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Wednesday, May 25, 2016

The Early History of Regulated Health Care

The Early History of Regulated Health Care: [Editor's Note: This Q & A with Dr. Michel Accad, M.D. on the economic history of modern medicine covers the 'pre-Flexner era' to the Great Depression. Part 2 will feature the period from the the Great Depression to today.]

Sunday, May 22, 2016

David Hume - The Great Empiricist & Skeptic

Prices: How are they derived?

Bread $2.00/loaf. We see this at our local grocery store. This price sends a signal to us. If it does, what signal is it sending? It is obvious that the $2.00/ loaf is the signal, prima facie. Yet, there is more to this process.

Prices are signals to both parties in the free trade process. However, how are they derived?

Barter
In the past, free traders used barter to exchange goods. The "prices" of those goods were expressed in the other good that was needed by the seller. For example: If a seller of a cow needed two hens, the price would be two hens. 

Money

As barter was replaced with money, the unit of money represented the price.(e.g 1 hen= 2 gold coins) This made the process more efficient for both sellers and buyers on the transaction.  With the case of money, prices are stated in terms of money, as in this example, the number gold coins.  With money, we can carry it forward with currency, as the prices would be expressed in terms of the respective currency type. (e.g. USD, Euro, Pound, etc)

Price and Subjective Value

Money is a means to do multiple things. It helps maintain a level of recordkeeping or accounting of transactions, as we previously discussed since prices are presented in terms of money.  Money also is used to "store value". This concept of "storing value" is a curious one, since value is subjective. While this is true, the money used may not and does not measure all the value expressed in the transaction. However, we can see what things people  value over another based on the law of marginal utility. Hence, prices play an active role in helping the economic actor to evaluate his utility preferences. 

Prices, therefore, are spawned out of a need to attempt to quantify subjective value for the economic actor. As the actor is moving to improve his situation, he goes to acquire more "stuff". In this pursuit, he will make choices on the acquisition of "stuff" based on his preference ranking. Note: this preference ranking is dynamic, thus it is constantly changing.  

Conclusion

Prices act as a valuable tool in the free market process. They provide vital information to the economic actors. The primary purpose for prices is the attempt to project value in terms of the money displayed. While prices can not quantify the true value for the economic actors, it does provide a way for the actor the ability to prioritize his wants and needs accordingly. 

Saturday, May 7, 2016

Econ Thought: The Law of Marginal Utility

In the study of economics, the Law of Marginal Utility is one of the key axioms to the entire body of knowledge. What are the key components that make the Law of Marginal Utility possible?  There are two: the Law of Non-Contradiction and Transitive Property

Law of Non-contradiction

This law of logic states the following: Something can not be itself and not itself at the same time. Using symbolic logic, (A) can not equal (-A). (A) must equal (A). Another translation of the Law of Non Contradiction is the following: The same object, or same person, can not be at two different points in space and time simultaneously. For example, one can not be at the movies, and not be at the movies at the same time. One can be at the movies at one point in time, then later in time, not be at the movies. Since someone can not be at two places at once, this forces the actor to prioritize his actions.

Transitive Property

Since the actor can only be in one place spatially and temporally, the actor picks one good, or activity, at a time.  If there are multiple activities, the actor must chose the sequence he prefers in a ordinal fashion, as time progresses. Hence, it is a play on the transitive property: If good (a) is preferred over good (b) and good (b) is preferred over good (c), then good (a) is preferred over good (c). Based on this property, the actor can show which goods he prefers over the other goods at that particular point in space and time.

Supply and Demand Curves are Created

From these two laws of logic, The Law of Marginal Utility is created. Based on this law, the downward sloping, from left to right, demand curve can be graphed. This demand curve, as time progresses, the price, as an expression of value, declines on the margin for each unit is purchased.  Conversely, the upward rising, left to right, supply curve can be graphed. This supply curve, shows that over time, as the need of the supply increases, the value of each unit increases, as expressed in the higher price on the margin per unit sold. The mid point where these two curves intersect is known as the equilibrium price.

Wednesday, May 4, 2016

Gross Calls for Helicopter Money

Mr. Gross' calls for Helicopter money is based on an unstable economic rampart. The notion that increasing the money supply will some how cure "Deflation" is risible. First, one needs to determine the cause of the current plight. The current plight is caused by the notion that a Central Bank can accurately calculate the natural rate of interest. Since the natural rate of interest is based on the notion of the inter-temporal personal utility preference, it is impossible for any human to accurately calculate this ratio.



Since the Fed, or any Central Bank, can not accurately calculate the natural rate of interest, the economic price fixing game is played in the capital markets. This provides grounding for volatile swings in various capital markets.



Gross Calls for Helicopter Money: Legendary investor Bill Gross calls on the Fed to bring about Friedman's 'helicopter money.' The idea of helicopter money was introduced by Chicago school economist Milton Friedman in 1969.

Tuesday, May 3, 2016

New ACA Study: Mercatus Center



Key Excerpt:

"The ACA established the reinsurance program to assist insurers offering ACA-compliant plans so insurers could charge lower premiums and attract more enrollees as the law’s changes took effect. These payments are an explicit subsidy benefitting individual market ACA-compliant plans financed by fees on nearly everyone with private insurance.

Prior to insurers setting their 2014 premiums, the Department of Health and Human Services (HHS) announced that it would pay insurers 80% of the cost of claims incurred by enrollees between $60,000 and $250,000. As an example, an insurer could expect to receive a payment of $112,000 for an enrollee with $200,000 in claims ($200,000 − $60,000 = $140,000 x 0.8 = $112,000). The Congressional Budget Office estimates that insurers were able to reduce premiums by 10% in 2014 because of expected reinsurance payments. "

Read the rest here:

Why Tariffs are Harmful

In the current Presidential campaign, much attention has been given to the trade with China or Mexico. Many have complained regarding the trade deficit and how it has impacted jobs. "We need jobs!", says the politician.  So, the proposal to "get jobs back" is to raise tariffs on China. Will this work? Answer: No.

A simple example: Inventory

Suppose that you owned a store. And, you sold only one good. That good was green beans. Your price of your green beans is based on many factors, one of which is the amount of green beans you had in your inventory to sell. In your process of doing business, the farmers that produce green beans discovered some sort of fungi that was destroying the green beans or making them unsuitable to eat. What happens next? In this case, the total inventory of green beans is shrunk, causing the prices of green beans to rise, with the demand remaining constant. 

Tariffs act as the fungi in trade, using our example. It simply is a tax that shrinks the overall inventory of that good, thus making the price if this good higher. Politicians assume, to wit, falsely assume, that they will raise more tax revenue by employing higher tariffs. While this seems workable on paper, in reality, humans will re adjust their purchasing preferences, due to the increased prices. The revenue generated from the tariffs will decrease. This action is tantamount to raising taxes to increase revenue. 

Raising Tariffs: It does not create Jobs

Job growth is spawned from proper capital investment and expansion. This comes from a pooling of savings. Employing or raising Tariffs is no different that raising taxes. This action simply taxes the original factors of production: land, labor and capital. Since it shrinks the inventory, it "taxes" the business owner. The business owner can not pass the tariff forward to the consumer. The consumer, over time, will seek alternatives, forcing the business owner to lose revenue. 

Conclusion

This brief article only shows a small negative impact of tariffs. The impact can be wide ranging, as the total inventory of a good is based on the global supply. Tariffs simply shrink the overall global inventory of that good, this driving prices