An Introduction to Economics and the US Economy
COMPANY ANALYSIS PROJECT: PART 1 SCORING GUIDE
COMPANY ANALYSIS PROJECT: PART 1 SCORING GUIDE
Identify the industry structures of a specific firm- Analyzes the industry structures of a specific firm.
Identify the market of a specific firm- Analyzes the market of a specific firm.
Communicate in a manner that is professional and consistent with expectations for members of the business professions- Communicates in a manner that is professional, scholarly, and consistent with expectations for members of the business professions. Adheres to APA guidelines; work is appropriate for publication.
TRADE: TRIALS AND TRIUMPHS
Male
International trade restrictions. According to one study, 93% of economists think such restrictions are a bad idea because they reduce economic welfare. They believe the trade is the way to produce more, better, and cheaper stuff and services for us all. The phrase often used to justify trade is “comparative advantage,” an idea that comes up throughout economic says Northwestern Professor Robert Gordon.
Robert Gordon
The real way to talk about comparative advantage is to talk about everyday people, and how about the example of a lawyer? A woman lawyer, very talented at law but also able to type twice as fast as her male secretary and what should she do? Should she be doing the typing? No. She should be out winning trials and winning law cases and that male secretary plotting along at half the speed should be doing the typing because she probably makes ten times as much as he does.
Male
And if she is making ten times as much, it means that to the economy, the lawyering is worth ten times as much as the typing. The typist has a comparative advantage in typing because he can make more that way than as a lawyer, which without a law degree can make a dime at. The lawyer has an obvious comparative advantage in lawyering because no one will pay her that much to type. So both parties are better off by specializing and then trading the fruits of what they do. But if this is the way to go within our country’s borders, why is trade consistently discouraged across borders by the various forms of what is called “protectionism”? Because countries all over the world are under pressure to protect their local companies and workers from foreign competition. They do so in several standard ways.
By imposing quotas, a ceiling on the amount of something that can be imported from another country or imposing tariffs, taxes on all imports coming into a country or instituting other non-tariff barriers like subsidies to domestic industries so they can price their goods below foreign competitors. For example, the U.S. imposed tariffs on corn brooms made in Mexico to hike their price and thus, discourage Americans from buying them. Why? Because the jobs of corn broom workers like those in this Alabama factory were threatened by corn broom workers in Mexico making one-sixth what these folks were.
Male
I would not wish to compete, not with the kind of way that the Mexicans are earning, you know, a dollar. I can live off —
Male
The same holds true in loads of industries, from textiles to steel. Why did free trade President George W. Bush slap at 30% import tax on billions of dollars worth of steel from abroad in 2002? To protect American steelworkers who are losing their job because of cheaper foreign imports.
Dan DiMicco is CEO of Nucor Steel, a low-cost U.S. producer, which historically oppose protectionism, but even his company had began to feel the heat.
Dan DiMicco
The problem was things got to such an extreme with the flood of imports and the destruction of the pricing in the marketplace that we had no choice but to get involved. They had something like 32 companies in this country, the entire industry virtually in bankruptcy.
Male
In our reporting, we have heard the same story from industry after industry, including textiles.
Jock Nash
In the year 2001, 146,000 textile workers in and — workers lost their jobs. In fact, in our industry, we lost more jobs in 20 months than exist in the steel industry.
Male
In short, protectionism prevails because of politics despite the fact that over time, the gains from trade benefit people the world over, those who pursue their comparative advantage in rich countries and poor ones and those everywhere who pay lower prices as a result. But it is easy to take the gains for granted. Imported goods at the mall may be a bargain, but how often do consumers thank free trade for the money they are saving even though it saves so many consumers so much. Economist Kent Ford.
Kent Ford
They get a bigger selection, they get a lower price. Trade benefits our exporting industries, Ford’s products, airplanes, high tech, IBM, McDonalds, Kentucky Fried Chicken, Coca-Cola.
Male
So Americans win across the board, but the loses from trade are concentrated, painful, and obvious, American workers lose their jobs. As in the steel industry, which President Bush tried to protect, but then Europe threatened to retaliate with tariffs against us, Japan and China made threats as well. Meanwhile, back in the inferno, noted trade economist Robert Lawrence thought the U.S. tariff heights, plus Europe’s threats of counter-tariffs might trigger a trade war, which would make us all worse off.
Robert Lawrence
What I really worry about is that our governments, the United States and Europe are going to get very caught up in fighting individual battles in retaliating and in fact, engage in a tit for tat confrontation, which could escalate over time.
Male
But CEO Dan DiMicco says foreign competitors have been using non-tariff barriers like government subsidies to engage in unfair trade with the U.S.
Dan DiMicco
This is not a matter of tit for tat. We have already been tatted in a big way. I do not know how better I can put that and maintain a sense of humor, okay?
Male
Moreover, say critics of so-called free trade, it can be unfair in another way when poorer countries exploit their workers to keep their wages down. Economist Thea Lee.
Thea Lee
Labor can be cheap because the government has made a conscious decision to deny workers the right to have a political voice, to organize unions, to bargain collectively or they are using prison labor, forced labor, indentured child labor on a wholesale basis and that is wrong.
Male
So you have no problem with free trade in principle, but it should have rules to ensure basic human rights in a place like China, say, or to make sure the environment is not ruined.
Thea Lee
Exactly
Male
What is hard to dispute, however, is that the removal of barriers to trade seems to have increased economic growth. After World War II, tariffs averaged a hefty 40% on manufactured goods across the globe. Over the decades, they have been brought down to today’s 4% or so, while the U.S., Europe, and Japan have prospered because of low tariffs, say economist like Professor Lawrence.
Robert Lawrence
The United States has never been more open as an economy and the United States has never been more prosperous. We do not try to make everything ourselves. We buy from the rest of the world and we sell to the rest of the world. Sure, some competition is not perfectly fair and we do need rules of the game in order to deal with unfair competition, but by and large, I think it would be extremely foolish for us to think we could withdraw and retreat back into a Fortress America.
Male
Economists like Lawrence agree that countries will always be under pressure to protect domestic industries, like say agriculture, but that is why the World Trade Organization was created, to regulate the rules of the game. Indeed, in late 2003, the WTO based in Belgium ruled against the U.S. steel tariffs as illegal. U.S. steel producers and workers denounced the decision as meddling with the sovereign affairs of America but the U.S. government then lifted the tariffs making American steel users like auto companies happy. Lifting the tariffs meant cheaper steel for the cars they sell, mainly to the fellow Americans.
Increasingly however, it is not just manufacturing or farm jobs that countries have been trying to protect. More and more of the world’s jobs are in the service sector, more than 80% of jobs in the U.S. Service workers have long thought they were safe from international competition. A convenient case in point, my dry cleaner in Brooklyn, Massachusetts to whom global competition has long been an abstraction.
Carl Levine
It does not mean anything. People are going to come in here, they want to look good, they want a good product and that is what we offer them.
Male
So you care about what happens in Brooklyn?
Carl Levine
That is my main concern is, how I am going to make a living here and then I worry about the outside world.
Male
Carl’s assistant Jimmy Clark underscores the obvious. “What is to worry about? Competition from some super efficient dry cleaner in Japan?”
Male
They will still be in Japan and we will still have Brooklyn.
Male
Economists like Robert Lawrence point the jobs like these to reassure Americans about the limit of the threat from workers abroad.
Male
Most of these people are in the service economy, most Americans work in the service economy, only about 15% of Americans are employed in manufacturing, only about 2% are employed in agriculture and those are sectors which are severely subject international competition. For the rest of us, they may be some elements of international competition, but by and large, our economy is self-contained.
Male
But foreign competition is now threatening U.S. service jobs as never before. The internet and the telecommunications revolution have meant that more and more service work can be sent anywhere in the world. That has led to call centers in India for instance, where they do fulfillment for U.S. catalog companies.
Female
The black bra and the CD recorder will be delivered by 6 PM, Friday.
Male
There is even a website, Elance.com, where companies from anywhere in the world can post requests for software jobs, design services, accounting, and get bids from anywhere in the world. And then there is the Pittsburgh firm that sends doctor’s dictations to India to be transcribed. As this promotional video shows, it has set up shop in four Indian cities because workers there have a comparative advantage in typing.
Male
Its software engineers are among the best in the world. English is the primary language. There is high computer literacy, excellent internet connections, and an experienced transcription workforce. The time difference between the United States and India is also an added value.
Female
While we are sleeping, they are working.
Female
For the first time, medical transcription truly has 24-hour coverage.
Male
The Indian workers are doing the job for a fraction of the U.S. cost by capitalizing on their comparative advantage. Typing for a few bucks an hour is their best most valuable work alternative. So they type while the U.S. medical personnel exploit their comparative advantage providing healthcare, but as this new global competition in services grows, it is leading U.S. service workers to call for protection. Software engineer Judy Adelstein is trying to form a union for high tech workers, speaks for many of them.
Judy Adelstein
This country on one side of its mouth that talks about how wonderful and we care about everybody, we are building, rebuilding a rack and we are doing this and we are doing that, but they do not care about their own people, okay? So do not talk at two sides of your mouth, okay? Do not talk — capitalism works. It works for you because you are rich. The corporations are on the country. It does not work for the rest of the people.
Male
Judy Adelstein’s husband is also a software engineer. He lost his job due to 9/11. Two years later, he had not found another.
Scott Adelstein
I mean, how do you explain 350 resumes and no job? Maybe just seeing how much experience I have and my salary, and saying, “Well, why should we pay him this kind of money when we can get someone for a lot cheaper?”
Male
What kind of money?
Scott Adelstein
$52,000.
Male
But the answer for a U.S. worker like Scott Adelstein say free trade economists and businessmen alike is to reinvent himself economically so he is always a step ahead of the competition, whether it is local or global. Wall Street money manager Rajiv Chaudry who came to the U.S. from India precisely because of the opportunities here thinks U.S. workers will continue to create new forms of comparative advantage.
Rajiv Chaudry
The internet was created in the United States, not in any other country in the world, and because of the internet, 10 years later, we have created — we have really refashioned our own economy and not in the process of refashioning the global economy. As a result, you know, millions of jobs have been created in this country as well as outside, so I do not know what the next big thing is going to be, but I can tell you one thing. It is going to come from this country and it is going to create a lot of jobs in the United States.
Male
Try telling that to Scott Adelstein, however. What was he doing when we last saw him?
Scott Adelstein
I am doing stock work for retailer.
Male
Meaning?
Scott Adelstein
Kmart.
Male
Kmart?
Scott Adelstein
Right.
Male
What exactly do you do?
Scott Adelstein
Stocking the shelves, pricing goods, and I work in nights.
Male
Are you embarrassed? I mean, you said retail, stocking, I did not know what you meant at first.
Scott Adelstein
Yeah, well, you know, it is just that, you know.
Male
You did not want to tell right away.
Scott Adelstein
Right.
Judy Adelstein
He is embarrassed, I think, with good reason. He is an educated person.
Male
An educated person who is competing against the increasingly educated counterparts abroad and who feels threatened by and therefore, suspicious of free trade regardless of the wide spread long-term benefits, almost all economists assure us free trade inevitably brings.
REFERENCES
• http://www.mhhe.com/economics/solman_video_mov/trade_triumph.mov
RATIONAL MAXIMIZING
Economics now covers everything we do in the ordinary business of living. It analyzes what we do by making just a couple of core assumptions about how we actually behave.
That is not bad. I mean —
Yeah?
I like it better than I thought I was going to.
Great, awesome.
The first assumption is that we are all self-interested.
Oh, a thousand bucks.
[Laughs] No way. Wait a minute, no, no, no, this car is way better than a thousand.
I am just throwing out a figure. I do not —
Okay. No that is fine. That is fine. I just —
The second assumption is that we are all rational.
Two thousand, I mean that…
That is by weighing the costs and benefits of any action, we can figure out how to maximize our self-interest. That is why economics calls people rational maximizers.
This is a ’93 Accord.
Yeah, but it only has like 50,000 miles on it.
Really?
Yeah.
So, for example, when economic woman here sells her car to economic man, he is trying to get the price he can.
I thought I was getting a deal here!
You are. You are. You are my bud, come on. It is a good car. I would not sell you a bad car.
And economic woman is acting in her rational self-interest as well. There must be people who need a car more than this guy, but they cannot meet her price.
No.
Forty-seven? Forty-eight?
I cannot.
Five thousand.
Five thousand.
Five thousand.
You just bought yourself a car.
Yes!
Now, most of us do not think there is anything wrong with selling at the highest price or buying at the lowest price; that is just human nature, is not it? To get the most one can using simple reasoning. In fact, rational maximizing turns out to have been the driving force behind market economics from the very beginning. Adam Smith, the first name in economics. Here is how he famously put it in his book, “The Wealth of Nations,” published the same year as the Declaration of Independence.
[ Music ]
Give me that which I want, and you shall have this, which you want. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.
[ Music ]
So people are self-interested.
Hey, you just bought yourself a car.
Ah, yes!
And they are supposedly rational.
Can I have the number nine, please?
But how true are these assumptions? Very true, say mainstream economists. To prove the point, textbook author Stan Brue asks students in his class which line they choose at a fast food restaurant.
Stan Brue: They say, “The shortest line.” “Why?” “Well, my time is valuable, you know? I do not want to waste my time standing in line.” “Why do not you get in the longest line?” Well, they intuitively understand that. I said, “You have made some little kind of a cost-benefit decision in your self-interest. It was rational for you to get into the shortest line.”
So here, getting in the line with only three people would be the rational choice.
Thank you.
But Professor Brue insists that you are even being a rational maximizer if getting on this line turns out to be a whopper of mistake.
Three cheeseburgers.
Stan Brue: Maybe you are in the shortest line and you find out that the person in front of you is ordering fries and hamburgers for the Greyhound bus out back.
Four of the combos.
Stan Brue: But you did not have that information when you got into line.
BLT with cheese, I would like 10 of them.
Stan Brue: Should you now go seek that information by going up to everybody and say, “Sir, I would like to get your order so that I can make a rational decision”?
Hi, can I get your order so I can make a rational decision?
What?
Stan Brue: Heck no. Because the information is costly to get, people would probably wonder what you were up to, and it is not it worth your while. But that is another rational decision.
And yet, we can all think of behavior that seems both irrational and counter to what we would usually think of as our own self-interest.
Literally it is hurting right there in my elbow just to hold it.
Like trying out a shot-put for first time in one’s late-50s. Yeah, but then you have got to throw it. I decided not to make an irrational fool of myself, but instead asked students at this track meet, if they had encountered much irrationality in their lives lately.
Well, being in college, I mean, I have seen a lot of irrational things. So I would probably say the most irrational thing that I have seen is a guy getting naked at a party.
Yeah, I can top it. One of my friends, unfortunately, we were at a party together. And we went to the party together so we were kind of keeping an eye on each other and he got out of sight and one thing led to another and he was going to the 7-Eleven to get some cigarettes. He borrowed someone’s truck, he had no idea whose truck it was and he ended up about 30 miles away from [inaudible] in the woods. He had crashed, drunk driving. And that was pretty irrational, I would say.
Sleeping in class always happens.
Sleeping in class?
Yes. It is normal to stay up until four and then go to class and sleep.
But that is not rational.
No, it does not make sense.
Well, how much are you paying for a class, I mean, for example?
I know we pay about $115 a class.
A hundred and fifteen dollars a class, and you sleep through some of them?
Sometimes.
So that would be irrational?
Yeah. If my Dad knew, he would probably kill me.
And there is getting into shape today only to overeat for the next two weeks; being scared to compete on Friday the thirteenth; the list is endless. In economics, even tipping at a roadside restaurant can seem irrational. Do you leave tips at roadside restaurants you are never going back to?
Yeah, I definitely do. I have waitressed before, so I always have.
And you?
Absolutely. Absolutely leave tips.
But why? You are never going to go back there.
Because if she has done a good job, she should be rewarded for it.
I work at a restaurant where we have a collection of tips that are split at the end of the night. And I know what it feels like not to be tipped, because I would say 50 percent of people that come in there do not. So I would definitely leave a tip.
Indeed, the model of the purely self-interested homoeconomicus — economic man — is so simplistic, it is long been the subject of satire.
How do you do? I am a merchant banker.
How do you do, mister…?
Um, I forget my name at the moment, but I am a merchant banker.
As when an investment or merchant banker is solicited by a charity worker.
I wondered whether you would like to contribute to the orphans’ home.
I am awfully sorry I do not understand. Can you just explain exactly what you want?
Well, I want you to give me a pound and then I go away and give it to the orphans.
Yes?
Well, that is it.
No, no. No, I do not follow this at all. I mean, I do not want to seem stupid, but it looks to me as though I am a pound down on the whole deal.
Yes, you are.
I am? Well, what is my incentive to give you the pound?
Well, the incentive is to make the orphans happy.
Happy? Are you quite sure you have got this right?
Yeah, lots of people give me money.
What? Just like that?
Yes.
They must be sick. [Laughter]
But this banker from the English TV comedy series Monty Python’s Flying Circus is not it a fair example of the rational maximizer according to some economists.
Nice to do business with you!
They argue instead that acts of apparent altruisms such as giving money to orphans, tipping, or as here at MIT, free bike repair, really do maximize self-interest by making the person who does them feel better.
Stan Brue: Now, Mother Theresa was not selfish, no-one says she was selfish. But she pursued her self-interest. She did the things that made her happy, and that was to help other people; and avoided the things that brought her pain, watching them suffer. And we all do that to some extent. We leave tips at roadside restaurants we will never see again, why? Because it will make us feel bad if we do not. And so acts of altruism are acts in really, in self-interest. They are unselfish, but they are self-interested.
But to critics of economics and more and more economists, this is too broad a definition of self-interest. If anything you do is self-interested because it must make you feel better or you would not do it, the idea of rational maximizing loses its power to explain. If this poor guy, say, starts drinking his oil instead of spraying it and drops dead, we do not explain anything by saying that he must like oil and so drinking it had to be an act of rational self-interest. In fact, the 2002 Nobel Prize for Economics went to a psychologist and an economic experimenter for showing just how human humans can be. Bob Frank, who came up with the oil example, is a star of behavioral economics, a new field that he says…
Bob Frank: …unites psychology and economics. I think the neo-classical economists were guilty for a long time of ignoring human psychology. And what the behavioral economics movement has done is bring some of the known facts about human psychology back into the picture. We are not always the rational, automatons assumed by the neo-classical model. And I think that has been one of the interesting contributions of behavioral economics, is to remind economists that we are really kind of a richer more complicated creature than some of the models suggest.
Bottom line then,: there is a debate within economics about how accurate the basic economic assumptions — rationality and self-interest — really are and, thus, about the basic economic model of human behavior. Professor Nancy Folbre is another noted critic of the neo-classical model.
Professor Folbre: I think it is half right. I think in a lot of situations, people make very rational decisions with a lot of foresight and a lot of information, but I think in general, economists still overstate the extent to which you can explain everything with a rational futility maximizing model.
On the other hand, says Stan Brue, that model is true enough in the end to make some pretty useful predictions about economic behavior.
Stan Brue: I am going to predict that people will prefer a higher wage to a lower wage, other things equal. And I am going to predict that a consumer will prefer a lower price to a higher price, other things equal, like the quality of the product. And I am going to predict that a business is going to try to earn more profit rather than less in terms of rational decision processes, under normal, usual circumstances. But people are not perfect decision-makers, and just because they do not always behave in some perfect rational way, does not mean that it is not it valuable to have an assumption that they act as if, most of the time.
But the assumption economics makes, is that people act as if they were rational maximizers all of the time. And bottom line, that is the assumption that just about every textbook and every textbook model is based on.
Ten diet cokes, 12 cokes.
• Solman, P. Rational Maximizing. [Video file from textbook publisher companion Web site] website
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