Friday, July 16, 2010

Glenn Beck's Real Economic Lesson

Most conservatives have an odd belief that because they support what businesses do, that they must inherently know something about how businesses work and the economy as a whole.  And I've generally found that, for the most part, they don't know what the hell they're talking about.  And my biggest complaint against liberals is that they don't take economic classes, which would allow them to realize that conservative economic policies aren't just immoral; they're just plain wrong.

And so I'm reading TPM and see that they cover the second installment of Beck University, Glenn Beck's latest money-making scheme to convince rightwing rubes to fork over even more of their soft-earned money.  And this one was even worse than the first.

And the funniest part about it is that, as part of the lesson, the "instructor" actually admits why he got the job: Because he's the cheapest.  Here's the "lesson" in economics he attempted to impart, as given by TPM:
"The number one concept to best understand wealth," Buckner explained, "is to understand the value of your time."

"Why?" Because once you understand the value of your time and how best to use it, you "won't produce that which you are not the lowest cost at producing."

Buckner elaborated, kind of: If Joshua is the most efficient pie-maker, and Jennifer can make cheaper cakes, then they should each play to their strengths to maximize output and minimize cost.

For example, "why am I here?" he asked. "Truthfully, I'm the cheapest."
And...no.  In case you weren't lucky enough to take an economics class by someone who actually knew what they were talking about, let me assure you, this isn't economics.  Or at least, it's not modern economics. 

As one commenter at TPM pointed out, this guy is basically promoting Mercantilism, a discredited economic system that predates Adam Smith and modern economic theories, which basically says that you should only produce what you produce best.  And again...no.  That's definitely not the best way to produce wealth.

Profits, Not Costs

Rather, our modern economics is based upon the idea of profits, and that you should sell products that will earn you the most money.  It doesn't matter if Joshua is the most efficient pie maker, if he can sell his cakes for twice as much profit.  If he makes a pie for a dollar and can sell it for five dollars but make a cake for two dollars and sell it for ten dollars, he should make cakes.  After all, eight dollars is more than four dollars; even at Glenn Beck University.

It's all about how much you can sell your product or service for; not how much it cost to make it.  Costs don't even factor into how much you should charge for a product or service.  It's all about how much someone's willing to pay for it.  I mean, I can produce blogposts for free, but because I don't get paid for them, it's not a particularly good use of my time; financially speaking. 

And of course, the ultimate lesson here is this dude's own worth.  As he said himself, he's doing this because he's the cheapest, and had Beck wanted to pay a real economist, he would have had to pay a lot more.  But Beck realizes that his rubes will buy whatever he has to sell and if they're dumb enough to shell out money to Beck University, they're too dumb to realize what a crappy lesson they're getting.

So the great deal Beck's getting isn't because this guy is so cheap, but because Beck's rubes are so dumb that they put real value to his valueless lessons by paying for it.  It was Beck's name that added economic value to this endeavor.  The "professor's" cheap lesson merely increased the profit margin.  But that was because there was no point in paying more for a lesson that wouldn't be learned anyway.

9 comments:

Godot51 said...

I wonder what percent of Beck U's "enrollment" is made up of liberals and those others who joined to debunk and ridicule him. Perhaps one day it'll come out that he was doing an "Andy Kaufman" type of comedy... (but he's failing even at that).

The Original David said...

Doc,

first let me say that I’m sorry that this comment will be somewhat critical. I think you know that I ‘m a big fan of much of your work. That said, it’s rare that opportunities for constructive exchange come up between different camps on the Web, so it’s only among friendly voices that such constructive exchanges can occur. Sometimes that can be mistaken as rhetorical friendly-fire or providing aid and comfort to the “enemy”, but that’s not the spirit in which these remarks are intended. In fact, I don’t really believe in the “enemy” label per se. There are extremist asshats on all sides, but I don’t perceive any of them as enemies, misguided-misinformed-Americans maybe, but not enemies. In your case, I would not apply the MGMIA label, but I do feel that I should point out some issues with this post.

I’m assuming that you are an interested layman where economics is concerned. Your earlier critique of Anderson and Bodvarsson (2005) is my basis for this assumption. Of course, we’re all economists on some level as we all produce and consume. In that sense we are all physicists as we deal with phenomena such as gravity and friction on a daily basis. Yet, few of us would be ready to provide an opinion on the emerging scientific controversy over the essence of gravity. Then again, there is no policy side to physics, so it’s possible that economists bring it on themselves.

The concept that Beck’s “professor” is so ham-handedly trying to describe is called comparative advantage. Economists of all stripes recognize the concept. One notable example in this instance would be Paul Krugman. Comparative advantage is in fact grounded in cost. It’s quite different from mercantilism and that is not what’s described in this admittedly poor example.

...

The Original David said...

...

Generally you are correct that the problem is normally accepted to be one of maximizing the profit function rather than minimizing the cost function. However, profit is revenue less cost, so there is always a derivative of the profit function in cost. In models of monopoly, perfect and imperfect competition, the profit maximizing price (Bertrand) or quantity (Cournot) or both (Stackelberg) will be stated in terms of marginal cost.

This belief is so strongly held that in the so-called New Empirical Industrial Organization (NEIO) literature, cost structures are frequently estimated from observed changes in volume and price. NEIO adherents typically assume that producers know their own true cost structure, a rather bold assumption. Though, whether or not that assumption holds, there is no debate on the rational relevance of cost structure to the profit maximization problem. By extension, cost is critical to the welfare maximization problem as well (see comparative advantage).

All of that said, Beck’s “professor” is an MBA. The cartoon version of economics taught to MBAs is hardly adequate to really understand comparative advantage, certainly not at the level of nuance required to interpret and teach it to a general audience. Krugman, by contrast, won his Nobel for work directly related to CA and he has authored some excellent articles targeted to the interested lay audience on this very subject.

To your general point, I find that self-identified conservatives more often get economics right in their policy analysis than do self-identified liberals or progressives. Though, there is little evidence that they act more in accordance with accepted views when they legislate. This is one of the reasons that the overwhelming majority of economists identify as conservatives. There are few lefty economists of any note. In economics the facts tend to lean conservative.

That Krugman and DeLong are considered lefties says more about American politics than it does about them. Though, in his current role as a partisan pundit, Krugman does not confine his remarks or policy prescriptions to areas in which he has any special professional expertise or to areas where there is wide agreement within the discipline. This has eroded his professional standing, but I suppose that’s a reasonable trade-off for a still relatively young Nobel laureate to make.

So, again, sorry to take the other side on this one, but I hope this was useful to you and to your other readers.

-TOD

Doctor Biobrain said...

First off David, there's no need to apologize for disagreeing. Debate is always welcome here and I prefer for people to tell me when I'm wrong, as I absolutely HATE being wrong and would like a correction as soon as possible.

Oh, and just so you know, I actually wrote a very long response for our last discussion, but I never finished it and it eventually got so stale that I thought it'd be weird to post it. But it's still sitting here on my computer. I might use it as a post someday.

In regards to your comment, the only helpful part was your mention of Comparative Advantage. I looked it up in Wikipedia and got a decent idea of what it meant. I also read a very good essay on it from Krugman, and he explained things quite well. Your explanation, on the other hand, was garbbly gook. I understood the words and translated them into English, but found that they did little but showcase your education. Sorry, but if you re-read them, you'll find little in the way of basic explanations.

One big concern you should have is that, while technical jargon is certainly helpful among those familiar with it; I've found that jargon can often impair understanding. And that people get so wrapped up in using their tech talk that they aren't actually making any sense. That's why I make a point of keeping things as basic as possible, as it not only helps me explain my thoughts better, but helps keep them straight in my head.

And overall, I've found that if someone can't explain their position to an intelligent person willing to listen, then they probably don't know what they're talking about. I'm not saying that's the case here, but that's a general rule I have and you should keep it in consideration.

I'm going to post my actual response to this in another comment, because this one's already too long. I think I'll also do a separate one regarding the political issue.

Doctor Biobrain said...

Regarding what I wrote about Buckner's "lowest cost" statements, I suppose I just misunderstood, as I assumed he was making a microeconomics argument and not macro.

Specifically, I assumed he was instructing individuals on how to determine which specific products they should sell; by finding what they can produce the cheapest. But assuming you're correct and he was merely explaining Comparative Advantage, then my initial assumption was incorrect, as that doesn't involve the actions of specific individuals.

And the basic idea is that, in the grand scale of things, the markets will balance out sales price and you should focus on what you can produce cheapest; and that's on the macro level. But...an individual who can charge a premium for his cakes due to his reputation for making great cakes should continue making cakes, even if it costs more for him to make than the competition.

And so I'm thinking it was just a misunderstanding on my part, primarily due to the limited scope that TPM presented from the material. I was just riffing on his pie-cake analogy, as he seemed to be telling cakemakers that they should make pies if they were less expensive.

And I should add to this, the concept of Comparative Advantage makes perfect sense to me and I suppose I've always sort of taken it into consideration. Just to be clear, I've always supported free trade and definitely think America should be focusing on the products/services it can do best, rather than vainly attempting to rehash past industrial glories.

Of course, it's a lot easier to say that sort of thing, than it is to expect people to learn new skills and relocate to other parts of the country. And when you see your job get relocated overseas, it's not so easy to see the new job popping up in another part of the country. But retraining and relocating is what needs to happen, so people need to focus on that a bit more.

Doctor Biobrain said...

And finally, in regards to your suggestion that conservatives "more often get economics right," which conservatives are you referring to? You mean the ones who believe that taxcuts for the rich pay for themselves, and refuse to even cite spending cuts to justify them? How about the conservatives who insist that governments should decrease spending during recessions, and insist that we need a balanced budget amendment to outlaw deficits?

Are those the conservatives you're referring to? Because that's the majority conservative opinion. Now, maybe you agree with them that it would be economic ruin to allow Bush's taxcuts to expire. And if that's your position, I'd certainly like to hear your argument on that (though preferably in English). Because I read conservative arguments on this all the time and they don't make a lick of sense. You'd think 39% was the new 90%, listening to their absurdist claims.

But of course, I've read quite a few conservatives who geniunely believe that Obama will eventually raise the top rate to 100%, because he hates rich people and wants to redistribute their wealth to black people. Surely those aren't the conservatives you're referring to. But I assure you, I've read more of them than I've read of you.

And yes, I agree that liberals should learn a lot more about economics, which is why I wrote that in my post. But for as much as I'm sure there are conservative academics who can explain economic policies, the vast majority of them are economic know-nothings who can't even properly duplicate the economic talking points Rush Limbaugh fed them. And they ALL believe themselves to be economic experts.

The Original David said...

Doc,

I didn't attempt an explanation of comparative advantage. I 'm sorry if something that I wrote led you to believe that I was trying to explain it.

People use technical language because technical language has specific meaning. My comments were quite long enough without trying to explain in plain language the details of the solutions to the various framings of the profit maximization problem. There are text books for that. The technical language was there so that an interested layman armed with Google and some curiosity could get from my comments to a fuller explanation, as you did with comparative advantage. You'll find that you can easilly do the same with the rest if you're interested.

-TOD

Doctor Biobrain said...

David - Perhaps I shouldn't expect you to be my personal tutor here, but I have a few questions about Comparative Advantage that I don't see answered elsewhere. (And btw, these are geniune questions, as I definitely agree with the theory.)

Is the basic idea here that you should always find the thing you do most efficiently, because that will always work to your advantage? Or is this just a basic theory explaining how both sides can benefit from trade, without one side screwing the other over?

Because I understand this as a proposition of "Hey, let's divide the job so we do the thing we do best," which explains how it would benefit two sides to work together. But I don't understand this as a "I should make pies because it's the easiest thing for me to make" sort of thing. And in that case, it'd seem that Beck's "professor" was wrong, as he seems to be using this theory to teach people how to generate wealth by focusing their talents on the thing they do cheapest.

And the other confusing thing is: Doesn't CA still take profits into consideration? I mean, yes, Portugal makes wine cheaper than England and would benefit by sending excess wine to England in exchange for English wool. But...it'd be even cheaper for Portugal to export seashells, and the only reason it doesn't is because there's not much profit in exporting Portuguese seashells.

And so the whole reason Portugal would ship excess wine is because it gives them a larger profit than if they instead made their own wool or tried to export seashells. And so it's still about the profits, not the cost. And if the profit they'd get from exporting wine became smaller than the savings they'd get by producing their own wool, then they should produce wool and not excess wine; even if they can do it cheaper than the English. It's not just that the wine is cheaper for them than England, but that they can get better profits from it.

And overall, it seems to me that this is a minor theory which correctly explains how free-trade can benefit both countries. But it still doesn't preclude us from using profits as our guide to what we should produce; rather than costs.

Am I totally wrong about this, or what? Just so you know, I've had thoughts about posting a blogpost about Comparative Advantage, in order to explain it all in English; but I wanted to make sure I knew what I was talking about before I said anything.

Doctor Biobrain said...

Oh, and you never did address my questions about conservatives being right about economics.

Are you honestly suggesting that influential conservatives like Sarah Palin know more about economics than myself? Or were you not considering the vast majority of conservatives when you spoke of them being correct?

Not that I know for sure where you stand politically, but based upon your reasonableness, I daresay you're not a conservative by today's standards. Unless you agree with things like a moratorium on all govevernment regulations and the belief that Obama's mild healthcare reform represented a socialist "takeover" of the entire industry, you're a moderate these days.