Category Archives: Uncategorized

Supply and Demand Assignment

 

Market: Graphics Card

Graphics card prices have been steadily increasing, higher than their manufacturer suggested retail pricing. With the climb in popularity of cryptocurrency mining, more and more individuals require graphics cards. They are an effective way of mining digital currencies such as ethereum, leading to a greater demand. This demand has created a product shortage in graphics cards, and lead to a higher price.

The demand determinant for this case is the number of buyers. The number of buyers increased because they use the graphics cards for mining, which is very popular right now. This pushes the entire demand curve to the right because of the increase in demand. The shift of the demand resulted in a shortage of product, and the equilibrium quantity and price increased.

Nvidia and AMD, two of the largest graphics card producers, have issued statements that they are attempting to fix this problem. It has been rumored that they will release products that are catered towards mining, and this should decrease the demand for the regular graphics cards, decreasing the price.

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Supply and Demand Assignment

Source: Red chilli prices crash 40% in two weeks

Market: Chilli

Chilli prices in Telangana, India have dropped by over 40% in two weeks due to a surplus of the good.

The chilli market in the country has increased, on average, 50,000-60,000 bags (of 40-50 kg each) a day. This means there has been a large increase in the number of sellers in the market. This moves the supply curve to the right and creates a surplus in the market, dropping the equilibrium price of chilli dramatically. The price dropped from 12,500-13,000 about two weeks earlier to 7,000 a quintal.

Chilli market Supply and Demand Assignment

A Scarborough Subway Expansion? Get on the Right Track, Please.

Toronto is booming, drawing in hundreds of thousands of new residents continuously, and growing as the fourth largest city in North America. Yet, our transportation network is failing to keep up. Alright, that is quite the understatement. Clearly, it sucks. The TTC drastically lags behind modern transit systems seen in other big cities, doing Torontonians no justice in being ridiculously incomparable to the high-tech, high-speed, highly reliable transit systems ranked among the best in the world. Instead, we must deal with frequent delays, closures and shuttle buses, and horrible bus schedules. The TTC certainly has a great deal of flaws, but in broad terms, it serves its purpose: to provide and facilitate accessible travel within the city for the citizens of Toronto.

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With this in mind, it is indeed indisputable that a replacement for the aging Scarborough RT is long overdue. There has been enough back and forth debate – from subway, light rail, then subway again – to ensue frustration, and a ‘just build SOMETHING’ mentality. Given the following facts, a push to replace the aging system is not unreasonable:

  • Scarborough is home to 650 000 residents
  • Vehicles running on the 30 year old Scarborough RT are reaching the end of their normal lifespan and the system must be replaced
  • The city and TTC needs to deliver a fast, efficient, and reliable subway system extending from the Bloor-Danforth (green) line north from Kennedy Station to Scarborough Centre

However, this type of push is entirely incompetent in deciding which system can better connect neighbourhoods and serve more people. Evidently, John Tory has come down with a case of this narrow-minded mentality. The push for a replacement of the Scarborough RT has become a largely political matter, with Tory insisting on a Scarborough subway while his opponent previously backed light rail. As reported by The Globe and Mail,

“He ran for mayor in 2014 on a promise to stick with the Scarborough subway plan. His opponent on the left, Olivia Chow, wanted to go back to light rail. Mr. Tory won. The provincial government backs the subway. Ottawa signed on too”

However, when we strip away the politics and look about this situation from an economic perspective, we can clearly see the gaping flaws in Tory’s insistence on seeing through with his campaign promise.

Cost vs. Benefits

In short, a subway expansion makes absolutely no sense. We can easily understand the reasoning behind this statement by thinking about the costs and benefits for a mere 2 seconds. Here it goes:

The cost that has risen to be associated with this undertaking is quite simply absurd. According to Metrolinx, the Government of Ontario has committed a $1.48 billion investment to replace the current Scarborough RT. Sure, we can push it a bit, setting a $2 billion budget in early 2016 for the subway expansion, but the problem is, the cost has currently risen to a ridiculous $3.35 billion. In fact, the range of accuracy can be off by a full 50%, meaning costs can come as high as $5.02 billion. What’s more? The plan to build a three-stop subway was cut down to one stop. $3.35 billion just to add a single new stop to the Bloor-Danforth line. If this is not enough, and you are still unfazed, I’d love to study under the tutelage of your coolheaded, strong and steady mind. Or rather, consider this: the city will be spending an estimated $1.45 million for each new rider the subway extension attracts. In what way can this possibly make sense?

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Perhaps we should shift gears, and have a look at the benefits.

Sure, a subway expansion will allow riders to experience a seamless journey to Scarborough Centre without transferring at Kennedy Station, all in the spirit of relieving regional congestion. It can sound pretty good, right? Allegedly, this seamless journey saves time commuting, with Tory even invoking emotion to say that this saved time can be better spent with family. However, according to the Toronto Star:

In a report released in June, city staff said the replacement of the SRT with a one-stop subway could save riders “up to five minutes.”

That’s correct, a mere five minutes, a substantial benefit indeed. Surely, five minutes off the commutes of many people? It’s unfortunate that even there, the benefits look bleak. An estimated 4500 new riders at the beginning of project planning has halved, plummeting to about 2300 last summer.

When it comes down to it, a $3.35 billion to $5.02 billion cost, to replace an old system, shaving 5 minutes off the commute of 2300 people? The costs vastly outweigh the benefits. There have got to be better solutions.

Efficient, Equitable, or Fair?

With the scarce resource in this circumstance being money to fund the expansion of public transit and given the circumstances, I would argue that this project is far from efficient. In choosing to build a Scarborough subway expansion, one forgoes the next best choice of building a light rail, cheaper bus stations, or using the money to serve as a down-payment on other transit projects Toronto desperately needs. There are a great many alternative uses this funding can go towards – in this situation, opportunity cost would be a toss-up between a subway relief-line to ease the pressure on the massively over-crowded Yonge line, or building a light rail for Scarborough. Both of these decisions make an equal or greater amount of people better off. In the case of the cheaper light rail, it makes no people worse off as Scarborough residents still acquire their much-needed transit, however makes some people better off by leaving more funding for other transit projects. This would be a more efficient decision than the absurd subway expansion, and the TTC truly needs to get a grasp on the idea.

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Equity is a difficult concept to describe in this situation, as disagreement surrounds fair methods to allocate funding for public transit. However, in short, by dedicating ridiculous amounts of tax payers’ money, upwards of $3.35 billion, the lack of equity is blatantly seen. The resources would be unfairly distributed among those 2300 riders, costing the government $1.45 million per new rider, a ridiculous plan that leaves funds in no way fairly distributed among citizens.

What are the Alternatives?

We should not allocate such an enormous budget to insist on a subway expansion to Scarborough. Instead, there are many alternatives, some of which may be more beneficial than others. These include:

  • A bus terminal to help pedestrian access and free up more land for development
  • Adapting GO Transit (using Smart Track)
  • Network of LRTs (Light Rail Transit)

A better alternative should include the benefits of a fast trip speed, frequent service, and the currently accepted TTC fare level , 3 factors that will draw more riders with a reasonable demand. It should allow the TTC to prioritize a mission to connect more neighbourhoods and serve more people. With this in mind, I would recommend the light rail alternative to connect the Scarborough community. Despite its growing cost, it remains cheaper than the subway, a sensible project is already being planned: a 17 stop LRT can be built within the funding envelope along Eglinton Ave. E. to the UofT Scarborough campus.

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Residents have even petitioned for this alternative, with one reading:

It’s time for our politicians to understand that we do not just want one stop on the subway; we want transit that takes us to work, school, and all the opportunities this city has to offer.

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This TTCriders advocacy group lobbying for the LRT plan with a petition containing more than 250 signatures are on the right track. Politicians should truly take the time to understand what the people need, and no one knows that better than the people themselves. It is time set the right track in connecting the Scarborough Centre economic hub with greater Toronto opportunities by choosing to fund more realistic and sensible projects like the LRT rather than a subway expansion.

The Sharing Economy is on the Rise

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The world’s largest taxi company owns no vehicles.

The largest accommodation provider owns no real estate.

Uber? Airbnb? Sound familiar?

Allow me to introduce you to an idea we have all learned in kindergarten, quite old, yet is only just beginning in its potential to generate economic opportunities; presenting the “sharing economy.” It is an economic model driven by network technologies that enables individuals to borrow or rent assets owned by someone else. Where regular individuals have become entrepreneurs.

Various types of sharing-economy companies exist, relating to transport, goods, services, space, or music and video. The sharing economy is projected to be worth $335 billion by 2028, and by 2020, experts say that more than 40% of the American workforce will be freelancers, contractors or temporary workers as well.

After reading this, I would expect two reactions:

  1. “I have been spending way too much money on eBay!”
  2. “So how have millennials caused an exponential shift towards the ‘sharing economy’ in the last couple of years?” (If you have thought of this and I really hope you did, you are at the right place!)

There is a whole generation of people that don’t want everything mass produced, wanting things that are unique and personal. This has combined with the functions of fast internet, smartphones and geolocation services. Today, the ability to access something is more important than ownership.

Companies such as Uber have become household names and so naturally I asked friends, most of whom are young adults, “why do you Uber?” and their top reasons were:

  • Fast trips any time, almost anywhere
  • Safety
  • Post-party rides
  • Avoid the cost of owning a personal vehicle

All of these factors will help us further explore how companies in the sharing economy contain somewhat of a status symbol, are a utilitarian service, and a booming business all wrapped into one.

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This brings up the question: Do the benefits of the so-called sharing economy outweigh the costs?

The opportunities and benefits are far greater than the associated problems. The only worry would be security within the peer-to-peer marketplace and monopolizing firms.

As we focus on the companies Uber and Airbnb, Uber provides incentives through discounts for your first ride and has a rate much cheaper than a taxi. The time spent waiting for an Uber is less and thinking like an economist and of the total cost, when you add the costs foregone — assuming that your “next best alternative” would be working — and costs of the ride itself, why would one not Uber? Especially in ridesharing, customers are in a rush and therefore the time cost to learn multiple user interfaces for the best deal is simply not worth it. I will continue to tap at my Uber app.

Airbnb has huge economic incentives to deliver a good experience through ratings to rate features of their stay, e.g., cleanliness, location, and communication. As well, both guests and hosts may provide personal comments. Airbnb automatically provides $1 million in insurance against damage or theft to nearly all of its hosts and only rarely gets claims. This framework of trust has unlocked huge value from unused bedrooms.

“In the last 12 months in Paris, we’ve generated $240 million in economic activity,” said the Airbnb CEO, Brian Chesky.

Social networks provide a way to check up on the customer as online billing is now highly efficient. With this comes the enjoyment and empowerment within the customer’s experience, and is a factor that is highly valued. How many more utils does one receive from an Airbnb stay compared to a hotel stay? The connection to the culture and people is there within the accountability and transparency between the parties.

Rental services are in itself cheaper than owning them and so can be afforded by any category and class of people. For example, consumers pay on average $9000 to own and operate their cars, and this does not include the high price of gas. Public transportation doesn’t run around the clock, and not all taxi companies run 24 hours a day. People who are out and about after regular hours, such as late-night shoppers and second- and third-shift workers, often use Uber to get home quickly when bus and metro train lines are shut down.

The supply and demand structure is constructed such that the listings are made and then the demand is aggregated. Internet mediaries now effectively expand the supply of taxi-like services to fit market demand in real time on a global scale, this solves the problem of deadweight loss that exists within the taxi market.

Common benefits for participants of the sharing economy include:

  • Always delivered more value faster
  • Avoid the hassle and expense of purchase, storage, and maintenance
  • Labour-intensive economy
    • Low fixed costs
    • Variable costs adjusted to meet demand

To make use of under-utilized inventory is driving sustainability for the environment. The sharing economy has been expected to alleviate societal problems such as hyper‐consumption, pollution, and poverty by lowering the cost of economic coordination within communities.

Just think how much better all this is for the environment — for people to be renting their spare bedrooms rather than building another Best Western and another and another. The sharing economy is powerful, and efficient as society gets the most that it can from its scarce resources.

Generational altruism is practiced, the selfless concern for the welfare of others through reputation. For both the customer and provider, intentions, capabilities, and values IS A CURRENCY SO POWERFUL.

“A good reputation can be used to buy cooperation from others, even people we have never met.” – Mark Pagel, Wired for Culture, 2012

More than 50 percent of Airbnb hosts depend on Airbnb to pay their rent or mortgage today. Chesky added: “Ordinary people can now be micro-entrepreneurs.” People who have difficulty finding a job have the opportunity to be employed as tour guides along with becoming hosts.

Competing companies will innovate, leveraging collaborative technology to connect with their customers. This will radically change the way goods and services are created, distributed, priced, accessed (not owned) and consumed. It is true here that competition enhances welfare. The role the government plays is through regulation as the Canadian government continues to debate on how to treat the sharing economy legally.

THE BOTTOM LINE: This emerging model is now huge and disruptive enough for regulators and companies to have woken up to it. That is a sign of the sharing economy’s immense potential and wave of productivity. It is time to start caring about sharing.

 

Let’s talk about prices, and rationality.

We’re soooo irrational, it’s crazy.

Every since I was a little girl, I’ve seen everyone around me – friend, strangers, and family members fall for this. Hell, I’ve even seen myself fall for it even though I know better. From clothing to food, we humans Keep. On. falling. For. The. Same. Trick. OVER AND OVER AGAIN! Yep, we’re extremely irrational – emotions could affect us, a little bit of irrelevant information could affect us from buying things.

Us irrational buyers effect the demand portion of the supply and demand graph, causing a shift in the graph. According to our wants, the companies selling the goods and services bend to our will and produce as much as we, the buyers desire.

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In a way, we’re the ones in control of the companies!!

Anchoring Effect
What is this effect?
Anchoring effect describes the common human tendency to rely too much on the first piece of information offered (the “anchor”) to the buyer when making decisions.

This is why places like Pacific Mall in Toronto can still stay open, despite all the haggling. No seller would ever put the selling price of a product lower than their production cost, just because you as a buyer convinced them that you should have the item for a lower price. Eventually, every buyer gets tricked into believing that they got an excellent bargain from their purchase. Information asymmetry is the first reason buyers never get a good deal. This only occurs when one party knows more about a product than the other party does. In the case above, it’s when the seller knows more about a product than the buyer.

We DO NOT pay a rational price for goods.

Given the level of asymmetry or ‘unevenness’ in the knowledge of the transaction between the buyer and seller, this is where anchoring effect comes in.

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“But lowkey I’m still making $$$$”

Dave Ariely, the James B. Duke Professor of Psychology and Behavioral Economics at Duke University conducted lots of research, one being him reading a poem to his students and telling them he would do poetry readings of varying lengths (short, medium and long). He asked half his students if they would hypothetically agree to listen to him if they were paid $10 and the other half if they would pay him $10 for the honor of listening to him. They were then left to bid for each section. Those who had been offered money, offered on average $1.30 for a short poetry reading, $2.70 for a medium and $4.80 for the long reading. Interestingly those who had been asked if they would pay Ariely offered a dollar for the short, about two dollars for the medium and just over three dollars for the long reading. The initial offer not only anchored how much they would pay but also whether they would pay or be paid. This is called arbitrary coherence, as the initial price is randomly chosen (arbitrary) and in turn affects future prices (coherence).


Way Overpriced!

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Materialistic? Non-materialistic? Which one are you?
I’m definitely more on the materialistic side.

The more the person values luxury goods, the more materialistic they are, since they’re higher on the materialistic scale measuring material values.

Economic psychologists documented in their recent studies that materialistic and non-materialistic people view the world differently from each other. They also studied something called the “labeling effect”, a term used by psychologists and marketers which describe the effect people evaluate products based on external cues, such as a product label, a server’s recommendation and/or the price – rather than the quality of the product.

These researchers conducted a study where a group of people were shown 2 bottles of wine, one cheaper than the other, but in fact they were the exact same wine in 2 different bottles. When asked to grade both wines, materialistic people graded the cheaper wine significantly lower than the expensive one.

But this is a basic human tendency called confirmation bias, where we interpret the world in a way that fits with our preexisting views. This means that we need something to compare an object to, for a price. In the case above, the confirmation bias is seen as  materialistic people giving a low score for the cheaper wine.

So yes, products can be indeed overpriced.

The Sharing Economy: Crowd-based Capitalism

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My alarm goes off, it’s 9:00 am and I have work in 30 minutes. If I spend 10 minutes getting ready, I’ll be left with 20 minutes to transit but that’s relying on a notoriously inconsistent public transit system so I guess Uber is my only option now.

The amount of times I’ve been put in this situation is quite appalling, to be honest, but the truth is that in my situation the convenience by far outweighed the costs. Let’s take a step back for a second. I just ordered a random person on the street, in his own personal vehicle, to drive me to work, all in under a minute using a mobile app on my phone. I really paid to get into this strangers car? Whats going on here?

Well, let me tell you it’s that magical sharing economy.

The Sharing Economy is basically an economic model in which individuals make money from underused assets. A prime example of this being car sharing (95% of a cars lifetime goes unused, why not maximize the time spent with the asset?)

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This socio-economic system has changed the way people interact, do business and use their resources. While on the other hand many also say that its dented traditional businesses and have made them

The Pros

Use, Reuse, and Re-purpose

There are many people in the world who own more than just one car, property and gadget (Heck, even a pair of expensive shoes) that are not used commonly. The sharing economy allows private owners to offer their possessions to others for a fee, and this really is shown in practically every market. From the most popular ride-sharing service (Uber) to being able to rent luxury sneakers (LSWOP) there really is no idea of the limits people will go to produce income with their additional assets.

Less Unemployed

Although many have quit their day jobs because the benefit of working their own hours (and being their own boss) showed to be more valuable than a secured income, many have also found employment through these services. More online / at home jobs and more platforms to sell (Etsy, Amazon, eBay) have allowed these workers to have sources of income that they may be able to live off of.

New Business’

This economic structure has a grey area when it comes to government regulation and that serves as an incentive for business to enter. (can, however, make more competitive markets) The hotel industry is heavily regulated by businesses; they need accessible fire escapes, they need to have disability accommodations need to meet health and safety regulations ETC. Airbnb has nothing like that and it really does allow the alternative to be cheaper at times because of it.

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The same goes in the taxi industry.  To be a taxi driver in NYC, you need to have a medallion. And what if I told you these medallions once sold for over 1 million dollars? (The most recent selling posts had them for around 200k) for While some drivers actually own their medallions, others are owned by different taxi companies. People actually have to take out HUGE loans to be allowed to supply A SERVICE.

This is one of the strongest reasons why the sharing economy is so successful and relevant. Through its nature (deregulation) its gotten rid of one of the primary barriers to entry, along with general start-up costs.

The Cons

Loss in government revenue

A set back in this economy that many critics say are the potential losses in tax revenue for the government. Many people who do business over the internet (such as writing, coding, artwork, commission based services) provide their services internationally. This results in not everyone paying taxes on their earnings online.

Frauds and Scams

The amount of news articles my parents have shown me about people posting fake Airbnbs to take money from unsuspecting vacationers is depressing. The nature of an online business means it’s going to be hard to regulate. Don’t even get me started on how difficult it is to track people and prevent them from using a service. (IP changes, proxies, ETC.)

There’s no chance in hell the business would spend time and money to check each and every single listing to insure that they’re all nonfraudulent. (They have more than 4 million listings on their website! that’s more than the top five hotel brands combined.)

Its just a new form of capitalism

Critics and analysts say that “Sharing Economy” is not a good name for what it implies but rather “Access Economy” because it provides a path for people to access services and products they need and its the capitalists and players who benefit the most, not the individual who actually offers their services through these websites.

The Verdict

Personally, the sharing economy seems analogous to the Californian Gold Rush. It was the people supplying the tools not the people searching for gold who made money. In this case, its venture capitalists and engineers providing the tools.

Thankfully I’m able to say I’m not searching for gold at this time! I feel more like the town that benefited from all the business that came in and helped to bring the economy up in the area. There is a wide variety of services available to me at the click of a button, and honestly, that’s what I love. I can order food to my doorstep, or get a ride to school all in the same app. Personally the benefits outweigh the cons!

 

Will the Free Market Decide Whether Capitalism is Still the Best?

 

Is capitalism the best economic system?

Have you ever been just browsing the internet, maybe watching Youtube, then you decide to check the comments on whatever you were looking? Big mistake. Doesn’t matter what you’re watching, it always somehow manages to devolve into politics. Through the slurs being thrown left and right, you might have heard the terms capitalist, and socialist, definitely not as terms of endearment. So how did we get to this point? Shouldn’t this debate have ended,several decades ago? How i wish that were true. After the cold war, consumer confidence was up, the market was strong everything seemed to be going great, it was an age of prosperity. This all came grinding to a halt in 2008 when the housing market crashed, with few lucky survivors. Coupled with the slowest recovery from a recession since WW2 (and certainly not helped by the controversial election of Donald Trump) people have begun turning towards more radical solutions, to either “fix” capitalism, or replace it. This has presumably brought you here, where I’d like to take you through a quick briefing of both systems, and to decide whether capitalism is or isn’t the best system afterall.

So let’s first start off with defining capitalism. It’s an economic system where the exchange of goods and services are done privately. That is to say, that government interference is limited, or in some cases not present. However, there is no major nation that operates solely on this system, not even the US in its current state. While it certainly is true that the US government has a lesser influence on the market as compared to many other countries, it still has some presence in things such as education, food safety and public infrastructure. As such, it is considered a mixed economy, where there is blend of private and nationalized elements working together. Many economists who advocate for free markets such as F.A Hayek and Milton Friedman accept the role of government in places where the market can’t provide, for example, law enforcement. Capitalism can also be broken down into different schools as well, so for the sake of this blog’s topic I’ll narrow it down to a matter of market economies and command/centrally planned economies. Because honestly, talking about the different interpretations of capitalism warrants a blogpost of its own.

On the flipside, there’s Socialism. While not quite as far reaching globally as capitalism ever since the cold war ended(communism and socialism were closely linked), there are still some strongholds left in this world. Almost the polar opposite to capitalism (and perhaps that’s why the debate is so heated), the state plays a major role in planning the economy, and owns large portions of the elements within. As they are considered a command economy, they have control over the production output, and the pricing of their goods.

Now that we’ve answered the question of what and socialism are, it’s time we took a look into the closer details as to why they are so fundamentally opposed to each other.

Efficiency

Capitalism, is primarily concerned with the generation of profit, which has been called both a strength and a weakness of the system itself, but i’ll cover the latter afterwards. Now, why would the pursuit of profit be ideal? Using economic terms of scarcity and incentives, we can come up with an explanation. Capitalism uses economic incentives to motivate people to innovate and to create better products for the consumer market. By dangling the possibility of striking gold and becoming rich, people are drawn towards the opportunity like moths to the flame. As Milton Friedman states:

“Well first of all, tell me: Is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course, none of us are greedy, it’s only the other fellow who’s greedy. The world runs on individuals pursuing their separate interests”

Now, one might ask how does this relate to capitalism? It’s quite simple, capitalism understands that there will always be greedy folk, in turn uses that hunger for money into something productive to society and then rewarding them for it. In that sense, greed is good. More greedy folk trying to get into the same market will drive down the price through competition, ideally of course.

If anything, markets are very efficient at allocating resources. Think of it this way, if you make a bunch of things that no one asked for, you’ve just spent time and effort all for nothing, and you’d have wasted resources, making no profit. You’ll also have to figure out what to do with those products that people didn’t buy, and chances are, you probably have a loan to repay too. In effect, if you’re considering taking your chances at becoming the next gorillionaire, you’ll have to consider the three production questions if you plan on getting anywhere.

  • What to produce?
    • You should be producing what the market is demanding for, yet at the same time is profitable. Ideally, the demand and the supply will meet
  • How to produce it?
    • Ideally, you do so with the lowest costs for the highest gains. This of course, within legal boundaries
  • For whom to produce?
    • It all depends on the scope of the market. It could be aimed towards more local markets, or it can be international if the demand is there.

Does this mean that it’ll automatically give everyone the ability to make the right decisions? As much as that would be great, I don’t think any system could do that. In some ways, it can be seen as both a positive and a negative economic incentive, as you either gain money for making good choices, or lose it if you don’t.

Now that may sound harsh, and it has been a point of criticism, that the system is too insensitive, too unfeeling and that the only thing it cares about was money. As stated by Michael J Sandel, a writer for the Atlantic:

“The most fateful change that unfolded during the past three decades was not an increase in greed. It was the reach of markets, and of market values, into spheres of life traditionally governed by non market norms. To contend with this condition, we need to do more than inveigh against greed; we need to have a public debate about where markets belong—and where they don’t.”

Returning to the point I made about the primary goal of profit, it’s important to also explain why some people can see it as a problem. It essentially puts a price tag on every aspect of life, and is invasive, as some things such as art reflect on a more personal level, slapping a monetary value certainly removes such an element. The greed factor may also cause a monopoly, if the government doesn’t take proper measures to prevent this, especially in markets with higher fixed costs like hydroelectricity. A final critique on market economies is that they are prone to market crashes and instability, as seen most prominently in the 1930s great depression, as well as the 2008 housing market crash. It is commonly cited that the lack of regulations promoted irresponsible spending, and making high risk bets that didn’t pay off are what caused it, and that in such cases the government had to step in and spend to fill the sudden lack of spending from consumers.

Now, in a socialist economy, things are much more rigid, and in some circumstances less prone to crash(less risk taking).

  • What to produce?
    • You will produce what has been decided and planned ahead by the government.
  • How to produce it?
    • You’ll likely use state owned or communal equipment
  • For whom to produce?
    • In socialism you produce for your people as a whole. This isn’t to say that all socialist governments are self reliant, North Korean juche style(ironically though, North korea receives quite a lot of help from neighboring china)

 

One of the most prominent criticisms socialism’s efficiency is that there’s been no example where economies that place more weight on this model have actually succeeded economically. Bold statement, but let me explain. Looking at nations that outright call themselves this(not the ones that call themselves social democracies), none of them can be considered prosperous. While most of the leaders that hold the power like to claim their virtue and how they have helped the people, a cause for concern is that having such unchecked power under one group or person could invite corruption, or equally bad, incompetence. As an example of this which seems to fit a broader trend(Zimbabwe under Mugabe, Cuba, North Korea ) Venezuela under current president Nicolas Maduro and his United Socialist Party, the bolivar has been devalued to such a point that the premium currency in the popular online game World of Warcraft was deemed to be worth more. At one point, the government decided to print new bank notes to help cope with the hyperinflation, yet there was a shortage in the amount of bills(quantity shift left in supply, upwards movement of price equilibrium as demand either increases or stays same), which incidentally made a good portion of the nation millionaires overnight.Unfortunately for them, the money had very little purchasing power, and there was a lack of items to even purchase. Keep in mind that this is a country that has the most oil reserves in the world, surpassing even Saudi Arabia and Canada, yet is only the 11th in terms of production. Not to mention, the number of barrels produced has declined by nearly 30% recently. As 50% of their gdp is reliant on petroleum, which also accounts for 95% of their exports, this severely hurts the country. What we can see from here is that centralizing market wide decisions tends to make things less efficient. Another thing that is less mentioned(all though brought up in the article about the WOW currency), is the centralized control tendency to create black markets, as some products are heavily regulated and taxed, or sometimes outright banned.

Equity

One of the most major criticisms of capitalism in modern day economics, is the large gap in the wealth distribution between the upper and the lower classes. According to statista, in the US the 50% that comprises the lower income brackets only accounts for 1.1% of the nations total wealth, while the top 1% represent 35%. Since “fair” is a very subjective term, this is something that is very difficult to decide.

To a free market capitalist, fairness is that someone is entitled to reap the rewards of his own intellectual labor and to decide what their workers’ pay will be, and not be forced to hand it away to someone who, in their view did not contribute as much to the success. The worker on the other hand should be able to move around by their own volition and bring their trade elsewhere if they are unsatisfied with their salary.

Socialism operates on a platform that focuses on social and moral incentives, as you are to work for the good of people. In such a case, wealth is redistributed so that the gap between the highest and lowest earners is shrunk. The famous phrase popularized by Karl Marx “from each according to his ability, to each according to his need” is a perfect way of describing the principle behind their views on equity. One of their most prominent platforms that we see in modern mixed economies is the universal healthcare system, which while is free for up front usage, gets covered in taxes later on. As a whole the system helps care for those who aren’t able to and raises the equity, at the cost of making another person worse off.

As much as pursuing fairness can be an admirable goal, it certainly hinders to a crippling degree the efficiency of the country’s economy. For one, this causes a lack of incentives for development or innovation, or more specifically the wrong motivation. As economist John Kay writes:

“These planned economies failed in the development, not just of consumer products, but of business methods. Their technological development was disappointing in almost all not related to military hardware. Centralised systems experiment too little.”

Without the prospects of economic movement as well as a general averse attitude to taking risks for greater reward, people aren’t as motivated to push themselves harder than the next person, if they know the government will redistribute it so that they end up in similar places.

My Thoughts

So with this in mind, do i think that we should move towards more regulations, or fewer? Personally, I’d rather a freer market, though i am not opposed to all government regulations. In citing the housing market crash and the great depression, I am still very unsure on the causes or the handling of it, as they are both very hotly debated even to this day(interesting articles on the handling of the great depression and financial crisis). And that’s the thing, economics is such a speculative study that it we can’t scientifically prove regulatory policy properly. 

However, from what I can observe, most successful mixed economies focus more on the market side, while splicing some elements of social benefits such as healthcare. Clearly, this is only sustainable because these countries were economically prosperous before they implemented these changes.

Until we can find better alternatives, I believe capitalism is currently the best economic system among the various choices because it incentivizes people to push harder and allows for anyone to succeed. It also is more versatile, in being able to afford more social programs, while socialism unfortunately tends to turn to some forms of privatizing out of a necessity. In having to pick a system that doesn’t always work, and a system that hasn’t worked, I believe the choice for me is clear.