filitono’s blog

So this post is on both Russia and Economics, surprise! There are a few things I’ll mention here but they are all about groceries and for what people are willing to pay extra. Let us begin by comparing three different grocery stores and each one’s locations, clientele, hours, and pricing.

All three of these stores are within walking distance of RGGU where I am staying.

Now as many of you already know I am almost always willing to pay a premium for convenience, often a fairly significant premium, thus my store of choices is store B. I have shopped at each store and have made a few observations. Store A has a large selection and presumably makes its money on volume rather than significant mark-ups. Store B has a larger mark-up on most goods, and I attribute that to the increase in convenience someone is willing to pay for a 24hr store. Store C however has staggeringly high prices, while it also has some convenience in that it is near Tverskya(the 5^th avenue of Moscow), its major selling point is that it is expensive. Now this may seem very odd to most in the west, or at least my reading, audience that would prefer to find a good deal or a more expensive version of the same thing. So let us pick a homogeneous good such as a 2 liter of Coke-a-Cola. This is homogeneous since all the Coke is made to the same specifications, bottled in the same plant(s). 

I do not recall the exact prices, so I will use P as the cheapest and P*x as the variations in prices (if P=$1, and x= 1.2 then P*1.2= $1.20). At Store A Coke costs P, and Store B it costs P*1.2, and at Store three P*2. It is important to note here that it is impossible for “Rich Boy” who bought his Coke at Store C to display any social superiority to “Johnny Dumpster-Diver” who bought his Coke at Store A, by holding the more expensive, but identical Coke, in his hand. So why would “Rich Boy” buy the more expensive Coke? Presumably he went to the more expensive grocery to find better quality food stuffs, or food stuffs not available at the other grocery stores. It is important to note to things here, first that Coke can be bought at any of these stores so it is not solely to find better food stuffs that he is going to Store C, secondly it is not convenience that is his primary motive since Store B is the most convenient both in terms of local (parking especially), and hours of operation.

So once again, why does “Rich Boy” buy from Store C, if there is no improvement in convenience, he is not looking for better quality product, or he cannot “signal” his higher social standing y drinking the more expensive  Coke alone. I propose that he is a snob, and does not want to be bothered with seeing the riff-raff who buy cokes at prices P and P*1.2.

This is a beautiful example of price discrimination; it essentially forces snobs to pay more for the same product to remain snobby. That is to say, they do not enjoy their Coke any more than anyone else, but since they are willing to pay more for it, the market responds and they do indeed pay more. Now some may argue that this is not fair, in fact if the factors were reversed and the poor were charged more (in order to pay for the higher risk of shoplifting and robbery in poorer/more dangerous areas), many people would decry the evils of the situation. I however think either case is acceptable, but I will remain on the topic of the rich getting charged more for the moment.

For a moment look at what the main factor for the price increase is, the snob effect. It simply does not pay to be a snob, you are charged more for the same product. This brings me to one of my favorite arguments. Capitalism promotes tolerance, or at the very least creates a penalizing structure for intolerance. Some 50 years ago in the US, many people refused to allow black people to eat in their restaurants, shop in their stores etc, etc. There two possible reasons for this, the first is because the business owner himself was racists, or because he believed his patrons were, and acted as a racist in order to please them.  Let us look at the first possibility; if the owner is the racist then he will suffer the consequences from denying a significant portion of the market from his business. Since it is his private property, as much as his home, his coat, his car, or his food, he has every right to deny any person access to it for any reason he pleases, but he will suffer the consequence from abstaining from trade. (In the near future the value of foreign trade will be discussed in terms of its efficiency and possible reasons why people are protectionist, including nationalism and racism.) This business owner has been punished by the market for his racist beliefs.

The second option, that of the customers being racist and the owner merely appeasing them, has a similar break down of costs. Since the owner forgoes the many customers based on race, and still desires to maximize profit, he will see he has a competitive advantage for his specific clientele. While a diner down the street which will allow black people in charges a price of P for a burger, the “appeasing owner” may now charge a premium of P*x (where x is greater than 1) to his clients for making them happier by denying some peoples entry. He then shifts the cost of racist behavior to his customers and capitalism once again punishes illogical racist behavior. 

What does that last half have to do with Russia, who knows….I like to rant.

First Installment

Alright this is the first installment of my series of blogs on economics and various "moral" issues, that will hopefully bring forth some intense and informative debate...:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

I thought it would be a good start to give a quick overview of some of the basic terms that economics use to sound smart, but aren't really complicated at all.

..:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Opportunity Cost: The cost that is not seen, it is essentially the next best activity one could be involved in at the time. For instance, if you are studying, your opportunity cost is sleep, or eating a meal, or working. It all depends on what you value most.

Game Theory: Suprisingly enough, this is a highly mathematical analysis of "if, then" situations, and is often characterized in analysis by little boxes with more little boxes inside them, and possible "pay-offs".

For Example:

   ______A____________D_____

A|_____5,5_____|_____2,7_____|
D|_____7,2_____|_____3,3_____|

Player 1 is on the left, and Player 2 is on the top. A = Accept and D = Deny.

In this game, there is a proposition, whatever it may be, if player 1 accepts and player 2 accepts, both players will get $5 (5,5). But if Player 1 accepts and Player 2 rejects then Player 1 receives $2 and Player 2 receives $7. The same is true vice-versa. It is therefore rational for each player to choose to Deny the proposition, in hopes that the other will accept…or possibly as merely a defensive decision (because 3 is better than 2). I realize this is a bit confusing, but look at it for a bit, and it will sink in.

This form of analysis is used especially in determining what decisions nations will make in international trade situations, and in cartels. It explains why it is good for a cartel to work together, but that each individual within the cartel should rationally choose not to co-operate.

Rational Ignorance: This is an idea wrapped up in game theory. It states that people when voting will choose to know little about the candidates because of the opportunity costs associated with learning about the candidate. This also goes for a lot of things such as buying a car, a house, or investments.

Savings: These are the monies put aside by individuals, and in one form or another invested by firms.

Investment: These are the savings of individuals loaned to firms that firms use to buy capital. [Important note: only firms can invest]

Capital: Is the stuff workers use to be more productive, such as shovels. When a ditch digger has no shovel, he is very slow at digging. Then his employer (a firm) invests and gives him a shovel, if they have more money to invest they might buy him a small caterpillar, if they had even more then a front-end loader, etc etc etc.

Equilibrium: Is the point where quantity demanded, and quantity supplied are equal, and a price is determined. Price is determined by the market.

Markets: In this context it will refer to the structure of the market, some industries are perfectly competitive, some are monopolistic, oligarchies, and competitive monopolies.

Monopolies: Firms with the ability to set a price equal to demand at a quantity CHOSEN by the firm. Monopolies can be natural, when there are increasing returns to scale, or natural barriers to entry. Some monopolies are caused by regulation.

These definitions will serve as a good starting point for future discussions. I intentionally made them rather short, and possibly a bit vague, because of the audience for whom this is intended, some are fellow Econ majors and don't want to read all this again while others have never heard this "specialized" language before. If you are part of the latter, please e-mail me any questions and I'll be happy to explain them further. In fact, the responses to this message with in all likelihood have a strong impact on the next few postings.

P.S. I'm still looking for a name for this whole series, any suggestions?

Alright, hopefully that first blog helped get some terminology out there, and warmed up my writing style enough to be entertaining.  This post will probably be several installments long, because once it gets moving it is pretty involved, by involved I mean there is a lot of action/reaction in it, it’s really pretty straight forward, it just requires a lot of words to explain it.

Let’s start out with the current economic situation. The recent housing bubble has burst, some major corporations have failed, Bear-Stearns being the most notable, and politicians have pledged to save the day. Hilary has said she would “freeze interest rates”, some have promised tax cuts, or to cut spending, by any number of various mechanisms, such as stopping a very expensive war etc , etc. I’m not going to deal with much of that right now, although I reserve the right to do so later. This is about the interest rate, and how it affects you, and most everything around you.  So first some definitions (please remember economics is highly opinionated, and that there are MANY other definitions, but these are the most logical to me):

1.       Inflation:  Is the amount by which the money you hold looses value. If in 2007 $1 bought 100 peanuts, and in 2008 $1 only buys 98 peanuts, then you have suffered from 2% inflation.

a.       (Deflation, is the reverse…it is when the money you hold buys more over time)

2.       Nominal Interest Rate: The rate a bank charges on a loan. (This is what you see reported in the newspaper)

3.       Real Interest Rate: equals the Nominal Interest Rate minus Inflation ( RIR = NIR – Inflation)

4.       Leverage: A complicated way of saying owning something with borrowed money, very risky.

5.       Liquidity: This is essentially how easy your money can flow back and forth, money in the stock market, or your wallet is very liquid, while money in say your house, is very illiquid.

Now back to the current situation, actually, back to last Julyish, the US housing market, which was highly leveraged, tanked. This caused a liquidity problem, and the market acted quickly, stocks overall fell, and banks offered higher interest rates to entice people to save more, and thus give them some liquidity in order to afford a serious crisis in the banking industry. This is all very natural and good, even though it may sound scary.

Then the Federal Reserve “lowered interest rates” it is important to understand that the way the “Fed” lowers interest rates is by buying backing US Treasury bonds from private banks, and thus increasing the money supply. This makes money more available in the banking sector, and reduces the incentive for the bank to offer high interest rates, since they now have the money they need. This is a very simplified version of the actual happenings but it will do for now.

Since then, there have been many interest rate cuts, and much debate on the ethics behind many of them, some are saying the Fed is not helping enough, and others say the Fed is creating a scenario of “moral hazard” and saving the rich. This will all be discussed in later blogs, which I will link to from here. Now that you have seen a little bit of how interest rates affect your everyday life (interest rates on you bank accounts, CDs, mortgages, car loans, and even created the TV rentals industry, think about it, it will be discussed later) we will move on, or back, to the philosophy of interest.

Aristotle, Mohammed, and St. Augustine all thought charging interest was immoral, Aristotle and St. Augustine for the philosophical reason that money is not natural, and does not grow. For instance, if you leave a plant out in good soil it will live, die, and seed will be born, and they will grow, while money, left in any circumstance only stays the say or deteriorates, thus money should not grow from money, and thus interest is immoral. Mohammed was direct by Allah, through the messenger “Gabriel”, to say interest, or “usury” was wrong and that’s pretty much his deal.  I’m not going to go into arguing theocratic rules, so I’ll fight the philosophical ones. Aristotle, and St. Augustine suffered from a misunderstanding of what money is.  The current economic definition of money is that it is

1.       A unit of account

2.       A medium of exchange

3.       A store of value

It can be gold, copper, big wheels, nails, or fingernail clippings, if enough people agree to use it as a medium of exchange. From a philosophical point of view money is merely a representation of a person’s production, or their “best efforts” to make it a bit Randian. That is to say, that a man works, and produces something of value with the life, time or effort, that another man values, and is willing to exchange the products of his own life, time or effort, for the other.  Money is the medium of exchange for one person’s life, time or effort, to another’s.  Now keep this in mind throughout.

Interest is essentially saying that money is worth more today than it is tomorrow; in business school this is called a discount rate, and thus when someone loans another person money the first person should be compensated for the inconvenience of not having their money. An easy way to illustrate this, think of a little child in a candy shop. The child wants the candy bar now, but if you offer them enough, say 4 candy bars, they might be willing to wait till next week to buy said candy bars. This child has quickly calculated how much a candy bar now is worth compared to a candy bar next week.  From a very early age we all understand the value of time versus effort, or money, for a little bit of a more familiar example; think of a man needing his house painted. He is willing to pay $500 to have it painted by the end of the week, but if it is done in two months, he is only willing to pay $350. Now this is an example of how labor is less valuable in the future in the present, but remember that money is just a representation  of labor, a person’s life, time, or effort.

So far, we have talked about the philosophy behind money, and a quick justification for interest.  So the foundation has been laid, and there will be subsequent posts of several of these topics. Please let me know which are of the greatest interest to y’all and I’ll put those on priority.