September, 2008 browsing by month


1st Schumpeter Question

Monday, September 22nd, 2008

How does capitalism work, according to Schumpeter? You might think about the role of the entrepreneur and of creative destruction. Also pay special attention to why Schumpeter says capitalism fails to work.

Sept 18 topic

Tuesday, September 16th, 2008

What are the causes and effects of inequality for Adam Smith?    In what ways does a market economy address the problem of inequality?  How should we address these inequalities or should we?

Please respond to this question no later than Thursday at 9 am.

Bobbi Herzberg

Who knows how to make a pencil?

Monday, September 15th, 2008

Here is George Will on Russ Roberts on why no one knows how to make a pencil and why that is a good thing.


Addendum: The first link did not work. Cut and paste this one into your browser and it should take you to the essay.

Price gouging?

Sunday, September 14th, 2008

From Alex Tabarrok at

Response to my Mother

Alex Tabarrok

My wonderful mother is upset, like pretty much everyone else, at the price of gas.  “Well, the hurricane has knocked out a lot of production on the gulf coast,” I say.  “Yes but there’s plenty of gas in the pipes that was produced before the hurricane – the suppliers are gouging.” she responds.  Arrghhh….must resist, must resist, must be ….nice.  “mmm,” I say.  You and my Econ 101 students (103 actually), however, are not so lucky.

Many people think that price is determined by historical cost.  Price is never, ever, determined by historical cost. Price is determined by supply and demand.  If supply or demand change then the price changes regardless of historical cost.  Last year’s fashions?  The price falls regardless of cost.  Chopped up dead sharks?  If demand is high, the price is high regardless of historical cost.  If the demand for gas were to suddenly fall, the price of gas would fall too, regardless of cost.  In the present situation the supply of gas has been reduced and the price has gone up.  Historical cost is always irrelevant.

Is the high price due to supplier gouging?  Not at all.  If you want to blame anyone for the high price blame your fellow buyers not the suppliers.  A high price means that some other buyer is outbidding you to obtain the limited supply.  It’s buyers who push up prices in a competitive market and it’s suppliers who push prices down!

It’s true that some suppliers are making big profits but people have the cause and effect backward.  It’s not the high profits which are causing the high price.  It’s the high price which is causing the high profits.  If you were to tax the high profits, for example, you wouldn’t reduce the price.  Indeed, quite the opposite because the high profits motivate suppliers to increase the quantity of gasoline as quickly as possible.

The last point brings us full circle because as the situation stabilizes suppliers increase the quantity supplied until price is pushed down towards long-run costs (which are also historical costs).  Thus, in the usual situation it appears that price is determined by historical cost.  It’s only in the brief time period when a shock shifts (short-run) supply away from historical cost that we can see the truth.  Price is determined by supply and demand.

Addendum: Is it just me or did Ken Arrow ever feel the need to correct his Mom on economic matters?  Did Adam Smith?  “Look Mom, I know you’re upset about the price of mutton but let me tell you about this new theory I’ve been working on…”


Question for Wealth of Nations

Tuesday, September 9th, 2008

I run into people all the time who feel a deep-seated anger at the forces of economic and social prosperity that were unleased by the ideas that were disseminated by Adam Smith in The Wealth of Nations. For this week’s post, I am interested in your thoughts about why people would be opposed to things like division of labor, specilization and gains from trade. Would the world have been better off without Adam Smith and others of his ilk?


Tuesday, September 2nd, 2008

Mandeville assignment:

The “required” reading for next time is “The Fable of the Bees: or Private Vices, Publick Benefits.” It starts on page 1—everything before then has a roman numeral. Read the preface and “The Grumbling Hive: or Knaves turn’s Honest.”

Also read “The Introduction” starting on page 39 and “AN Enquiry Into the ORIGIN of Moral Virtue,” pgs 40-57.


If anyone did not get this as an email please email me so i can fix the problem.

–Randy (