August 31 

Q1: So would it have been better if we had stayed as hunter/gatherers, or at least stuck to agrarian subsistence? It seems progress has only hindered us as a people.

R: Many question the concept of progress, at least as an unqualified good. In the book Money Makes the World Go Around by Barbara Garson, a Thai woman is asked why she would prefer to work in fishing rather than in an electronics plant. She replies, "When my father is fishing he looks up at the sun only a little while and the whole day has gone. When I'm at the electronics factory I look up at the clock after an hour and it's only two minutes later. "(111) I suppose we might relish some simplifying of our lives.  

Q2: In what time period did money come into common use?

R: We know the Greeks and Romans coined money over 2400 years ago. However, money was not in common use as a means of exchange because the vast majority of the populace was not involved in market activity. Markets and the use of money, particularly fiat money, didn't become common anywhere until about the fifteenth century. Commodity money was used in many places for thousands of years. It was sporadic and simply occasioned the exchange of goods between tribes or clans in the early empires. 

Q3: Where was the first well known market place located and what were some of the most popular early goods?

R: The text mentions the Grand Bazaar in Istanbul, Turkey which still exists. The exchanges there in the very earliest period -- maybe 200-300 CE (or 1800 years ago) -- were principally in-kind or barter. Three of the best books to read about markets are Trade and Markets in the Early Empire, The History of Commerce and Fernand Braudel's Capitalism and Material Life. 

Q4: Where did the barter system first originate and why there before any number of other cities?

R: I don't think we can answer this question with any certainty. Barter may have begun simultaneously in a variety of places. It is likely that it happened before there were written records of human society. And then it becomes a matter of interpretation as well. Can tribute between two tribes in which say furs are exchanged for several horses be considered trade. Often these exchanges would occur simply by dropping the items on the ground and walking away. When the practice of trade or swapping became routine and regular it would be said to constitute barter.

September 2

Q1: What are property laws?

R: The institution of private property was essential before the capitalist market system could emerge. The government through courts of law needed to establish contracts as binding in law and recognize and legally protect the ownership of land, goods and capital. 

Q2: How much is the tragedy (Hurricane Katrina) going to affect our economy?

R: There are estimates of as high as $100 billion to rebuild the Gulf Coast region. That is the immediate impact. Whether it triggers a recession -- which we were poised to enter anyway -- is a bigger question. We have the strange phenomenon of the housing bubble about to burst (housing prices to fall), while oil prices creep up and the Federal Reserve Chairman raises interest rates (necessary to raise the capital to pay our debts). We're unlikely to see serious inflation in an economy as weak as ours and unions as powerless.

Q3: Is commodity money something that holds value at its smallest natural denomination? So, gold and silver are commodity money even though culture puts a price on it -- creates its value?

R: Commodity money is that which has intrinsic worth which normally means that it has use value. So, if cows were used as money and all goods were priced in terms of cows, that would be commodity money. Silver and gold were the first forms of common currency actually minted to be used principally as means of exchange. So, in some sense they were both commodity money and money as we know it today. By the early 19th century most market societies had converted to a system in which at least part of their money was in paper form with gold and silver held by the government in a fixed ratio to the outstanding paper circulating in the economy.

Q4: Who developed the idea of supply and demand?

R: The first formal models of supply and demand were developed by the British economist Alfred Marshall in the 1890s.

September 7-9

Q1: Is there any legislation pending in Congress to raise tariffs against imports to alleviate the trade deficit?

R: There is much railing against the Chinese but President Bush just made an offer at the U.N. to remove all our tariffs if developing countries would do the same. He is an inveterate free-trader. However, we offer $100 billion of subsidies to our farm sector alone.

Q2: What is marginal cost?

R: The addition to total cost when one more unit of a product is produced.

C3: Excellent demonstration of market forces. I enjoyed it a lot.

R: The Stanford University economics department came up with this game simulation. It does allow you to see in a microcosmic way how the forces of supply and demand are supposed to work. It is flawed however. The Smithian model and the Neoclassical model today assume perfect information, i.e., buyers should know the price various sellers are willing to offer their products for. But this simulation is more like an auction in which no one knows either what sellers are willing to sell their product for or what buyers are willing to pay, but only what they actually offer. 

Q4: Can a seller and another seller combine to offer a higher price in order to maximize profit?

R: Not in this game. But you get the idea. It would be in the interest of the sellers to combine and withhold supply to force buyers to buy at their reservation prices (the highest they are willing to pay). This game gives neither buyers nor sellers an edge in the transaction. But you have to remember the Hoover Institution (one of the most conservative, pro-business think tanks in the U.S.) is housed at Stanford University. They might want the market system to look like a fair game.

Q5: Would a seller ever sell under their marginal cost?

R: If they did, they would lose money on that sale. Since marginal cost is the extra cost of producing that unit (say $5), if they sold it for less (say $4) they would lose the difference. So, they would be selling it for less than they paid to produce it. Now, our farmers do that every year. Corn is sold at about $2.50 a bushel when it costs about $3.25 a bushel to produce. American taxpayers make up the difference when our government subsidizes farmers for the $.75 a bushel loss.

Q6: What would happen to your selling ability if someone found out what you paid to produce the good?

R: The buyer would offer no more than enough to just cover your costs. The shroud would be lifted from the transaction.

 Q7: In price inelasticity are there other factors that can affect the situation?

R: That just about covers it, but what's really more interesting are shifts in demand and supply. The category of expectations covers a variety of those other factors. Consumers' reactions to a price change may be affected by a host of considerations that fall into this category. Certainly Hurricane Katrina produced a massive swing in expectations. The minute gas prices at the pump began rising people began filling their tanks and bringing extra containers to fill up as well. They were anticipating a gas shortage and continued price hikes. So, suddenly their demand for gasoline was increasingly inelastic and, by the way, seemingly contrary to the law of demand (prices rise, Qd declines, but remember that is only true under ceteris paribus and their expectations were constantly changing). So, what was really happening was a shift of the demand curve to the right allowing the oil companies to gouge consumers. The oil companies didn't bother to tell the public that there really wasn't a shortage of refined oil, either in transit or in our near future as a result of the Gulf Coast being knocked out. Only one refinery was shut down and that for only a short while. If we had a Congress with an interest in nailing the petroleum companies they would investigate. Eventually we will learn how much in the way of excess profits were made in that short two week to three period.

Q8: When someone moves out of a rent controlled apartment does the rent go up?

R: You betcha. That's why people hang on to rent controlled apartments forever if they can. Ed Koch, the former Mayor of New York still lives in an apartment in Greenwich Village for which he pays only $400 a month.

Q9: How elastic (is demand with respect to price) in the agricultural market even with government controls? How would it be if there were no controls?

R: The government has always had a policy of providing cheap food to Americans. We don't pay the true cost of what we eat (just accounting for the economic cost without considering the long-term effects on soil fertility and our ability to feed folks in the future). Clearly food is a necessity and so demand for it is highly inelastic but demand for any given kind of food is somewhat elastic (i.e., there may be many good substitutes for broccoli -- don't get me started).

Q10: When there is excess supply because demand has fallen, are products then sold for much less at discount stores?

R: That can certainly happen. It can be that the business just writes off the loss or it can be that the firm still makes a profit but doesn't want the product to be sold in its own stores. A similar strategy was used by name-brand appliance manufacturers who would sell their products at one price under their own name, then sell the very same appliance under the Sears brand for considerably less. This is a form of price discrimination. Remember our double oral auction? Imagine if sellers were able to group consumers into two broad categories -- those whose reservation prices were above a certain level and those below that level. They would then price the very same products in the segmented markets at two separate price levels and grab as much of the consumers' reservation price as they could. The people buying the Sears brand are the low-end customers whose reservation price is below that of those buying at the appliance stores with the name-brand appliance.

Q11: Is pizza a luxury good, i.e. does it have an elastic demand?

R: Any particular food (as opposed to all foods as a category) has many good substitutes. So, I would suspect that pizza has a slightly elastic demand. I don't recall what Nicole and Laura discovered when they talked to the local pizza parlor. But I suspect that the owner felt they didn't have an opportunity to raise price much without experiencing a significant fall off in sales.