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Economics as a career
July 12, 2009 by admin · Leave a Comment
If you find yourself doing well in this course and discover that economics interests you, you may want to think about majoring in it. Graduating with a major in economics provides a variety of career choices. Many students go on to graduate school in economics, business, public administration, or law. Graduate M.B.A. and law programs find economics majors particularly attractive because of their strong analytical skills.
A graduate degree (a master’s or doctorate) in economics is typically required to pursue a career as a professional economist. About one-half of all professional economists are employed by colleges and universities as teachers and researchers. Professional economists also work for the government or private businesses. Most major corporations have a staff of economists to advise them. Governments employ economists to analyze the impact of policy alternatives. The federal government’s Council of Economic Advisers provides the president with analyses of how the activities of the government influence the economy.
Students who major in economics but who do not pursue graduate school still have many job opportunities. Because economics is a way of thinking, knowledge of it is a valuable decision-making tool that can be used in almost any job. Undergraduate majors in economics typically work in business, government service, banking, or insurance. Opportunities for people with undergraduate economics degrees to teach the subject at the high school level are also increasing. Arnold Schwarzenegger, Mick Jagger, and Ronald Reagan are among the long list of famous undergraduate economics majors!
The average salary of an economics graduate is comparable to that of finance and accounting graduates and is generally higher than those with management or marketing degrees. Professional economists with graduate degrees in economics who work for private business average approximately $90,000 per year, and those who choose to work as teachers and researchers at colleges and universities earn approximately $75,000 annually. Although salaries vary substantially, the point is that a career in economics can be rewarding both personally and financially.
Even if you choose not to major in economics, you will find that your economics cousses will broaden your horizons and increase your ability to understand and analyze what is going on around you in the worlds of politics, business, and human relations. Economics is a social science that often overlaps with the fields of political science, sociology, and psychology. Because the economic way of thinking is so useful in making sense of the world around us, economics has sometimes been called the “queen of the social sciences.” Reflecting this, economics is the only social science for which a Nobel Prize of the Swedish Academy of Science is awarded.
Association is not causation
July 12, 2009 by admin · Leave a Comment
In economics, identifying cause-and-effect relationships is very important. But statistical association alone cannot establish this causation. Perhaps an extreme example will illustrate the point. Suppose that each November a witch doctor performs a voodoo dance designed to summon the gods of winter, and that soon after the dance is performed, the weather in fact begins to turn cold. The witch doctor’s dance is associated with the arrival of winter, meaning that the two events appear to have happened in conjunction with one another. But is this really evidence that the witch doctor’s dance actually caused the arrival of winter? Most of us would answer no, even though the two events seemed to happen in conjunction with one another.
Those who argue that a causal relationship exists simply because of the presence of statistical association are committing a logical fallacy known as the post hoc propter ergo hoc fallacy. Sound economics warns against this potential source of error.
Good intentions do not guarantee desirable outcomes
July 12, 2009 by admin · Leave a Comment
There is a tendency to believe that if the proponents of a policy have good intentions, their proposals must be sound. This is not necessarily the case. Proponents may be unaware of some of the adverse secondary effects of their proposals, particularly when they are indirect and observable only over time. Even if their policies would be largely ineffective, politicians may still find it advantageous to call attention to the severity of a problem and propose a program to deal with it. In other cases, proponents of a policy may actually be seeking a goal other than the one they espouse. They may tie their arguments to objectives that are widely supported by the general populace. Thus, the fact that an advocate says a program will help the poor, increase wages, improve health care, expand employment, or achieve some other highly desirable objective, does not necessarily make it so. Let’s begin with a couple of straightforward examples. Federal legislation has been introduced that would require all children, including those under age two, to be fastened in a child safety seat when traveling by air. Proponents argue the legislation will increase the survival rate of children in the case of an airline crash and thereby save lives. Certainly, saving lives is a highly desirable objective, but will this really be the case? Some lives will probably be saved. But what about the secondary effects? The legislation would mean that a parent traveling with a small child would have to purchase an additional ticket, which will make it more expensive to fly. As a result, many families will choose to travel by auto rather than air. Because the likelihood of a serious accident per mile traveled in an automobile is several times higher than for air travel, more automobile travel will result in more injuries and fatalities. In fact, studies indicate that the increase in injuries and fatalities from additional auto travel will exceed the number of lives saved by airline safety seats. Thus, even though the intentions of the proponents may well be lofty, there is reason to believe that the net impact of their proposal will be more fatalities and injuries than would be the case in the absence of the legislation.
The stated objective of the Endangered Species Act is to protect various species that are on the verge of extinction. Certainly, this is a admirable objective, but there is nonetheless reason to question the effectiveness of the Act itself. The Endangered Species Act allows the government to regulate the use of individual private property if an endangered species is found present on OY near his or her land. To avoid losing control of their property, many landowners have taken steps to make their land less attractive as a natural habitat for these endangered species. For example, the endangered red-cockaded woodpecker nests primarily in old trees within southern pine ecosystems. Landowners have responded by cutting down trees the woodpeckers like to nest in to avoid having one nest on their land, which would result in the owner losing control of this part of their property. The end result is that the habitat for these birds has actually been disappearing more rapidly. As you can see, good intentions are not enough. An unsound proposal will lead to undesirable outcomes even if it is supported by proponents with good intentions. But economic thinking can help us avoid this pitfall.
The economic way of thinking
July 12, 2009 by admin · Leave a Comment
One does not have to spend much time around economists to recognize that there is an “economic way of thinking.” Admittedly, economists, like others, differ widely in their ideological views. A news commentator once remarked that “any half-dozen economists will normally come up with about six different policy prescriptions.” Yet, in spite of their philosophical differences, the approach of economists reflects common ground.
That common ground is economic theory, developed from basic principles of human behavior. Economic researchers are constantly involved in testing and seeking to verify their theories. When the evidence from the testing is consistent with a theory, eventually that theory will become widely accepted among economists. Economic theory, like a road map or a guidebook, establishes reference points indicating what to look for, and how economic issues are interrelated. To a large degree. the basic economic principles are merely common sense. When applied consistently, however, these commonsense concepts can provide powerful and sometimes surprising insights.
Scarcity leads to competitive behavior
July 12, 2009 by admin · Leave a Comment
Competition is a natural outgrowth of scarcity and the desire of human beings to improve their conditions. Competition exists in every economy and every society. It exists both when goods are allocated by price in markets and when they are allocated by other means-political decision making, for example.
How goods are rationed influences what competitive techniques people will use to get them. When the rationing criterion is price, individuals will engage in income-generating activities that enhance their ability to pay the price needed to buy the goods and services they want. Thus, one benefit of using price as a rationing mechanism is that it encourages individuals to engage in the production of goods and services to generate income. In contrast, rationing on the basis of first-come, first-served encourages individuals to waste a substantial amount of time unproductively waiting in line, while rationing through the political process encourages individuals to waste time attempting to influence the political process.
Within a market setting, the competition that results from scarcity is an important ingredient in economic progress. Competition among business firms for customers results in newer, better, and less expensive goods and services. Competition between employers for workers results in higher wages, benefits, and better working conditions. Further, competition encourages discovery and innovation. two important sources of growth and higher living standards.
Scarcity necessitates rationing
July 12, 2009 by admin · Leave a Comment
Scarcity makes rationing a necessity. When a good or resource is scarce, some criterion must be used to determine who will receive it and who will go without. The choice of which method is used will, however, have an influence on human behavior. When rationing is done through the government sector, a person’s political status and ability to manipulate the political process are the key factors. Powerful interest groups and those in good favor with influential politicians will be the ones who obtain goods and resources. When this method of rationing is used, people will devote time and resources to lobbying and favor seeking with those who have political power, rather than to productive activities.
When the criterion is first-come, first-served, goods are allocated to those who are fastest at getting in line or most willing to spend time waiting in line. Many colleges use this method to ration tickets to sporting events, and the result is students waiting in long lines (and sometimes even camping out overnight) to obtain tickets. Imagine how the behavior of students would change if tickets were instead given out to the students with the highest grade point average.
In a market economy, price is generally used to ration goods and resources only to those who are willing and able to pay the prevailing market price. Because only those goods that are scarce require rationing, in a market economy, one easy way to determine whether a good or resource is scarce is to ask if it sells for a price. If you have to pay for something, it is scarce.
Corporate and Individual Behavior
July 12, 2009 by admin · Leave a Comment
After this long and hopefully provocative introduction to the conflicts between economic efficiency and ethical considerations, this blog now offers thirty questions that have both ethical and economic consequences. Do not expect these questions to have clear answers. You may even find some of the expositions or scenarios to be not only controversial but outright offensive. Perhaps this is unavoidable to get you to consider ethics not just as “yet-another-exercise necessary to pass a class,” but as “food for thought.” To learn, it is essential that you discuss ethical dilemmas with your colleagues and friends. I promise that you will not only find the discussion entertaining, but that you will be shocked as to how widely differing their points of views will be.
For all of the scenarios that follow, it is important that you consider whether your answers depend on the following:
• if you have exclusive access to the economic resource in question. For example, are you the only producer of your product or the only available employer, or are there many standby alternatives?
• if the fact that others (e.g., your competitors) engage in the same questionable activity can excuse or mitigate your own ethical flaws.
• if you represent yourself or if you represent someone else—that is, if you are the sole owner of the company vs. if you are a part owner of the company vs. if you are an executive of a company.
Who you represent is an important “if.” By law, as a corporate executive, you have a fiduciary obligation to your shareholders. The seminal opinion on this subject was written by the New York Court of Appeals in 1984:
Because the power to manage the affairs of a corporation is vested in the directors and majority shareholders, they are cast in the fiduciary role of “guardians of the corporate welfare.” In this position of trust, they have an obligation to all shareholders to adhere to fiduciary standards of conduct and to exercise their responsibilities in good faith when undertaking any corporate action. Actions that may accord with statutory requirements are still subject to the limitation that such conduct may not be for the aggrandizement or undue advantage of the fiduciary to the exclusion or detriment of the stockholders.
The fiduciary must treat all shareholders, majority and minority, fairly. Moreover, all corporate responsibilities must be discharged in good faith and with “conscientious fairness, morality and honesty in purpose.” Also imposed are the obligations of candor and of good and prudent management of the corporation. When a breach of fiduciary duty occurs, that action will be considered unlawful and the aggrieved shareholder may be entitled to equitable relief.
Most economists and a number of courts have interpreted fiduciary responsibility to mean that managers must maximize shareholders’ profits to the best of their abilities.
• if you do not represent the corporate entity, but the government. That is, would you argue in favor of an action if you were a corporation that you would prohibit if you were the government? If you do take the stance that it is the role of the government to make rules and companies should be free to live inside the rules, then also consider also that companies are free to donate to politicians and lobby government—and many actively do so to influence governmental rules and legislation. Is the government a benevolent arbitrator, or a set of politicians willing to be corrupted?
• if the social cost to prevent an unethical behavior is too high. In some instances, it might require an Orwellian police state to prevent a non-desirable behavior. In other cases, “paying to prevent bad behavior” may also create bad incentives for future bad behavior that tries to obtain such payments in the first place.
• if you do not represent either the corporation or the government, but your faith’s religious institution. How do you reconcile your economic views with your religion’s ethical views?
Another interesting question is whether you consider the ethical dilemma to be rare or common, and whether you believe it to become more or less common in the future.
Each of the scenarios below is followed by some additional questions, often more specific than the above considerations. These additional questions are not replacements for the above set of questions.
You cannot possibly cover all 30 questions in an introductory finance course. In fact, you may not be able to discuss more than one or two points per class session. Given time constraints, to help you make a choice among the questions, I have marked some of the more important cases in bold and with an extra bullet.
Separating Economics and Ethics?
July 12, 2009 by admin · Leave a Comment
The clearest explanation of the role of economic efficiency that I know of comes from an anecdote about a press conference held by Robert Fogel right after his 1993 Nobel Prize was announced. During the press conference, a reporter expressed outrage. One of Fogel’s controversial hypotheses was that slaveholders had limited their abuses of slaves, because slaves were valuable economic resources. Fogel asked the reporter whether a relative of the reporter had passed away. The reporter answered that his grandmother, indeed, recently had. Fogel then asked the reporter why he had spent thousands of dollars on funeral expenses, when economic efficiency would have suggested selling the corpse as dog food. Of course, Fogel’s goal was not to suggest more efficient methods for corpse disposal, but to point out that, just because an action is economically efficient and just because someone explains that an action aids economic efficiency does not mean that the action should be adopted. Economic efficiency is only one side of the coin. Never forget this! In these two cases—slavery and corpse disposal—efficiency seems like an entirely unimportant point. Incidentally, Fogel’s hypothesis is also just that—a hypothesis, not a fact. Given ample evidence of severe abuses, it may be difficult to believe either that slaveholders limited abuse, or, even less credibly, that slavery was an efficient means of production.
A good economist’s argument that counters many “ethical appropriateness” considerations is that it is better to first achieve the economically most efficient solution, and then use the money thereby saved/earned later for “better purposes.” In the reporter’s case, it might mean a cheaper funeral and donation of the saved money toward causes that grandma would have liked.
The same suggestion of “efficiency first, charity separate and later” appears in many economists’ A living wage?
arguments. For example, in Scenario 24 on Page 182, we consider the living wage, which is the salary necessary to maintain an average family. Assume that paying above minimum wage gains you no extra economic benefit, and assume that there are more than enough applicants to allow you to pay minimum wage. Should you pay a living wage to your employees? If you do, your firm’s profits will be lower. Your products may become more expensive. Your firm may lose market share, or even go out of business. So, most economists would suggest that you should pay market wages (minimum wage), and then spend the earned profits in a lump sum transfer payment to the most deserving causes (e.g., the poorest people and/or most deserving workers).
But unfortunately, our economists’ solutions are not as idyllic as we like to suggest. First, virtually every transfer creates allocation distortions and distorted future incentives. If paid once, why would it not be paid again? In the real world, there are no non-distortionary lump sum transfers. Second, who are the most deserving recipients? Your poor workers? Poorer non-workers? Even poorer people in the third world? There is good evidence that too many choices lead to “no-choice.” Indeed, in the real world, the economists’ voluntary lump sum transfers usually just do not occur.
An Insider Trading Case With Twists and Turns
July 12, 2009 by admin · Leave a Comment
Let us dive into a case in which all sorts of interesting economic and ethical issues arise. On Christmas 2002, Sam Waksal, CEO of ImClone, learned about negative interim F.D.A. test results on ImClone’s promising cancer drug Erbitux. He promptly informed his family before the test results became public knowledge, who sold their shares and thereby avoided millions of dollars of losses. In 2003, Waksal was indicted and sentenced to 7 years in jail for insider trading. (Ironically, the interim results only caused a delay. Waksal’s Erbitux seems to work and will probably save thousands of lives.)
Economists are divided on whether insider trading should be prohibited. First, informed trading aids market efficiency: it moves stock prices more quickly towards their correct values. Second, the zone between what constitutes illegal trading based on inside information vs. legal trading based on superior business knowledge can be rather gray. Third, the social cost of making sure that inside information neither leaks nor is exploited is very high, and we currently criminalize even many innocent slips.
But ignore for a moment whether insider trading should be legal or illegal. What is the right penalty for this currently illegal activity? Sam Waksal is one of the world’s top biotech experts. Some patients consider him a saint, though perhaps one with mild flaws, because his work has saved the lives of thousands of people. His incarceration will slow down the ongoing work of ImClone—a fact that could cost the lives of thousands more people who will no longer be able to benefit from what Waksal might yet have done. (What if Waksal’s efforts had saved or could save you or a family member?) Is it better to allow Waksal to forfeit a part of his fortune and thereby stay out of jail? The victims of his insider trading (the shareholders who bought the shares at too high a price) could be made better off. Cancer patients could be made better off. And Waksal would be made better off.
But there are problems with the financial penalty suggestion: If forfeiture became the sole legal remedy, would this be enough to deter future offenders? Could future insider traders avoid penalties if they sheltered their fortunes in shell companies? Would companies just make up the penalty for executives convicted of insider-trading?
More generally, should richer people, or people who have contributed more to society, or people who would contribute more to society (an economic gain that incarceration would destroy), be allowed to pay in order to get away with actions that others cannot get away with? We already can see some of this differentiation today: bail is more easily met by wealthier people, and many penalties come in the form of a choice to the offender: pay X dollars or go to jail. So, should we go so far as to allow richer people to commit crimes if this “can make everyone better off,” e.g., if we then had them pay ample compensation to the victims? What if they commit parking violations? breach of contract? speeding? fraud? rape? second-degree murder? first-degree murder? Where do we draw the line? (Consider that the victims could receive a lot of money that they might not otherwise receive. And consider that you could be the victim!)
Enter the Rate of Change Indicator
June 26, 2009 by admin · Leave a Comment
The rate of change indicator certainly proved its worth between 1995 and 2004. For starters, in its patterns of movement, the indicator clearly reflected the A-B wave sequences that took place during this period. Rate of change measurements frequently provide advance notice of market reversals, reversing direction before rather than after or even simultaneously with the trend of stock prices. As a general rule, rate of change indicators peak approximately 50-65% into a market upswing. The area at which these indicators turn down is an area in which it is probably too late for buying, possibly a touch early for selling; this is an area during which it might be appropriate to prepare for the next downside move.
As you can see, every cyclical peak that took place between 1995-2000 was presaged by a negative divergence, with prices rising to new highs, the rate of change indicator turning down to reflect diminishing upside price momentum. This characteristic, in reverse, was also present during the market declines of 2000-2002, with cyclical market lows characterized by advance positive divergences and the rate of change indicator reversing to the upside as prices moved toward their final lows. The 50-day rate of change indicator provided a fine notice of market rallies that developed in late 2001 and 2002.
Investors received clear notice of market recoveries that took place based upon the 18-month cycle, notice provided by the cyclical lengths and by the action of the 50-day rate of change indicator.