Tuesday, November 20, 2007

Economics 301

I took one business class in college. It was a general business class for non-majors and "not so bright" business majors that have rich daddies. And in this business class, we received a taste for accounting (the Brussels sprouts of business, good for you but no one really like it), business law (tofu, no one really understands what tofu is, but they know they have to eat it), marketing (pizza, easy to understand and everyone likes it), finance (spinich, tastes good, but you really don't know why) and economics (white rice, a lot of starch, not a lot of nutritional value).

Okay, that's what I thought until recently.

My husband and I went to a lecture by an economist. Not my cup-o-tea, but I had to attend the lecture. When I think of economics, I think of supply side, I think of "butter and guns", I think of voodoo economics (thanks to Bush without the W – remember he charged Reagan with that). But this lecture was different.

This man talked about economics in a different way – he made it seem interesting, made it seem more real. And it was not about money. He made economics about incentives. And that makes sense to me. I mean, money makes transactions easier, but most people do not buy and sell things because of the money. They do so because of what money represents.

For instance, I have ten dollars in my purse, and if I pass a coffee shop (not Starbucks), I can enter and purchase a fived dollar cup of flavored coffee if the value of the coffee exceeds the five dollars in my purse.

Oh, that example is not about incentives. Try this one.

Lets say I make $35,000/year doing a fairly trivial job. It is 40 hours per week, with no overtime, and no real mental stress. I am offered a "managerial job" that pays $40,000/year, with potential for me working an additional 20 hours per week, with more mental stress. Well, that's about 1,000 hours. So I would be working for $5/hour for the extra hours, and my job would be tougher. So for me, the incentive is just not there.

In college, I was always unsure of buying guns or butter, especially since I had little experience with either. I was part of the Parkay® generation (butter-Parkay®). Me, I am liking this new economics.


LarryLilly said...

Why did you and your hubbles go to the talk in the first place? You didnt say why, and that is so much of the unsaid thread.

As far as economics is concerned, I was in petroleum engineering way back just prior to the mid 70-s oil embargo. And while the embargo started the rollercoaster of oil prices even today, at the time, like 2 years prior, oil was only selling for like 3 bucks a barrel, now its nearly 100.

So to make sure that I would be employable after college, since the 3 bucks a barrel didnt mean there was a lot of hiring, I had a double major, petroleum engineering AND business. Yeah, it was boring, especially economics. In fact I remember the Sunday before I was to start at my first job, one day after I would have walked to get my diploma, but hey, i was married, had a child, and I didnt need to wait to start working, so i didnt hang around for the walk, BUT I did call my macro economics prof asking him did I get a passing grade for the course, cause if I didnt, i was screwed LOL. He said yeah, you got a "C". They would have given me a BJ to attend a discussion on economics now.


So again, WHY did you two go?

RWA said...

Interesting lecture, but that is a good point. Incentives are a major part of economics.

Advizor said...

I like your example of the incentive to go in to management. It shows a difference between our perceptions of incentives.

Management thought that $5,000 and a bigger title would motivate you to take the promotion. You saw it as 1,000 more hours an a lot more stress. You saw that as a negative while they saw it as opportunity.

I'm in a similar situation. I don't live in Houston, but all of my bosses are there, and all the promotions they offer would require a move to there. They offer me money and and prestige, but I want a shorter commute, more time with my family, and weather under 90% humidity. I want to work hard and go home. They want me to work harder and stay longer.

They literally couldn't offer me enough money (OK, for a million I'd go) to move to Houston. Except for the food there is nothing there for me to enjoy.

In the long run, money, by itself, is a very poor motivator. Would I go for a $1,000,000? Sure, if it was $1,000,000 after taxes. But just for one year, and I'd be counting down every day.

Economists, who should know better, forget this point and are always surprised when the economy does odd things.

Why won't people move out of New Orleans and their mold ridden house? Why do old people refuse to sell the dying stock that their mother loved? Incentives go far beyond money.

Thanks for an interesting post.

kathi said...

Loved the way you broke it down. I bet your profs in college loved you.

Leesa said...

larry: I left that out intentionally.

rwa: thanks, sweetie.

advizor: sometimes others think we should value what they value - and it is not so.

kathi: thanks, sweetie.