Cafe Hayek - Latest Comments in Final Exam

Re: Final Exam

OregonGuy — Tue, 28 Apr 2009 09:45:38 -0000

Opportunity.

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Re: Final Exam

mobile — Tue, 28 Apr 2009 09:42:39 -0000

It's a final for an economics course. So I reckon I have at least a 50% chance of getting the right answer if I say

"Supply and demand".

Re: Final Exam

Martin Brock — Tue, 28 Apr 2009 09:38:26 -0000

First, the comparison between the "lifetime earnings" of this Nepalese man and the annual earnings of some no-account American worker is bogus. These comparisons surely ignore wealth not accounted for monetarily, so if this Nepalese man subsists on food he grows himself or barters for food with his roof thatching services, he hasn't "earned" anything. If he can't buy an mp3 player with dollars, he has no "earnings".

The Nepalese man is alive, so he's consumed enough food to stay alive for however long he's lived. An American worker earning the minimum wage can't eat for a lifetime on his monetary earnings, so the comparison is plainly nonsense.

The division of labor accounts for nothing here, since the no-account American worker has no particularly valuable skills, by assumption. Presumably, if this Nepalese man could immigrate to the U.S., he could do anything the American can do better and would earn a higher monetary wage, ignoring any discrimination based on his national origin. I take this fact for granted.

Synergy accounts better for a real difference in wealth. The American worker's labor is more valuable because he performs it in a more productive context characterized by many productivity enhancing innovations that he and everyone around him takes for granted, from paved roads to air conditioning and fast food.

These synergies aren't necessarily a product of "social investments" (or state spending) vs. market dynamics, but an American worker is certainly more productive as consequence of them.

It seems reasonable to call the American worker's greater wealth, insofar as it really exists, an "accident of birth". Who doubts that the Nepalese man would earn more, by the measures we assume here, had he been born in the U.S.? This fact warrants no larger government in my way of thinking. Maybe it warrants a smaller government.

I don't know much about Nepal, so I don't know how much relative freedom has to do with it, but I do know that the Nepalese man would have a hard time immigrating to the U.S. legally, so any scarcity of freedom is not confined to his side of the border.

Finally, maybe people in Nepal just don't want to live like Americans.

Re: Final Exam

Patrick — Tue, 28 Apr 2009 09:18:01 -0000

Even in a non-capitalistic society individual skills are not rewarded as highly as is the ability to lead groups of people effectively. Sure, highly specialized people in any economy are valued, but it will not and should not be rewarded on the same level as a great leader. Unfortunately, the western economy also tends to create and reward poor leaders as well as the great ones.

Re: Final Exam

S Andrews — Tue, 28 Apr 2009 09:15:57 -0000

You are also missing this part of Nepalese history:

In the late 1940s, newly emerging pro-democracy movements and political parties in Nepal were critical of the Rana autocracy. Meanwhile, with the assertion of Chinese control in Tibet in the 1950s, India sought to counterbalance the perceived military threat from its northern neighbour by taking pre-emptive steps to assert more influence in Nepal. India sponsored both King Tribhuvan as Nepal's new ruler in 1951 and a new government, mostly comprising the Nepali Congress Party, thus terminating Rana hegemony in the kingdom. After years of power wrangling between the king and the government, the monarch scrapped the democratic experiment in 1959, and a "partyless" panchayat system was made to govern Nepal until 1989, when the "Jan Andolan" (People's Movement) forced the monarchy to accept constitutional reforms and to establish a multiparty parliament that took seat in May 1991.[21] - Wikipedia

In essence, most of 20th century Nepalese Governing institutions were modeled after their Indian Counterpart. Well, we all know that India wasted more than 4 decades experimenting with Fabian Socialism.

Re: Final Exam

S Andrews — Tue, 28 Apr 2009 09:11:54 -0000

You guys are missing the whole point. Communist Party of Nepal is the single largest party in Nepalese Assembly. Now that they have a party with an ideology of social investments, Peace and Prosperity is a given in the future of Nepal.

Re: Final Exam

Otto Maddox — Tue, 28 Apr 2009 09:06:30 -0000

According to some college professors I am aware of, the Nepalese are being economically exploited and oppressed by the United States.

(Sorry, somebody had to say it.)

Re: Final Exam

Sam Grove — Tue, 28 Apr 2009 08:58:45 -0000

The Nepalese chef is wealthy in that he is able to provide for his needs and handle many tasks, but is he able to produce much value for those he does not meet?

He can provide valuable services, but he is not able to mass produce those services to trade with others beyond his normal reach.

His multiplier is small.

Re: Final Exam

TrUmPiT — Tue, 28 Apr 2009 08:56:57 -0000

"Yet his total lifetime earnings were less than even a very lazy, untalented American might earn in a single year."

Are you, perhaps, referring to lazy, untalented Cindy McCain who owns more luxury homes than she can remember or count and makes something like $10,000,000 per annum for looking at herself admiringly in the mirror when she wakes up in the morning? Yes, I'm sure you must have been thinking of her when you said that.

Re: Final Exam

Jon Biggar — Tue, 28 Apr 2009 08:48:39 -0000

I suspect that Henderson would agree that our culture of economic freedom *is* a "social institution" that we owe a lot of our prosperity too. But I also suspect that Frank would completely disagree with that.

It's really interesting how liberals are so ready to tear down the social institutions that gave us a prosperous society and replace it with an ivory tower thought construct that they believe (without evidence) will work better.

Re: Final Exam

Michael Fernwood — Tue, 28 Apr 2009 08:45:38 -0000

A Nepleese or American workers' lifetime earnings are determined by the amount of producer surplus that worker can extract for their skills or services. Earnings will increase only to the extent that a worker's marginal opportunity cost of providing a service is less than the marginal revenue a society, or market will pay the worker.

Tiral and error, luck, will enable the worker to discover a skill or service on which a free and fair market places the highest marginal value. The worker will chose to specailize in that one skill or service only. A talent for that skill or service may have exisited prior to specialization or it may not. Certainly, post-specialization, society will at least perceive a talent. Monopolistic rents may even ensue.

In the case of Mr. Frank's multi-talented cook (roofer, plasterer, metal worker, carpetner, electricain) a likley specialization as a residentail contractor nay have been the occupational lifetime earnings producer surplus maximization.

Unfortunately, for the cook, Mr. Frank's employer, the Peace Corps, was most likley building new huts in the village for a marginal cost of $0. It is hard to extract producer surplus when you are competeing against free.

Such as it was, the cook had no other option but to be hired by Frank who then extracted consumer surplus by having the cook fix things around the house.

The intellignet and resourceful cook lived in a market burdened by the debt of American social investment.

Re: Final Exam

BoscoH — Tue, 28 Apr 2009 08:29:22 -0000

Why does a spectacularly intelligent and resourceful person in Nepal earn spectacularly less than a lazy untalented American?

Because on whole, our Nepali friend doesn't provide as much value. The fry cooker at the local McDonalds serves hundreds of people per day. The WalMart greeter helps thousands find the shopping cart line. A small roofing company in the USA might do hundreds of reroofs and thousands of roof repairs per year. The thing we do really well here systemically is allow lots of small value to aggregate into large value. Inexpensive and standard payment/credit, rule of law for enforcing contracts, relative peace internally all contribute to this ability to aggregate value. An existing asset base, of course, is responsible for lots of the value that exists to be aggregated.

Rack me.

Re: Final Exam

ettubloge — Tue, 28 Apr 2009 08:26:51 -0000

Most of the answers contain explanations. I would like to list this "lazy" guy's abilities: drive a car, purchase and set up and use a computer, speak and write coherent English, analyze complicated business issues and, more than anything else, reside and market his skills where there is greater return than in Nepal. My guess is this Nepalese superstar can do more than A-Rod except play baseball. But baseball playing is a more marketable skill.

Re: Final Exam

MatTrue — Tue, 28 Apr 2009 08:24:48 -0000

According to Frank, I owe a huge "debt to the social investments that supported [my] success."

Several issues with that:

1) I also owe a huge debt on the house government policies encouraged me to buy. And because of disastrous monetary policy, I lack the freedom to unload that debt any time soon.

2) I DIDN'T ASK for the social investments of my parents generation, and I'm not asking any for my family now. But I'M ASKED (forced) to foot the bill of these "investments" EX POST FACTO. I only had one year of public education (kindergarten because the Catholic school I was to attend didn't offer it), which my parents property taxes probably paid the teacher's entire salary that year, and for the next 12. But, somehow, my parents and I are still in debt and not paying enough. "Son, now that you're 18, here's the bill for your education.... and diapers... and meals.... and back rent..."

3) The notion that the only investments of value are the ones that the government makes for us is absurd. I suppose we should outlaw the stock market. Paul Mansour makes a great point above about owing our success to the actions of previous generations, before we ever had these "social investments".

4) Federal expenditures have outpaced revenues for much of the last 100 years. If these really are investments, where are the returns, and where is the accountability?

Re: Final Exam

Perry E. Metzger — Tue, 28 Apr 2009 08:20:10 -0000

So many of these answers strike me as entirely missing the point.

The question is not "why is Nepal poor" or "why is the US rich" or anything like that. It is: "Why does a spectacularly intelligent and resourceful person in Nepal earn spectacularly less than a lazy untalented American?"

This is a much shallower question than "why is Nepal poor" or "why is the US rich" and is much easier to answer.

The wealth you accumulate per unit time has nothing to do with how skilled you are -- you could be the best ironmonger on earth, sit on your behind all day and earn nothing.

The wealth you accumulate has nothing to do with how hard you work, either. You could find a patch of land and spend all day digging deep holes and filling them again, expending enormous effort in so doing, and never earn a penny.

The wealth you accumulate has to do with how much other people are willing to give you in exchange for the goods and services that you provide them.

There are therefore four things to examine in answering: are what goods and services the talented Nepalese man has tried to put on the market, what are fellow Nepalese able and willing to trade for those goods and services, what are the goods and services an average American puts on the market, and what are fellow Americans willing and able to trade for them.

First, let us note that we haven't been told what the Nepalese gentleman is typically selling. He might have a vast array of talents, but that doesn't tell us what he generally does with them. However, the fact that he's willing to work as a cook even though he has a wide variety of skills would seem to indicate that he's not working regularly at some single lucrative profession or running some sort of continuing enterprise of note.

Even in third world countries, some people become relatively wealthy, and as in every other country, that has more to do with what you do with your skills day to day than with what skills you may possess. I presume that even in Nepal, some people are wealthier than others, and not necessarily because of their delicate handwork skills. I suspect, for example, that it would be hard to convince someone with a successful import business to work as a cook, and I presume that at least some such people must exist. The man who imports sheet metal or portable radios may not be as smart or as talented as the goat cook, but he's stumbled on something of far more value to far more of his fellow Nepalese, so he can earn more per unit time even if he could never make an intricate structure from tin or cook a goat.

Second, although we might discuss at length why Nepal is poor, all that matters here is the fact that it is indeed poor. If your customers are poor, they will not be willing to pay as much for goods and services as richer people will. I think that, in the effort to be clever and think about why Nepal might be poor many other responders have ignored that the mere fact that it is poor is the critical part. Even a fully free society with no hindrances whatsoever on the market can be poor, at least early on in its history. Capital takes time to accumulate. The question is not at all how free the market in Nepal is, or anything like that -- all that matters is that it is poor.

Third and fourth, we might discuss the situation of the typical American worker, who is operating in a culture where people have great demand workers who will put in a steady 40 hours a week at some well defined task that, thanks to the state of economic development, produces value on a steady basis, and where, because the overall society is quite rich, such workers generally have their pay bid up quite high by world standards.

I realize a lot of people would like to read something deeper into this situation, but as is often the case the straightforward answer that looks only at quite obvious details seems to be the right one. He is relatively poor because he is doing the wrong things, he is absolutely poor because there is little wealth in his country. The lazy American benefits from a more structured production system in a wealthy land. The Nepalese man could become wealthier not by becoming more skilled but by doing something more valuable to his fellows, or by leaving for a country where there is more money to pay for his existing sort of work.

Re: Final Exam

Matt — Tue, 28 Apr 2009 08:08:56 -0000

One word: Nepal.

Re: Final Exam

Bronc — Tue, 28 Apr 2009 08:04:57 -0000

Two words - supply, demand

Re: Final Exam

Chris O'Leary — Tue, 28 Apr 2009 07:58:04 -0000

While it's amazing that he can do all of those things, the problem is that...

1. None of those skills can be performed from a distance (or over the Internet) in order to benefit from trade. Instead, he can only rely on local buyers (who are also poor). If he could somehow sell those skills to rich Americans, then he could make some money. He would likely make much more money if he moved somewhere else. There are Bosnians here in St. Louis who make pretty good money (e.g. $20/hour) working as handymen.

2. Those skills don't add up to something amazing. They are just discrete skills and are still only locally valuable.

3. The local economy doesn't place a premium on those skills.

Re: Final Exam

Ken Nelson — Tue, 28 Apr 2009 07:57:25 -0000

The answer, naturally, is that there is less demand for the Nepal chefs services. If a million Peace Corp volunteers parachuted into Nepal, his wages would rise accordingly.

Re: Final Exam

Shaune Stoddard — Tue, 28 Apr 2009 07:55:27 -0000

It is speculation to answer the question without further facts. Some questions:

*Is there basic rule of law? Can the cook trust that someone in power (government, church, local bully or otherwise) won't come along and simply take his earnings?

*Does Nepal have a solid/stable currency and banking system? Can the cook put his well earned wages in the bank and trust that they won't be lost, stolen and/or inflated away?

*Does Nepal have private property rights? Can the cook buy a small piece of land and build a small house on it that he owns "clear title". When he dies, can he pass it down to his children?

*Is the cook free to associate/dissociate with anyone he wants? Is everyone in his community (local,state) free to trade with each other?

*Does the basic legal system support contracts? Are they enforceable in some material manner?

*Does the Nepalese (sp?) culture (tribal, traditional, religious or otherwise) embrace freedom and respect for individual man? Can he feel that he is in control of his own life?

*Where is the Nepalese society in their development, understanding and utilization of rational thought? In their society, is the primary explanation for "the way the world works" given by "priests"?

*How did the lazy/untalented American "earn" his wages? Clearly define "earn". Can he quit his job and still somehow afford to buy a color TV, beer and/or a pack of smokes?

*Does the lazy/untalented American wake up every morning and feel like a victim? Does he feel that the world "owes" him something?

*Has the lazy/untalented American ever truly gone hungry?

Summary question: Does the cook live in a society where he feels secure that he can proudly provide an ever increasing standard of living to his family via the fruits of his labor (mental and physical)? Does the American have pride or does he believe he is a victim?

Re: Final Exam

Ike Pigott — Tue, 28 Apr 2009 07:52:50 -0000

Mike@PVL --

Supply and Demand are secondary measures, and not primary causes.

If it were as simple as to say there wasn't enough aggregate demand in Nepal economy, then Keynesian stimulus would play a role.

We could boost overall demand by paying Sherpas to carry sheep up and down the mountains.

Re: Final Exam

kurt — Tue, 28 Apr 2009 07:48:27 -0000

institutions

Re: Final Exam

Mike@PVL — Tue, 28 Apr 2009 07:40:44 -0000

Because American employers are willing to pay the lazy unskilled American more. Remember Ricardo: prices, even labor prices, are not determined by value. The Nepalese polymath is welcome to attempt to charge higher for his skills, but I would assume in his culture he is not unique. That is to say, many people in Nepal are likely to posses these skills. So, any attempt to charge more might result in being passed over for another equally talented Nepalese man. Supply and demand, the rest is, as they say, just commentary.

Re: Final Exam

JS — Tue, 28 Apr 2009 07:36:33 -0000

And labor restrictions (unionization, immigration restrictions, minimum wage laws, etc)

But mostly productivity.

Re: Final Exam

JS — Tue, 28 Apr 2009 07:35:20 -0000

Productivity.