Please note that my opinions are my own, and the opinions of the anyone or any institution quoted are theirs. The opinions expressed herein do not reflect the opinion of North Carolina State University, its board of directors, the College of Management or any other college, Student Media Authority, or WKNC Raleigh.

Tuesday, January 23, 2007

Etymological Moment


Hypothesis: manu-facture; manu coming from manual, or hand and facture coming from factor (or inputs).

Econ-spin: labor (manu) + capital (factors) = product

Actual etymology: from Latin manus or "hand" and Latin facere or "to make"

To make with one's hands.

Monday, January 22, 2007

An Extension of Unions

So, Nathan was nice enough to point out that all the great economists say that unions are OK. That's fine, I don't care. In my current area of study, unions depress pay and fundamentally stifle the quality of the supply of labor. (Don't be verbose...)

For instance, in education, unions serve to create across-the-board equally scheduled pay based on tenure. Simultaneously, they advocate iron-clad job security, and even in states that do not have unions, the State does a good job of securing even pay and iron-clad security. This prevents us from paying people for their merit and firing the ones not worth paying.

The abolition of unions would increase wages for those better-suited for teaching and put some not-as-well-suited out of a job (but they don't need to be teaching our kids anyway). In other words (and this is important):

It would more-efficiently allocate wages.

As the science of economics seeks study the maximization of wealth through the efficient allocation of resources, this seems like a good step for policy-makers to take.

The extension of the argument, as suggested by Nathan: "The existence of unions, though beneficial in the short run, is ultimately detrimental to the individual." Brilliant! And almost Keynsian. But I won't tell any of your libby friends. Hush, hush.

My extension to his: "Yes, and unions are ultimately detrimental to society. As it is unfair to the individual, it is unfair to all collectively: the ones working for a depressed wage may be better suited for and earn more in another position, or at the very least will consume less of our resources; the ones not working in whatever position (teacher in my above example) may now have another option that replaces their first or even second choice of a career, changing the whole set of opportunity costs the individual weighs in the efficient allocation of his own fiscal or human capital."

A Note on Unions

If I dislike unions so much (and I do), would I join one? Hell, yes! Elaborate, you say... Fine, but I'm going to do what an economist does best and assume (and forgive the following jargon):

A1) Institutionalized collective bargaining does not increase efficiency in a labor market that can be treated as a commodity market. That is to say more elaborately, for quality-undifferentiated labor or unskilled labor, the labor may be assumed to be readily available and treatable as a classic commodity--only efficiently allocated when fully exposed to the the functions of a free market (given constant transportation costs).

A2) Unions exist and I can only talk about not-having-them in my theoretical econ-world.

The existence of unions works against labor market efficiencies and causes a total loss to society. However, it would be unwise for me not to exploit the system for personal gain. Therefore, a fallacy of composition occurs and Smith's invisible hand slaps us around a little bit.

Now for my crack-pot pet theory for the day (see previous post): labor unions are a byproduct of market failures and themselves failures of the organized labor market. Therefore, governments should protect me, nay all of society, from myself by banning unions. This will increase welfare, or at least keep me from hurting others due to my inability to comprehend the consequences of my actions of the inability to make the best decision for society as a whole due to imperfect information.

Note on Economic Fame

What does it take to make a good economist? Or at least a famous one?

Great economic insight, sometimes at par with contemporaries, sometimes exceptional ability... and one crack-pot theory to set yourself apart from the pack.

Seriously, Rothbard has a knack for explaining things with exquisite analogies. But his stance on currency? *Gag*

And Friedman, so wise, so omniscient in the field. Heralder and harbinger of the greatest truths of 20th century economics, and all at least 10 years before we all started believing him. But his stance on the Fed? I mean, he had to have read SOMETHING good about it!

Keynes gave me reason to participate in the electoral process. He showed that governments do matter, as the largest consumer in an economy. But I just can't touch EVERY market failure as a justification of his theories. There is a natural limit to how much government one can stand. Someone ask Pinochet... oh, never mind.

Oh, and Nash? Well, I guess you can be right about EVERYTHING. But not everyone has his unique grasp on reality.

Cheating: Jobs and Relationships

Without going into too much detail, please take the following scenario:

  1. Policemen need to be honest.
  2. The nature of their work exposes them to bribes: opportunities to "cheat."
  3. Their decision to cheat relies partly on the probability of getting caught, the amount of the bribe, and some sense of satisfaction (with themselves, their ethics, their job, etc.).
  4. Many less will cheat with a higher salary, but bribes may just become bigger to compensate.
  5. So, they may be kept from cheating by keeping a significant portion of their compensation out of their pockets until their entire career can be "certified" clean; that is, give a good pension to the deserving, good cop.
Now, it may not seem natural at first, but taking the scenario of a spouse, or commited one into account:

  1. Spouses need to be honest. Love one another. Be trustworthy. All that jazz.
  2. The nature of being a social animal exposes them to plenty of opportunities to "cheat." Define that however you wish.
  3. Their decision to cheat relies partly on the probability of getting caught, the reward for cheating (the attractiveness of the individual, their attentiveness, their gifts, etc.), and some sense of satisfaction (with themselves, their ethics, their relationship, etc.).
  4. Many less will cheat with a better looking mate, a higher combined income, better emotional security... but barring it all they may just cheat with an even further attractive mate. In the end, its all about morals. Why else would super-celebs cheat?
  5. So, then, what keeps one from cheating? A significant portion of compensation must be kept until after a clean record can be proven. Since gifts, income, and even beauty don't make much sense here, I am left an appearantly logical conclusion: give good couples a great reward. God will give us good "pensions" for displaying His love and commitment in our human endeavours on Earth.

A Note on Currency

It's really quite simple.

You can't eat gold... and you can't burn it. If the conservative conspiracy theorists and certain libertarian economists are right, and "the system" DOES fall apart, holding on to gold won't save you.

You see, its all about what the other guy has that you want. In that situation, he may not accept gold for food, because then he has to find someone that will take gold for the water he needs. So basically, in the absence of "money" in any form--a complete collapse of "the system," the transactions costs savings over the barter system are made irrelevant by the inconvenience of money in a time of crisis.

To put it another way: the other guy has you over his knee in a complete economic collapse. You are at his mercy. Take your gold and chew on it... or eat your oil. I don't care.

The Agency Problem in Public Education

My first attempt to publish this article ended in me writing a 12-page discussion of the topic as a whole. If anyone wishes to see the work-in-progress, e-mail me. Otherwise, here is about as concise as I could get it for lay readers.


I wish to expose the broken system of public education currently putting America at risk for a long, hard fall from super-powerdom. If selected to continue my research in this project, I will produce a detailed analysis of the agency problem in public education and its effect on the quality of our nation’s education.

I will start by taking a look at how to define the "agency problem" from corporate governance theory. Next, I will form an analogous definition for the problem in education, noting caveats and elaborating on my choices for analogies. I will then discuss the reasons our current system fails to solve these problems. Finally, I will propose hypotheses for research and possible methods.

The agency problem may be defined like this: a principal (
analogous to an employer) employs an agent to act in the principal's stead, that is, to make decisions in the absence of the principal; a conflict of interest arises in that the agent performs and makes decisions in his best interest, which can not be the same interests (though they may produce parallel decisions) when the agent is not also the principal. The agency problem, then, is the conflict of interests that arise from differing personalities (tastes, preferences, valuations, etc) of the principle and agent.

The table below is a brief summary of the agency problem applied to corporations and public education.


Public Education




Respective Interests




Board of Directors

School Administration

Home Consumption



Job Consumption




d(perks)/d(profit) is neg

d(doctrine)/d(knw) is neg4

Agency Problem

Above optimal perks

Above optimal doctrine


  1. If a CEO is in charge of maximizing profit, the agent who is directly charged with maximizing knowledge is the teacher. The school, then, as an institution, never enters the picture and can be thought of as the institutional "market" for knowledge transfer, where the principal’s role is as Grasso’s was to the NYSE.

  2. Just as a manager is in charge of maximizing profits, a teacher is charged with maximizing knowledge. Likewise, as a manager is in charge of maximizing firm value, a teacher is charged with maximizing the net-present-value of that child's future earnings (which will vary considerably across individuals and time).

  3. Whether it is to correct some past injustice or to ensure the survival of an epistemology, a teacher derives clear utility from this practice of indoctrination. These teachers value indoctrination in a way managers value their perks consumed.

  4. As knowledge is product of classroom activity, the marginal benefit to the student is increased analytical thinking skills. These skills make a pupil more competitive in labor markets and more productive as a worker, thus increasing his potential future earnings. “Affective teaching” (Sowell), or indoctrination reduces the development of independent thought and analytical skills, as consumption of perks decreases profit in a corporation.

The agency problem can be solved, or eased, in numerous ways by changing the agent's incentive structure directly, rewarding (or punishing) good (or bad) performance, and external incentives. Whereas an optimal combination of all these solutions can align the owners’ and manager’s interests, An optimal combination cannot be reached in public education. Direct incentives are only possible if the teacher teaches only her own children, becoming strictly a parent-teacher, and hence eliminating the agent problem. Performance-based incentives are currently restricted by teacher unions. External incentives are not implemented, save external constraint of behavior through curricula.

Why does the agency problem continue to plague our public schools? I propose two main reasons for the continuance of the status quo, the quality of educators and the unionization of teaching, and I argue that these two factors must necessarily change before methods of solving the agency problem may be applied.

I propose two main hypotheses. Due to the inability to build standard direct and performance-based incentives, the only option left is to restrict the agent's behavior; the imposition of curricula, standardized tests, and teacher accountability occur in the public sector, where the other solutions to the agency problem are restricted.

  1. I argue that the private sector, where performance-based pay and real threat of dismissal, will provide a higher quality education or at least deflate salaries whilst maintaining status quo, freeing up resources for more efficient (or profitable) uses.

  2. I argue that the constraint of teacher behavior in the public sector improves education, but not to the same degree that performance-based pay and dismissal incentive would--that is to say, the alternate method of constricting behavior does not fully compensate for the lack of standard solutions to the agency problem. I expect to observe this result because the constraint of behavior prevents other methods of compensation and incentive-building to be chosen optimally, given they could be chosen.

A simple means comparison between a control group and experimental group may reveal the most information. The closest to a natural experiment we find in education is the marked differences between public schools (unionized, bureaucratic, and monopolistic) and private schools (competitive labor market, competitive market for students).

I wish to test the differences between historically “indoctrinable” subjects and “pure” subjects both in public and private schools. I expect the stringency of curricula in history, literature, and philosophy, for example, to be higher than that in curricula in mathematics and science in the public schools. I also expect the constraints on teacher behavior to be absolutely smaller in private schools in all subjects.

Further research would allow me to develop more robust methods for testing my hypothesis, and may allow me to develop a theme more consistent and relevant to competition and choice in education.