Freedom Within a Market System?

On this post I wanted to focus more on a lesser known economist, John R. Commons. He had some radical views on some topics of economics. One topic that he focused on was the idea that economic activity depends on the underlying legal and institutional relationships and how they develop over time. He analyzed these legal and institutional foundations of capitalism by looking at transactions as the basic unit of analysis. He saw these transactions as involving the transfer of property rights, but the transactions did not have to take place through the market. Bargaining transactions take place through the markets while managerial and rationing transactions do not. Bargaining transactions take place between legal equals and there is a double transfer of ownership. Each side can decide whether or not to participate and each side gives something to the other. This essentially led to his view that collective action was necessary to maintain order within a society. Without other parties involved in a transaction, individuals would not respect the institutions that society relied on.
This leads me to my question on this topic. Does the freedom of individuals have to be controlled in order to keep order in a society? Collective action can prevent people from interfering with the freedom of others and also gives a framework where people can act as well. For example, there can only be freedom within a market system if it is possible to make contracts that will be honored, which does limit the freedom of individuals based on the contract. I do believe that individuals have to be controlled in order to keep order in society because without having some sort of control over people, they will act in a selfish way in order to increase their personal gains.

Non-additivity in Consumers' Demand Theory

There can be many relationships drawn between individual demand curves and collective market demand curves, but Professor Oskar Morgenstern says that in some cases the market demand curve is not the lateral summation of the individual demand curves. This is because an individual's demand is so variable based on several different factors and effects: the bandwagon effect, snob effect, veblen effect, speculative demand, and irrational demand.
The bandwagon effect is when people are buying things because they see other people buying them. For example, with Johnny Manziel going to the Cleveland Browns in the NFL draft, people will buy Manziel jerseys just to jump on his bandwagon. The snob effect is when the demand for a consumers' good is decreased because others are also consuming that good. It represents the desire of people to be different. So, given the same Manziel scenario, people would buy someone else's jersey instead of Manziel's because of the snob effect. The veblen effect is when the desire for a good is increased because of the price of that good. A real Manziel jersey would be preferable to a fake Manziel jersey in this case. Speculative demand is when people invest in a commodity because they expect the price to rise. Irrational demand is when people buy things off of sudden urges and its neither planned or calculated.
My question in all of this is, which effect do you think effects consumers' demand the most? Also, which of these curves can be added together in order to produce a market demand curve and which ones aren't able to do that?

The Value of Human Capital

In his lecture, Becker discusses the value of human capital and how it can be changed, or augmented, through investments in training and education. Becker believes that individuals can raise the value of their labor power through these investments. These investments, in training and education, give individuals increased specific and general knowledge and it is this knowledge that gives them the skills they need to keep their jobs or current positions within their companies. However, the need for manual labor in modern society is not as great as it once was. Even with the improvements from the investments in training and education, machines are replacing many of the jobs that used to be performed by humans. With the continued advances in technology, and companies turning towards machines for production, there has been an overall decline in the value of human capital. The specific knowledge and training needed by individuals today is simply an understanding of how to operate, maintain, and repair the machines that have replaced the jobs they once performed. Companies do not mind that they no longer need many individuals for production, the use of machines is increasing production and decreasing costs which in turn greatly raises profits. My question is this, will there ever come a time when human capital no longer has any value? The rise of machines, for lack of a better term, is removing the need for human capital in the market place, and it is unlikely that human capital will make any sort of comeback. So the question remains, will the value of human capital disappear entirely, or will there remain a percentage of jobs for which manual labor remains necessary? Is there a solution or must we accept the elimination of human capital?

Becker and Posner Doping Athletes

Going along the lines of Gary Becker and Richard Posner, I would like to point out another blog opinion that both of these economists discussed. The issue is doping athletes in professional athletes. Why do athletes turn to performance enhancing drugs in their professions? One reason might the gains they will make if they are number one. In terms of competitiveness, professional sports are not lacking in any way so each team or athlete are equal roughly in terms of talent level (except for the super stars). One of the defining factors would be the monetary gains of doping. Consider the Yankees success in baseball, the Miami Heat and Los Angeles Lakers in basketball, or Lance Armstrong in Biking. What separates them from the rest of the pack? Mainly their monetary gains from winning. Consider the issue of Lance Armstrong winning seven Tour De France back to back to (you get the picture) and making sponsor deals and having millions of Americans wearing your yellow bracelets. Not only did Lance Armstrong make multiples times what the guy in second place made but also made him a household name. The same goes for A-Rod and Barry Bonds. So it pays to be first in terms of money and fame. No one remembers second place or likes to pay second place like the first place.
So what is legislation trying to accomplish. It is trying to reduce the side effects of the performance enhancing drugs on the quality of life of the athlete competing. PEDs might help that sprinter win the race by a slim margins but if the whole pack is taking the drugs the marginal benefit to taking the drugs will be reduced until the point it will have to be a necessary step in competition.
My question is why doping athletes such a huge problem in sports? Should it be such a big deal and how would legislation help stop this type of activity?

Gary Becker- Organ Sales

Many have been focusing on Gary Becker and his works on explaining social issues with the economic approach. Often Becker comes up with a answer counterintuitive to what the social norm of the activity. I'd like to present a subject that might have a spur an interesting debate: organ sales. Becker first presents data from the year 2000 in which fifty thousand persons are on the waiting list for a kidney and only fifteen thousand kidney transplant operations were performed. The average time to wait on this operation is about four years. Liver transplant wait time is even worse. Almost three thousand people died on the waiting list for kidney transplant and add around thousand more for deaths while waiting on livers. Becker looks at other options to maximize this market. The first option would be opt in and opt out programs in developed countries that can utilize cadaveric organ donor to attempt to lessen the deadweight loss of transplants. The more interesting approach would be to legalize the sale of organs in a free market system. In a free market system, prices would settle at levels that would eliminate excess demand for any type of organ. Becker predicts that the going rate of a kidney probably would be around $15,000 and about $35,000 for a liver. This seems like a high price level for an organ but considering that the going rate currently for a kidney is $100,000 and a liver is $175,000 it would seem like the equilibrium price would decrease drastically. The black market of organs sales could take the route of drug sales in colorado. In which although there is a black market for the product it would be easier to go through legal channels because of the lowered risk of legal consequences.
An interesting consequence of legalizing the sale of organs would be would people give up their organs  because of altruism.
My question to this blog is would you give up your organs to benefit someone in need or to gain financially as you have two kidneys and $15,000 for a kidney might be great paycheck. Who would benefit in the market of organs and what would the cost be on society?

How Far is Too Far

The 1930’s saw the emergence of Keynesian theory along with the opposing views of Friedrich Hayek. Of particular relevance was their differing view on the involvement of government in economic affairs/markets, especially in times of economic depression. Keynes examined the issue and insisted that monetary expansion and government deficit spending were needed in a great depression, or else one ran the risk of a great degeneration. If there was no intervention on the part of the government, then the economy may fall into a cycle of reduced spending and high unemployment from which it could not recover. In the opinion of John Maynard Keynes, there was a direct relationship between aggregate demand and employment. By infusing the economy with money, there would be an increase in demand for goods, and subsequently spending. This increase would be reflected in a rise in employment to meet new demand. What Keynes would later acknowledge as a side effect to this theory would be a rise in inflation that resulted from the introduction of new money into the economy.

            Friedrich Hayek argued the complete opposite of Keynes. The involvement of government in markets disrupted the ability to communicate signals clearly. The introduction of new monies brought inflation that made the value of the dollar unstable. This instability hindered the ability for prices to properly communicate signals in markets since their value was under constant speculation. The regulation of markets hindered the ability for markets to communicate the signals of both the supply and demand side of the economy. Hayek believed that the hindrance of the markets ability to communicate signals properly would lead to capital and labor being allocated in places that they normally would not, and subsequent bubbles of disequilibrium being created. This disequilibrium could only be fixed by allowing the market to correct itself (which would require a phase of decline and depression) or put off by the government further intervening to give short-term stability. This cycle of government intervention would only prolong and augment the disequilibrium with each subsequent intervention that was necessary to reconcile the last.

             This issue that Keynes and Hayek argued on was one of great importance back in the 1930’s, but even more so now. Back then it was much harder for governments to create money because of the gold standard. Today, governments have ability to print money and borrow debt in masses. With each intervention, the scale of each subsequent one grows in order to resolve the last one; with this comes massive governments that stand to regulate and intervene in so many facets of a country. The role of government’s influence on the economy is debated around the world. There is no doubt that government and rule of law is necessary to protect the rights of the people, but how far should this power extend. To allow economies and markets to correct themselves from the centuries of intervention would mean a time of depression of unemployment for the people. Is it the government’s role to ensure that this doesn’t happen by continuing to intervene in order to protect the economic well being of those it serves? Even if it means more and more to fix the very problems it may be causing? Or is it necessary for the government to take its hands off of the economy and markets while some suffer during the correction phase. Do we trust the concept of competition or continue to intervene seeing how deep we’ve gotten ourselves now? I believe there is a middle ground that must be reached but will admit that I am not sure where it falls.

Crime and Government - Becker

In the last article we read by Gary Becker, “The Economic Way of Looking at Life”, Becker addresses his perspective on crime and punishment and how they tie into the economy.  Becker believes that “the amount of crime is determined not only by the rationality and preferences of would-be criminals, but also by the economic and social environment created by public policies.”  His statement raises the question for me whether the social norms and laws bring people to commit criminal acts or is it a person’s rationality or preference that cause them to commit crimes?  I also found Becker’s statements that “fines are preferable to imprisonment and other types of punishment because they are more efficient.  With a fine, the punishment to offenders is also revenue to the State,” to stand out as something significant for discussion.   I believe that statement makes sense to create revenue for the government but as economists, how is the line drawn for what is beneficial for the state and what is not in regards to crime?  If people commit criminal acts and the state can simply fine them (resulting in a more efficient benefit for the economy), then what criminal act goes from a fine to imprisonment?  Particularly, because when people are imprisoned, part of the state’s revenue is used to keep prisons and jails functioning.  Does this cause controversy for the government to balance the State’s need for revenue as well as for the safety of society?