Economics Forum 2: Wealth

Posted on by Josh Smith

This entry is about wealth. I highly recommend this article (which covers similar topics to this entry, perhaps better).

The term “wealth” gets thrown around a lot. Like “public good,” however, economists mean something specific when they talk about wealth. It is not just money; it is anything that people want. When a person has more of what they want than they did a year ago, we can say that they are wealthier. If they have more of what someone else wants, we can also say that they are wealthier if they are then able to trade with the person who desires their things and thus get more of what they want.
The question of what people want is somewhat normative (econ jargon meaning “opinion-based”), but some examples will help here. Fishing, farming, and hunting are all ways of obtaining very simple forms of wealth: food, or the stuffs to make it. Besides food, people want clothing and shelter almost universally. Thus, making or trading those things can create wealth.

This point requires some explanation. The term “create wealth” is by no means a misnomer. Any time a person exerts effort to make some materials a little bit more useful or desirable to others, they are creating wealth. As an example, oranges on a tree in Florida aren’t of much use to us in Missouri. When someone makes the effort of picking, packing and trucking them here, they have created wealth.

Trade is another way to create wealth. Any time a person trades something they have for something else, economists tend to assume that they gave up one thing for another thing that they valued more. Because trade usually happens between two people (or two families, businesses, etc.) we can assume that they each feel like they got more out of the trade than they put in, or else they wouldn’t have traded.

Adam Smith more or less invented the modern study of economics when he published “The Wealth of Nations” in 1776. It’s safe to say that no economist today disagrees with his fundamental assertions that societies are made wealthier through specialization and trade (I thought about linking to eBay and Craigslist here, but the fact is that most people do their trading face to face, at the store, etc.).

Today, and for many years now, human civilization has been able to support a standard of living well above subsistence for many people. Specialization and trade, coupled with the concomitant improvements in technology made possible through the application of science to business, have made our current level of total wealth possible. It is also possible to destroy wealth, however. When willing traders are forbidden to trade by force or by law, wealth is destroyed. Property destruction is by far the most obvious form of wealth destruction (not counting campfires or other destructive acts where the destruction itself has value).

I have tried to explicitly avoid mentioning money so far. Though it is essential to our current degree of specialization, money is not truly necessary for specialization and trade — it’s just very convenient, and uneclipsed in efficiency as a medium of exchange.

Try thinking about wealth in the terms I’ve laid out here. Imagine the wealth you create for yourself, your friends and family, your employer. See whether you can think of any forms of wealth destruction that I didn’t mention. I look forward to any and all comments pertaining to this important free-market concept: wealth.

More Thoughts on Outliers

Posted on by Sarah Brodsky

I’ve finished reading another chapter in Outliers, about education: “Marita’s Bargain.” This chapter describes a typical day in the life of Marita, a 12-year-old girl attending a KIPP charter school in New York.

I highly recommend reading this chapter. You’ll be inspired by Marita’s determination and by the many examples of how KIPP has changed people’s lives for the better.

Here are some thoughts on “Marita’s Bargain”:

  1. I was annoyed that Gladwell doesn’t identify KIPP as a charter school, instead calling it an “experimental public school.” KIPP is indeed innovative, but not because it’s been given some license to experiment that other public schools are denied. KIPP’s policies and curricular choices would be legal for other schools to adopt; it’s just that traditional public schools usually don’t go out of their way to find best practices. I would expect a book like Outliers, which is premised on systematic generalization, to point out the different incentives that charters and traditional schools face, as well as the divergent outcomes for students that result.

  2. Gladwell seems to imply that KIPP’s success stems entirely from the extra time its students spend on schoolwork. The omission is understandable, because there isn’t space in a short chapter to analyze all the causes of school achievement, but readers should keep in mind that dedicated principals, well-qualified teachers, and sound instructional methods enter the mix. Which adds to my frustration with Gladwell — why doesn’t he ask what brought these factors to the “experimental” school? Was it a stroke of luck?

  3. I love the quotes from Marita, especially her comments on how hard she’s working at KIPP, and how her friends and family respond to her efforts. This middle-school student is making great sacrifices to get the best education she can, and I’m sure she’ll go far. Maybe she’ll appear in another Gladwell book some day, for her own scholarship or research.

Tobacco Tales From Both Sides of the State

Posted on by David Stokes

The Kansas City Star has a detailed article about the upcoming cigarette tax hike, while today’s Post-Dispatch has a profile of Bill Hannegan, St. Louis’ most vocal opponent of smoking bans.

The Star story quotes a couple of statists wgo think that the cigarette tax hike is a win-win-win situation because it will provide more kids with government health insurance, encourage adults to quit smoking, and prevent future children from taking up smoking in the first place. I think it is more of a lose-lose situation, because it expands the welfare state while targeting a certain group of people (smokers) to fund the political goals of those who salivate at the idea of getting young children on the dole early, so they can spend the rest of their lives thinking it is perfectly fine and normal to be dependent on the government. From the story:

But raising taxes unfairly penalizes low-income people, who are more likely to smoke, said John Nothdurft of the Heartland Institute, a conservative Chicago think tank.

“You’re making the bottom portion of society, who can least afford to pay taxes, pay more taxes,” he said. “They’re going to subsidize middle-class families getting SCHIP.”

To think that welfare used to just be for the poor. Now, it’s for everyone!

Thoughts on Outliers

Posted on by Sarah Brodsky

I’ve been reading Malcolm Gladwell’s latest bestseller, Outliers: The Story of Success. I just finished the chapter about Asian achievement in mathematics. I’ve written a few blog posts comparing Asian and American education in the past, so considering Gladwell’s argument now can serve as a follow-up.

Gladwell gives two explanations for Asian dominance on international math tests: First, he writes that Asians enjoy an advantage in learning math facts because of distinctive features of their language; and, second, that Asians’ perseverance — a direct result of their traditionally labor-intensive agricultural practices — allows them to master complex ideas that Western students give up on too soon.

I don’t know enough about linguistics or neuroscience to evaluate Gladwell’s first claim. But I’m intrigued by his second idea, that long hours of study and determination help account for the Asian math miracles. Gladwell cites a study showing that on an international math test, countries’ math scores were perfectly correlated with students’ willingness to fill out a long questionnaire about themselves — a list of questions unrelated to math. It looks like there’s a connection between patience for lengthy tasks and math success. If we take those cultural attitudes toward studying and transplant them to the United States, maybe we could replicate the Asian successes.

Here are a few things schools could do to change their math culture:

  1. Spend more time on math. My impression is that schools (at least, good schools) integrate reading into several subjects — science, social studies, etc. — but that math practice stays in the math classroom. Teachers could do more to reinforce math lessons throughout the day, especially in science, and schools could allot longer periods of time for math instruction.

  2. Simplify the elementary curriculum. State standards are part of the problem here, because the convoluted curricula making the rounds in the U.S. were designed to appeal to public schools. Covering more topics isn’t always better. Schools should cover a few mathematical principles each year, building up depth over the course of several weeks. Skipping around from counting to geometry to probability and back again encourages short attention spans and superficial understanding.

  3. Tailor assignments to individual students. A student has little reason to persevere in trying to learn a difficult concept if the class will soon move on, whether he or she has mastered it or not. There’s no need to hold everyone back while a few students catch up, but schools could assign more independent work so the weaker students continue to review the previous material. Individualized assignments would also give the best students a chance to develop their math skills beyond grade-level requirements.

Various Thoughts on the Stimulus Package

Posted on by David Stokes

I am not going to give my opinion on the stimulus package here, as I would be in over my head compared to the people I am linking to in this post. But I would like to share Dr. Haslag’s commentary about it from our main website, and also link to this article (link via Drudge), which quotes numerous economists with varying views, including one gentleman from St. Louis.

Unforeseen Benefit Coming to STL?

Posted on by Phil Eckelkamp

There may be a new unforeseen benefit stemming from the AB-InBev deal. Jeremiah McWilliams over at Lager Heads is reporting that our new Brazillian neighbors may be pushing to end the 1-percent city earnings tax. McWilliams quotes from a Post-Dispatch business column by Joe Whittington:

Anheuser-Busch InBev has on tap an effort to lessen the burden of the city’s earnings tax, according to knowledgeable sources.

One source said the brewery has talked with the Bryan Cave law firm about representing them in the effort. Bryan Cave cited client confidentiality when questioned about the subject.

A call to acting City Counselor Steve Kovac, whose office would handle the matter for the city, has not been returned.

One source said the brewery is trying to “avoid a pay cut for the Brazilians coming to town.” InBev, which bought the brewery, is based in Belgium, but many of its top executives are from Brazil.

The 1 percent tax, which affects those who work in the city, represents a big lug for the city, and the brewery was identified in a financial report for fiscal 2008 as the No. 1 source of this tax in the city. Its payment totaled $7.39 million, or 4.2 percent of all earnings and payroll tax collected by the city.

Now, I’m sure that the chances of actually overturning the tax are fairly slim, but I love their ambition of lowering taxes for everyone. Of course, I say this without having read any of the legal theory underpinning the firm’s purported argument, because Bryan Cave is doing its proper legal duty and keeping its mouth shut. I’ll just have to wait with baited breath. There are, however, a few pieces on the Show-Me Institute’s website demonstrating that eliminating the earnings tax makes good economic sense.

Even if the 1-percent tax were struck down, though, I’m sure city officials would try to find another way to get “their” money.

Urban Schools Need Fundamental Change Before They Will Improve

Posted on by Eric Hanushek

Nobody doubts the need to improve our schools. Students across the nation are being left less than fully prepared to meet the challenges of the new economy. But the problem is especially acute in our urban centers, including Saint Louis and Kansas City, which have been declared educationally bankrupt.

Kansas City is historically famous as an example of the problems facing much of the nation. Following a federal judge’s desegregation order that gave school officials a license to dream (at no cost to the district), the school system moved to the very top of the spending rankings for urban districts in the nation during the early 1990s. But student performance did not budge, and the eventual withdrawal of court support and state funding left the city with some great facilities — but without more learning. Saint Louis followed a slightly different court-ordered plan, spent almost as much money as Kansas City, and got the same dismal student achievement results.

Saint Louis and Kansas City have not been alone. Nationally, schools — urban, rural, and suburban — have pursued aggressive spending programs. They have followed conventional wisdom, reducing class sizes, introducing a wide variety of “reforms,” and hiring more educated and experienced teachers. And, as a nation, our achievement today is little different than it was in 1970.

What is wrong with this picture? We have moved our schools to a vastly different level of resources — almost quadrupling since 1960, after allowing for inflation. Yet we have not improved our performance. We do not come close to equaling the performance of students in East Asia, or in the better European countries, or in Canada.

This general problem confronts our nation, which is entering into a new competitive era in the international economy. And it particularly falls on our urban populations that lag the United States as a whole, and thus lag the dynamic economies of the world.

The most direct conclusion is that we need to make much more fundamental changes in our schools. We cannot continue doing what has not worked, even if we do this more intensively.

A fundamental issue is that we do not reward success. The current system has few rewards for producing higher achievement, but instead supports failure. If a school does well, the staff should be rewarded, not punished. If a teacher does well, she should be rewarded.

Some such better incentives are being put in place. Saint Louis and Kansas City have had a large out-migration, students fleeing the regular public schools for charters or for the suburbs. In a best of worlds, these public schools would recognize that they must change and would break from the long history of mediocre to poor schools. In the worst of worlds, everybody except perhaps the most immobile will simply leave the shell of Missouri urban public schools. The future options could not present a more stark contrast.

Eric Hanushek is a senior fellow at the Hoover Institution of Stanford University. He is the author of a Show-Me Institute study on education finance and has been a guest speaker for the Show-Me Institute lecture series with Saint Louis University and the Kansas City Public Library.

 

Privatization at Work in Kansas City

Posted on by David Stokes

The Kansas City Star has a nice article about a soon-to-be-decided proposal that would privatize the Kansas City Animal Shelter. From the article, it sounds like this bill, which would turn management over to a private vet clinic, is expected to pass soon. This seems like an exciting example of privatization at work in Missouri. Hopefully, it will work out as well as privatization of the county pharmacy did for St. Louis County. The animal shelter bill is expected to save taxpayers $175,000 per year, but I am sure the animals would rather be taken care of by government employees than be subjected to the cold, hard hands of capitalism.

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