Matt Nolan

Use value, exchange value, and “cost”

/in /by

When writing this post I found myself a bit uncomfortable with terminology like “use value” and “exchange value” and so steered away from them – well also because a production function approach to the question is just so much damned clearer!  Exchange value was fine, but use value I found a bit confusing – as I always wanted it to be defined either in terms of the buyer (their utility) or the seller, and even in terms of the seller are we talking about the price they sell at or their full economic cost (which includes the opportunity cost).  This especially frustrated me as I know that 13 year old me used these terms all the time.

Now I think I have a clear idea on it all again, so I’m just noting this down so I can look it up in the future!

Use value:  Read this as utility Matt.  It is the value of the person using it.

Exchange value:  Price.

You’ll notice something is missing here when I talked production functions though … the actual supply of goods and services.

Read more

Matt Nolan

Heterogeneity matters: Why remembering people are different is important for thinking about outcomes

/in /by

When I was a student a lecturer said to us “When analysing trade, does it make sense for us to assume everyone is the same?  If everyone was the same why would they trade with each other?“.  This is simultaneous a bit of a silly question and a useful one.

He answered that they wouldn’t, and went on about something – but in truth it is because of his definition of “same” with regards to the model he was describing.  He was looking at a GE model with people with the “same” endowments and preferences – and yeah sure in that model there is no trade.  But this ignores the idea of production entirely – even if we have the same preferences and same “characteristics” (in terms of the hours we are endowed with and our ability to turn those into leisure or output), the existence of a production process with specialisation implies that there is benefit from specialising and then trading.  This division of labour is pretty central to our understanding of trade, so we shouldn’t really look past it.

But it raises something important as well.  We need to describe why people are trading, and what exactly is driving that process, before we can evaluate anything.  Let’s make a quick framework that will help us do that!

Read more

Matt Nolan

Bleg: The role of unions

/in , /by

I see that Bloomberg is stating that Economists are changing their minds about unions – moving from seeing them negatively to seeing them positively.

Unions are an interesting topic, but are also inseparable from a discussion about the relative welfare state and competition policy embedded in a nation.  Nordic and German trade unions are quite different from the trade unions of the US, UK, and Australiasia – and any evaluation of an institution in this way requires a model that allows us to represent the institution relative to other institutions in the economy, the way individuals behaviour relates to that, and how the outcomes for individuals will vary.

So does anyone want to do some of that in the comments below?  I will hopefully be writing up some things on these issues over time – but as a starting point for discussion I will put up this oversimplification.  Unions help to correct issues of insufficient bargaining power for labour, but like any monopoly their existence leads to deadweight losses which hurt those outside of the unionised industry, and are unfair to capital owners in competitive markets.  Evaluating whether more unionisation is good relies on comparing the costs and benefits given in this oversimplification.

Off we go …

Matt Nolan

A bad econ model is better than the alternative

/in , /by

Let us talk about this.

https://twitter.com/Noahpinion/status/1041714463060049920

I will be using this model myself next week to talk about migration (opps post timing changed and that was already up), so lets have some fun talking about this.

Read more

Matt Nolan

Migration and wages: A model that is wrong but useful

/in , /by

The link between migration and wages is complex and confusing – especially when it is often communicated about in different ways (eg are we talking about wage growth now with regards to monetary policy, wages in specific industries due to the changing make-up of the economy, or long-run real wages?).  And I can’t be much help here.

However, I think this is one place where carefully using the macroeconomic model taught in ECON101 can help us to think about the issues a little bit – especially if we are narrowing the question to only “what is the monetary policy consequences of changes in migration flows“.  Now this model is wrong, assumptions in it are wrong, the outcomes it describes aren’t forecasts – but it clearly articulates tendencies we observe following a change in economic circumstances which will hold in more realistic models, and clarifies assumptions that may make these tendencies false.  We have pointed at this before for monetary policy – but lets outline a bit more now.

It is a model for thinking about the potential consequences of something in a critical way – not something that we accept uncritically as truth.  To me this is pretty damned useful as a way to start thinking about something, so let’s do it!

Read more

Matt Nolan

Are real wages lower than 40 years ago

/in , /by

While rolling around the internet I found the following:

Lets have a look shall we.

Interesting!  But something seems a bit off – surely this can’t be true!?  Let us investigate.

Read more