Evidently some of us think like an economist without studying economics, formally. I was frequently told by my grad students that my budget and policy classes were more like an economics class than political science. I spent a lot of time discussing trade-offs and 2nd and 3rd order effects.
This speaks well of you and of your grad students. Of course, this blog, Bastiat's Window, is named for Frédéric Bastiat's Parable of the Broken Window, whose message is that it is essential to consider those 2nd and 3rd order effects.
I was a farm boy. We didn't study economics, but good farmers have to know a lot of practical economics. 2nd and 3rd order effects (we didn't call them that, of course) hit you fast on the farm.
That's a great story. Back in the early 1980s the fed govt had a program called Payment in Kind that promised farmers either money or the equivalent in crops for *not* growing certain crops. At the time I owned a small rural grain elevator business. We bought and sold corn, soybeans, and wheat, and sold and delivered livestock feed and chemical application.
I had a very intelligent customer who grew all three crops and also raised hogs and cattle. I worked out a spreadsheet for him. I showed him that if he took the 'correct' position on 9 different sets of options he would only lose money if the entire farming price structure collapsed, in which case he was screwed anyway, and if it went well he could make oodles, while if only some of the contracts 'worked' he would still do well. We discussed it for a couple of weeks and then he declined. Too 'risky' for him, even though he trusted e, and I was getting nothing out of it.
Well, the next year he asked me how he would have done if he had made the contracts (both puts and calls). I had kept the sheet, so we ran it on those numbers. He would have made money on 8 of 9 and lost a very small amount on one. He 'lost' about a million dollars by not doing it. He just sighed. Farmers are also very conservative in trying new things.
P.S. I think it was in 1983, but normally wheat prices were about $4/bu forever. Suddenly they began going up like crazy. When they got to $6/bu I looked at the 50 years of records I had (I bought it 3 years before) and found what was the least amount of wheat the elevator had ever bought in any one year. Then I looked out and saw every farmer I knew planting wheat (when normally a lot of them wouldn't). I 'sold', a contract for 100,000 bu (that I didn't have or didn't have contracted for delivery from farmers) to the riverhouse (large grain elevator located on the river) for July/August delivery for $6.24/bu. I promised myself it the price went to 6.44 I'd sell the contract and eat a $20,000 loss. It hit $6.28 or so and began dropping.
That was in early Oct I think. The next summer I was filling that contract with wheat I bought from farmers for $4.10/bu. I had asked every one of my customers if they wanted to sell to me for future delivery at the time, for $6/bu. Out of 150, none sold to me. So when I bought it for $4.10/bu some were very unhappy, but I told them, I took the risk, I get the profit.
The common reason for not contracting to me was "How do I know I'll have any wheat to deliver?" I asked, "What's the worst wheat crop you ever had? Sell me 1/4 of that." Not one did. Conservative.
I wish people would listen to Dr Cagan. There is a regrettable modern tendency to dismiss any difference of opinion as due to ignorance or stupidity. And so, people will never understand each other.
I drive through the Bay Area fairly often, and I think Prof. Vickrey's ideas live on in their HOV lanes.
The other two gentlemen are to be admired.
Great article, sir, and some insight into your unusual thought process. (To a non-economist.)
Thanks so much for your kind words. Our professors included conservatives and liberals and socialists and libertarians. The department was plagued by rancorous battles but, so far as I recall, they all stemmed from personal issues, not political differences. One of my favorite professors was Alexander Erlich, and I recall him giving me a high grade on some verbal praise for an essay I had written on John Stuart Mill's proto-libertarian philosophy. Those HOV lanes are, indeed, Bill Vickrey's legacy.
Did the professor follow his student's advice and put $500 in an envelope?
There is a sharp distinction for everyone between what we know and how we behave.
For instance, several years ago I had an epiphany about why "A Place for Everything and Everything in its Place" works.
It's because the 15 seconds it takes to put something away in its place, is always shorter than the 15 minutes it takes to find it. I call it Economics 101 (perhaps it is).
So, do I live an organized life? Ask my wife if you dare.
PS - I've discovered a benefit for the irritating habit my computer has developed of autocorrection and filling in words. It forces you to review carefully what you wrote. It's like having a secretary that types up your dictation, I guess we've come full circle.
Macirish, if you carefully review what you write, you are an honorable exception these days. More and more people simply rely on spellcheck to keep them from sounding like idiots and it doesn't always work. That is why you see usage errors like "tow the line" or applauding a remark with "Here, here." Imagine my disappointment when a secretary who wrote that the Christmas lunch would feature pasties instead provided mere baked goods. Is there a vicious circle at work here, where bad usage becomes more common, therefore more widely accepted, because it is cheaper?
I'd like to say that I have been faithfully reviewing what I wrote in the past. But suddenly it seems like it can't be avoided. There are moments when I'd like to make my own mstakes, but usually I'm in a hurry and just glance at what I wrote. (Yes, I had to force this #$% box to let me mistype mistakes.)
Sometimes, the acceptability of computer sloppiness is a good thing. In the early days of email, I worked for a lunatic who demanded that all emails be entirely error-free. So, rather than doing actual work, dozens of employees spent endless hours proofreading emails to make sure they wrote "I'm going to the cafeteria and will return in 30 minutes," rather than "I'm going to teh cafeteria and will return in 30 minutes." The latter would have brought a screaming rage and 15-minute hate session from said lunatic.
I'm quite sure he didn't follow my advice. Perhaps I'll ask him, sometime. :) I love your 15-second epiphany. My wife and I have strived in recent years to follow that principle. I call it my War Against Entropy. When I'm busy tidying up my office late at night rather than leaving it for the next day, I tell Alanna, "I'm putting off procrastinating until tomorrow."
"...putting off procrastinating..." is a pretty interesting turn of phrase.
While I try to be better at a place for everything, I don't always succeed. But, now when I have trouble finding something (that I should have put away), I at least remind myself of what I should have done. (And that's a first for me.)
I am convinced that if the world is consumed by nuclear conflagration in the next few years, it will be because autocorrect made some change that fatally altered the message contained in a sensitive diplomatic cable. Sometimes when I have a spare moment or two, I type the name of someone I know (generally someone whom I dislike) and see how autocorrect changes their name. Sometimes, the results are quite spectacular. :)
Much more likely in a military order or situation report or the like, it seems to me. I am unpersuaded that diplomatic communications are consequential, still less that their details are.
The possibility of an error causing a catastrophe is something to worry about.
We were one micro-switch away from losing the east cost to an H-bomb.
And then there was the case where a Russian soldier refused to believe that the US was attacking Russia when their radar systems mistakenly reported we were.
No point going on, but a lot of potential for a catastrophe.
Then there’s the theory that the A-bombs were dropped because the Japanese word mokusatsu was mistranslated when the Allies demanded unconditional surrender.
Wow. No kidding? Although I was stationed in Japan for 19 months, I was too young to realize what an opportunity it was.... One thing is certain, MacArthur "won the peace" or I would have been "behind the wire".
But, I wonder if the Japanese language has a word for 'unconditional surrender" of an enemy, but no word (or a completely different word) for it when it is applied to themselves?
There was no misunderstanding over “unconditional surrender.” The controversy was over Japan’s use of “mokosatsu” in its response. The word can mean either “withhold comment” or “ignore.” In 1950 the argument was raised that the Japanese High Command had really said they would withhold comment while deliberating, whereas the Allies took it to mean ignoring the demand for surrender. Most scholars dismiss this argument as a myth and believe that the Allies understood it correctly. But there’s enough controversy to make it an illustrative example.
Economics 101 in the etymologically sound but obsolete meaning of the word “economics”: household management, taught in schools as “home economics.”
Gary Becker (may his name be for a blessing) analyzed it as the manufacture of a basket of homely and highly-valued services (or, possibly, of that ethereal product “utility”) from a given budget of money, time, and the legal maximum on spouses. That is: it is exactly like building and maintaining a subway system. It is a species of engineering, not of economics, as the latter term is now used.
The latter, economics as now understood, is the study (housewives and engineers and entrepreneurs manage, not study) of market (fairly freely chosen, mostly trade, barter, and exchange) responses to changes in conditions, especially political conditions (hence the older name “political economy”).
Really good point. Let me make sure I understand what you're saying.
"A place for everything and everything in its place." Is a choice, selected because it is more efficient. Economics is the study of when and why people make that choice.
David, I wanted to let you know that I added a fifth anecdote to this piece--a recollection of Donald Dewey's comment on framing of research. I also posted that additional chunk in my newest post, "On the Mortality of New Yorkers, Presidents, Dogs, and TV Characters" (https://graboyes.substack.com/p/on-the-mortality-of-new-yorkers-presidents).
Though I only received a BS in Economics, I can truly say that it has continued to shape how I approach the world, even as my career moved towards another direction. Understanding that every graph I see has underlying assumptions (some of which I may heartily disagree with) always make me want to know more, to question more, and to never take things at face value.
I still get emails from students I taught 25 years ago telling me how some recollection of our class affected some decision they made, say, in treating a patient.
Thank you SO much for the publicity. So glad you have similar memories of Lowell Harriss. I really love the photo. He really seemed to me to be an anachronism back in the 1980s. He really wasn't that old, but he had the air of someone from a bygone, gentler era.
First, thank you for a wonderful, thoughtful and informative article. Second I would tentatively diagnose your somnolent professors with sleep apnea. Today a very treatable condition. Third, I also discussed second and third order effects with my students. It was sometimes difficult for them to follow: if you treat a patient with this what will happen and then how will that affect both your patient and the next step in treatment. The process was difficult for them to consider but rewarding when they did. Fourth, my son spent a year+ in Iraq with the greatest military in the world but as the intelligence officer he was always amazed that the command didn’t take into consideration knock on effects. Maybe the study of economics should be more universal.
Apnea sounds likely. Thanks to your son for his service. I’ve always told students that no matter what they study, take a couple of Econ classes. At age 25, I was a political writer for newspapers, and I decided that I couldn’t really do that job properly without knowing some Econ. I thought I’d take a few classes, but ended up devoting my life to it. I’m still a journalist, though. :)
I never had any interest in economics as a young man. My mind was consumed with science, especially biology. While many around me aspired to be athletes, actors, successful business people, engineers, etc. I knew I wanted to be an '-ist'- paleontologist, ornithologist, herpetologist, marine biologist, etc. I finally settled on medicine when my exposure to laboratory research led me to miss human interaction. My interest in economics was finally piqued by reading, Freakonomics by Dubner and Levitt. I found it fascinating. When Covid hit and we were muddling through the early pandemic with unprecedented policies such as lockdowns, business closures, social distancing, and school closures one of the first things I recall that supported my intuition that we had it all wrong was the assessment by economists that the death toll from these policies would exceeed that of the virus itself. Well-established economic equations showing the rise in deaths caused by fall in income was a revelation and, looking back, prescient. I believe history will show our top-down, governmental pandemic response to be the greatest failure in the history of medicine and public health. I will certainly look up Landsburg's book.
Evidently some of us think like an economist without studying economics, formally. I was frequently told by my grad students that my budget and policy classes were more like an economics class than political science. I spent a lot of time discussing trade-offs and 2nd and 3rd order effects.
This speaks well of you and of your grad students. Of course, this blog, Bastiat's Window, is named for Frédéric Bastiat's Parable of the Broken Window, whose message is that it is essential to consider those 2nd and 3rd order effects.
I was a farm boy. We didn't study economics, but good farmers have to know a lot of practical economics. 2nd and 3rd order effects (we didn't call them that, of course) hit you fast on the farm.
Derivatives originated with agriculture. Wall Street just copied what farmers have always known. See this old piece of mine: https://graboyes.substack.com/p/old-west-derivatives
That's a great story. Back in the early 1980s the fed govt had a program called Payment in Kind that promised farmers either money or the equivalent in crops for *not* growing certain crops. At the time I owned a small rural grain elevator business. We bought and sold corn, soybeans, and wheat, and sold and delivered livestock feed and chemical application.
I had a very intelligent customer who grew all three crops and also raised hogs and cattle. I worked out a spreadsheet for him. I showed him that if he took the 'correct' position on 9 different sets of options he would only lose money if the entire farming price structure collapsed, in which case he was screwed anyway, and if it went well he could make oodles, while if only some of the contracts 'worked' he would still do well. We discussed it for a couple of weeks and then he declined. Too 'risky' for him, even though he trusted e, and I was getting nothing out of it.
Well, the next year he asked me how he would have done if he had made the contracts (both puts and calls). I had kept the sheet, so we ran it on those numbers. He would have made money on 8 of 9 and lost a very small amount on one. He 'lost' about a million dollars by not doing it. He just sighed. Farmers are also very conservative in trying new things.
P.S. I think it was in 1983, but normally wheat prices were about $4/bu forever. Suddenly they began going up like crazy. When they got to $6/bu I looked at the 50 years of records I had (I bought it 3 years before) and found what was the least amount of wheat the elevator had ever bought in any one year. Then I looked out and saw every farmer I knew planting wheat (when normally a lot of them wouldn't). I 'sold', a contract for 100,000 bu (that I didn't have or didn't have contracted for delivery from farmers) to the riverhouse (large grain elevator located on the river) for July/August delivery for $6.24/bu. I promised myself it the price went to 6.44 I'd sell the contract and eat a $20,000 loss. It hit $6.28 or so and began dropping.
That was in early Oct I think. The next summer I was filling that contract with wheat I bought from farmers for $4.10/bu. I had asked every one of my customers if they wanted to sell to me for future delivery at the time, for $6/bu. Out of 150, none sold to me. So when I bought it for $4.10/bu some were very unhappy, but I told them, I took the risk, I get the profit.
The common reason for not contracting to me was "How do I know I'll have any wheat to deliver?" I asked, "What's the worst wheat crop you ever had? Sell me 1/4 of that." Not one did. Conservative.
I wish people would listen to Dr Cagan. There is a regrettable modern tendency to dismiss any difference of opinion as due to ignorance or stupidity. And so, people will never understand each other.
I drive through the Bay Area fairly often, and I think Prof. Vickrey's ideas live on in their HOV lanes.
The other two gentlemen are to be admired.
Great article, sir, and some insight into your unusual thought process. (To a non-economist.)
Thanks so much for your kind words. Our professors included conservatives and liberals and socialists and libertarians. The department was plagued by rancorous battles but, so far as I recall, they all stemmed from personal issues, not political differences. One of my favorite professors was Alexander Erlich, and I recall him giving me a high grade on some verbal praise for an essay I had written on John Stuart Mill's proto-libertarian philosophy. Those HOV lanes are, indeed, Bill Vickrey's legacy.
Very nice memoir. Thank you, Dr. Graboyes.
Glad you liked it!
I always like your posts.
Mutual.
Thank you.
Did the professor follow his student's advice and put $500 in an envelope?
There is a sharp distinction for everyone between what we know and how we behave.
For instance, several years ago I had an epiphany about why "A Place for Everything and Everything in its Place" works.
It's because the 15 seconds it takes to put something away in its place, is always shorter than the 15 minutes it takes to find it. I call it Economics 101 (perhaps it is).
So, do I live an organized life? Ask my wife if you dare.
PS - I've discovered a benefit for the irritating habit my computer has developed of autocorrection and filling in words. It forces you to review carefully what you wrote. It's like having a secretary that types up your dictation, I guess we've come full circle.
Macirish, if you carefully review what you write, you are an honorable exception these days. More and more people simply rely on spellcheck to keep them from sounding like idiots and it doesn't always work. That is why you see usage errors like "tow the line" or applauding a remark with "Here, here." Imagine my disappointment when a secretary who wrote that the Christmas lunch would feature pasties instead provided mere baked goods. Is there a vicious circle at work here, where bad usage becomes more common, therefore more widely accepted, because it is cheaper?
I'd like to say that I have been faithfully reviewing what I wrote in the past. But suddenly it seems like it can't be avoided. There are moments when I'd like to make my own mstakes, but usually I'm in a hurry and just glance at what I wrote. (Yes, I had to force this #$% box to let me mistype mistakes.)
Sometimes, the acceptability of computer sloppiness is a good thing. In the early days of email, I worked for a lunatic who demanded that all emails be entirely error-free. So, rather than doing actual work, dozens of employees spent endless hours proofreading emails to make sure they wrote "I'm going to the cafeteria and will return in 30 minutes," rather than "I'm going to teh cafeteria and will return in 30 minutes." The latter would have brought a screaming rage and 15-minute hate session from said lunatic.
I can’t help feeling sorry for the lunatic. Of course, I don’t have to work for her, or possibly him.
Count yourself among the fortunate. :)
I can't help but wonder how much time that lunatic spent proof-reading emails.
You’d be surprised.
Do not forget the inclusion of "sensitivity readers", whose job is far from traditional editorial work.
Orwell wrote extensively about sensitivity readers, who tended to the fragile sensibilities of high officials.
Isn’t it vicious cycle?
Either expression is correct.
I bet people who write “tow the line” say the same.
I'm quite sure he didn't follow my advice. Perhaps I'll ask him, sometime. :) I love your 15-second epiphany. My wife and I have strived in recent years to follow that principle. I call it my War Against Entropy. When I'm busy tidying up my office late at night rather than leaving it for the next day, I tell Alanna, "I'm putting off procrastinating until tomorrow."
"...putting off procrastinating..." is a pretty interesting turn of phrase.
While I try to be better at a place for everything, I don't always succeed. But, now when I have trouble finding something (that I should have put away), I at least remind myself of what I should have done. (And that's a first for me.)
I am convinced that if the world is consumed by nuclear conflagration in the next few years, it will be because autocorrect made some change that fatally altered the message contained in a sensitive diplomatic cable. Sometimes when I have a spare moment or two, I type the name of someone I know (generally someone whom I dislike) and see how autocorrect changes their name. Sometimes, the results are quite spectacular. :)
Much more likely in a military order or situation report or the like, it seems to me. I am unpersuaded that diplomatic communications are consequential, still less that their details are.
The possibility of an error causing a catastrophe is something to worry about.
We were one micro-switch away from losing the east cost to an H-bomb.
And then there was the case where a Russian soldier refused to believe that the US was attacking Russia when their radar systems mistakenly reported we were.
No point going on, but a lot of potential for a catastrophe.
Then there’s the theory that the A-bombs were dropped because the Japanese word mokusatsu was mistranslated when the Allies demanded unconditional surrender.
Wow. No kidding? Although I was stationed in Japan for 19 months, I was too young to realize what an opportunity it was.... One thing is certain, MacArthur "won the peace" or I would have been "behind the wire".
But, I wonder if the Japanese language has a word for 'unconditional surrender" of an enemy, but no word (or a completely different word) for it when it is applied to themselves?
There was no misunderstanding over “unconditional surrender.” The controversy was over Japan’s use of “mokosatsu” in its response. The word can mean either “withhold comment” or “ignore.” In 1950 the argument was raised that the Japanese High Command had really said they would withhold comment while deliberating, whereas the Allies took it to mean ignoring the demand for surrender. Most scholars dismiss this argument as a myth and believe that the Allies understood it correctly. But there’s enough controversy to make it an illustrative example.
And here we are in 2024 thinking we can rely on an AI Agent to correctly translate communications.
Economics 101 in the etymologically sound but obsolete meaning of the word “economics”: household management, taught in schools as “home economics.”
Gary Becker (may his name be for a blessing) analyzed it as the manufacture of a basket of homely and highly-valued services (or, possibly, of that ethereal product “utility”) from a given budget of money, time, and the legal maximum on spouses. That is: it is exactly like building and maintaining a subway system. It is a species of engineering, not of economics, as the latter term is now used.
The latter, economics as now understood, is the study (housewives and engineers and entrepreneurs manage, not study) of market (fairly freely chosen, mostly trade, barter, and exchange) responses to changes in conditions, especially political conditions (hence the older name “political economy”).
Just last week, I told someone that home economics was the original and economics was the offshoot.
Really good point. Let me make sure I understand what you're saying.
"A place for everything and everything in its place." Is a choice, selected because it is more efficient. Economics is the study of when and why people make that choice.
That, and how those choices of place change with certain stimuli, such as changes in relative prices.
Thank you for writing and sharing these stories!
My pleasure.
This is WONDERFUL. Thank you for writing it.
So glad you enjoyed it!
David, I wanted to let you know that I added a fifth anecdote to this piece--a recollection of Donald Dewey's comment on framing of research. I also posted that additional chunk in my newest post, "On the Mortality of New Yorkers, Presidents, Dogs, and TV Characters" (https://graboyes.substack.com/p/on-the-mortality-of-new-yorkers-presidents).
Though I only received a BS in Economics, I can truly say that it has continued to shape how I approach the world, even as my career moved towards another direction. Understanding that every graph I see has underlying assumptions (some of which I may heartily disagree with) always make me want to know more, to question more, and to never take things at face value.
I still get emails from students I taught 25 years ago telling me how some recollection of our class affected some decision they made, say, in treating a patient.
Robert, You motivated me to write this: https://www.econlib.org/robert-graboyes-on-the-minds-of-economists/
Thank you SO much for the publicity. So glad you have similar memories of Lowell Harriss. I really love the photo. He really seemed to me to be an anachronism back in the 1980s. He really wasn't that old, but he had the air of someone from a bygone, gentler era.
Yes. Well said. That's my take too. I think I might have seen him at an AEA meeting in New York in December 1988 or January 1989. But I'm not sure.
Nice piece, Professor Graboyes. I’m looking forward to reading your book when it’s published. Thanks for the reminder about The Armchair Economist.
Delighted on both counts!
Thank you for this! I'll be subscribing.
I'm honored!
First, thank you for a wonderful, thoughtful and informative article. Second I would tentatively diagnose your somnolent professors with sleep apnea. Today a very treatable condition. Third, I also discussed second and third order effects with my students. It was sometimes difficult for them to follow: if you treat a patient with this what will happen and then how will that affect both your patient and the next step in treatment. The process was difficult for them to consider but rewarding when they did. Fourth, my son spent a year+ in Iraq with the greatest military in the world but as the intelligence officer he was always amazed that the command didn’t take into consideration knock on effects. Maybe the study of economics should be more universal.
Apnea sounds likely. Thanks to your son for his service. I’ve always told students that no matter what they study, take a couple of Econ classes. At age 25, I was a political writer for newspapers, and I decided that I couldn’t really do that job properly without knowing some Econ. I thought I’d take a few classes, but ended up devoting my life to it. I’m still a journalist, though. :)
Did you notice your article was linked to on Instapundit?
Seems lots of people are interested in the arcane art of economics.
Yup! Instapundit is very generous about li king to my pieces.
Robert,
I never had any interest in economics as a young man. My mind was consumed with science, especially biology. While many around me aspired to be athletes, actors, successful business people, engineers, etc. I knew I wanted to be an '-ist'- paleontologist, ornithologist, herpetologist, marine biologist, etc. I finally settled on medicine when my exposure to laboratory research led me to miss human interaction. My interest in economics was finally piqued by reading, Freakonomics by Dubner and Levitt. I found it fascinating. When Covid hit and we were muddling through the early pandemic with unprecedented policies such as lockdowns, business closures, social distancing, and school closures one of the first things I recall that supported my intuition that we had it all wrong was the assessment by economists that the death toll from these policies would exceeed that of the virus itself. Well-established economic equations showing the rise in deaths caused by fall in income was a revelation and, looking back, prescient. I believe history will show our top-down, governmental pandemic response to be the greatest failure in the history of medicine and public health. I will certainly look up Landsburg's book.
Regards,
Rick