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October 25, 2024

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Adam Smith's Pin Factory

August 28, 2024

Adam Smith - Our Founding Father ADAM SMITH VISITS A PIN FACTORY Adam Smith’s description of a pin factory is on the first page of The Wealth of Nations . (Chapter 1 – “Of the Division of Labour”) Drawings of pin factories of this period show workers using hand tools. Smith says the process can be broken down into 18 distinct steps, including packaging the pins. Smith mentions that pin factory workers were poorly paid, despite their high productivity. Adam Smith says he visited a pin factory employing 10 men who produced 48,000 pins per day. If each of the ten workers had done all the steps themselves, Smith says each worker could produce only 10 or 20 pins per day. So the pin factory replaces 2,400 to 4,800 pin makers. The increase in labor productivity (output per person per day) is as high as 50 times that of individual pin makers. This reduction in unit cost or average cost (AC) and the huge i...

Bilateral Oligopoly

May 09, 2024

The best movie about the Gunfight at the O.K. Corral is titled My Darling Clementine. A great western - great cast, great photography. DEFINITION OF A BILATERAL OLIGOPOLY Models of market structure assume that the demand side is represented by a large number of buyers. The structure of the market, and the assumed market outcomes, depends on the number of suppliers and how they compete. Suppliers either post one price or exploit their knowledge of buyer categories by using price discrimination. Despite the comments about the key role of consumers in determining economic performance, consumers are fairly passive when the discussion focuses on imperfectly-competitive industries. But many markets are not structured this way; the buyers are not passive consumers but large corporations that do not passively accept suppliers’ prices. Net prices are actively negotiated. These markets are often bilateral oligopolies. In a bilateral oligo...

The Stock Market Crash of 1929 and the Beginning of the Great Depression

November 29, 2018

Famous Headline Introduction The usual reasons given for the Great Depression – the stock market crash of 1929 and the later collapse of the banking system – do not tell the whole story. Available economic data indicate (there were no national income accounts in 1929) that a recession had already begun before the stock market crash. The crash of October and November of 1929 was a catalyst that made the recession worse but the partial stock market recovery in early 1930 did not end the recession. Industrial production continued to fall quickly and unemployment rose rapidly in 1930. Continuing farm and businesses failures over the next two years wiped out thousands of small rural banks and threatened total financial collapse in early1933. For a fuller explanation, we have to go back to the 1920s to see additional reasons for the origins and the rapid decline in output at the beginning of the Great Depression. We have to look at the int...

Explaining Derivatives - An Analogy

November 28, 2018

You go around to farmers with cows. You buy all the cows and pay the farmers a small fee to milk the cows and sell the milk. You pay for the cows with ass(et)-backed securities called MBSs (Milked Bovine Securities) that you tell investors are udderly safe. But some of the cows don't give enough milk (cow flow problem) or give no milk at all. You take some of the asset-backed securities, say they're backed by the subprime cows, and use them as collateral to sell another set of securities called CMOs (Cow Milk Obligations). Then you buy CDSs (Cow Dried-up Swaps) from AIG (Angus Insurance Company) to insure the CMOs when the cows stopped giving milk. If you work it right, you collect more on the CDSs than you pay out to retire the CMOs. The money you get from selling the dead cows go to pay the CLOs (cow leather obligations). You could also sell CDOs (cow dung obligations) that depend on how much cow dung is produced. This is a typical Wall Street product - turning sh...

Government Finance 101. Fiscal Policy: Welcome to Alice in Wonderland

October 12, 2024

PRELIMINARY SUMMARY OF FISCAL 2024 BUDGET The deficit in fiscal 2024 was around $1.8 trillion, about $5.0 trillion in revenue and $6.8 trillion in expenses. Interest on the national debt this year is around $960 billion, over twice the interest on the fiscal 2021 budget. Interest expense this year passed outlays for the military. Leaving aside Social Security and Medicare, interest expense is about 20% of total budget outlays. Interest expense is about half the budget deficit. The fiscal 2024 deficit was 6.4% of GDP. SOME BASIC DEFINITIONS AND A LITTLE DETAIL Some basic definitions for people in government suffering from political amnesia: Deficit. The difference between the federal government’s spending and its revenue in one fiscal year. The fiscal year starts on October 1. So fiscal year 2024 started on October 1, 2023. You know right away this is going to be confusing. Debt . Short for national debt or ...

John von Neumann Sees the Future

November 10, 2018

John von Neumann JOHN VON NEUMANN CREATES THE FUTURE If you want to understand the world we live in, you have to know about the thinking of three men – Alan Turing, Claude Shannon and John von Neumann. I’ve talked a little about Alan Turing in an earlier essay. All three men knew each other, discussed their ideas with each other and promoted each other’s ideas. John von Neumann has been called the smartest individual of the 20 th Century. Even an outline of his accomplishments, which you can read about in Wikipedia, is hard to believe. He invented game theory, which I discussed in two earlier posts. He headed up a group of mathematicians who invented new statistical techniques at Los Alamos that made the atomic bomb possible. In 1944, he wrote a memo that outlined the structure of the modern computer. He then managed the design and building of a modern general computer and consulted on the building of virtually all ...

Josiah Wedgwood, the Wedgwood Pottery Company, and the Beginning of the Industrial Revolution in England

April 12, 2020

Wedgwood Anti-Slavery Cameo A better introduction to the beginning of the Industrial Revolution than Adam Smith is the history of Josiah Wedgwood and the Wedgwood Pottery Company. This is how one company actually ushered in the Industrial Revolution. The revolutionary generation that first adopted steam engines saw the following trends and changes: Manufacturing was being modernized by a small group of entrepreneurs. Much of the new raw material processing and manufacturing was concentrated in a small area in the middle of England, away from London. These modernizing entrepreneurs formed a new economic, intellectual and social network. Modernizing entrepreneurs like Wedgwood tended to be members of Dissenting sects (like Quakers) or Nonconformist churches (not members of the Church of England), Whigs (liberals) in politics, and believers in “progress.” They were optimistic about the future, influenced by the ideas of Hume, Rousseau, Locke and Adam Smith. They believed...

The Roman Republic Commits Suicide: A Cautionary Tale for America

June 04, 2021

Roman Legion Why Study Rome? Americans have focused on comparisons between Rome and America twice in American history. The first time was during the period from before the Revolution to after the ratification of the Constitution and Bill of Rights, when the founding fathers and others looked to the Roman Republic for ideas and inspiration on how to structure the new government. After the American Revolution, the founding fathers, having read the Roman authors detailing the collapse of the Roman republic, worried about internal threats to the survival of their new republic. The second time was when the United States became a superpower, especially after WWII, and then again after the collapse of the Soviet Union in 1991. Commentators compared America to the Roman Empire at the height of its power. There was some discussion about how America became a permanent warfare state and how it affected domestic democracy and civil society. ...

“Pax Americana”: The World That America Made

November 24, 2018

There are two kinds of empires: the kind that rules through ruthless exploitation, and the kind that seeks to induce allies into defending themselves through economic incentives. (George Friedman) INTRODUCTION America's power and influence in the world rests on three broad, interrelated bases: 1) Overwhelming military power that can be projected anywhere in the world, supplemented by security arrangements with allies and supporters. 2) A large, innovative, dynamic domestic economy as the basis for global economic and technological leadership. The economy provides the resources and technology to support the military and a global foreign policy. 3) Claims to moral and ideological leadership and influence, particularly the promotion of liberal democratic societies and supporting political institutions. This post will discuss the economic aspects and related security objectives of American foreign policy. It will focus on the structure of the global...

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