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Thursday, August 28, 2014 Serving Maine and Lincoln County for over a century. Volume 139 Issue 35
139/35 - August 28, 2014 139/34 - August 21, 2014 139/33 - August 14, 2014 139/32 - August 07, 2014 139/31 - July 31, 2014 139/30 - July 24, 2014 139/29 - July 17, 2014 139/28 - July 10, 2014 139/27 - July 3, 2014 139/26 - June 26, 2014 139/25 - June 19, 2014 139/24 - June 24, 2014 139/23 - June 05, 2014 139/22 - May 29, 2014 139/21 - May 22, 2014 139/20 - May 15, 2014 139/19 - May 08, 2014 Home and Garden 139/18 - May 01, 2014 139/17 - April 24, 2014 139/16 - April 17, 2014 139/15 - April 10, 2014 139/14 - April 03, 2014 139/13 - March 27, 2014 139/12 - March 20, 2014 139/11 - March 13, 2014 139/10 - March 06, 2014 139/09 - February 27, 2014 139/08 - February 20, 2014 139/07 - February 13, 2014 139/06 - February 06, 2014 139/05 - January 30, 2014 139/04 - January 23, 2014 139/03 - January 16, 2014 139/02 - January 09, 2014 139/01 - January 02, 2014 138/52 - December 26, 2013 138/51 - December 19, 2013 138/50 - December 12, 2013 138/49 - December 05, 2013 138/48 - November 28, 2013 138/47 - November 21, 2013 138/46 - October 14, 2013 138/45 - October 07, 2013 Early Bird 2013 138/44 - October 31, 2013 138/43 - October 24, 2013 138/42 - October 17, 2013 138/41 - October 10, 2013 138/40 - October 03, 2013 138/39 - September 26, 2013 138/38 - September 19, 2013 138/37 - September 12, 2013 138/36 - September 05, 2013 138/35 - August 29, 2013 138/34 - August 22, 2013 138/33 - August 15, 2013 138/32 - August 08, 2013 138/31 - August 01, 2013 138/30 - July 25, 2013 138/29 - July 18, 2013 138/28 - July 11, 2013 138/27 - July 4, 2013 138/26 - June 27, 2013 138/25 - June 20, 2013 138/24 - June 13, 2013 138/23 - June 06, 2013 138/22 - May 30, 2013 138/21 - May 23, 2013 138/20 - May 16, 2013 138/19 - May 09, 2013 138/18 - May 02, 2013 138/17 - April 25, 2013 138/16 - April 18, 2013 138/15 - April 11, 2013 138/14 - April 04, 2013 138/13 - March 28, 2013 138/12 - March 21, 2013 138/11 - March 14, 2013 138/10 - March 07, 2013 138/09 - Feb. 28, 2013 138/08 - Feb. 21, 2013 138/07 - Feb. 14, 2013 138/03 - Jan. 17, 2013 138/06 - Feb. 07, 2013 138/04 - Jan. 24, 2013 138/05 - Jan. 31, 2013

COLBY

home : announcements : announcements August 28, 2014

10/30/2013 2:00:00 PM
Coastal Economist
By Marcus Hutchins


The biblical tale of the Tower of Babel recounts the confounding of the world's languages. I conjecture that this conversational confusion commenced with economists.

During the past few centuries, economists have developed their own language, which in turn, affects their thought process. A discussion with one of these practitioners of the dismal science can cause one to feel as though he or she has just stepped into that tower of antiquity.

To make matters worse, we economists use the same words as normal folks. Yet, we assign enigmatic alternative definitions to those words and assume that others understand our thoughts and intents. My wife assures me that we are wrong in this assumption.

One of the terms, without which economists can scarcely pen a sentence, yet whose economic meaning is not to be found in Miriam-Webster, is the word "efficient." According to the dictionary, efficient means "capable of producing desired results without wasting materials, time, or energy."

I have a friend who tells me that an economy can be efficient only through competition. As an economist this thought is nonsensical. Yet, under a certain definition of "efficient" this statement has some validity.

Consider the auto industry for a moment. Without competition from Honda, Toyota, Mercedes, Kia, Ford, and the rest, GM would likely produce cars with less "efficiency."

This is not how economists use this term. Economists typically ignore this type of "efficiency." Matters concerning effective production are relegated to the business folks and industrial engineers. Economists will not trifle with things so tangible and practical. We assume this type of efficiency through competition.

So how do economists define the term "efficient?" Efficiency occurs when the marginal cost of any product or service equals the marginal utility. Obviously, right?

For as long as my mind can recall, I have heard people of all sorts, the learned and the illiterate, the wise and the otherwise, utter the tired old adage, "If a thing is worth doing, it is worth doing well." To an economist, not only is this an absurd declaration, it also strikes a blow to the heart of efficiency. Efficiency happens when the cost of the last bit of effort is just barely compensated by the benefit derived therefrom.

An example might help, but this example comes with a warning. I suggest you withhold this illustration from your children and grandchildren who might yet be in school.

Back when I was in grad school, the Ph.D required one class in the history of economic thought. This topic was, at the time, of marginal interest to me. To be fair, I enjoyed history. Further, I retained terrific memories of my undergrad economic history class in which I met my wife-to-be. However, while at Columbia, other studies were of much greater interest to a guy who aspired to trade international financial markets.

Getting back to our illustration, on the first day of class, the economic history professor informed us that we could either write a paper or take an exam for the course credit. As soon as I heard that, I was elated. I silently stood up, tiptoed out of class, and determined to write a paper, never to return to class.

About half way through the semester, having put a fair amount of thought into it, I dictated a 25 page paper to my wife who dutifully sat at a typewriter pecking to paper each of my words. The next day I handed the humble offering to my professor whose face I scarcely remembered from that 10 minute solo encounter at the start of the semester.

After a few days I met with the prof to discuss the paper. He informed me that it was actually quite good, worthy of a B+ in the class. He further explained that if I were to rewrite two sections to include a few minor items, he would give me an A. At this point economic efficiency immediately came to mind.

It had taken me one evening to dictate this paper to my wife. With that degree of effort I had gone from an F to a B+. Now I was presented with the option that, with a few days of actual hard research, followed by another, longer evening of dictating and typing, I could move from a B+ to an A. This was a lot of work for what I felt was a small gain.

After a very quick calculation of this additional effort ("marginal cost") and its accompanying improvement in grade ("marginal utility"), I replied, "B+ is good enough for me in this class."

That was efficient. If a thing is worth doing, it is worth doing up to the point where the cost of additional effort just matches the value of the additional benefit. Sometimes, if a thing is worth doing at all, it is only worth doing "half-baked." I further add that if a thing is not worth doing, it is not worth doing well.

Often, when economists are looking into notions of efficiency, they are considering what and how much of a good or service is produced in an economy. In other words, is it possible to rearrange the quantities produced of certain goods and services, through taxation, subsidies, outright public production, or outright prohibition, and thereby bring a higher level of economic welfare (what we call "utility")?

The libertarian perspective addresses this question as follows; everyone who spends money in the economy gets to vote, in proportion to his or her income and wealth, on what will be produced. The products which people want will be brought forth, since these are the products for which money is spent. The products people do not want, will not be produced since no one will pay for them.

So does it not follow from this that the economy will naturally move toward efficiency if the public sector simply stays out of the markets? Since we vote with our money, should we not expect that companies will manufacture just what people want in just the amounts we most desire, which is, after all, "economic efficiency?"

We will examine this question next week. I can hardly wait.

(Marcus Hutchins, MA, M. Phil, Economics, Columbia University, NYC, is a former economist, treasury bond arbitrage trader and hedge fund manager. He retired to Southport in 1997 where he resides with his wife Andrea and his youngest daughter Abbey. He welcomes feedback at coastaleconomist@me.com.)



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