Tag Archives: Conspiracy Theories

What determines the prices of goods and services in a market economy?

Basic Economics: Prices are set by supply and demand
Basic Economics: In a free market, prices are set by supply and demand

A few days ago, I posted the meme above on the blog’s Facebook page. The meme makes fun of unionized public school teachers, who feel entitled to the same salary and benefits as doctors, software engineers, etc. in the private sector. I thought that all Americans were familiar with basic economics. But judging from some of the comments to the meme, that is not the case. This post will help.

So, the point of this meme is simple, it’s to point out that the teachers who belong to teacher unions are ignorant of basic economics, specifically, the law of supply and demand. As we’ll see in a minute, this is literally lesson 1 of Economics 101.

When there is more demand for a product or service than there is a supply for it, then prices go up. When there is more supply for a product or service than there is a demand for it, prices go down.

A good place to see this explained is in a book by famous black economist Thomas Sowell. Thomas Sowell has written many books, but he wrote one book in particular for people who have no knowledge of basic economics. It’s called “Basic Economics: A Citizen’s Guide to the Economy“. And the first few chapters explain how prices are set by supply and demand:

  1. What is Economics?
  2. The Role of Prices
  3. Price Controls
  4. An Overview of Prices

Most people who commented on the meme had some knowledge of basic economics, and how prices are determined.

Here’s Bruce:

Wages–the prices of labor–are set by free people bidding in an open market for the labor of people willing to work. They are not set by an emperor weighing abstractions. There are 3.7 million teachers working in the US, and only about 5000 professional athletes.

And Chris:

My coworkers and I (we are fintech people with highly specialized knowledge and computer skills) were talking about some computer-related consultants who are so specialized and so good that they command hundreds (if not thousands of dollars per hour). The top of the top cyber security guys, who do presentations at conferences on threats and vectors? Yeah, thousands if not tens of thousands of dollars per hour.

So far, so good. But others argued that the prices of goods and services are determined by a sinister cabal of politicians and other elites, who paid athletes lots of money in order to distract the masses with “bread and circuses”. Now, I know what you’re thinking. How does paying athletes MORE get people to care about sports? It doesn’t. Actually, it’s the (widespread) demand to see the performance of (scarce) elite athletes that causes the wages of those athletes to increase. It’s not a conspiracy – it’s free people making choices about what they want to buy in a free market.

It turns out that there are two views of how wages are set in an economy:

The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of “socially necessary labor” required to produce it.

LTV is usually associated with Marxian economics… The LTV is central to Marxist theory, which holds that the working class is exploited under capitalism, and dissociates price and value. Marx did not refer to his own theory of value as a “labour theory of value”.

Mainstream neoclassical economics tends to reject the need for a LTV, concentrating instead on a theory of price determined by supply and demand.

Marxists economists believe that the value of a good or service is determined by the social utility of the work produced. But classical (“free market”) economists believe that value is determined by the scarcity of the good or service relative to the demand from consumers.

So, a Marxist economist might say “teaching English is valuable because it is relevant and meaningful”. But, a classical economist would say “conducting a security audit on distributed point-of-sale system is valuable, because few people can do it, but many people want it”.

So, the conspiracy theorists view of economics, which asserts that teachers should be paid more than software engineers and doctors, is actually based on Marxist (atheistic) assumptions. And yet many of the people who hold to the conspiracy view of prices fancy themselves to be Christians and conservatives.

I’ve noticed that school teachers and non-STEM university students and professors are very likely  to hold to the conspiracy theory view of prices and wages. Robert Nozick wrote a paper about why this happens. It turns out that “wordsmiths” (his word) are conditioned by their performance in the classroom to expect success in the free market economy. But when they find that their “brilliance” in English poetry, Medieval history, or lesbian dance theory has no value to anyone else, they fall in with these Marxist assumptions and conspiracy theory views of the economy. It’s a coping mechanism for people who value academic acclaim more than doing something useful for their neighbors.

Consider this article from College Pulse about a survey of 10,590 undergraduate students:

Students with certain majors are far more likely than their peers to approve of socialism. Philosophy majors, in particular, have a positive view of socialism. Nearly 8 in 10 (78%) say they view the economic system favorably, followed by 64% of anthropology majors, and 58% of both English and international relations majors. Accounting and finance majors are least likely to view socialism positively (20% and 22% respectively).

Do you know what accounting and finance students have to study? Basic economics.

I noticed that the practical commenters who were trying to explain why teachers earn less than software engineers all had some experience working for a living in the private sector. A couple of them mentioned how studying economics on their own had led them to a correct understanding of how the economy works. That’s what happened to me, as well.

As soon as I got my first job as a software engineer, and finished my study of Christian apologetics, the very next thing I studied was economics. It was Dr. Jay Richards who got me interested in it, when I heard him speaking about economics in an apologetics lecture for Stand to Reason. I contacted him, and he recommended the works of two famous economists, F. A. Hayek and Thomas Sowell. And that’s what I want to recommend to you, too. Our continued liberty and prosperity depends on ordinary Americans taking the time to educate themselves about basic economics.

Ron Paul ends CNN interview about his controversial newsletters

Video here:

Here’s a video of Ron Paul promoting the newsletters in 1995.

The conservative Weekly Standard has more about the Ron Paul newsletters.

I have to be diplomatic about this and not comment, but I think that this revelation is good for the Republican party. I recommend that Ron Paul voters look into backing Michele Bachmann, which gets you all of the conservatism, but without the conspiracy-theory baggage. If electability is a concern, then we should be looking to Newt Gingrich.

MUST-READ: Correcting the economic myths that liberals/leftists believe

Here’s a nice New York Post. (H/T Mary)

Full text:

According to Barack Obama, “The arguments of liberals are more often grounded in reason and fact.” But according to Margaret Thatcher, “The facts of life are conservative.” Who’s right?

Myth: The deficit was caused by Bush’s tax cuts.

Fact: For over four decades, 1960 through 2000, federal revenues averaged 18.2% of Gross Domestic Product and the trend was virtually flat. The final Bush tax rates became effective in 2003. In 2006 and 2007, well after the new tax rates were in effect, federal revenues were 18.2% and 18.5% of GDP, above historical levels. The federal government collected over half a trillion dollars more in 2007 than it did in 2000.

Myth: Republicans spent like drunken sailors.

Fact: Federal spending from 1960 through 2000 averaged 20.3% of GDP, with a slightly upward trend. The average over all Bush years, 2001 through 2008, was 19.6% of GDP – below the historical average. The 2001-2008 average deficit was also below the 1960-2000 average.

Myth: Republicans exploded the federal debt.

Fact: Per the US Constitution, “all bills for raising revenue shall originate in the House of Representatives.” Democrats controlled the House from 1955 through 1994, leaving the federal debt held by the public at 49.2% of GDP. Republicans then controlled the House from 1995 through 2006 and left it at 36.5% of GDP — below the level left by Democrat Congresses.

At the end of Bush’s presidency the debt was 40.2% of GDP. Now, two years post-Bush and four years of a Democrat Congress, the debt is 64% of GDP, the highest it’s been since Harry Truman was paying off World War II.

Myth: The deficit is due to the Iraq War.

Fact: The Congressional Budget Office calculated that the Iraq War cost $709 billion from 2003 through 2010. Total federal deficits over those eight years added up to $4.944 trillion, with the bulk of that ($2.968 trillion) added in just the last two years, after Bush was out of office.

By contrast, federal spending on education over 2003-2010 was $792 billion, and Obama’s stimulus will cost $814 billion. How often do you hear that our deficit problem was caused by education spending?

Myth: The Reagan and Bush tax cuts only benefited the rich.

Fact: According to the CBO, “The lowest three income quintiles have seen declines in their average tax rates since the early 1980s .¤.¤. The average tax rate on the top quintile has fluctuated more, with periods of increases and decreases, and was somewhat lower in 2007 than in 1979.”

In fact, the top quintile (top 20% of taxpayers) paid about 25% of its income in federal taxes in 2007, about the same as it did in 1982. By contrast, the middle and bottom quintiles paid less than 15% and 5%, respectively, both lower than at any time since 1979. The bottom two quintiles had negative average income taxes – they received more in tax credits than they paid in income taxes. Per the CBO, “In 2007, about 35 percent of households did not owe any federal income taxes.”

Myth: The deficit is due to military spending.

Fact: If federal military spending had been eliminated in its entirety in 2009, the deficit would still have been $776 billion, a historical high. Defense spending is less than one fifth of the federal budget and less than 5% of GDP. When the economy was doing quite well in the 1960s, defense spending was twice as high in those terms. In fact, President Bush presided over smaller defense budgets (as a fraction of GDP) than all presidents from 1941 through 1993.

Myth: “The last eight years,” “the last ten years,” “the last decade,” “the lost decade.”

Fact: From 2000 through 2007 real GDP grew 2.4% annually and real disposable personal income grew 2.8% annually. The economy added 5.5 million net new jobs in those years. The unemployment rate stood at 4.4% in May 2007, just before the newly elected, Democrat-controlled Congress raised the minimum wage.

From August 2003 through December 2007, over eight million net new jobs were created.

Fiscal year 2007 was the last one under a federal budget written by a Republican-controlled Congress, and marked the peak in real GDP, jobs, and the stock market. The bad economy of the “last ten years” was all in the last three years – under federal budgets written by a Democrat-controlled Congress.

Myth: Bush deregulated banks, causing the financial crisis. Fact: President Bush did not deregulate banks, or much of anything else. He increased staffing and spending on economic regulation more than President Clinton did. The number of pages in the Federal Register averaged more in Bush’s first term than at any prior time in US history. He signed the Sarbanes-Oxley Act of 2002, the most sweeping regulation of business since the New Deal.

The New York Times, no cheerleader for President Bush, said in 2003, “The Bush administration is rightly pushing for the Treasury Department to regulate the two giants [Freddie Mac and Fannie Mae], along with the network of federal home loan banks.” It was Barney Frank and other Democrats who helped kill such regulation. Frank said, “These two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis.”

Not a Myth: The above facts are matters of historical record. The sources of many myths are computer models rather than results from the real world. Remember the economic model that said the unemployment rate would not go above 8% if Obama’s stimulus was passed? The stimulus was passed, yet the unemployment rate went above 10% and has been above 9% for the last 19 months.

The models that say extending today’s tax rates would add to the deficit assume that tax rates have no effect on taxpayer behavior. That is an assumption virtually all economists, and most non-economists, know is false. Yet Congress requires the CBO to base its predictions on that bogus assumption.

The reality is that government spending is the problem. It is absurdly above historical levels right now and is unsustainable. It is driven by payments for individuals (64% of 2010 federal outlays) and entitlements, especially health care spending. ObamaCare did not bend the health-care cost curve down, either; it bent it up.

We have to go with Margaret Thatcher on this one.

What a great find by Mary!

Let’s re-post a Margaret Thatcher video and bask in her glorious competence and intelligence.

[youtub=http://www.youtube.com/v/okHGCz6xxiw]

She had a background in the hard sciences, like Angela Merkel, another conservative.

I think if Christian women want to impress men, they should talk like  the Iron Lady. Liberalism / leftism is really just selfishness, envy and blaming others for your own choices. What man wants to marry someone like that?