The Economic Way of Thinking

After The B.S.: Graduate Economics Or Law School?

Here's Greg Mankiw's discussion of the alternatives.

Substitutes Everywhere: Who got the hooch?

In a few weeks, I’ll give my standard lecture on Prohibition in the US and its similarity to the War on Drugs.  It’s one of the more insightful applications of supply and demand analysis, and I think it’s effective in making students appreciate the power of the economic way of thinking.  In fact, when Dave gave his Prohibition-War on Drugs lecture in EC 101 back in 1997, I became hooked on Econ and never looked back.

 

For teachers and professors who give this lecture, the standard approach is to draw an inelastic demand curve for alcohol.  You then discuss the shock to supply that came about during Prohibition, the windfall profits and subsequent black market, and the unintended consequences of well-intentioned policy.  You can then talk about the end of Prohibition and a return to relative calm in the alcohol market.  After pulling students in with the Prohibition example, the War on Drugs is a pretty easy extension.

 

The key to the story is the inelastic demand curve.  I often say that since smoking cabbage, cigarettes, or crack aren’t very good substitutes for marijuana, quantity demanded will only fall slightly as prices rise.  At this point, one of my students almost always incriminates himself by saying, “But, Dr. B, you substitute between different marijuana types as the price rises…”  While the student is correct, this is usually an opportunity for a joke, “Well, Joe, I guess I don’t know as much about dope as you do…But, you’re right that people will substitute, and they’ll tend to go for more potent forms of the substance.”  In terms of specific substitution, though, my lack of familiarity with the marijuana market usually forces me to punt.   

 

Thanks to this CNBC slide show, the excellent Showtime program Weeds, and my viewing of Pineapple Express (a terrible movie) last night, though, I may actually be able to hold my own with Joe this time around!

Increased Minimum Wages Will Keep Illegal Mexican Workers Out of America

Do you remember this from the Michael Dukakis, former Democratic Governor of Massachussets?

There is a simpler alternative. If we are really serious about turning back the tide of illegal immigration, we should start by raising the minimum wage from $5.15 per hour to something closer to $8. The Massachusetts legislature recently voted to raise the state minimum to $8 and California may soon set its minimum even higher. Once the minimum wage has been significantly increased, we can begin vigorously enforcing the wage law and other basic labor standards.

Millions of illegal immigrants work for minimum and even sub-minimum wages in workplaces that don’t come close to meeting health and safety standards. It is nonsense to say, as President Bush did recently, that these jobs are filled by illegal immigrants because Americans won’t do them. Before we had mass illegal immigration in this country, hotel beds were made, office floors were cleaned, restaurant dishes were washed and crops were picked — by Americans.

Read the whole enchilada here. 

Substitutes For Everything

Could T. Boone Pickens be right?

WalMart vs. FEMA In Response to Hurricane Katrina

My friend Steve Horwitz fine analysis is mentioned here.

Some Thoughts on No-Fraud Banking in the Underground Economy

Off the top of my head:  given the low denomination Federal Reserve Notes (perhaps even reduced to $50 someday), isn't there an incentive for thieves, especially well organized associations of crooks, to reverse and reduce transaction costs?  And how?  By developing some kind of parallel medium of exchange.  Perhaps some kind of conversion of Federal Reserve Notes into an alternative medium of payment among crime organizations. Allow inter-hood branch banking. 

Furthermore... maybe 100% reserve banks, accepting Federal Reserve Note deposits, and issuing IOUs.  Why 100%?  Rothbard's banking-as-legalized-fraud charge could be avoided, if one is so motivated. 

A 100% illegal banking system founded upon 100% honesty.

Could there be some kind of dual currency -- both dollars and IOU's being deposited and withdrawn? Or perhaps the emergence of competitive note issue?

Has something like this evolved here or elsewhere?    Do any of these ideas seem somewhat sound and applicable?  Is there a potential consulting opportunity that stares us in the face?

Send Fredo Off to Do This, Send Fredo Off to Do That

I recently gave my EC 101 lecture on money and denominations of money. As always, I point this out to my students:

Within the past 25 years the government has reduced the largest bill denomination from $1,000 to $500 and then down to its current size, $100.  Why?  In large part to fight the war on drugs.  The lower bills raise the transaction costs among criminals. 

I recall the Godfather II scene where Fredo delivers a case full of cash to Hyman Roth's location in Cuba.  Say it was filled with $1 million.  Then a single delivery deal would take one thousand $1,000 bills.  But what if Fredo had to deliver the million using $100 bills, as he would today?  Then it would require, of course, ten thousand $100 bills to complete the transaction.  No check or credit card transactions, so that means more suitcases, more deliveries, and so on.  Not only harder for Fredo to pretend to fulfill a family responsibility.  It's also tougher for him to betray the family by getting something for himself.   He'd have a higher risk of getting caught. And so, too, for all the criminals out there, including any of those other "I'm smart, not dumb like everybody says" Fredos. 

Boettke's on Board!

I got a start on this site.  My co-author, buddy, and bosom friend Pete Boettke has just come on board.  There are substitutes for everything.  Pete and I aren't together at GMU.  This is the next-best thing. 

Please give Pete a warm welcome!

Real Tomato Ketchup Eddie?

Paul Heyne, Pete Boettke and I argue that there are substitutes for anything at the margin. We see this time and again in the real world. Some substitutes are obvious:  Bottled ketchup vs. mustard, bottled ketchup (or mustard) vs. Cousin Eddie's homemade ketchup, etc.

I've just learned that there's another close substitute for ketchup among many people.  Ever hear of banana ketchup?

Okay.  Let me go further.  I say a bottle of gin can be a substitute for a bottle of banana ketchup.  A tin of Skoal long cut straight.  (Alright, these days the "tins" are plastic.) A pocketful of pennies.  A handful of daisies.  A dead and rotten fish.  A used Jodi Picoult novel.  A  set of new sparkplugs.  A Lowe's giftcard.  I say a baseball bat can be a substitute for banana ketchup, or a hat, or ballglove.  I say a brick can also be a substitute, a hammer, an allen wrench... at the margin.

Heck, I say a tire iron can be a substitute for bottled ketchup.  Charcoal fluid can be substituted for a tire iron, a baseball bat, even a can of snuff.  At the margin.

And on and on she goes.  How can any of these be substitutes for a bottle of tomato ketchup?  Can you suggest some reason other than most of them can be used as gifts in place of a bottle of ketchup?  Go ahead, give it a try.  The more examples and explanations, the better!