Let's Talk Politics

Shifting alliances among parties in a multiparty system: one of the main causes of political and social instability.

Examples include but are not limited to South and South-Eastern Europe (since Bulgaria and Italy are my favorite case studies). I have often doubted the efficiency of the bipartisan system, however, could the US be on the right track?

Comparative vs. Absolute

After four difficult years, I can finally say I understand comparative advantage. I don't mean simple calculations or the basic concept behind the fancy technical term. Well, I do mean both, but what I mean to stress is that I understand it. I might just pop up open that bottle of champagne I've been saving for special occasions. Or just have a glass of cold water to wake me up from my temporary excitement and get me started on yet another problem set nearing its deadline. Either one will do.

I can't be certain if it was me falling asleep in the majority of classes, or the way professors try to explain things and often fail, or both, but I am finding out only now that I have confused Smith and Ricardo's absolute and comparative advantage up to this very moment. Who knew that absolute is absolute and comparative is based on comparison?! OK, enough silliness, but as obvious it is to most of you, the notion that by flipping a fraction, the comparative advantage pattern will be reversed holds true every single time (unless the fractions are equal, duh!) had not crossed my mind!!

Full credit and my deep gratitude goes to my online textbook resource (since I refuse to buy actual Econ textbooks anymore) that got me through the basics of my Master's International Trade and the current International Economics classes. Sadly, I took the former before the latter and thought that after passing the more difficult one, I'd dance my way through the other. I couldn't have been more wrong...

The Games People Play

Read this, read this, read it!!!

I.T., a friend at MIT, casually sent me the article, adding that one of the main reasons why he enjoys economics is that this particular field of study toys with people through experiments. In my mind's eye emerged the image of a puppet show - a marionette guided by two giant hands - and I could not help but share my fears with him. I told him that economic policies often serve the interests of few and thus, inequality is brewed. From inequality spur jealousy, violence, conflicts and instability. Envy is not a deadly sin for nothing.

Then I was reminded of a recent discussion on inequality and how it was time to change my stubborn attitude towards the phenomenon. While some level of inequality and unequal distribution of income is required for growth, too much of it most likely creates more problems than solutions. One must keep an open mind when it comes to social policies, but remain focused on the goal of encouraging investment and entrepreneur opportunities.

"You never know what policy is going to be effective for what group of people," my friend elaborated. And this is what I find most curious (and frustrating, sure) about economics. A single policy has so many variables for all of which it is impossible to control, so many possible and hardly foreseeable outcomes. Case studies can be helpful and we can learn from past mistakes, but who knows if the same economic theory can apply universally without catastrophic consequences.

I suppose this is where sociology and psychology come in handy. Or as my friend cleverly pointed out, "The more you know about people, the easier it is to manipulate them."

Thought for Food

Sarkozy at Davos for video, and the full text of the speech here.

Deflation Is the New Inflation

The deflation scare in Japan is all over the news these days. It seems that deflation is in, inflation is out.

Not only are prices decreasing by record rates, but unemployment is falling as well!  Boy, I am so close to packing up my stuff and moving to Japan. Economists don't share my enthusiasm, however. Articles such as this one in Business Week for instance, elaborate on the present danger facing most central banks in developed countries in the Northern hemisphere. Never in my wildest dreams, have I ever pictured falling prices as a phenomenon to be dreaded, feared and fixed. Not that I don't see the very clear point economic theorists make, but I can't seem to be able to turn my back on my inflationary childhood and adolescence.

Just to clarify what I mean, take the Soviet satellites with the traumatic communist and post-communist experiences with their "governments in transition," an endless and seemingly futile history of transition consisting mostly of fighting inflation. Even while residing in the United States, and especially during the recent recession, the Obama administration stimulus plan caused even more worries about hyperinflation and stagflation. Yet, printing money didn't even cause the much-publicized anticipated inflation, let alone help fight deflation. When merely pumping money into the economy doesn't quite have the predicted results, isn't it time to turn to other panaceas?

Convergence, Divergence

"Economic Convergence shows that if two countries at different stages of development (e.g. one rich and one poor) move towards the same steady state level of capital per worker (k*), due to decreasing returns to K, the richer country is projected to grow at a much slower rate than does the poor one, which is at an initial stage of development where any additional increase in k produces much higher returns and thus, a much higher y."

Legend: K = capital; L = labor
              k = capital per worker (K/L)
              k* = steady state level of capital per worker
              Y = output
              y = output per worker (Y/L)
This is just the first sentence I wrote for a problem set. I'm quite proud of its length... and somewhat scared I may be turning into one of those people... You know who you are!

The Coordinates of Happy

Today's class on economic development briefly mentioned the Happy Planet Index and after I got over the initial fit of giggles that shook me, I decided to actually pay attention and keep an open mind to just how economists dare to approach this uncanny task of measuring and classifying happiness.
After a couple of graphs and the professor's ramblings trying to explain the graphs to an audience already with one foot out the door, I finally discovered the main point to years of studying happiness. Or at least the main point for me. Apparently, data show that over time happiness stays fairly constant where an overall increase in a country's level of income or total GDP is observed, ceteris paribus. This means that if the distribution of income remains fairly constant as well, people are not any more likely to feel happier than before. Moreover, what struck me as incredibly narcissistic, yet true, an individual is only likely to feel happier if he or she is better off than the people around him. As the saying goes in most Balkan countries, "I'm doing well only if my neighbor does poorly."

So, if being happy is so dependent on one's well-being relative to others, how can we ever strive for equality? I am strongly averse to talks of utopian politics and societies, but I do believe that there must be some universally established minimal level of subsistence. This debate goes back to ancient times when philosophers from different eras argued about the nature of man. Are we born good and the environment corrupts us or do we have evil and egotism written across our hearts (but we spend a lifetime trying to better ourselves and save our souls)?

Whether we believe one or the other, we must not forget that economists are not trying to make people happy. Redistribution of income can have positive effects on total welfare by raising living standards, but negative effects on individual happiness. Above all, welfare is not a perfect measure of the effectiveness of economic policies, and sadly, it is rarely used as such a barometer.

What seems to make people happy is a groundwork of working domestic policies - today's optimistic prospects for investment in tomorrow's stable returns.