The Basics!

I was going to jump into the topic of "California Exporting Pollution" but I think some economic foundation is in order . Before I start, I wanted to expand on my last post with my economic hero, Milton Friedman. Friedman was a nobel prize winning economist. His work spanned many economic disciplines; however, he was well known for his writings on free market economics and capitalism. I had the pleasure of meeting him on a cruise, no less! The cruise my wife and I were on happened to be the site of a National Review convention. Milton Friedman was one of the speakers. I approached he and his wife in the dining room, and timidly asked for his autograph. I explained my background, and he immediately began to tell me of his friendship with one of my previous professors at UC Davis. He was extremely kind and charming, and the world is a lesser place without him. I honestly believe the video I shared is one of the most succinct arguments for capitalism in existence.

On to the basics. Mind you, I'm dealing with "the dismal" science, so this is no easy task! My educational "chore" over the past 25 years, has been to try and condense complex economic theory into intuitive/relevant ideas for my students to "chew" on, and even apply. Economics is divided into two disciplines: microeconomics, and macroeconomics. I like to think of these in terms of questions. With macro, the question might be: "Is the US economy growing?" Or a more relevant macro question today: "Can/should the government help the economy grow?" A good micro question is: "why did hand sanitizer prices rise during COVID?" Macro = big picture, Micro = smaller economic picture. Let's start with micro. Microeconomics is rooted in individual choice! We do things which make us happy. What's interesting is that you and I don't have to like the same things for economics to work. You like sushi, I like steak, hence we have sushi joints and steak houses. One of the more interesting conclusions is the idea that as I do more of anything, it gives me incrementally less satisfaction. Try eating your sushi every night for a month, and see if the "Law of Diminishing Marginal Utility" doesn't stand up! By the way, economists are great at using big words to describe obvious observations! They also have an uncanny knack for burying simple economic ideas in the most complex math imaginable. While studying graduate economics, I had to audit a differential calculus class to understand the econ math!

News flash: I just finished the first episode of an economic podcast recommended to me. It sounded like both were economists debating the idea of "What would Keynes do..." in the face of our COVID devastated economy. I enjoyed listening; however, their academic arrogance, was soon apparent. They collectively chatted about Keynes desire for economics to point individuals to "the good life." The underlying assumption being that the masses have no understanding what the "good life" is; therefore, they need to be pointed in the "correct" direction by the economic "elite." In addition, my hero, Milton Friedman, disagreed with Keynes. Friedman went so far as to say that a completely free market would help eliminate racism. Now that's a relevant topic! He argued that a profit maximizing business would be hampered if it neglected to bring "valuable" minorities on board. If a valuable minority was instead hired by the competition, the racist firm would fall behind. Of course my two elite economists rejected his thinking out of hand! Not me however, because unlike the elites, I have spent time in the economic "trenches." Consider my experience! I deliver fuel and oil to farmers in the central valley of California. When I started in 1992, I realized that many of my customer's operations were managed by spanish speaking workers. I don't speak spanish, so what did I do? I hired spanish speaking truck drivers! The majority of my drivers are now hispanic. I consider this one of my most important decisions over the past 25+ years. Instead of deliveries being "lost in translation," the farm foremen send text messages directly to my drivers, en espanol, and the deliveries get made correctly. Had I been a racist, I would have missed out on a clearly "profit maximizing" move. I'm confident that some of my drivers make much more that many of you reading this blog. That makes me exceptionally proud. I want nothing more than for my first generation immigrant truck drivers to succeed in our economy. All of them are proud homeowners, which makes me proud as well. Does this prove Friedman right? Not exactly, because I am only one anecdotal data point, but to dismiss him out of hand is folly. Further study is obviously warranted here. I've included another video with Milton Friedman, thanks to my good friend who reminded me of it, John Barry. As you watch, consider how Friedman believed in the power of the marketplace in overcoming racism/hatred.

Back to microeconomics... A marketplace exists anywhere buyers and sellers come together. Ebay came along just in time for me as an educator. Suddenly explaining what a marketplace was and how prices move became much easier. Watching on Ebay as shortages developed and prices rose made my economic explanations easier. Covid has upended many markets, so I'll just pick just one to analyze.

I was completely annoyed at the onset of Covid because I couldn't find hand sanitizer for our operation. I was willing to pay almost anything, and finally Amazon came through. What the heck happened? Well, my friends, demand increased! In fact, demand exploded. We represent this with a rightward shift in the demand curve (See graph below). Since the supply curve is initially static, an increase in demand leads to an increase in price! I can't emphasise the power of supply & demand enough. It's the first thing that comes to my mind whenever I see any price changing. Now, what irritated me was that the government, and Amazon, were out patrolling for "price gougers." Economics tells us that hand sanitizer prices will rise, but not necessarily by how much! Who's to say that a 25% price increase wasn't entirely justified, but Amazon determined that 20% was too much. Hog wash! This my friends was authoritarian intervention in the free market!

I'm a visual learner and economic graphs completely mesmerize me (I know, I'm weird!). My technological skills hamper me here -- the only way I could figure out how to add graphs was to take a picture of a hand drawn graph and upload it. This will have to do for now. I've also included a "bonus" graph of the gasoline market (see note about wife below!)

I have to thank my wonderful wife, Kelly, for agreeing to be my editor. Upon reading my first draft, she said "you've got way too much information here!" The meat cleaver came out, and I hope you like what remains.