Tom Woods and I Take on Alexander Hamilton via Krugman
The latest episode of Contra Krugman.
Are Economists Wrong When They Solve the “Firm’s Problem”?
Thanks to those who chimed in for my test question in a previous post (which you will need to review if you want to understand the present post).
So, people agreed with me that in the question I reproduced, the “correct” answer was to have each type of firm maximize profit, meaning the actual amount of dollars.
Then, to answer the second part of the question, you figure out how many firms go into wheat vs. corn production by seeing what number n makes wheat producers earn (roughly) $2 profit just like the corn producers do. (It’s not exactly $2 profit for the wheat producers, but if one more corn producer jumped in then the profit of wheat producers would be lower than $2.)
Now, here’s what’s weird: At the “equilibrium” n, you’ve got (as we said) corn and wheat producers earning (about) $2 profit each. But, they don’t hire the same number of laborers in order to produce that outcome. So that means one type of producer earns a much different *rate* of return on invested capital than the other. So how is this an equilibrium outcome?
(NOTE: I think I know the answer, but I’m just explaining the apparent problem in the way we economists typically solve one of these problems. We have the firm maximize the absolute dollars of profit, when we know in real life investors would shift into an industry where the *rate* of profit is highest. Nobody cares about the dollar-amount of profit, irrespective of how much you need to spend upfront on factor inputs. So, to repeat, I think I know how to resolve this apparent tension, but I will wait to see what others think before I chime in.)
A Possible Flaw in the Way Economists Typically Solve Problems
I was helping some students study for an exam–the thing I was best at in my life was taking tests, so I always find ways to go back to that activity–and I encountered what may be a subtle inconsistency in the way economists typically solve these types of problems. But, before I decide whether I’ve actually stumbled on something worth pursuing, I first want to make sure other professional economists went down the same path I did.
So, in the comments, if you want to participate please tell me whether you have a degree (and what level) in economics, and then what you think the answers are to the questions.
THE QUESTIONS
There are 1,000 firms. Each firm must decide whether to produce corn or wheat. For firm i, the production function for corn is given by:
C_i = 2L_i^(2/3)
where _ denotes subscript and ^ denotes exponentiation. L_i is the number of units of labor hired by firm i.
For wheat the production function is:
W_i = ( 160L_i^(1/2) ) / n
where n is the number of firms who have chosen to go into wheat production.
The market prices for corn and wheat output are $3 and $5 per unit, the wage rate for labor is $4, and the interest rate is 10% per year. Each firm is a price taker in whatever line it goes into.
==> Calculate the profit-maximizing levels of output for a corn- and a wheat-producing firm, respectively.
==> In equilibrium, how many of the 1,000 firms will go into corn and how many into wheat production?
Murphy Twin Spin
==> An interview on anarcho-capitalism and the liberty movement.
==> My talk on taxes in Bratislava:
Outrageous Rulings in the Silk Road Trial
I have seen Lyn Ulbricht, Ross’ mom, give talks on how her son got railroaded in the “Silk Road” trial a few times. After the most recent one in San Antonio, I realized that a lot of libertarians probably aren’t aware of these details. Regardless of what you think about Silk Road, this is pretty jaw-dropping stuff. I think the 8-minute video below strikes the right compromise between details and your scarce time.
The Problems With Carbon Tax “Border Adjustments”
This is counterintuitive for even academic economists, so if you’re into this stuff, don’t miss it. Here’s a key part:
The RFF [Resources for the Future] study does not so much come down against the use of border adjustments to mitigate the problem of “leakage,” but rather the authors are pointing out that economists have not yet fully recognized just how complicated the problems are. “Intuitive” results may in fact be wrong.
It would take too much space to fully summarize their various arguments, but let me at least give a flavor. In the first place, it makes a difference whether the underlying carbon tax (which is only imposed by some governments) is levied on extraction, production, or consumption. If some governments impose a tax on the extraction of carbon-intensive fuels, then the global (pre-tax) price of energy rises. This causes fossil fuel production to increase in non-carbon-taxing jurisdictions, which is a form of leakage on the supply side.
On the other hand, if a carbon tax is imposed by some governments on consumption, then the global (pre-tax) price of energy falls, which induces more consumption of fossil fuels in the non-carbon-taxing jurisdictions, which is a form of leakage on the demand side.
Already we can see that different governments would collect different amounts of revenue based on the form of a carbon tax, and that these different forms would induce different worldwide effects. In principle, border adjustments could help offset this leakage.
However, once you begin formally modeling these processes, you see that all kinds of outcomes are possible. For example, the authors can construct a scenario in which a country with large oil and gas resources and a domestic carbon tax on production would hurt the welfare of its people if it then added border adjustments, even though one might have originally thought that such an adjustment could only make things better.
(To give some of the details: This outcome could occur because initially, before the border adjustments, the government is implicitly getting foreigners to shoulder some of the cost of its domestic tax, due to the higher world price of energy that even foreign consumers must pay. But with border adjustments, energy can continue to flow to consumers in non-taxed jurisdictions with no impediment, and so there is no reason for their price of energy to rise. Therefore, once the border adjustments have been added, the taxing government is concentrating the brunt of its tax on its own people. Given that the government is going to levy a domestic carbon tax, then, in this scenario we can see that adding border adjustments makes its own citizens poorer.)
Airbnb: Regulation Without the State
My latest at FEE. An excerpt:
If potential renters had perfect information and deliberated over such decisions with the discipline of a samurai, there would be little need for external rules or regulation. Owners could offer rooms of varying attributes (including price), and each renter would pick the option that he or she liked best. There would be no surprises or regret.
In reality, it is difficult for renters to ascertain whether a room in another city has cockroaches, or the likelihood that one’s car will be stolen if parked outside that building. Furthermore, some people might not have the willpower or wisdom to pay $1 more for a room that has a smoke alarm, rather than a cheaper room that is a death trap in the (unlikely) event of a fire. In this world, we can imagine that without regulation, renters might end up in less desirable rooms than they’d been expecting and would occasionally realize they had made a foolish mistake by not paying enough attention to a certain risk.
Murphy Twin Spin
==> My appearance on the “Reinvent Money” podcast.
==> At Lara-Murphy.com I show that Japan has been shedding Treasuries a lot more than China.
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