupied a very strategic location: right on the sea, at the edge of Ancient Greece and on the way to the Caucuses and the East (and therefore the Silk Road). We also have evidence that, at this time, Troy gathered pretty much all of its income from tolls it charged to people passing through its ports and city. Might it be that, rather than a beautiful woman, the war was fought because Greeks grew tired of being taxed more and more whenever they tried to gain access to the East?
Continue reading

The Best Example of Bad Graphs

Those of you in the UK (or elsewhere) who read the Telegraph may have noticed an article recently called “How the Fed triggered the Arab Spring uprisings in two easy graphs”. If you want the gist of it, here is the first graph:

Now, as most economists learn, correlation does not equal causation. But let’s assume for the author’s sake that he has a point. What should we think when we see commodity prices rising (starting June 2010) and the Fed’s Treasury purchases rising after the fact (around Aug-Sept 2010)? Yes, if we want to read causation, then we’d say that the rise in food prices caused the Fed Treasury purchases, and not vice versa (as the article claims).

The second graph, which we show below, displays the correlation between, well, we’re not sure. Continue reading

Why Care about Dow Jones?

Turn on CNBC, go to Yahoo Finance, or read the Wall Street Journal, and one of the most published (and sought for) indicators is the Dow Jones Industrial Average. Another is the S&P 500, along with the Nasdaq. Why is this? Is everyone who follows this number invested in the market? No, but the ups and downs of all of these indices are assumed to be a proxy for the ups and downs of the US economy. If the Dow Jones Industrial Average (DJIA) is climbing, commentators are happy. If the DJIA is losing points, however, it’s reported as bad news. Same with the S&P 500 and the Nasdaq. Is this logical?

The S&P 500 is composed of 500 companies with large market capitalization in the US, and is chosen by committee. Is is the second most followed index in the US (and possibly the world) after the DJIA, which is a composite of 30 large, publicly owned companies, also chosen by committee.

For those of you who think it might be odd that a collection of only 500 companies, let alone 30, could represent the whole economy, you’d be correct. In fact, in recent years Small and Medium Enterprises have been growing in number and are representing more and more jobs and a bigger slice of the economy. So, if over 80% of jobs are in companies that are considered SME’s and aren’t even public, why do we care so much about these indices?

The answer lies in our need for a locus of order and control. If we can equate 30 companies with the health of our economy, it is a neat and simple solution to a messy and complicated situation. It is interesting to note that this is often the same reason conspiracy theorists have their beliefs: it is easier to know someone, somewhere, is in control, than to accept randomness and chaos.

Before dipping into murky waters of psychological babble, we’d like to come back to the original idea behind what the DJIA and S&P 500 are supposed to represent, but tweak it for reality. If, (as the Economist said the Kauffman Foundation reported), nearly all job creation between 1980 and 2005 took place in firms that were less than five years old, shouldn’t we be following these sorts of entrepreneurial companies instead? Well, there is one new index that does: The Global Entrepreneurship Development Index, or The GEDI. This, as its name suggests, is a global index and divided by country (71 in total), identifying the most entrepreneurial, as well as bottlenecks impeding growth in each country. Denmark is ranked first, the United States is second, and China and India are very low on the list.

Unfortunately, for now the list is not free and is published only once a year, so chances are that CNBC and Yahoo Finance will continue monitoring 30 large companies which are of no consequence to our lives.

You can buy the Global Entrepreneurship Development Index on Amazon here.