Homo Economicus
Monkeys and Darts
The contentious issue here is the efficient market hypothesis, a theoretical construct that it is impossible to consistently predict the direction of the market. Economists and practitioners had long suspected the randomness and unpredictability of the stock, but it was Eugene Fama, one of the laureates, who first formalized and empirically tested the idea in the 1960s. Fama first debunked the chartists, exemplified by Charles Dow of Dow Jones fame, who claimed the ability to predict future price moves based on past prices. Fama also showed that stock prices respond very quickly to new information. These facts suggest that it would be hard and expensive, if not impossible, to predict price movement based on past information.
The Lighthouse of Economics
In The Nature of The Firm, Coase mulled over the raison d’etre of firms in an economy. In The Wealth of Nations, Adam Smith described a free-market economy where the butcher and the baker supplied dinners with no coordination but guidance from an “invisible hand.” However, even in Smith’s time, the economy was not made up of such free-acting butchers and bakers, but firms that externally competed in the free market while internally maintaining an authoritarian grip using direct command. Smith did not ask why such voluntary dictatorship exists. Karl Marx answered that it is an apparatus of evil. To answer Smith and to refute Marx, Coase argued that transaction cost, the cost of trading in the free-market, could explain why firms exist and how large they are. Although the price mechanism in the free market generally allocates resources efficiently, it is quite expensive to use. When a car company has to look for tire suppliers, for example, it has to negotiate contracts and ensure that the tires arrive timely. When the car company decides that these contracts are too costly and time-consuming, it may choose to make its own tires. Firms will grow larger as such vertical integration occurs, until the organization cost of managing multiple processes outweighs the cost of using price mechanism.
The Shopping Period
The overcrowding problem of “Fairy Tales and Fantasy Literature” is far from unique. Due to lack of qualified teaching fellows and classroom size, students have to compete for class spots. In departmental electives, professors can require students to submit an application, sometimes giving preference to students who are more prepared or simply have a higher GPA. But a one-for-all application that focuses on prior experience goes against the mission of the Gen Ed program to introduce students to a broad range of academic pursuits. It is also impractical that Professor Tatar, or professors of other popular Gen Ed classes, should read hundreds of applications.
The Warren Bubble Act
In her unveiling of the bill, Warren pointed out that it “isn’t right” that the Fed charges banks an interest rate of .75 percent, while the unsubsidized Federal Stafford Loan program charges students 6.75 percent. There are, however, many right reasons why the rates are different. The .75 percent discount rate is for overnight loans, which are loans only available to banks in good financial condition and which provide collateral for their loans. It is also not a day-to-day financing option for banks, but rather a last resort to ensure financial stability during events such as the September 11 attack. Student loans, on the other hand, are mostly risky long-term loans to individuals without credit history and collateral. Banks are very unlikely to default on their overnight loans, while 17.3 percent of student loans which originated in 2009 are expected to default over their lifetime. The suggestion that banks and students should have the same interest rate may be politically popular, but it shows Warren’s lack of understanding of debt and finance.
Winter Is Coming
To start, although the Seven Kingdoms of the Westoros continent, where the saga unfolds, have the social and technological characteristics of medieval Europe, its economy ebbs and flows like the modern business cycle. Seasons on the continent lasts years. For an agrarian society, summer is like an economic boom and winter is like an economic depression. The grumpy old characters often deride the young ones as “summer children,” who have not experienced the hardship of a prolonged winter. The wise Northmen’s motto? Winter is coming.
