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Wednesday, March 31, 2010

Armchair Economics – Capitalism, Consumerism, and Narcissism

Some people propose that today's youth and humans in general in this society comprise the most narcissistic, self-centered population the world has ever seen. On the other hand, some conclude that we are merely seeing a change or shift in norms and values over time. Many like to give humans the benefit of the doubt and assume the latter, when in fact the former is true. Needless to say, one of the main areas in which this selfishness and seeming narcissism can be seen is advertising. And not only can this selfishness be seen in advertising, but it is quite possible that the advertising itself inspires it. As an armchair economist, I believe some basic principles of economics and capitalism play a role as well.
Proponents of this generalized idea of an evolutionary shift of norms and values usually deny the presence of this apparent societal selfishness. Their seeming laziness encourages them to simply shove the issue aside, either to deal with it later (perhaps in future generations when it really becomes a problem) or not at all. Journalists like Raina Kelley, however, choose to take the road less traveled and observe the present-day fundamental facts of society to correctly conclude that this population is comprised of some of the most self-centered individuals the world has ever seen, suggesting that we are experiencing “a narcissism epidemic.” How or why does she make this bold, absolutist conclusion? Well, honestly I do not know, but I choose to take the less traveled road with her and observe things myself, and there are indeed many factors that support her (and, agreeably, my) opinion. There are also many approaches that can be taken when considering the selfish-or-not dichotomy, the first being scientific.
British neuroscientist Sarah-Jayne Blakemore is able to conclude without a doubt that the present-day population indeed quite selfish. Specifically, she observed MRI scans of the brains of teenagers and adults after asking them specific questions. She demonstrates with her own study on the areas of the brain that when making decisions or choosing a course of action, teenagers largely do not use the part of the brain responsible for empathy and understanding, meaning that they think “less about the impact of their actions on other people and how they are likely to make other people feel.” This region is known as the medial prefrontal cortex. Blakemore claims that instead of using this region, teenagers use an area in the back of the brain called the superior temporal sulcus, which is responsible for the perception and imagination of actions, as well as the prediction of outcomes based on those actions. In other words, Blakemore is saying that teenagers immediately imagine the effects of their current choice and how it will affect them and virtually ignore the consideration of the possible impact on others. This concept is very important in that it provides a biological explanation for a specific behavior, namely a predisposition for teenagers to behave a certain way: selfishly.


How did this lack of empathy and understanding come about? And, if our grandparents and ancestors
did consciously think about the effects of their actions on others, how or why did our brains evolve so drastically to become so seemingly selfish in nature, as Blakemore illustrates? Well, perhaps we should instead investigate the nurture aspect of the situation. In other words, I would argue that this evolution of the brain has stemmed from environmental factors, the primary factor being advertising. Psychologists and sociologists are all the time investigating whether a certain effect is born of nature (biological factors) or nurture (external, environmental factors). Sometimes they are even intertwined, as I believe the case is here. The nature-versus-nurture argument is vast and is applicable to almost any observable situation or exigency in society, but here I believe the external factor of advertising through media has, over time, caused an evolutionary shift of the human brain. Perhaps the fact that we are constantly to exposed to so much individualistic, self-based advertising, our brains began to recognize the advertisements as the status quo, the normal ways of life, therefore our personalities reflect those fundamentally selfish ideals without us even consciously realizing it. Perhaps we are too caught up in our selfishness to recognize our selfishness, or perhaps we just don't want to. Or perhaps we enjoy the selfishness. I know I do, and I believe most economists would agree.


Samuel J. Scott takes a societal approach, pointing out that a major factor of self-absorption is of economic origin. He believes that it is currently impossible to move up the societal and economic ladders due to the past generations' disinterest in retirement and the current situation of the economy. Scott says that all we can do to pass the time is strive to obtain degrees and “choose to have fun, travel, and live life for ourselves.” Scott's assessment definitely seems relevant with the current economic conditions and the fact that it supports the claim that this generation is self-centered. Another important fact is that our economy here in the United States is based around consumerism. We are a self-interested society that
consumes things in vast amounts, this consumption essentially being fueled by our ever-present selfishness. Thus, sales-driven companies exploit this selfish consumption by constantly finding different ways to appeal to us through advertising. Furthermore, the concept of whether or not this selfishness is purposeful is irrelevant in Scott's analysis in that he puts the blame largely on the current economic situation. Although I agree with Scott up to a point, I cannot accept his overall conclusion that it is currently impossible to move up the societal and economic ladders. I think he is simply making an extremely pessimistic generalization about society and the American population in order to further enrich his opinion and the persuasiveness thereof. That said, his argument does emphasize and corroborate the notion that external factors are pushing us to behave this way and to “live life for ourselves.” I would argue that perhaps our grandparents and ancestors are and were not as selfish as we are either because they simply were not exposed to the present-day individualistic forms of advertising, or because opposing ideals were implanted in their brains early on in their lives.


An important concept must be considered here though. Economics dictates that humans are rational and self-interested. We accept this, but for some reason society views this self-interest, as well as capitalism, consumerism, and profit maximization, as a bad thing, when in fact it is a great thing! I will explain more on this a little later. For now, let's consider some advertising as an illustration.


All advertising is targeted toward a specific demographic and usually attempts to appeal to the emotions and fundamental ideals of that particular demographic in order to evoke Scott's living-for-ourselves ideal. A successful, knowledgeable twenty-first-century marketing team can effectively persuade anyone to do almost anything these days. Moreover, advertising almost always encompasses a sense of individualism (as opposed to collectivism), usually in terms of self-improvement and self-help, which seem to be the primary, self-centered goals of humans nowadays. For example, consider the infamous weight loss supplement advertisements that guarantee that you can lose a thousand pounds in a matter of hours by simply taking a pill, all while relaxing in your leather armchair with the television remote in one hand and a Coke in the other – armchair economics at its best.


Consider the reader's perception of the product in the aforementioned type of advertisement. I can see it now. The marketer would probably throw the ad for the weight loss supplement on a page in a popular magazine targeted toward women, like
Cosmopolitan or People, for example. They would slap a picture of a beautiful young woman wearing a bikini with a body that probably took years to sculpt in the top left corner, and perhaps even put some before-and-after-type shots to emphasize the product's seeming effect. The marketing team would also probably opt to put some outrageous statistical claims in bold-face print with phrases like “99.9% effective!” along with a few seemingly falsified endorsements from celebrities, doctors, and/or fitness experts. Sound familiar? I'm sure it does. That is because these types of ads work. They convert into sales. The owner of a marketing firm knows this; an expert economist knows this also, but he or she knows it is true because of the fact that humans are rational and self-interested.


Now let's look specifically at the tactics the marketer used here to grab the attention (and probably the money) of the reader. First, the ad appealed to the senses and drew on the emotions of a perhaps overweight female audience desperately wanting to be thinner. The second tactic is a logical approach through which the advertiser puts flashy, captivating, too-good-to-be-true statistics on the page to almost guarantee its effectiveness. Humans, being rational in nature, love when things
make sense logically. Lastly, they usually pay famous people or experts to say something good about the product in question to emphasize its popularity and the fact that the reader is missing out on a great product. You can find several, if not all of these types of tactics in nearly every type of advertisement for any type of product or service. It has become the norm for marketers to both create and then subsequently exploit these fundamental senses of self-centeredness, self-betterment, laziness, and individualism, among other things, in the target audience.


What about the “narcissism epidemic,” though? Well, I would be slightly reluctant to casually throw around the term
narcissism in describing the present-day population in that I do not exactly believe that we consciously and blatantly disregard the feelings of others; perhaps that is merely subconscious byproduct of the ad-induced self-interest. Either way, hopefully now Kelley's opinion rings a bit truer than it originally did.


Sometimes the advertiser's approach is direct and straightforward in that you know exactly why and how they are attempting to persuade you, and you are able to actively approve or disapprove of a specific advertisement or product. Other times, however, the effect is subliminal, and we do not consciously realize that our viewpoints, opinions, and essentially our
brains, are being warped. Advertisers recognize and make use of this subliminal capturing of the target audience. It does not matter whether the ad is in a commercial, magazine, poster, newspaper, or whatever else; they all use the same approaches to achieve the same effect – sales.

In that sense, I would like to propose a seemingly abstract concept based on a somewhat replicative structure. I believe that advertising creates selfishness
because the manufacturers doing the advertising are selfish. What I mean to say is manufacturers and entrepreneurs are merely rational, self-interested humans in a capitalist society surrounded by consumerism. In a free market economy, self-interest and its consequent selfishness and individualism are what create the general welfare of the individuals in society. The common man is able to buy microwaves, cell phones, and computers because of the original inventor's profit-driven self-interest, and this concept will always be true of a society with a free market economy. Politicians are quick to cite profiting as some sort of crime or negative act, when in fact it is beneficial and absolutely necessary for the welfare of the individuals of society.


On the other hand, if the inventor's original intention was helping
others and allowing others to “profit,” then perhaps the subsequent advertisements of his or her product or service would focus on collectivism and the genuine desire of the happiness of the target audience. This idealistic collectivism and seeming altruism is very rare, though, if it even exists at all. Although the emotional effects of advertising may seem of concern to only a small group of individuals, it should in fact concern anyone who cares about the future and welfare of our society. Profit maximization, in relation to capitalism in a free market system, is both our savior, in that it provides us with a means by which consumption and subsequent satisfaction can occur, and our enemy (society's and politicians' viewpoint, NOT mine), creating and inspiring this aforementioned selfishness of society's individuals that everyone views as being a negative attribute. I would absolutely conclude that it is in fact, however, a very positive selfishness. I believe what is born of self-interest is self-interest, and that's what makes the world go 'round. Capitalism is one of my best friends, and I'll stick by it 'til the end.

Saturday, March 27, 2010

Armchair Economics - Mutually Beneficial Voluntary Transactions in a Free Market Economy

My last post outlined the cause of the current financial crisis. This post has more of a conceptual subject, if you will, while it maintains very realistic application. If you've taken any sort of economics course, you've probably heard the phrase mutually beneficial voluntary transactions. As I will continue to say, however, you don't need a degree in economics to understand what they are. Essentially they are the foundation of a free market economy. They are what makes the world go 'round. As usual, I will let a concrete example do most of the explaining. Through the years, I have found that generally this is the easiest way to understand the basic principles of economics.

Ok, so let's say I go to the grocery store and buy a gallon of milk for $4 (I actually bought 2 gallons yesterday). I don't know the exact market price of milk, and I'm sure the demand curve is not likely to shift drastically anytime soon, so I rounded to an even $4. When I check out at the register, putting tax aside, I hand the cashier $4, and take my gallon of milk with me. Now, why did the transaction take place? Simply put, I valued the gallon of milk more than the $4 while the cashier or the grocery store itself values my $4 more than the gallon of milk. Each party stands to gain something from the transaction, thus it is considered mutually beneficial. This concept explains why there are always two thank you's exchanged at the register. A slightly less obvious but equally important idea here is that all of these types of transactions are voluntary, meaning each party actively engages in it and it is not forced. These concepts are the definition of a free market economy in which transactions are not forced. Obviously one of the largest, most meaningful examples of a mutually beneficial voluntary transaction is international trade in regards to imports and exports.

The last thing I want to touch on in this short post is the determinant factor of the number of transactions that take place in any particular free market economy. That factor is price. Let's assume that on any given day at any given grocery store, the price of of a gallon of milk is $5. At this price, 20 people are still willing to buy the milk. As price increases, quantity supplied increases, so the grocery store, wanting to increase their profit, produces 40 gallons of milk. Since the demand for milk at the price of $5 is only 20 people, however, only 20 transactions will take place. This situation is known as a surplus, because quantity supplied is greater than quantity demanded. Remember that these are mutually beneficial voluntary transactions. On the other hand, if the grocery store for some reason lowered the price to $3 per gallon, more people would be willing to buy milk at that price (we'll say 40 people) but the grocery store would lower the quantity supplied to 20, so only 20 transactions would take place. This situation is called a shortage in that quantity supplied is less than quantity demanded. Thus the maximum number of transactions occurs at a price of $3, called the equilibrium price.

Congratulations, you now have a better understanding of mutually beneficial voluntary transactions than politicians and the United States government...


Best,
Tyler
 

Wednesday, March 24, 2010

The current macroeconomic situation and the global recession: the cause of the current world financial crisis.

Last time I discussed some introductory economics. This post, while somewhat of a tangent, is a product of the fact that I am sick and tired of hearing and seeing completely untruthful information about the current macroeconomic situation in the US and the global recession in regards to the cause of the current world financial crisis. Thus I felt this post was immediately necessary.

For the past few years many people (noneconomists) have thrown around all sorts of phrases and economic and financial jargon like supply and demand, inflation, money supply, GDP, etc. that they heard a reporter rattle off on the nightly news (as if those things actually mean something) as causes of the current world financial crisis and the current economic situation in the United States (as well as the global recession). Yes, those terms are important, but only in other contexts! They are not causes of the financial crisis at all. Keep reading and you will see why.

In short, the primary root cause of the current recession and economic crisis was the huge increase in the issuance of subprime adjustable-rate mortgages and the CDO's (collateralized debt obligations) that they made up. The amount of subprime mortgages issued in 2005 and 2006 increased drastically, while the issuance of prime mortgages actually decreased. Basically, banks loaned money (more than ever before) to people who would obviously default on those loans. People bought houses with these loans expecting housing prices to increase, but that didn't happen. 


Mortgages are securitized by the American government; they are pooled together and sold off in sections, which obviously spreads the risk and uncertainty to those who take part in purchasing them. This created a large, widespread web of risk, if you will, in that the securities are dependent upon their underlying subprime mortgage values. The value of the CDO's and their securities decreased and were miscalculated to begin with. Ratings agencies could not accurately determine their value, thus more uncertainty existed. This is why so many Americans lost their retirement, which was largely based on these mortgage-backed securities.

 

Worst of all, the federal government encouraged the purchasing of these securities without knowing the underlying risk involved. The web of risk was not limited to the US; it was worldwide (and still is). Major corporations like AIG, Citi, Chase, Bear Sterns, etc. held many of these risky CDO's and when they failed, everything that depended on them failed (many aspects of society).


 If all this helps at least 1 person, then this post will have been worth writing. I have a feeling that it will clear up some things for many of you. I hope it gives you a better understanding of the current macroeconomic situation in the US and the global recession in terms of the cause of the current world financial crisis. Feel free to comment or email with any questions.


Best,
Tyler

Thursday, March 18, 2010

Some introductory economics for the armchair economist...

I feel like Armchair Economics needs somewhat of an introductory post so that some basic principles of economics can be established from the start which can be seen, either directly or indirectly, in every topic on this site, as well as in every topic regarding economics for that matter. Most of the content in this post will probably seem boring to most, but the introductory economics are absolutely necessary if you want to have any understanding of things I plan to talk about on this blog. Also, in an effort to make this blog and its posts as authentic as possible, I am going to write every post from my leather armchair.

What is Economics?

The US economy? The UK economy? Gross Domestic Product? International trade? Finance? Well, yes and no, but mostly no. Look at it like this: These things are based on economics, not the other way around. Simply put, economics is about rational human beings making choices, and the how and why behind those choices. Economics can also usually answer the other interrogatives as well (who, what, when, where, and how much). I agree with Landsburg in stating that the world “is full of mysteries” that spark curiosity, and that economics is about recognizing this and attempting to solve those mysteries in a manner that is consistent with the assumption that humans behave a certain way for a reason. In certain cases, this can be called sociological economics or psychological economics. Attempting to solve these mysteries is made easier with the use of assumptions and models. Again, there may never be an absolute solution to a particular mystery, but proposing some ideas doesn't hurt.

A real-life example that illustrates the answering of the aforementioned “interrogatives”

Yesterday, I bought some Peanut Butter M&M's (my favorite candy) at CVS.
  • Who? Me, obviously. Unless I paid them or provided a service for them, what incentive would someone else have to go buy me candy?
  • What? Peanut Butter M&M's. The M&M's cost the same as a Crunch bar, but I benefit more from the M&M's because I enjoy them more.
  • When? Around 2:00 PM. Up until that time, the benefit of eating the M&M's didn't outweigh the cost walking down to CVS to get them. Thus I didn't have a high enough demand for them until 2:00.
  • Where? CVS. There, the M&M's cost $.79. At Harris Teeter, they cost $.99. The obvious benefit is a savings of $.20. This is, of course, ignoring the fact that Harris Teeter is about 2 miles from my house whereas CVS is right down the street, thus CVS is even more beneficial.
  • Why? Simply put, the benefits of receiving and eating the M&M's obviously were greater than the cost of acquiring them.
  • How? I walked to CVS. I could have driven my truck or ridden a bike, but for me the cost of walking was less than that of driving or pedaling.
  • How much? 1 pack. I bought 1 pack instead of 2 because the marginal benefit of the second pack of M&M's was not greater than its cost.

Assumptions

Included in these basic principles are simple propositions that economists call assumptions. Assumptions allow us to simplify the seemingly complex world in which we live and make certain aspects of it easier to understand. Essentially, they simplify situations or issues and make problem-solving easier and more approachable. For example, if we wanted to approach or understand international trade, we could assume that there are only two countries in the world and that each country produces only two goods. While quite unrealistic, the assumption simplifies the concept and we can have a better understanding and a tighter focus. Assumptions comprise the framework of economics, and everything and anything related to economics is built upon certain underlying assumptions.

Models

In third grade, I made a model of the solar system by attaching painted styrofoam balls to some clothes hangers. Similarly, economists use models like diagrams and equations which are built with assumptions. Just like my model in third grade simplified the solar system, economic models attempt to simplify reality in order to better understand it.


I suppose I'm getting a bit long-winded here, time to wrap things up I suppose. I'll do so with several final introductory propositions. The applicability of the theories and laws and basic principles of economics is vast. Landsburg, and any other economist for that matter, uses economic reasoning when observing human behavior. Moreover, when the range of that applicability is in question, he “always prefers to risk error in the direction of being overly inclusive.” It definitely makes things a bit more interesting (especially in terms of introductory economics), and you will soon see why.


Best,
Tyler

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Wednesday, March 17, 2010

The foundation of Armchair Economics

Armchair Economics is based largely (but certainly not solely) on Steven E. Landsburg's The Armchair Economist. this site acts as both a summary of concepts from the book and a presentation of concepts with roots elsewhere that are unrelated to the book. If you're bored, I encourage you to buy the book in its entirety for about $10 on Amazon.

Now for somewhat of a disclaimer...

I would love to tell you that politics, specifically government policy, will not be discussed on this blog and is not related to economics. Naturally, however, both of these relationships are inevitable and sometimes oftentimes necessary, especially if the goal is to help the average person (a noneconomist) understand a concept from an economic perspective, that concept essentially being the product of some of the core principles of economics. This is the fundamental purpose of Armchair Economics. I say this because the last thing I want is for this blog to become a source of unsavory argument and political debate in the form of comments and hate emails. That said, I do welcome your comments if they are relevant to the post in question. For the most part, bipartisanship and its constituents are largely unimportant to me as well as to the topics within this blog (I believe it is unimportant to the welfare of our nation's citizens, too, but that's another story altogether). I will never refer to myself as a Democrat or a Republican or a Libertarian or a member of any particular political party for that matter. I will simply attempt to address things from an economist's perspective, interested in the overall welfare of individuals.

I also want to address one last preliminary concern:  My posts are meant to be mere presentations and proposals of ideas, concepts, and principles, and obviously examples thereof. They are not to be taken as declarations of absolute truth or as flawless solutions to national and world issues. They are simply meant to spark interest, curiosity, thought, and perhaps action, all while helping you become an armchair economist.

Whew. Ok, so if you can accept and understand all that, I sincerely believe you will enjoy following my blog and reading my posts. Now, go (or stay, rather) and enjoy Armchair Economics.


Best,
Tyler