How are money and inflation institutions?

The macro textbooks usually say that inflation comes from the supply of money. In a regime of fiat monies, central banks “compete” at providing stable money. However, some central banks’ hands are tied by their governments’ desire to use the inflation tax. If you don’t trust the local money, you can always switch to foreign exchange, gold, or even Bitcoin.

But if money is what folks accept as such, its devaluation must also come from folks collectively thinking that the central bank intends to print more.  Its rise in purchasing power can also come from holders thinking of it as a “safe” money.

Veblen once defined institutions as collective habits of thought (at p.107).  That means that to predict inflation, one must anticipate the price expectations and strategies of buyers and sellers of money. Today, cash is king, so that it makes sense to see low or even negative inflation and interest rates.

This means that the macro textbooks don’t have the full story. Inflation is also a story of institutions in the sense of Veblen.

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How to let big banks fail

The idea of “too big to fail” comes from the experience of bank runs in the early 20th century.  The answer then and now is deposit insurance. But such insurance has its limits, just like any insurance contract.

Lawrence White suggests that bank runs can be prevented if we redesign the banking system.  He suggests a money substitute that just might work, except that the big banks will have, perhaps, a hard time making money on fees.

It seems that the idea can be integrated with the emerging market for cryptocurrencies.  How?


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Living the lousy life of a telecom consumer

Remedies against monopoly

You can almost see  the present system of announced prices, with unannounced promos maintained by the telecoms, as a form of price discrimination, a concept familiar to students of economics.

The two aren’t quite monopolies. But for the sake of discussion only, imagine that they are a two-piece cartel, a bikini in nosebleed-speak.

What can consumers do to foil a price-discriminating monopolist/cartel?

Any interesting answers out there?

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EC 11. Special HW on the stock market

Imagine that your grandparent willed you P1 million. You have decided to invest this inheritance in the Philippine stock market, specifically in only one company.

Your homework assignment is to choose that one company, and report at how much you acquired the stock (any price at which it traded in the PSE will do) in an email, and to give a short explanation for your choice.

A second part of this assignment is to report at the end of the semester how your investment did, and to give a brief explanation of how or why the outcome came about. Try to answer the following questions, based on your readings and your experience in this imaginary experiment: Are stock market investors who win just lucky? To what extent do diligence and smarts matter?

The first part is due by Friday, February 5, 2016. The second part is due on March 20.

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Bitcoin as money

BITCOIN Screen Shot 2016-01-29 at 10.04.16 AM

The following is a note found on Facebook.

Random ideas on what makes money money
by Kermit Kefafel,  Friday, January 29, 2016

Is money a public or private good? It is a private good imbued with public interest. The public goods that attach to money are the safety of the banking system and price stability, as conventionally promised by a central bank.

What are cryptocurrencies? They act as substitutes for the use of cash in untraceable transactions, the idea of Bitcoin. You can even buy bitcoins at your local 7-Eleven.

The market for Bitcoin has lately been shaken with the arrest of one of its principals; there is talk that it could collapse. Will other cryptocurrencies have the same problems?

I suspect that for a cryptocurrency to become viable, it must hurdle the trust problem — its users and holders must be assured that its supply and valuation are, in some sense, sacrosanct. That its price could bubble up and down like a financial asset is a negative. Even fiat-currency central banks pay some kind of lip service to exchange stability under the current system of floating exchange rates.

Because of the public-goods aspect of money, a stateless currency requires an enforcement mechanism that is private but viable. Does such an enforcement mechanism exist?

Or, are cryptocurrencies just another Ponzi scheme?


For reference, see Lawrence White’s article in the Cato Journal.

The central bank (Bangko Sentral ng Pilipinas) has issued an advisory regarding the lack of regulation on virtual currencies.

A recent assessment predicts continued growth of Bitcoin in the Philippines.



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HW for EC 11 – Factor Markets and Rents

Please refer to my Lecture 9 on Derived Demand, and the three chapters in Mankiw that cover the markets for factors of production, earnings, and income inequality.

This is due Feb. 3, 2016 by email (hard copy to be submitted in class on Feb. 4).

The usual rules for citation of sources apply when you answer these questions:  You may use any source – textbooks, Google, etc. – but you will get no credit if you do not cite your sources. You may also organize yourselves in any way to cooperate — or compete — with each other. Please indicate briefly whether you are convinced of your answer, including the reasons as to why or why not.

1. In 14th century Europe, the Black Death killed about a third of the population in a few years.  What would economics predict as regards the wages of laborers and the rent for land? Explain. Applying this economics lesson to a country that produces babies right and left, what would you predict will happen to wages in such a country? [15 pts.]

2. Suppose that a protracted civil war kills 20% of the population of a territory.  Based on your answer to Question 1, would you recommend war as a policy or strategy to raise wages? Why or why not? [5 pts.]

3. Mankiw suggests that economics professors should be paid zero wages.  Why? Is the explanation related to rent, Ricardian rent, or quasi-rent? Why or why not? (Hint: Define, explain, and illustrate the three types of rent.) [15 pts.]

4. The basic lesson in labor economics is that in a competitive labor market, labor is paid the value of its marginal product.  Explain this using a numerical example. [15 pts.]

5. If you wanted to maximize your earnings from your labor, which of the following strategies would be most important? Least important? Re-order the list from most to least important when applied to you as a particular individual. The possible strategies are: (a) look for a job that no one else wants; (b) get as much education as you can afford or attain; (c) get lucky with your natural talent; (d) practice, practice, practice; (e) get lucky in that the employer is your own family corporation; (f) be pretty or handsome; (g) be willing to commit crime; (h) apply for jobs where there are labor unions; (i) start your own business, just like Bill Gates.  Explain your answer. [10 pts.]

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How economists approach history

If only to inspire economics students to study history, and how to apply economics to solve historical puzzles, here’s an example of a very interesting study.

In this work, Douglas Allen and Peter Leeson explain the economics of warfare in the medieval ages, focusing on the technologies of the long bow versus the short bow.

Perhaps, perhaps, one can conclude that major human endeavors, including war and struggles for power, are drivers of innovation.  This echoes the idea of ‘creative destruction’ from Josef Schumpeter.

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