Posts in category 'economics'

It would be difficult to write a holiday wrap-up blog post series without a mention of inflation, which became the new boogieman in the latter half of 2021 as we’ve seen inflation rising steadily, with the rate in some categories exceeding 7% year over year.

That inflation is suddenly a problem is really quite remarkable given that 18 months ago everyone was terrified of a depression-level event as a result of mass illness, lockdowns, and so forth. But to the credit of our governments, while a lot of mistakes have been made, it’s pretty clear that many of the policies that were instituted–particularly the various financial aid packages that were put together–have done what, at the outset, would have seemed impossible: turned the threat of economic calamity into the kind of boom we all wished we could’ve seen after the 2008 crash.

But like so many of the other topics I’ve written about, this is just another example of an issue that, for my generation, is completely novel. The last time inflation exceeded 3% was way back in 1991! Meanwhile, the prime interest rate, which is a key tool for controlling inflation, is at historical lows (thanks 2008!).

For a generation that has never seen real inflation, this situation is novel, frightening, and deeply frustrating, upending yet another aspect of life that was previously familiar and consistent.

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In my introductory post for this series I rattled off a number of topics that seemed especially interesting to me in light of the last two years of COVID, one of which being the relationship between capital and labour. A light and simple topic, obviously, but it seemed worth a post.

Standing in the shower I was thinking about my way into this subject, and then it dawned on me that my post on supply chains, and in particular the topic of supply-demand dynamics, made for a very nice segue into this topic, particularly given the conversations I’ve been having this year regarding the labour market.

I’m going to start off with a basic thesis that I suspect some might find a bit controversial, maybe even mildly offensive, but that (as I understand it) is pretty well understood in the world of economics: Labour is a market, and salaries are our price for our labour. This means that, absent government intervention, salaries are a function of supply and demand, along with all the other forces that make a market function.

This is not what anyone deep down wants to believe!

Naively, I think we’d all like to believe that the value we pay for something reflects what that thing is, in some way, intrinsically worth.

But what makes an iPhone valuable? We know from Apple’s filings that they’re achieving something like 30% gross profit margins on their consumer devices. That means we’re paying over a third more for the device than is reflected in the total costs of raw materials, labour, shipping, and so forth. And yet people still buy those devices, believing them to be worth the additional cost.

What about, say, a collectible baseball card? Intrinsically, the card is worth pennies in paper and ink. And yet there is a market in which such a thing could sell for hundreds or thousands of dollars.

The reality is that prices reflect not just pure utility, but rather something more intangible.

To offer just a little taste of just how intangible, consider the idea of the Keynesian beauty contest:

This would have investors pricing shares not based on what they think an asset’s fundamental value is, or even on what investors think other investors believe about the asset’s value, but on what they think other investors believe is the average opinion about the value of the asset, or even higher-order assessments.

In other words, our estimate of the value of a good isn’t necessarily even based on our own idea of its intrinsic value, but rather our idea of what other people believe to be its intrinsic value.

Meta!

Well, the same is true of labour, and the forces unleashed by COVID that have turned markets for goods and services upside down have had similar impacts on the labour market as well.

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I’m going to preface this post by noting the obvious: I am not a trained economist or anything like that. While I do cover some of the nuts and bolts of the supply chain crisis as I understand it, I have no doubt there’s much I’m misrepresenting and even more I’m missing outright.

Now, with all that said, I’m gonna dive right in and hope I don’t get anything egregiously wrong. So, without further adieu…

Growing up in a place like Alberta, you’re never really that far from the agricultural sector. But, as a born and bred city boy from the bustling metropolis that is Edmonton, it’s not unusual to hear someone lament that folks really should have a better understanding of where their food comes from.

And I can’t help but agree!

Food is one of those many things many of us take for granted. If you’ve grown up in some of the more privileged places in the world (and there are plenty that are far less fortunate), it’s pretty normal to walk into a grocery story and just expect to find a huge range of products at affordable prices, many sourced from all over the world.

But it isn’t until times of crisis–usually a natural disaster of some kind–that we actually spend any time thinking about how that food travels from farm to grocery story to plate.

Oddly, I’ve rarely had that conversation about any other products that feature in our day to day lives. Until recently, who among us had spent any time wondering how our television or engine block or framing lumber ended up in our possession?

But, as with so many things, the pandemic has opened our eyes, forcing us to face these complex, interconnected systems that govern so much of our lives.

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