EC 12 assignment for end-January through mid-February 2014

Prepare, individually, short written answers to the following questions, and submit them to me by e-mail ( on or before February 4, 2014. Most of the answers can be found in Chs. 8, 9, 10, and part of Ch. 13 of the Backhouse textbook. You should also do some independent research using other sources.

1.Summarize the ideas and theories in institutional economics. Include the economic thought of Veblen, Commons, Wesley Mitchell, and Galbraith.
2.What is the Tragedy of the Commons? Explain. (Here, you may consult:
3.What is Keynesian economics? What is the role of ‘animal spirits’ in Keynesian economics?
4.What is the so-called neoclassical synthesis between neoclassical economics and Keynesian economics?
5.What is the main difference between the ideas in Keynesian economics and the so-called New Classical Macroeconomics?
6.What is general equilibrium theory, and what’s wrong with it?

Please bring ten hard copies of your submissions for giving out to me and your classmates when we meet again on February 5.

Be prepared for a major quiz on February 5 on Chs. 7, 8, and 9 of the textbook. Our class discussions on February 5, 7, 12, and 14 will focus on your submissions to the above 6 questions.

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Explaining the movement of the Invisible Hand

Adam Smith distinguished the market price of a good from its “natural” price, where the latter in Smith’s words is “the central price, to which the prices of all commodities are continually gravitating.” It seems, here, that the natural price is the same as what we today call the long-run equilibrium price in a competitive market.

Smith already had a supply/demand explanation of the movement of the market price, which is what one observes in the market. Excess supply would cause the market price to fall, while excess demand would cause it to rise. Thus, at equilibrium, where supply equals demand, the market price would tend to stabilize.

Smith also broke down the market price of a commodity into its factor-price components – wages, profits, and rents (which are simply the earnings of the production inputs of labor, capital, and land).

Because of competition among producers (and perhaps because wages and rents are not instantaneously adjusted), Smith saw that gyrations of the market price would correlate with movements of profits, and profits/losses provided a signal to producers to enter/exit the market. This is, of course, the Invisible Hand explanation of the working of the market mechanism. The invisible hand would guide people to produce what is demanded in the market, according to the signaling of profits.

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Causation, correlation, and the law of large numbers

By Kermit Kefafel

This is not-so-deep philosophical banter. It sometimes figures, with varying degrees of ‘deepness,’ in classroom discussion.

Correlation is not causation, but a lot of the former helps the latter. Otherwise, statisticians would have no jobs.

But what happens when there is no correlation at all? I suppose it means there cannot be causation. How would I know this? If you had too fat a scatter, and yet underneath all that there is causation, either you don’t know how to ‘control’ for the other variables, or if you do (which is the normal case), then the hypothesized theory must fall flat on its face (there is causation, but it’s not as supposed by the theory being tested).

The matter then sometimes reduces to ‘how much correlation’ would help the cause of causation. The skeptics remain free to ask ‘how large a sample would you need’ to further the cause. This part of the debate is in large part an application of the Law of Large Numbers, which states, simply, that if your sample is too small, you have nothing but a song. We could then go on to a disquisition on what exactly a ‘sample size’ means, and how large is ‘large.’

Of course, statistics and ‘evidence’ are in practice irrelevant when it comes to matters of faith. If you believe, you do. If you don’t, it’s a free country. But ad hominem and ex cathedra are pretty much anathema to an open mind and a good-faith debate, assuming there was a need for such.

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How you are my friend, by Kermit Kefafel


So, okay, no man is an island.  And when the bell tolls, it tolls for all of us.

But do we all have to be friends? Of course not.

For one, friendship is not a choice.  It just happens.  It is quite possible that two people are friends but don’t know that they are.  They may see each other in some other relationship, like father-son or politician-voter, etc., but when friendship happens, the two friends simply are.

So, exactly, if it were definable, what is a friend?  I think friends are those who enjoy each other’s ‘alive-ness.’  You can enjoy Buddy Holly, but if he didn’t know you when he was still alive, you can’t be friends.  But this just pushes the definition question to outer space: What is enjoyment?  There I stop.  That’s the primitive in the friendship definition.

Here are a few random ‘facts’ about friendship:

Only peers can be friends.  Inequality kills friendship. A person in need is usually not a friend; he’s just needy.   But a rich man can friend a poor man if they were equal on some other footing, like skill at eight ball. This means, intellectually, I can’t be friends with the folks at  They think they’re thought leaders, so I must be a follower.  Tough beans.

You can’t have too many friends.  Any one who says he has lots of friends lies.  Why is this?  This is so because, as I said earlier, friendship just happens.  And somehow the gods of friendship require that you be able to count your friends easily. How can you ‘enjoy’ someone you can’t even remember? This is also so because equality is a precarious balance, an uneasy equilibrium.  That also means an enemy can be a friend.

Friends respect each other’s relationships with others.  This follows from the selective (though not by choice) but peer nature of friendship. Peers let peers do their thing. And pears let apples be.

Even more importantly, friends value each other’s privacy. Every act of friendship that involves an ‘opening up’ is only through mutual consent.  You can’t even ‘confess’ a secret to a friend who doesn’t want to listen (because that’s the way he/she might be at that time). And of course, one who feels entitled to crash in on you at any time is not a friend but one who abuses the idea of friendship.  Bottom-line neoplasm: Friends, more than others, understand and maintain fences and boundaries.

An especially good kind of friendship is the low-maintenance plug-in plug-out kind.  You haven’t seen this friend in years.  And yet, you meet and it was as though it was yesterday that you last saw each other.  This has a down side.  When such a friend dies, sometimes it takes a while before you can grieve because you may not know about it for a while. This happened to me, so I know how tough that is.

Love and friendship are not the same.  Can they mix? Only if lovers understand boundaries, and usually they don’t.

Very few of even your ‘close friends’ on Facebook are your friends.  Some of your friends on Facebook are your enemies.  Beware.  I wrote this note on April 1, 2013 (that’s a double-whammy in the superstition derby).

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Is inclusive growth a fad?

Just a link to a lecture given at Silliman University last September.

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Where is the Philippine peso going? Up and away? Up and down?

There has been some recent wrangling over the plight of OFW families because the peso has risen. One foreign bank active in local financial markets has predicted a P40 to US$ exchange rate for 2013-14. In an academic paper, Prof. Gerardo Sicat of the University of the Philippines has raised the issue of whether the economic managers, mainly the central bank (the BSP) and the fiscal authorities, should do something about the matter. Sicat’s main beef is that the government has adopted a very conservative fiscal policy that has contributed to the peso appreciation.

The conventional wisdom is that the peso has strengthened because foreigners are optimistic about the domestic economy, and they have been a major factor behind the recent stock market gains. The peso rise has hurt the families receiving dollar remittances as well as our local exporters and the call center-BPO sector, but then at the same time it benefits those who own peso assets. This piece of arithmetic is also a given, although some people seem to focus more on the supposed ill effects of peso appreciation. The latest IMF report considered the peso ‘not overvalued’ in 2011 and early 2012 when the US$ rate was P43.3. Observers like Prof. Sicat are right to ask whether a P40 rate might be overvalued.

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The mystery of money

Is there a nexus between economics and psychology? This little book by Michael Phillips (The Seven Laws of Money, 1974) suggests yes.

The book explains the laws of money, summarized as follows:

  1. Money will come when you do the right thing.
  2. Money must be tracked, and ‘credit’ earned.
  3. Money is a dream, a fantasy to be recognized as such.
  4. Money is a nightmare if you do wrong for money.
  5. You cannot give money away; it comes back.
  6. You cannot get money as a gift; you will have to repay or pay forward.
  7. There are worlds without money.

Supposedly, economics is the study of human choice. We therefore choose between money, in whatever form it appears to us, and something else, such as happiness. What we give up for money is its opportunity cost.

But we already know that money can’t buy happiness. So, the big question is: What is the opportunity cost of money?

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