Profits, Equilibrium and Market Failures

It’s been a while. I have been studying some advanced neo-classical economics! It’s terribly complicated, but there is one thing that has been nagging the corner of my mind about some of the assumptions that I just want to air:

One really big premise is that completely free markets that have perfect information and limitless consumers/producers that compete perfectly will achieve this magical equilibrium where exactly the right amount of the good is produced and purchased and there is no profit or loss anywhere.

This never happens in the real world, for various reasons, but a thought occurred to me that it actually CAN’T happen. This is because both consumers and producers wriggle extra gain out of a trade by purposefully fixing their respective prices too high or too low. For example:

Demand: Qd = 100 – 2P

Supply: Qs = 20 + 2P

The perfect equilibrium price would be 20. I’ve come to realize that the price will at best be around 20, but never 20.

Something will happen like a producer will put the item on sale, offer a coupon, a rebate, SOMETHING that snags just a little bit more of the market. Neo-Classicals will say that this is impossible because producers are price takers. This is an acceptable response, but only in the long run. In the short run they can disrupt all they like. Not to mention the super-subjective value judgments like “this place is convenient” or “I feel they treat their inventory better and I like that” and so on, which could create very real long-term preference in consumers for that producer in the market.

Conversely, consumers can do the same thing. They can demand and possibly receive a discount. This is short-term as well, and according to Neo-Classicals the short-term doesn’t exist in any meaningful sense.

However, I’d like to remind everybody about the concept of “nickle-and-diming”. Because this short-term finagling is going on constantly for virtually every transaction, no perfect equilibrium – no matter how perfect the setup and competition is – will ever be achieved.

I mention this because the Neo-Classicals see a market that SEEMS like it should reach equilibrium, yet it never does. They can’t see why it doesn’t, so they have created this concept of “market failure”, and then they propose that the government should step in and do something about it; and of course this never works as intended or at all really. In reality, it seems to me that the more room the producer and consumer have to haggle, the less likely it is they will approach equilibrium, but the more they will value the sale at the end of the experience. They will each REALLY feel like they came away with something they wanted. This is something economists tend to shy away from because it’s impossible to measure a feeling, and even if you could, no two people would be the same. You can measure past preference though! And we do that through watching profits, which Neo-Classicals view as a market failure.

Here’s something more – reducing profit to zero by reaching that magical equilibrium would distort the “value to me” that each consumer or producer has. The product becomes uninteresting and I suspect that this would actually provide incentive for consumers and producers to look at other, more interesting, products. This exit would throw this product into flux and that flux would make it interesting again, but not at equilibrium.

In conclusion – this notion of market failure is flawed since it is easy to see that equilibrium is quite impossible even under perfect conditions.

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Categories: Morality

Bin Laden was already dead

It was politically expedient to kill some random pakistanis and then declare mission accomplished. He probably died from kidney failure and our folks just collected the body.

Either that, or they just dressed someone up and buried the body at sea. Either way – bring the troops home and leave the middle east alone!

Categories: Uncategorized

Egypt and its road ahead

March 17, 2011 Leave a comment

It’s been a while, but I have a moment and something on my mind. It’s long. Here we go!

I know a guy that lives in Cairo. He is a very devout Muslim and he cares deeply for all Muslims. He does not wish violence upon non-Muslims, but he has some big concerns that he gets excited about. He is not alone in this, so it is worth mentioning. Here they are:

  1. Israel and its treatment of Palestinians and Lebonese.
  2. US involvement in how Middle East countries run themselves.
  3. Why does the US support Israel.

The big one of those is #1, and I’ll address that last. Let’s knock out the easy ones first:

#2: I agree that the US should not be doing this. This forces the US to take sides in something it does not understand and the simple involvement of the US in deciding a regime/victor/social norm means that whatever gets put into action is not viewed as a Muslim choice. This means the Muslim country doesn’t get to be autonomous. They resent this, and rightfully so.

#3: There are two reasons for this. The first is that the US made Israel and so we have an interest in keeping it going. The second is that Israel is a stable and reasonable power center in the region and so they are very attractive to work with. They do a hell of a better job of maintaining a peaceful country than any other power in the region. That’s just how it is.

Now for the biggie: #1

This comes down to the childish “He started it” justification. The Palestinians and Lebonese attack Israel, murder civilians and children and then cry bloody murder when the Israelis do it back to them. Should the Muslims just accept Israeli rule? Should the Israelis give up and disperse? Sadly, these easy answers are flat-out impossible for a host of reasons. So what can Egypt do? They want to help the Palestinians and Lebonese and they don’t want to see Muslims get killed, so what should they do?

Well here’s what doesn’t work, and subsequently, what they CAN’T do, no matter how much they want to:

  • Violence. Either war or terror attacks – neither change anything for the better, they just make things worse. But that’s not all – doing this would also weaken Egypt because tanks, planes, explosives and personnel are not free and resulting reprisals (both military and economic sanctions) are costly.
  • Give Israel a stern talking to. Israel doesn’t care what Egypt thinks and talking tough isn’t going to make them start caring. What it will do is make them consider Egypt hostile and that isn’t good for Egypt because it makes the previous bullet point more likely.

Alright, so if they can’t do either of those, what then CAN they do? First, let’s analyze the situation so that we understand what we’re talking about a bit more:

Palestine and Lebanon are run by bloodthirsty lunatics that only know war and terror, and that are bent on getting some sort of revenge against Israel. That is what got them into power. It is really hard to convince the rest of the world that these are reasonable people, and Egypt won’t be able to do it.

Let me use an analogy. Convincing Israel or any other non-Muslim country that the leaders of Palestine and Lebanon are the kind of people that are reasonable and that can be trusted is like trying to convince an Amish book store that they should hire this guy to go out and speak with clients:

Unemployable

It just isn’t going to happen with things the way they are now. So, now that the situation is explained a bit more clearly, here’s what Egypt must do:

1) Gain bargaining power.

They can only do this by becoming respectable in the view of the world. Notice I said “respectable” – not “liked”. As an example, China is respected, but not really liked because they murder their own people by the thousands every year (maybe millions). They are needed because they don’t break contracts and they offer services the rest of the world needs – this means they command respect, and with it, bargaining power. As an example I present the fact that the Kyoto Protocol has not been re-upped. The only reason for this is because China said “No, we’re not doing that and we dare you to not do business with us.” It is possible for Egypt to gain this power too.

2) Become a model of what the Muslim world should be.

To become a model, Egypt needs to do what has only ever worked in the Middle East – become a trading powerhouse. They need to have little or no regulation on trade, strong property rights, and courts that move very fast (less than week from a filing to hear and rule on a case). The type of law they want to use is not all that important to accomplish these goals. See video below for more on that.

3) Help Palestine and Lebanon gain their own bargaining power.

This can only be done if the first is achieved and the second exists. If these three things can be achieved, then Israel will come to the table and seriously work with these countries, because anything else would potentially damage Israel’s ability to function as an economy. For example: Why would an outside country bargain with Israel if Egypt and Lebanon offer the same products/services at a lower price? Egypt and Lebanon would be in a position to sanction Israel. If Israel wants the sanctions removed, then they would need to bargain, but the difference would be that they would be more comfortable bargaining with a prosperous, stable and respectable Egypt and Lebanon rather than the unknown that Egypt is now and the murderous headcase the Lebanon is now.

What about Palestine?

Well, Palestine is caught up in its own pride. They want all of what was once called Outremere and Israel wants all of Outremere. As it is now – Israel has won this fight and Palestine is being a sore loser by refusing to integrate. If they did peacefully integrate and become a province of Israel, they could then travel around and live wherever they want. They wouldn’t have all of what they want, but then neither would Israel. That’s what is called a compromise.

As it is now, Israel has absolutely no reason to think Palestine would peaceably integrate, and Palestine is perfectly fine with that. That’s why they keep firing rockets at Israel, murdering children and blowing themselves up in crowded areas. That’s also why Israel treats Palestine like a bunch of murderous children most of the time and as dangerous animals the rest of the time, with no reservations about torture or blowing up houses. Both sides need to stop it, but without something positive to look forward to, they will never stop.

 

Egypt could become that positive thing that both parties can look to. The Muslim world needs a role model right now.

Such a thing did exist at one time. Here’s a historian talking about it:

Categories: Politics

What is Real Charity

January 7, 2011 Leave a comment

In this age of Nanny Stating, born again Christians, nutty Muslims and rabid Atheists, I had a recent realization about what is “charity”.

Firstly, I will define what charity is in the view of the above: Giving a good (including money) or service to someone that is deemed as “needy” by the person or group actually giving said good or service. In these groups’ view, you can be charitable by extension – so even if you aren’t giving the good or service directly to the recipient, because you caused a good or service to be given, you are still charitable. Because of this, people still get that little rush created from the goodwill towards men.

However, this is all wrong. Let me use an example:

You sell sandwiches and you have 10 to sell every day. You don’t like it, but you assume that at least 1 sandwich will be a 100% loss for some reason, and you’re ok with that. Now, during your day you come across a very hungry man that is desperately poor. You give him your 1 sandwich that you don’t mind losing and feel great for having been helpful. You have been charitable, right?

Well, no – you haven’t. To see why, we have to take the example to the extreme limits. Let’s continue with the example:

The next day, this man wins the lottery and is instantly a millionaire. Now, even though you knew you were going to lose the money for that 1 sandwich the other day, no matter how much you may want to deny it – you are tempted to be an indian giver (even if it’s for just a heartbeat). This is because you know he can afford it.

Let’s continue the example in the extreme: you have no problem with being an indian giver so you ask him to pay up for the sandwich. This means you were never being charitable at all. You were just willing to give the man a debt that you had very low expectations he would ever pay back.

Some might say, “I would never consider doing that!” Most people would never do violence on someone in the heat of the moment, but virtually everyone has considered it – and this is really no different. Whether you would act on it or not, you have projected a cost to him. You have put him in a subservient role, and this robs him of his dignity. You did this because there is a WAY outside chance that you could get full payment for that sandwich and deep down, you would rather strike a deal than just lose 100% of the cost of the sandwich.

Note that I never said that you wish ill on the poor man. You would rather he was not poor and that he could buy the sandwich from you. This general and natural good will towards your fellow human is what churches, governments and aid organizations use to beat you over the head to get donations out of you. They make you subservient to get your money, time, or knowledge – and then they go subjugate some welfare recipient, who doesn’t really want free stuff, but rather the ability to live like you do. We think ill of professional beggars because we know they are actively unwilling to engage in making a deal. They just want.

Real Charity:

So what is real, true-blue, honest to God charity? Real Charity is the willingness on the part of the seller to make a deal with the buyer at a huge loss to enable the buyer. Take our example again – if instead of just putting the man in your debt, you instead struck a deal with him that sucks for you. Maybe he dances a jig or tells you a funny joke or draws a crappy picture for you in return for the sandwich. You still get the warm fuzzies because you have helped out an unfortunate man, and maybe you just learned a new joke, or you have a picture to show people, or you have a story about a man dancing a jig for a sandwich. Either way – you have each enriched the other in some fashion. The next day, when he wins the lottery, you do not have the urge to collect because you made a deal. He paid for his sandwich. Instead, you may have a feeling of “He can pay me for the next sandwich now.”

The poor man has all of his dignity still, because he doesn’t owe you anything. He made a deal with you, and the deal is done. You can not ask for money from him without him asking you for something else in return.

Categories: Morality

Investing Ideas

January 5, 2011 Leave a comment

I’ve had a few people ask me what they should put their money into so that they don’t lose it.  Now, I don’t have those answers, but I do have a list of the common themes I find when I go looking for them, and I’ve recently seen some stuff that gave me a good idea as well. Here goes.

Priorities:

Liquidity – how quickly can you convert said item into cash?

Appreciation – how much will it increase in “value” between today and next month?

Risk – how likely is it that this will utterly tank and end up costing money?

Common Solutions:

Money Markets, CDs, Bonds and other “liquid savings” instruments:

  • Highly Liquid (90 days at minimum, 1.5 years max wait time)
  • Low Yield – Appreciates more slowly than inflation, which means a net loss in real value
  • All but bonds are not risky. Junk Bonds are risky, others are less risky

Conclusion: better than a savings account, but only slightly – with the exception that bonds could lose all your money. If you think the economy will improve only a little bit, this is a safe place to put your money.

Stocks and IRAs:

  • Illiquid
  • Uncertain appreciation and yield
  • Quite risky, but this can be hedged by using an Index Fund

Conclusion: could be good, but this is a long term investment. Don’t expect to see this money again for a long time. This is a good place to put your money if you think the economy has “rounded the corner”.

Consumable Commodities:

  • Semi-Liquid
  • They do not appreciate, but their prices are determined by inflation; thus, as inflation goes up, their prices go up and a profit can be made that is hopefully worth more than the amount the money you are being paid has dropped
  • Somewhat risky. Crops are prone to flooding. Animals are prone to the FDA and CDC deciding they don’t like pigs, cows or chickens and shutting down those industries

Conclusion: these seem like good investments to look into, but it is likely that if our economy tanks too hardcore that Obama will fully nationalize these industries. Most of these already operate at a loss, and full nationalization would make them worse. In the meantime – if you are cool with spending the time it takes to be a speculator, then you can probably make money here.

Non-consumable Commodities like Gold, Silver, Gems, etc:

  • Highly illiquid
  • Only appreciate at the rate of inflation
  • Only risky if you think the economy will improve. Gold is purported to be in a bubble right now, but Silver is not. It is about where it should be, and it will be going into a bubble, or so I hear. Gems are extremely illiquid and their value depends on your bargaining skills.

Conclusion: this is the ultimate safe haven if you think the economy is doomed and our country is doomed. Keep in mind that if you have too much of this stuff, you make yourself a target road warrior!

Useful Stuff like cars, houses, tools, and parts

  • Semi-liquid
  • Barring strong deflationary pressures (like houses have now), these will appreciate at a lower rate as inflation
  • These are risky because these things depreciate in value with time, but if the economy tanks as hyperinflation takes root – these will sell for much more than you pay for them now and they are easier to get and sell than gold and silver.

Conclusion: these are good to get if you are very pessimistic about what will be coming in the next year. Instead, look at the next suggestion!

Your Skills Fool!!

  • ALWAYS LIQUID – if you have a skill people want you can sell it PERIOD.
  • Some skills appreciate, some depreciate – so you must hedge yourself by learning a wide array of them. If you are reading this, you have access to the internet – WikiHow to make some product everyone needs and LEARN HOW.
  • This is the least risky thing of all. If you go pick up some crappy tools at a swap meet and learn how to do some stuff that people want, then even if you don’t get hired you’ll be more useful and you will get value in that respect.

Conclusion: this is a must for everyone. You need to know how to do more than drive in rush hour traffic, answer a phone and e-mail, and eat fast food. If our economy rebounds, then you have a new skill that will save you money later – even if you end up hiring someone to do the work for you. You will be able to pick out someone who knows what he/she is saying from someone who does not. If the economy tanks, you can now do something people will need on the informal or “Black” market. Either way – you make and/or save money.

Categories: Europe, The USA

Buying Real Property

December 31, 2010 Leave a comment

I recently bought a house and I picked now to do it for a few reasons:

  1. Interest rates are low
  2. The Fed has just monetized $600 bn of US debt

One reason not to buy a house right now is:

  1. Housing is over a price sinkhole.

Now, reason #2 is a truly spectacular reason to invest in “real” property. This can be land, precious metals (especially silver), ammunition, seeds, etc – anything that you personally own that would be valuable to someone in a society where paper money is worthless. You have to actually have the commodity in your possession – not a voucher.

So why a house if they are over a sinkhole, and what do I mean when I say housing is over a price sinkhole? That’s two questions and I have two answers:

Why a house?

I bought a house because I can live in it and as money becomes worthless through massive inflation (due to monetizing the debt) I will be able to pay off the house very quickly with my worthless money. It is exactly for this reason that the government is taking the first steps to start hyper-inflation in this country to pay off its own debts. Also, inflation rates are set to rise all on their own. I do not believe the Fed will be able to lower them with any monetary tricks. This is because the bond market, which the Fed purchases US debt through, is going to hell when the US’s credit rating is lowered AGAIN (it was lowered earlier this year). In order to sell our crappy bonds, the incentives for someone to buy them will have to go up – that means higher interest rates. If nobody buys the bonds, then no money is raised. Therefore, the bond interest rates will go up and mortgage interest rates (which mortgages are a fairly large portion of what the bonds are based on apparently) will have to go up even more-so in order to cover. Right now the market for mortgages is very volatile.

What do I mean by “housing is over a price sinkhole”?

A marvelous combination of perverse incentives for banks brought to you by ridiculous regulation has caused a really spooky situation in the housing market. The prices appear to be stabilizing, but there are things afoot that will destroy them some more. I envision this like a house on top of a thin piece of crust over a sinkhole that is getting deeper and deeper. The people in the house don’t know it yet, but they will fall a long way when the crust finally breaks.

Here are the main ingredients:

Banks are insured for loans that default for the full remainder on the amount because the government has decided they are “too big to fail”. They don’t get this if they short sell or loan modify, so right now they face a situation where if a loan amount owed is for $200k and the property is now only worth $100k and they adjust to $100k or short sell for $100k they are out $100k. If, instead, they foreclose on it they get the full $200k and they can then resell it as a repo for $100k. They don’t want too many people to notice this – especially with new regulation committees that have sworn to give a shit watching – so they are letting people hang on and aren’t foreclosing as quickly as they could.

If they aren’t selling (and they aren’t much), and they aren’t modifying or foreclosing – the prices have pretty much slowed to a crawl on their downward trend. This lets the politicians say, “Look! Our bullshit Keynesian measures worked! Take that free market!” But in actuality, what they are doing is sending signals to homeowners that are underwater on their loans that it is ok to just stop paying their mortgages. This is a moral hazard because people are less afraid about being evicted than they should be. I say “should be” because what will happen is that the banks will foreclose on all of them at once, claim a massive loss, get bailed out by Congress again, collect their insurance payouts, and rake in massive profits while house prices plummet to new lows.

Now, you might ask, “Why don’t you wait until after that to buy a house? They’ll be cheaper then.” That’s true, but I don’t think they’ll drop more than $50k more and interest rates will have to massively increase for the bailout. So, I just borrowed $100k at 5% interest, but I could have waited and borrowed $75k (my guess) at 25 or 35% interest.

Another reason to buy a house is that money in the bank is useless now, and going to be even more useless in the next year or two when inflation explodes. A house has many uses that precious metals do not, and I’m sure I’ll find some sort of entrepreneurial use for it.

Categories: Europe, The USA

The Holy Church of Western Government

December 29, 2010 Leave a comment

The Socialist View of Government

In the beginning, there was government. Government created the Earth and Seas and animals and finally people. People, being foolish and too ignorant to know better, took some of the Earth away from Government. By doing so, they created more food and wealth than what Government had intended them to make and this caused their numbers to increase beyond that which Government deemed prudent. To solve this, Government created war and taxes to pay for it. Through war, the numbers of people would occasionally fall back to what Government deemed prudent, and through taxes Government could starve those that survived in order to keep them from reproducing too successfully.

Then some people took the power of invention away from Government and created specialization. This allowed them to live in cities, which Government liked because it made them easier to affect en masse, but then they started trading with their neighbors and learning things like medicine. This caused their numbers to once again increase. Government found it difficult to stop this since the people tended to get along well with the people they were trading with, so Government took control of another invention of the people – Religion. Using Religion, Government was able to divide the people and set neighbor on neighbor and incite hatred (even though Religion said that sort of thing was bad. Government was powerful enough to force Religion to collude). Government jealously took back the power of invention.

Then people got tired of killing because Government made Religion tell them to, and for a while they went back to trading. This cycled a few times before finally Government convinced the people that they didn’t need Religion to kill each other anymore. They could do it just to appease Government. Government gave the people invention back so that they could find ways of being more efficient in killing each other – and they did – but they also found other things they liked using invention, particularly more medicines and more things to make them live longer and better lives.  In a fit, Government convinced one group of people it was their Government Given Right to slaughter other people wholesale – and they did. Then, when people had gotten tired of that, Government let them take a break for twenty years and then had them do it again.

Recently, people have become tired of this again, and are taking a break. They haven’t had any other such wars since. Many people have died in wars, but by comparison they have all been small matters. Government is still angry about the number of people inhabiting the world, and it is grumbling again….

The devout priests of the Almighty Government (politicians) try to appease Government by feeding it more taxes and giving it more control over the peoples’ lives in return for the wealth and power that Government provides. They do this today as it always has been done since Government created the world. Occasionally, the people take some of this control away from Government by limiting what they give to the priests. Government, knowing they are foolish and ignorant, have the priests try to gently goad the people back into compliance by raising taxes and limiting their power to collaborate – and especially by limiting their power to trade. If this doesn’t work, then once again Government will have the priests use war to coerce the people back into adherence; while at the same time, killing as many as possible because it is Government’s belief that there are and always have been entirely too many people around.

Categories: Politics