Another Meeting and Some Things I Think About In Class

Big news first, the Econ club is having a meeting tonight, April 8th, at McMenamins on Monroe at 10pm. Come and enjoy happy hour with the company of fellow disaffected Econ majors and watch diminishing marginal returns at work. 21+ only, because we still live in a fascist state that's keeping the free market down.

Speaking of diminishing marginal returns, that has to be one of my favorite concepts in Economics. Econ professors like to joke during a long afternoon class that they can definitely see evidence of downward sloping marginal benefits when their students start napping, getting off-topic, and daydreaming out the window. Of course, professors from other departments must also be aware of the gradual decline in focus over the course of a long lecture, but I wonder if economists take less offense to it. I sure hope so because sleeping in class gives me wicked awesome dreams.

A meeting today!

Just as a reminder, there will be a general Econ Club meeting today at 6pm at Valley Library 1422 (that's the big room in the basement). We also baked brownies, which will be available if Jennifer can smuggle them past the library watchdogs.

Should I split or should I steal?

Aside from always sounding prim and intelligent, the Brits also have a knack with game shows. They invented Who Wants to Be A Millionaire and Deal or No Deal. Right now I'm hooked on one that hasn't made its way across the Pond, called Golden Balls.

The interesting part about Golden Balls is the way every game ends. It starts out with two random players working together to build up a pot of money. It's pretty much a lottery game up until the end, where the add an element of game theory, and my econ senses tingle. Anyone who knows the Prisoner's Dilemma will find it familiar. 

After the jackpot is final, each player gets to choose whether they will split or steal the pot. If both choose split, each one gets 50% of the pot. If one steals while the other splits, the thief gets all. If both try to steal, though, they both walk away with nothing. There is discussion before hand, but both players must announce their decision before hands.

All good economists know the Nash equilibrium. Both should decide to steal, and walk away with nothing. Sometimes this happens, but sometimes not. Sometimes, a little miracle happens and both choose split and both hug each other and even in me, a little part thinks I have it all wrong about how cruel and evil the world is. Sometimes, a good soul chooses split while the partner chooses steal, and I feel the loser will go on to be a cynical economist.

This game does break the standard prisoner's dilemma because the agents can communicate and collude. Real life prisoners have done the same thing by forming criminal organizations that have oaths of silence. Suddenly a little bit more jail time doesn't sound so bad when faced with having your loved ones killed by vengeful gangsters. Morality and social pressure work in similar ways. The crowd cheers when the partners reach a split-split decision, and boo when someone steals. Is that extra cash worth being televised as a jerk?

So what would you do? Split or steal? Personally I would split, but only because I'd be diversifying my risk. If my partner splits, I walk out with money and a sense of human progress. If my partner steals, at least I'll be assured that I did not make a mistake in studying the dismal science of economics.

Keeping up with the Joneses

Recently I've been looking at various government websites targetted to kids. The Energy Information Kids is highly informative and well made, but the Federal Reserve System Kids page is horribly lacking. I will be writing to Ben about this unfortunate situation. Stay tuned for my progress reports.

February is Edgeworth Month

Someone gave my an American Economic Association 2010 Calendar that highlights a different economist every month, sort of like a cat calendar but without the cuteness and warmth. February is Francis Edgeworth Month.

Frank is famous for giving us the Edgeworth Box, one of my favorite economics gizmos. Aside from having fistfuls of innuendos shoved into every crack, the Edgeworth Box combines mathematical economics with the more talking-points economics (my personal favorite). An Edgeworth Box is great for demonstrating the first two fundamental theorems of welfare economics. The first theorem tells us that if certain conditions are met, self-serving agents will naturally come to a socially optimal outcome. The second tells us that by manipulating initial endowments, any socially optimal point is accessible.

What does this mean for the pundit economist? It means we should emphasize trade, trade, trade. Governments should establish property rights and allow individuals to exchange goods, and all parties will be better off. This sort of mutual benefaction is a good counter against those who are cautious about capitalism and see it as a zero-sum game.

There's some calculus in the Edgeworth Box which will not doubt please the more mathematically inclined econ student, but most of its concepts can also be demonstrated visually with some curves and lines. Overall, it's one of the sexiest things I've ever seen in my life.

Cynicism and the Science of Poverty Reduction

I love microfinance because it helps people by assuming the worst in them.

Elizabeth Schroeder came by Oregon State yesterday to give a lecture on the efficacy of microfinance. For those who don't know, microfinance is a lending system used in developing countries where normal credit markets don't exist. Lending is a pretty hard thing to do in the long run. Imagine people came up to you and asked to borrow some money with interest. Would you do it? You might if they appeared wealthy, gave collateral, and had good references. Those don't necessarily exist in the developing world. Banks understand the same thing.

This can be damning for poor communities. Starting even a simple business can have substantial start-up costs, which become problematic barriers without lending. Wealthy nations also suffer. Our simplest economic models tell us that you can get a lot of bang from your first bucks invested than from your billionth, and yet capital is not flowing into these economies of great potential. The uncertainty is just too great for traditional financial systems, even though there is money to be made in the developing world.

Enter microfinance. In this system, you, the lender, still don't know much about your clients in the developing world, but those potential borrowers probably know a bit about each other. They have friends just like everyone else, and they gossip and pry and quietly judge one another just like you. It's simple, then. Offer individual loans, but only to people who have formed a group of five other interested borrowers. If anyone in the group defaults, you cut credit off to everyone in the group. What happens is that people will only invite into a group friends who they trust not to default. As an added bonus, you might even get a little social pressure on deadbeat debtors to make their payments, and you don't spend a dime on collection agencies.

There's money to be made in these lending groups. The average interest rate is around 20%, while the repayment rate is an impressive 90%. It doesn't take a finance major to see the profit in microfinance. Oh yeah, you're also helping the poor of the world (as Ms. Schroeder demonstrated in her paper), but it's an example of cold economics turning the gears and not high-minded idealism. Bankers want to make money, struggling entrepreneurs will self-select, the incentives are there, and everyone is made better off.

Econ Club Fall 2008

The first (organizational) meeting of the Econ Club needs to get set. If you were a member of the club last year and are interested in continuing and perhaps willing to help run it, please let me know.

Patrick Emerson

P.S. Disregard the calendar below, it is doing its own thing...