Archive for trade

Economics and Personality Types

August 6, 2007 at 4:15 am · Filed under housing, neoclassical, trade

Personality Type and Student Performance in Principles of Economics
I got this from Greg Mankiw’s blog, where he posted a fascinating e-mail from a medical student on economists’ behaviour. According to the study above, students with ENTP, ESTP and ENFP personality types tend to do worse in Principle of Macroeconomics courses compared to ISTJ type students.

Abstract: This paper explores the relationship between student’s personality types, as measured by the Myers-Briggs Personality Type Indicator, and their performance in introductory economics. We find that students with the personality types ENTP, ESTP, and ENFP do significantly worse in Principles of Macroeconomics than identical students with the personality type ISTJ. We also find that introverted students earn significantly better grades than identical extroverted students. When we include the temperament variables described in the work of Kiersey and Bates (1984) in our model, we find that NT and NF students perform significantly worse in Principles of Macroeconomics than their SJ counterparts. We also find that a student whose temperament type matches the class instructor’s temperament does significantly better in the class than a student whose temperament type does not match the instructor’s. We believe this provides evidence of the importance of matching a student’s learning style with a professor’s teaching style. In conclusion, we discuss many options for improving instruction in the introductory economics course by offering a variety of different teaching and grading strategies that will better accommodate our students’ diverse personality types and learning styles.

I can see why NT and NF students tend to do badly in economics classes – some parts of textbook economics are surprisingly counterintuitive. The principle of comparative advantage is the first that comes to mind – the vast majority of people who have never taken an economics class believe that if American (for example) companies are less competitive than Japanese firms, America is doomed, mass unemployment will follow and Japan will take over the world. The reality is that mutually beneficial trade can and will take place even if Japan is better than America in all aspects. Although the logic behind this is unassailable, it does assume that displaced workers will find new jobs quickly – an assumption that may not be as accurate as we had hoped.

Suppose there are only two countries in this world – Japan and America – and these countries produce only two goods – pizza and cars. Japan is better at making both pizza and cars. Although Japan has an absolute advantage in both industries, America and Japan can both be better off by specialising in the industry that they have a comparative advantage in (eg if America has to give up more pizzas to make cars, it should specialise in pizzas – and if Japan has to give up more cars to make pizzas, it should specialise in cars). Trade takes place and everyone is better off – except for the American car workers and Japanese pizza chefs who are now out of work. Sure, they can retrain themselves and find a job in the other industry – but how long will it take? If it takes too long, they might not bother to retrain and would prefer to drop out of the workforce altogether. Or some automobile engineers may really, really suck at making pizzas. This is an extremely simplified view of the world, and fortunately in the real world displaced workers can find jobs more closely related to their skill sets. But I think some economists underestimate the time needed to retrain and find a new job. Yes, everyone is, as a whole, better off with free trade, but there will always be some people who are adversely affected. I think some of the gains from free trade should be transferred to the structurally unemployed, to help them find new jobs.

I’m currently reading ‘Hidden Order: The Economics of Everyday Life’ by David Friedman, son of the late Milton Friedman. It’s the best primer on neoclassical economics I’ve ever read. I was taken aback when he introduced indifference curves in the first chapter – something we never learned in A-level economics. Usually pop economics books begin with the basic principles of opportunity cost and supply and demand, but not this book. There is so much that is counterintuitive in this book that I wonder if neoclassical economists are from a different planet altogether. So far, the one that stunned me the most was Friedman’s assertion that you will be better off no matter what happens to the price of your house – whether your house price goes up or down, indifference curves show that you will still be better off. What Friedman neglects to mention (perhaps to avoid overcomplicating things) is that in many countries, but especially the US and the UK, it is common for homeowners to take out a second mortgage on their houses for consumer spending. In a booming housing market, borrowing against your house is like turning a portion of your capital gains into cash – your house is now worth more, so you take out a second mortgage (you can get more cash now because the price of your house has appreciated), pay off your first mortgage and spend the rest of the money. If your house price falls, you’re in deep trouble – we have what is called negative equity, where your mortgage is worth more than your house. It happened in the UK in the early 1990s and helped exacerbate the recession at that time.

If we ignore the fact that US and UK consumers love borrowing against their houses, the indifference curve theory works. But can we really ignore it? The mass hysteria currently taking place in US credit markets thanks to subprime mortgages suggests otherwise. Perhaps this is why ISTJ students tend to do better than the intuitive/feeling types – when studying economics, be prepared to leave intuition and common sense at the door. Logic and mathematics, along with the many simplifying assumptions we must make, rule the day.

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The World is Not All That Flat And Never Will Be

July 7, 2007 at 2:53 pm · Filed under government intervention, trade

Note: In the course of writing this post I have contradicted something I’ve said previously. I am very inconsistent in my beliefs, and writing this has only made me more aware of how much I have yet to learn. This pro-trade post looks at free trade and globalisation from a very narrow point of view – that of the Common Agricultural Policy and the ‘dumping’ problem. I have a tendency to use human self-interest to explain everything – and this has made me aware of the glaring inconsistency in what I’ve written on this blog so far. In previous posts I lashed out at people who scorn government intervention; I criticize government protectionist policies in this one. I neglected the fact that governments are made up of normal human beings, who have, first and foremost, their self-interests at heart. I thought of deleting this post, since it is quite pointless, but decided to publish it in the end, because it’s important to record my thought progression throughout this project.

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Okay, I’ll admit this – I spend far too much time agonizing about poor jobless workers instead of using my brain to think about matters rationally. But let’s get something straight – the rational part of me (let’s ignore the emo-ing, menopausal part of myself) supports free trade. In theory. Why do I emphasize ‘in theory’? Because to me, trade with no barriers at all is impossible. It is politically impossible. Not everyone has studied economics, not everyone knows about Ricardo’s theory of comparative advantage. Some voters will always oppose free trade if it is in their interests to do so. Remember my previous post about how I oppose government price ceilings on roti canai but support government subsidies for multinationals, despite both price ceilings and subsidies being examples of market distortions? That’s exactly what I mean here. A dairy farmer in Europe will be delighted to buy cheap Dell laptops made in China (because he saves money), but will be incensed if the EU allows Australian dairy companies to export milk to Europe. You can’t expect him to sit back and say, “Oh yes, I must allow highly efficient Australian dairy farms to export milk to my country so that my fellow countrymen can enjoy cheaper milk, while I go out of business because I am less efficient than my Australian colleagues! I’m not worried because I can get a job driving a Fern-Leaf delivery truck! All hail the power of market forces!”

No rational dairy farmer would think like that, because as a profit maximiser (assuming he is one), his self-interests come first. You know what he’ll do? He’ll round up his fellow European dairy farmers, form a huge, powerful agricultural lobby and pester their politicians into introducing protectionist policies to prevent Aussie milk from ever reaching European shores. That’s the Common Agricultural Policy for you, which makes up almost half (or is it more than half) of the EU budget, and is one of the worst examples of trade protectionism around.

If we want free trade to work the way it should be, we should get rid of everyone’s protectionist policies. Not just those of the Third World countries, but those of the First World as well. But you see, it’s never going to happen as long as politicians are the ones determining economic policies. Politicians (well, the vast majority of them) always put their self-interests first. Just like normal human beings. It is rather unfair to expect anything more of them (of course there are a few exceptions, whom I fervently admire). The agricultural lobby is powerful and rich. They are some of the biggest political campaign donors out there. Do you seriously think politicians are going to bite the hand that feeds them? Get real. Yes, we know that free trade is not a zero-sum game. But as long as there are people who see it to be zero-sum, it will be. Why? Well, let’s take the Common Agricultural Policy again as an example. Under this policy, European governments set the minimum price for agricultural produce like milk, and it is illegal to sell produce below this price (not that farmers actually want to). When you raise the price of a good above its equilibrium price, you’re going to get a surplus – supply exceeds demand. Under normal market conditions, when a surplus occurs, the price of the good will automatically fall as farmers cut prices to sell more goods. Eventually a price will be reached at which supply equals demand – the market equilibrium price. All is at peace.

But under the CAP, governments guarantee that they will buy up any surplus produce from farmers at the artificially higher price set by them. For the farmers, it’s like winning the lottery. It’s no wonder that this encourages farmers to produce as much as possible, safe in the knowledge that all their produce will be sold, and for a handsome price too.

What happens to the surplus farm produce? That’s where ‘free trade’ comes in. The EU bullies hapless Third World countries into lowering trade barriers against EU farm produce so that the European governments can sell their excess produce to Third World countries – at a fraction of the cost price. This is called dumping, and it is responsible for driving many Third World farmers out of business. How can you possibly compete with EU farm produce that is sold below cost price? What’s worse, Third World countries are heavily dependent on agriculture – the effects of dumping can be disastrous for them, since their economies are mostly agriculture-based. At the same time, these poor countries are not allowed to export their produce to EU countries, because the EU imposes tariffs on them. Isn’t it nice to be a big and powerful country?

This is not a rant about how life’s a bitch and the world is so unfair. My point is that free trade as it is meant to be is impossible because the vast majority of humans have only their self-interests at heart. You could say that I have a fatalistic outlook on things. Not really. Perhaps if more people studied economics, if more people believed in the theory of comparative advantage, things will change. The key is to appeal to people’s self-interest – if people believed that free trade would benefit them directly, then they would support it. But there will always be losers from trade, and I’ll wager they’ll do everything in their power to stop it. What we could do is empower those who can benefit from free trade, give them a voice and hope they make more noise than the naysayers so that the politicians will sit up and take notice. Perhaps they know all about comparative advantage too – maybe even more than you and I. But they have an election to win, and that changes everything.

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