Sunday, November 30, 2008

2008 AGEC 4213 Nerd of the Year!

Congratulations to Alex Davied, the 2008 AGEC 4213 Nerd of the Year!

Each year in my regression class we hold a forecasting contest. The second day of class we go outside and hit softballs, measuring the distance each person hit. We then develop regression to explain why some people hit further than others. See this blog entry discussing the activity in more depth.

To test whether they can really put together a good regression model, we hold a forecasting contest. Using data from their class, and previous classes if they wish, students are asked to construct a regression model. Then, we return to the field, hitting balls again, measuring distance again. But this time, before the person hits, students must take their regression equation and predict how far the batter will hit. Note this is an out-of-sample forecast. The student whose regression model has the lowest sum-of-square errors across all other students wins. This year's winner was Alex.

She wins $30 in cash and an obnoxiously large and tacky trophy, that yes, states 2008 AGEC 4213 Nerd of the Year.

One lesson that always emerges from the contest is the importance of parsimony. The winning student always has a simple regression model. Alex's model was distance = a0 + a1(male) + a2(experience) + a3(experience squared) where male is a male dummy variable and experience is the number of years the student has played on a softball or baseball team. Inevitably some students will construct a horribly complex regression with all types of quadratic and interaction terms, quite similar to our "locally flexible functional forms", and those regressions inevitably perform poorly. Usually, the winning model is: distance = a0 + a1(male) + a2(experience).

The contest is fun and educational. Moreover, it gets students outside, which is always popular with them and always good for evaluations.

Trust Me: I'm Good For It

The recent financial troubles have taught me the importance of loans in the everyday running of business. The fact that loans are needed for large capital investments, like building a factory, is obvious. What is not obvious is that a majority of businesses seem to need loans on a constant basis for operating costs as well.

I had always assumed that a well managed business would keep reserves of cash handy to help smooth out the rough spots between the purchasing of inputs and the receiving of revenue. But apparently they don't. When the financial world was being brought to its needs, the business world seemed unable to turn their lights on at work. It seems finance has gone far beyond helping businesses acquire capital and upstart money. They are now as important to daily activities as management.

(1) I asked a business person sitting next to me on the plane why this was the case. He indicated he didn't know, but it certainly was. Virtually every business relies on frequent loans for day-to-day activities.

(2) One of my former graduate students now works at a bank. I shared these thoughts with him and he indicated he felt the same way before he worked at a bank. But he sees many businesses taking loan after loan for little things like buying inputs and paying employees. Loans, not cash reserves, are used for smoothing out revenues and expenses.

(3) I was greatly relieved to see an article from The Economist help clarify this issue. From All You Need is Cash in the 11/22/08 issue, they state...

SELDOM has corporate strategy been turned on its head so quickly. Barely a year ago, cash was a dangerous thing to accumulate: activist investors stalked companies, urging boards to return it to investors, to pay special dividends or to buy back shares. Ever since the 1980s the fashion had been to make companies as lean as possible, outsourcing all but your core competencies, expanding your just-in-time supplier system around the globe, loading up with debt to “leverage” your balance-sheet. Old-style defensive conglomerates, such as Arnold Weinstock’s General Electric Company, were dismantled. Companies that hoarded cash—even ones as good as Toyota and Microsoft—were viewed with suspicion.

No longer. For many big American companies, the day of reckoning came two months ago when the deepening financial crisis brought about the abrupt closure of the overnight commercial-paper market. This briefly sent even the most solid companies into a desperate scramble to find money to meet such basic obligations as paying their staff. Since then, the guiding principle for managers everywhere has been to gather up whatever cash they can find, and then do their damnedest to keep as much of it as possible for as long as possible.

Tuesday, November 25, 2008

Encyclopedia of Economic and Business History

The best overview of the Great Depression I have seen. This site also has a superb Encyclopedia of Economic and Business History, covering topics from advertising bans to tractors to weather forecasting.

Green Energy

Subsidies always distort. In this case, we have wind energy farms paying consumers to take their power. They are generating wind energy that has a negative value, and paying people (from the subsidy money) to take the power off their hands.

Monday, November 24, 2008

Interesting Ag Facts

Dark chicken meat for exports accounts for 18% of chicken meat production.

The breakeven price for chicken breast meat is $1.45 / lb.

Interesting Ag Facts

An 18-ounce box of corn flakes contains 12.9 ounces of corn. If corn prices rise 50%, and these costs were passed through to the consumer, the price of corn flakes would rise 1.6 cents.

4.1% of U.S. corn is used to make corn syrup. A 2-liter bottle of soda contains 15 counes of corn. A 50% increase in the price of corn raises the price of this bottle of soda (assuming 100% of costs are passed to the consumer) by 1.9 cents.

55% of U.S. corn is used as animal feed.

It takes 7 lbs of corn to produce one lb of beef, 6.5 lbs for a lb of pork, and 2.6 lbs for a lb of chicken.

A 10% increase in the price of corn increases food prices by less than 1%.

-- From Corn Prices Near Record High, But What About Food Costs? by Ephraim Leibtag in Amber Waves.

Explaining Price Indices

Here is one of my students explaining price indices in a paper:

A person cannot compare an apple to an orange, and the same principle holds to numbers, so basically the price index turns the orange into an apple so the numbers can be compared.

Beef, Pork, Chicken, and Egg Consumption: 1910-2006

The increase in chicken consumption during the last century is amazing. Over the years chicken prices have fallen and chicken quality has vastly improved. I am guessing the rise in beef consumption is due to rising income, beef production technologies, but also the change in food culture such as the integration of the hamburger into American society. There have not been many new pork products like there have been beef products, but people still like pork and technological progress has allowed pork prices to remain low, keeping its consumption fairly stable. Egg consumption has fallen over the years, despite the large decrease in egg prices (see this graph). This article provides an interesting discussion about egg consumption, arguing health concerns are a main reason for its decline in consumption, but also arguing those concerns are both false and dissipating.

Corn and Gasoline Prices

Great graph showng the relationship between gas and corn prices. Would be a nice teaching tool, if students can understand the graph, they understand much of basic economics. Nicely displays behaviour in both equilibrium and disequilibrium.

From Feedstuffs, Nov 3, 2008.

The Great Depression - Maybe We Learned Something

On Nov 18 I argued it feels like we didn't really learn anything from the Great Depresssion because everyone seems to read into it what they want. If information doesn't change at least one mind, perhaps it is not even information.

I retract my claim. Tyler Cowen published a fantastic NY Times editorial describing what did and did not work in the New Deal response to the Great Depression. For the first time, an economist appears objective and open-minded when discussin the Great Depression. Congratulations Tyler!

Sunday, November 23, 2008

Keynesian Perspective

Economists are better at describing things in equilibrium than disequilibrium. It is the disequilibrium that is beginning to interest me more, and the passage below struck me as worth sharing.

The freeing of capital movements in the 1980s combined with the collapse of communism, releasing billions of new workers into the world economy, has recreated a global reserve army of labour. That in turn has contributed to a rise in the share of world GDP accounted for by profits and an accompanying decline in the share accounted for by wages. Such a development easily leads either to over-investment by businesses or a shortfall of aggregate demand. When wages lag, spending can keep up with output only by an expansion of consumer debt.

--Gerald Holtham in Prospect Magazine: "Workers of the World Compete".

With Real Poets, It is Hard To Tell

This Prospect Magazine article suggests Palin is really a poet at heart, suggesting that some of her dialogue can be feasibly parsed into magnificent poetry.

Modern poetry is so horrible that I cannot tell if the author is being serious, is mocking Palin, or is mocking modern poetry.

Ag Career Info

Interesting Canadian website about agricultural careers here. Do we have anything like this in the U.S.?

Why Neoclassical Theory is Important

All economists are well-versed in neoclassical economic theory, the theory where decisions are made at the margin and marginal values and costs slope downward and upward, respectively. The recent cow tax (discussed previously here) provides a perfect opportunity to demonstrate the usefulness of this theory.

The American Farm Bureau has announced that they oppose this tax because it would force some producers out of business (read more here). If the cow tax is based on any economic logic, it is supposed to force some producers out of business.

The basic idea is that the value of one more pound of beef to consumers declines the more beef you already have. It is like saying the first bite of a hamburger tastes better than the 100th bite. Conversely, the cost of greenhouse gases emitted from cows rises the more beef that is produced. At some point, the value of one more pound of beef becomes so low that it is less than the cost imposed by the greenhouse gases.

The solution is to produce less beef, to keep decreasing beef production until the value of each pound of beef produced is now higher than the environmental cost (and, of course, the production cost). To produce less beef, someone has to go out of business. The beauty of the cow tax is that it forces the least efficient producer to cease production. So if the cow tax is to produce benefits for society, if it is to correct the problem that some pounds of beef are valued less than the cost they impose, it must be high enough to force some producers out.

A final note: neoclassical economics asserts that this does not mean we should cease all beef production. As beef production falls, the value of each pound rises, and it will likely fall to some point where the value of beef is greater than the cost, even if beef still produces some pollution.

This post is written under the assumption that climate change is real and that small changes at the U.S. level have real benefits. I am not smart enough to know the correct answer to these two questions; I can only say I am open-minded and skeptical.

Friday, November 21, 2008

It is more than that...

The worst thing livestock agriculture can do is to misunderstand its enemy. One of my favorite podcasts, Loos Tales for Feedstuffs, discussed the issue of farm animal welfare on Nov 19. The title of the program was "It's about more than animal welfare."

The thrust of the commentary was that the animal rights activists seeking more humane treatment of farm animals have an ultimate goal of complete freedom for animals, and complete veganism for humans.

It is true that many activists are simply opposed to meat and milk consumption. However, many of these activists oppose the raising of animals for food because they do not believe someone raising animals for money will treat the animals kindly. So long as the animals are given a nice life, not all of the activists oppose animal food products.

It is always nice to pretend that there is an enemy who is pure evil, an evil who will oppose us no matter what. It makes us feel innocent. But part of the reason people are against animal food products is because whenever they see us raising animals for food they see only animals in cramped cages with no natural life. We have not given them "more humane" products and placed the onus on them to pay more for the better animal life.

We are part of that problem. Pretending we are not will only lead to our demise.

Don't Forget...

Don't forget how good you have it...

King Camp Gillette: Hero of Capitalism

Today, the superb blog Hereos of Capitalism honors King Camp Gillette, the inventor of the disposable razor, helping us get "as best a man can get." It took him six years to develop the razor - a spectacular example of perseverance!

Gains From Trade...And Love

An interesting example to illustrate the prevalence of economic forces across a variety of settings: from trade between countries to falling in love.

In 1974, Gary Becker developed an economic theory of marriage that suggests marriage provides advantages through comparative advantage, the same concept that provides advantages from trade with neighbors, other states, and other countries. The U.S. exports soybeans to China because we are better* at growing soybeans, and China exports textiles to us because they are better at textiles. When two countries are skilled at producing different products, they can both be made better off by trading.

Becker suggested that gains from trade can also be found when individuals with different wage rates (or salaries) marry. One person has skills more valued by the market place, and the other has skills less valued by the market place. This means they are skilled at different things, which suggests trade can make both better off. Trade, here, refers not to the trading of bodily fluids but as roles in the household. One goes to work and makes a high salary, and the other stays at home and makes sure the children receive constant love and attention. As a result, everything that needs to get done for a happy family gets done with the utmost efficiency.

Recent research into happiness suggests the theory is correct. As the graph above shows, couples with large differences in wage rates receive larger jumps in happiness from getting married than couples with similar wage rates. Comparative advantage is present, and important, between countries and couples.

* "Better" is defined here in terms of opportunity costs of production

Thursday, November 20, 2008

The Importance of Insurance

We are at the point in my data analysis class where I am teaching students how to calculate insurance premiums. The example we are using in class is yield insurance, where farmers get paid money if their crops experience low yields. Using the methods outlined in these notes, I teach them how insurance companies decide how much to charge.

Insurance markets are becoming increasingly important. Weatherproof is a company that makes coats, and people buy more coats when the weather is cold. If winters are increasingly warm, they stand to lose lots of money. To protect against this loss, they purchased an insurance policy that pays out $10 million in the month of December if the average daily temperature exceeds 40 degrees. Read more.

My father used to make money by putting on rodeos. He would pay a rodeo contractor to put on the show, and my father sold tickets to the show. If the weather was bad and people didn't show up to purchase tickets, he still had to pay the contractor. If he was still in the rodeo business, he could protect himself about bad weather by purchasing a customized weather insurance policy from CSI Entertainment Insurance.

Thriving insurance markets are important for society as a whole. Without affordable home insurance, one accident could plunge a normal family into financial ruin. I need not describe the importance of health insurance. For insurance markets to thrive, we must have people who can understand the economics of insurance and the basic of statistics to calculate what premiums they should charge. It is important for both insurance companies and societies. That is why we subsidize students to learn statistics and economics!
One of the reasons our economy is sick is that AIG (American International Group) started selling insurance on home mortgages. If you own home mortgages as part of your investment portfolio, you run the risk that some of those homeowners will default. AIG sold people insurance that pays out in the case default does occur. Yet they didn't crunch the numbers correctly. They underestimated the probability of a home default, and as a consequence, ran their company and our economy into the ground. (more on AIG here)

Note: an interesting NY Times article on the importance of weather forcasting in fashion can be found here.

Oklahoma where the wind comes sweeping down the plains

As new energy sources are being sought, wind is becoming less of a nuisance and more of a resource. Below is an awesome map, given to me by my friend Shannon Ferrell, which shows the wind conditions in Oklahoma. This map is akin to a map showing water resources, where the blue means water. Here, the colors mean wind strength, where red is windy, windy, windy, and perhaps, profitable, profitable, profitable.

I think the presence of wind corridors is especially interesting.

Hereos of Capitalism

In a capitalistic system, one only generates wealth for oneself if one generates wealth for others. To generate large profits, one must give the consumer something other people cannot. Whether it be a new invention, a lower priced product, or a higher quality product, the contributions of successful capitalists are the primary source of our great wealth.

Who has done more to help the poor: Henry Ford who gave us the modern car and assembly line, allowing us to produce every good cheaper, or former NC Senator John Edwards, the self-apppointed Patron Saint of the poor?

By the definition of a capitalistic system, the ones who generate wealth for themselves are the ones who generate wealth for all. These capitalists are the real Patron Saints of the poor. Who are all these people? The superb blog Hereos of Capitalism features one of these Patron Saints each day. Let us pay homage.

Bird Spectacles

I learn something new everyday. Here is one of my first lessons for today.
Bird hunting is big business, and some hunting preserves breed and raise birds to be set free and subsequently hunted. Pressures to keep costs low are the same for these farms as the farms that raise animals for food. Many house the animals in tightly confined facilities in large groups. Whenever you cram any large group of animals together, they get ornery and fight.
To prevent fighting, some of these preserves place "spectacles" on the birds, as shown below. They cut a hole in the beak perpendicular to the face, stick a metal pen through the whole, and attach a plastic device that limits the vision of the bird. The idea is that if a bird cannot see other birds, it cannot try to fight other birds.

Farm Animal Welfare: A Rare Statement of Truth

It is rare you see a reasonable and truthful statement regarding the issue of farm animal welfare -- from either side of the debate. Here are a two from an excellent story by the JAVMA News.

Multiple factors must be looked at when considering how to house an animal to ensure its well-being, according to Dr. Gail C. Golab, director of the AVMA Animal Welfare Division. "We agree that more attention needs to be paid to the behavioral well-being of production animals," she said. "In doing so, we don't want to be singularly focused on just providing additional space, as is the case with Prop 2.

"For example, moving laying hens to free-range production systems may allow them to engage in more species-typical behaviors, but it also increases the hens' risks of illness and injury because it increases their exposure to disease vectors and predators."

California voters call for changes in livestock housing - JAVMA News

Wednesday, November 19, 2008

Turkey Torture

Another undercover PETA investigation.

Explaining "Stimulus Package" to Students

The government is considering another stimulus package to avoid a prolonged recession. I believe that most people believe that when the government gives consumers a rebate to increase spending, people view that rebate as "new" spending.

Yet, ask your students where the money for that rebate check comes from. The check is paid for, of course, by taxpayers. So in a sense, taxpayers are writing themselves a check. How does writing yourself a check for $100 increase spending? You receive $100, but you pay $100. Its not like you now have more money.

The answer has to do with money demand. For the stimulus package to work, the rebate must cause some people to hold onto less money than they would have held without the rebate check. If it works, it works as follows. I am the government and I pay you $100 in a rebate check, and you go out and spend that money on beer and goldfish crackers. To get the money I don't raise your taxes by $100, as that would negate the impact of the crackers. Instead, I borrow the money.

Out in the economy are some people who are savers and have a certain amount of money they are holding onto. To borrow this extra money, I must convince these people to save more, and I do so by offering a higher interest rate. So these people now hold onto less money, because the opportunity cost of holding onto the money (i.e. the interest rate) is now higher. Thus, I induced people who were holding onto money to hold onto less through the higher interest rate. Those savers give up some of the money they were holding, and pass it to you indirectly. You then spent that money and saved the economy.

Thus, if you get a rebate check for $100, not all of that $100 is new spending. Some of it would have been spent by the person the government borrowed the $100 from.

The Cow Tax

Agricultural blogs and lobbyists are busy condemning a "cow tax" being considered by the Environment Protection Agency. See here and here and here. I tried looking for the original EPA document but it was taking to long. Derivative articles said the tax would be be $175 per dairy cow, $87.50 per head for beef cattle and a little more than $20 per pig.

Agricultural industries are condemning the tax, of course, as any industry opposes government action that hurts it and favors government action that benefits it. I'm told that people and professors are the same way.

However, if you think that global warming is a problem we must confront, and if you believe in capitalism, you should not oppose the cow tax. No champion of capitalism believes taxpayers should help firms pay for their cost of production. If a firm cannot sell a good for more than it costs them to produce, they should not be in business. If firms should pay the cost of the labor they use, they should also pay the cost of the pollution they emit. That includes pollution from cows, if such pollution exists.

The Market for Organic Eggs

Recently I came across a superb set of data containing egg purchases for 1,652 respresentative U.S. households for 52 weeks ending July 6, 2008. From these data, I found the following interesting results.

  • The average price of nonorganic eggs is $2.30
  • The average price of organic eggs is $3.63
  • The market share (in terms of eggs sold) of organic eggs is 0.8911%, so less than 1% of eggs produced are organic eggs
  • 92% of households bought only nonorganic eggs
  • 3% of households bought both nonorganic and organic eggs
  • 5% bought neither egg types
  • only 1 household bought organic eggs exclusively

Note that nonorganic eggs includes varieties such as cagefree eggs

For Misplaced Southerners

Are you a Southerner who now lives in an area that doesn't serve sweet tea? Have you noticed that you can't just add sugar to tea that has already been brewed and chilled? Do you get angry when you ask a waitress if the restaurant serves sweet tea and she replies, "no, but I can bring you sugar with your iced tea"?

I have found the solution! There is a sugar called Baker's sugar which contains much finer particles of suger. Simply carry it with you and stir it into unsweetened tea and it works great. You can't find it at Wal-Mart, but some specialty grocery stores carry it. It will change your life :)

Long live sweet tea!

Tuesday, November 18, 2008

The Utility of Positive Emotion

Negative emotion serves a clear purpose. A painful back warns us to take it easy, sadness warns us we need to change something in our lives, and envy helps us perform better than others and increase our presence in the gene pool.

But what about positive emotion? Is it just a nice by-product of the accomplishments we achieve by responding to negative emotions? The book Authentic Happiness by Martin Seligman has an interesting take on the role of positive emotion. Perhaps negative emotion helps us avoid and/or perform well win-loss games, while positive emotion helps pursue and perform well in win-win games.

Example, win-lose games: Teaching assessment is a win-lose game for me. I have to collect data on how our undergraduates are learning and write an assessment report. It doesn't provide me or my department with any useful information, so I lose by participating. The university wins by claiming it collects all this great data on how our students are learning to ensure quality teaching. Whenever I have to work on assessment I get aggravated and bitter that I must take time away from valuable things and use it to produce something of no value. I experience negative emotions, which discourages me from pursuing this type of win-lose game. I put forth little effort due to the negative emotion, which is actually good for me because it doesn't benefit me or my department.

Example, win-win games: Researching with my friend Jayson Lusk is win-win. We work well together, feeding off each other's thoughts in a way to generate new ideas that we never would have produced in isolation. With both win by working together, and produce much better research. Consequently, working with Jayson is one of my favorite parts of my job. I truly enjoy the work and the collaboration. I experience positive emotions, which encourages me to continue pursuing this type of win-win game. I consider our research collaborations my top priority due to the positive emotions I receive, which benefits me from the great research we produce.


The Great Depression - We Learned Nothing

The Great Depression is the single most important and useful event of study for economists. Yet, I cannot help but think we do not really understand what caused it and what cured it, and we never will.

This Sunday on This Week With George Stephanopoulos, the panel began discussing the economy with references to the Great Depression. George Will, a conservative, argued it was caused by a federal government who couldn't make up its mind on how to combat the depression. Consequently, businesses didn't know the "rules of the game" and therefore were reluctant to make investments. Paul Krugman, a liberal, argued it was because of a demand shock and the government simply needed to spend more or get more dollars in people's hands. Krugman argued businesses did not make investments because consumers were not buying anything.

I have noticed this trend among all economists. Their beliefs about the Great Depression can be predicted almost perfectly based on one variable: a dummy variable indicating whether they lean conservative. It is saddening that, because of this, it seems we can learn nothing from The Great Depression.

Note: Krugman is a great economist, but the fact that he possesses a Nobel Prize does not mean he necessarily knows more than George Will. George Will is more talented than the vast majority of Ph.D economists, despite the fact that he has a Ph.D in philosophy.

Politically [un]Popular Ethanol

Price controls today are not popular politically, probably because so many individuals remember the price controls of the 1970's. I was only born in 74, but I still have heard many stories, and none of those stories lamented the demise of gasoline price controls. Hopefully, given all we have recently learned about ethanol (see below), having the government choose "winners" in the energy debate will now become politically unpopular.

Congress stipulated that ethanol be cleaner than gasoline and handed the job of measuring emissions to the Environmental Protection Agency, which has found itself under ferocious pressure. The ethanol industry wants its product shown in the best possible light. Environmentalists want an honest accounting, which the public deserves but which they do not think an industry-friendly Bush administration is capable of.
The most contentious question involves the emissions caused by direct and indirect changes in land use associated with growing biofuels. Until late last year, corn ethanol had been seen as at least carbon neutral ...But then came a spate of new studies arguing that earlier calculations had failed to account for the emissions caused when land is cleared and tilled, releasing large quantities of stored carbon.

from Honesty About Ethanol, NY Times editorial, today.

we found that corn-based ethanol, instead of producing a 20% savings, nearly doubles greenhouse emissions over 30 years and increases greenhouse gases for 167 years. Biofuels from switchgrass, if grown on U.S. corn lands, increase emissions by 50%. This result raises concerns about large biofuel mandates and highlights the value of using waste products.

from Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change, Science magazine, Feb 08.

Monday, November 17, 2008

Food Tales

Food prices are expected to rise 8% in 2009. Feedstuffs Foodlink, Nov 17, 2009.

The number of hungry children in the U.S. rose 50% in 2007, increasing by 700,000 people. Source: Associated Press Article.

Many blame this, at least partially, on the U.S.'s absurd ventures into ethanol. It is important to remember that subsidies represent far more than a few wasted dollars spread over millions of taxpayers. Subsidies force people to divert resources in a way they do not wish, often away from things people really find important. The Economist recently described a German subsidy venture in solar energy as follows .

Germany’s generous solar subsidies covered the roofs of one of the world’s most sunless countries with solar cells, thus pushing up the price of silicon and reducing the cost-effectiveness of solar power in countries where it actually makes sense.

An Omnivore's Solution

Recent environmental activists have been proposing that Michael Pollan* be appointed Secretary of Agriculture. They don't seriously think it could happen, but just the thought excites them. (example here)

My impression is that they believe should Pollan become Secretary of Ag, he would take actions to force individuals into something closer to veganism. Pollan described to a large readership that much of the grains we grow are fed to animals, before fed to us, producing what he calls large amounts of waste. Since economic activity naturally uses fossil fuels, this "waste" is a contributor towards global warming.

This group of activists believe that if I decide to pay the added costs of fossil fuels (e.g. more fertilizer, more gasoline), to convert corn into beef, instead of eating corn, that I am committing an environmental crime. They wish to dictate in certain terms how fossil fuels are used to produce the goods that I consume.

I prefer an alternative philosophy. Fossil fuels are used in everything, to produce different goods for different people. Some people use more of those fuels than others, and they consequently pay a higher price the more of those fuels they use. Instead of dictating to people how they use fossil fuels, try to price fossil fuels right, and let people choose the goods (including food) that they prefer to eat.

Also, consider this thought. Suppose that we forgo meat consumption, using less land, fuels, fertilizer, and hence fossil fuels to produce our food. We save lots of money in the process through a lower grocery bill. We will certainly spend that extra money. How do we know these "other" things purchased will not use more fossil fuels than the meat we once ate?

* If you are not aware, Michael Pollan is a talented story teller who writes about food. His book The Omnivores Dilemma attempts to describe why the "true" costs of our food is not apparent at the grocery store. His understanding of markets and social coordination is poor, but then, he is not an economist. For a superb and fair critique of the book, see this one by George Mason economist Tyler Cowen.

Cage Versus Cage Free

You can play a role in animal treatment - Opinions - You can play a role in animal treatment TimeSincePublished("2008-11-17-04:30:00","2008-11-17","Nov. 17, 2008");-->Karen Levenson

Dear Editor - Re: "Mutts comic strip unfair to farmers" (Guelph Mercury, Oct. 28).
Though farmers may not believe they are cruel to their animals, there is overwhelming evidence that intensive confinement severely compromises the animals' welfare. Canada's voluntary codes of practice codify practices where animals cannot turn around or stretch a limb.

yada yada yada

Consumers want cheap food, perhaps not realizing the cost to animals -- sensitive beings that suffer. Consumers can play a key role in the treatment of farm animals by buying eggs from cage-free hens and pork from sows kept in group housing.
-- Karen Levenson, director, Animal Alliance of Canada, Guelph

Unfortunately, if you are opposed to conventional egg and hog production, the two alternatives presented by the author above are not the answer. Animal scientists are unsure as to whether the cagefree alternatives are any better for the animal, and some argue they are worse. In the conventional system there are 5 hens cramped in a small cage. In a cagefree system there are thousands of birds cramped, but a little less cramped, in a barn. In the former, the birds have virtually no room to move but do not suffer much injuries from other birds. In the latter, due to the large flock sizes, birds are very frequently injured, cannibalized, and suffocated from swarming.

Would you prefer being jailed in a cell with one roommate, or set free in the jail-yard to be repeatedly beaten and raped? That is an illustration of the choice between cage and cagefree eggs, if you believe the cage system is inhumane. The story for the sows is similar. Note that I am not saying the cage system is akin to prison, I'm just trying to provide a useful analogy for consumers who are unhappy with modern cage systems.

Fortunately, there is a solution, and it is called furnished cages for eggs, and shelter-pasture systems as described by the Animal Welfare Institute for sows. If you are unhappy with modern livestock agriculture as it currently exists, these are unambiguous improvements.

The Cost of Happy Hogs

This afternoon, my graduate student Lacey Seibert is giving her Master's Thesis defense. Her thesis concerns the cost of producing hogs under what many call improved animal welfare. A video of one of those "humane" farms can be viewed here. Compare that video to what traditional farms look like in the picture below.

Her results show that it costs $0.10 more per pound of live-hog (a hog ready for slaughter) under these higher welfare standards than in the traditional confinement farm shown above. Since one pound of live hog produces only 0.58 lbs of meat for the consumer (source), these higher welfare standards raise the cost of retail meat production by $0.1/0.58 = 0.17.*

Consequently, consumers would have to pay $0.17 more at the grocery store to provide hogs with a more content life. I think the current retail price of pork is about $3,** so this is an increase in pork prices of 0.17/3 = 6%. Anything wrong with this line of logic?

However, the farmer in the video seems to be claiming "antibiotic free". Many farmers who receive a premium due to the nonuse of antibiotics often deny antibiotics to sick pigs. That is not good stewardship. Organic farmers often provide poorer animal feeds, which leads to higher mortality rates. That is not good stewardship of animals either.

*Let Qf and Qr be the farm and retail quantity of pork. By definition, Qr= 0.58Qf, or Qf = Qr/0.58. The $0.1 per lb increase in costs raises meat costs by $0.1Qf = $0.1Qr/0.58, assuming that costs is passed onto the consumer in full. The per retail lb of this cost increase then equals ($0.1Qr/0.58)/Qr = $0.1/0.58 = $0.17.

**The current live hog futures price is $0.55 per lb of live hog, which is $0.55/0.58 = 0.95 per retail lb. For every dollar the consumer pays, the farmer receives $0.3. Thus, if the farmer receives close to $1 per retail lb, the consumer must be paying close to $3 per retail lb.

The Importance of Economics

Here is why understanding economics is important. India currently subsidizes fertilizer by an amount equal to 2.5% of its GDP (source). This subsidy is not just rent seeking. In an excellent paper describing the reasons people are averse to capitalism, they quote someone as saying...

"Attempts to remove such a subsidy [to fertilizers in India] have turned out to be politically
impossible and the majority of those opposing the removal do so not because they are
themselves adversely affected by it (as public choice theory suggests) but because they believe
that removing the subsidy will be bad for the economy."

Investigating Capitalism Aversion, published in Economic Policy in July of 2008.
Augustin Landier
David Thesmar
Mathias Thoenig

Subsidies do not create wealth, but instead forces society to purchase goods they do not want by producing goods that are valued less than they cost to produce. This is not wealth, this detracts from wealth. This is why we teach economics. This is why our job is important.

Interesting Ag Facts

20% of corn and 35% of soybeans grown in the U.S. are exported.

Source here.

American Socialism

Contrast the two excerpts...

This is the only major industrial society that has never had a large socialist party ideologically, meaning candidly, committed to redistribution of wealth. This is partly because Americans are an aspirational, not an envious people. It is also because the socialism we do have is the surreptitious socialism of the strong, e.g. sugar producers represented by their Washington hirelings.

In America, socialism is un-American. Instead, Americans merely do rent-seeking -- bending government for the benefit of private factions. The difference is in degree, including the degree of candor. The rehabilitation of conservatism cannot begin until conservatives are candid about their complicity in what government has become.

From The Hyperbole of a Conservative

"We have appreciated Sen. Obama's leadership on issues ranging from strong safety net programs within the farm bill to the promotion of corn-based ethanol as an important source of domestic energy," Bob Dickey, president of the 32,000-member National Corn Growers Association, said in letter of congratulations to the president.

From Farm Groups Welcome Obama

While I didn't vote for McCain, I will say that he is the only politician that I know of who opposes ethanol subsidies.

QLD livestock producers support fine increase

QLD livestock producers support fine increase
November 17, 2008
LIVESTOCK producers in Queensland have supported moves by the State Government to increase fines for animal cruelty and agree with plans to raise the maximum fine to $100,000 for individuals. Primary Industry and Fisheries Minister Tim Mulherin’s made the decision to raise the maximum fine last week. AgForce Cattle vice president Grant Maudsley said animal welfare was a core part of management decisions for all producers at all times because it was a huge influence on production efficiency, quality and handling.

yada, yada, yada

“Healthy cattle that are not stressed are the most profitable and it is important that the best outcome from a commercial production basis is achieved during the AAWS consultation,” Mr Maudsle said. Read more here.

The livestock industry is known for asserting that the well-being of an animal can be measured directly and solely by the animals' productivity. However, there is not one animal scientist who agrees with this statement. The scientific literature and my frequent conversations with scientists assures me my statement is not hyperbole. Plus, common sense is violated when producers tell consumers that sows in gestation stalls and birds in battery cages must be happy because they have lots of babies and eggs. The longer industry promotes this untruth, the more it will resemble the cigarette industry to consumers. I say that as a friend to the agriculture industry.

Here is an industry statement that would please me. "To compete in the marketplace livestock producers must adopt methods that are good for welfare in some ways and bad for welfare in others. In order for farmers to utilize practices that are good for animal welfare in all ways, consumers must first show a willingness to pay the added cost at the grocery store. Nothing would please farmers more than the opportunity to provide this extra service to consumers and the animals."

Saturday, November 15, 2008

Why Not Just Say "Farmer"

This recent story chose the headline, "Free-range pig farmer admits cruelty." I don't see why the "free-range" adjective was used. If anyone thinks it any more surprising why a "free-range" farmer would be guilty of abuse than a regular farmer, they need to get out and meet farmers.

I once did a tour of Iowa "free-range" hog farms, all of which claimed to abide by the standards set forth by the Animal Welfare Institute. While some provided a superb life for the hogs, one didn't even have a dry place for his hogs to sleep. These were farms that supply pork for Chipotle. So while I believe Chipotle certainly has higher welfare standards than the standard "factory" farm, it doesn't mean that every farmer is a responsible steward.

The Pitfalls of Organic Food

This week I had the pleasure of conversing with the world's top authorities on the science of food at a Detroit conference. I made it my mission to talk with as many individuals as possible and hear their opinions on important food issues. The most interesting artifact from these conversations is the difference in how they view organic food relative to the public.

On individual told me he never purchases organic food because he believes non-organic food is safer. Virtually no one dies of pesticides, but the absence of pesticides allows the growth of other microbials that makes food less safe. The latter part of that sentence may not be exactly right, but it was something like that.

A conversation I can better attest to regarded the welfare of laying hens. We typically think of organic eggs coming from happier chickens, as the organic standards have several welfare requirements, such as access to some free-range. Yet, one of the world's foremost authority on hen welfare told me he/she would never purchase organic eggs because he/she believes it to possess low welfare for the birds. I asked him/her to elaborate.

The major welfare problem with organic eggs is the low provision of health care. Organic producers cannot use synthetic amino acids, and this causes the hens to experience nutritional deficiencies, especially on small farms who possess a less sophisticated understanding of nutrition. Second, the large group sizes results in an enormous amount of inter-bird injury. Third, antibiotics are prohibited under organic standards. A hen who is sick and deserving of antibiotics would have to be pulled from the flock to receive the antibiotics, and her eggs sold on the traditional market at a much lower price. Faced with these incentives, farmers allow chickens to either die or experience sickness close to death before they provide the hens with the antibiotics they need.

Consequently, while layers may have more space under an organic system, they experience much greater mortality rates. What good is more space to a layer if she dies?

There are variations of egg production between the cage and organic system. I consulted individuals at the conference to better understand the mortality rages among these systems, and here is what I found.

Egg System Mortality Rate (% hens that die between pullets and being deemed spent)
Cage 3-5%
Enriched Cage 2%
Barn / Aviary 6-8%
Free-Range* 14%
Organic 20-28%
*free-range system here refers to an outdoor system with minimal barn / shelter provision

Comment added by Bailey on 2/13/09...
I recently talked with a very large organic egg producer and he suggested these numbers
Egg System Mortality Rate (% hens that die between pullets and being deemed spent)
Cage 2-3%
Barn / Aviary 6-8%
Organic 10-12%

Friday, November 14, 2008

The Indifference Principle - In Practice

The Indifference Principle is perhaps the simplest articulation of the economic way of thinking. The form I teach in class and describe in my textbook, was first described by Steven Landsburg in The Armchair Economist.

One of my former students studied the Indifference Principle in my class and then went to work as a grain merchandiser for ADM. He sent an email to an intern describing how to spot arbitrage opportunities and why those opportunities are temporary, explaining using the Indifference Principle. Below is the email he sent to his intern. Even in the workplace, understanding economic principles like the Indifference Principle is valuable.

There are a few times when we can ship meal over Chicago to the east. This happens when the supply is not where the demand is. Think of it as shopping in store, and you got to check out. You will try and find the shortest line. That is what everyone wants to do. For a short period of time there are shorter lines, but eventually they all even out. In that short period of time of shorter lines, you have the advantage. That is what happens in the meal market. There is shortage of meal in the east, western meal will flow over Chicago, but only until the markets even back out. But that small window is where we make a premium. Today I want you to find out our freight rate to Chicago (note this maybe under Chicago Prop). Then find the freight rate from Chicago Prop to Laurinburg, NC. When you have that you have the total rate from Des Moines to Laurinburg, figure the price per ton using 95 ton cars. Now look at the freight rate from Frankfort, IN to Laurinburg, NC and figure the freight rate per ton. If the meal market is -15 Z Frankfort, what does the meal market have to be FOB Des Moines for us to justify sending meal over Chicago.

Wednesday, November 12, 2008

Beef Prices in the 80's

On Nov 10 I posted a chart showing the decline in beef, hog, and egg prices from 1920 till today. A reader pondered why beef prices stayed so steady for most of the period then declined during the 80's forward. I'll give some thought to this later, but the question immediately made me remember a graph I placed in my textbook showing that the demand for beef definitely declined during the 80's, perhaps due to health reports about red meat. So part of the reason may be demand related. The graphs showing this are below. The index was calculated by a friend of mine who is an agricultural economist.

Broom Corn

Many of the brooms made today are still made from a plant, a plant called broom corn. It is a variety of corn whose tassels make for nice broom material. A picture of broom corn growing is below. Notice the large tassels compared to normal corn. It is mainly grown in Mexico and China. You can learn all kinds of things from strangers!

I, Broom

The passenger next to me on the plane to Detroit was a business person who was unfortunately subjected to my onslaught of questions (I'm a very curious person who can question a person to death). He is a member of the marketing department for a small business that produces brooms and mops. He was traveling to meet with Wal-Mart representatives, Wal-Mart being his biggest customer. I asked him to discuss two topics which I will succintly describe below.

(1) Somehow we got on the subject of the marvels of capitalism. I mentioned the debate between Hayek versus others regarding the performance of capitalism versus central planning, and told him Hayek largely won the argument for capitalism by arguing the information needed for economic production was dispersed across millions of people, and that information could never be obtained or harness by one organization. To explain, I noted (as economists have been doing since the 50's, see previous post here) that no one person knows how a pencil is made. No planning committee could either.

His eyes lighted with enthusiasm, and for the next 20 minutes discussed all the activities and decisions involved with making a broom. Will the broom be made with broomcorn from Mexico or fake broomcorn? Will it be a wooden handle from the U.S. or a metal one from China. There were tons of decisions, and most all of them involved purchasing an input from another currency. I wish I could have recorded it. A broom is so simple, yet producing one efficiently is not.

(2) I then asked him to describe the culture at Wal-Mart, him being a supplier of Wal-Mart mops and brooms. He described it as a culture of paranoia. You are filmed from the moment you leave your car at the parking lot. Some of your conversations may be taped. You may not be allowed to carry your cell phone in certain parts of their headquarters. Wal-Mart has a competitive edge and they are scared to death of losing it.

I'm so glad I'm in academia.

Hello From Detroit

I am currently in a Detroit Hotel awaiting the reception for a workshop titled, "Social Sustainability of Egg Production." The workshop entails throwing a bunch of "experts" in diverse fields and determining the consequence of adopting alternative methods of egg production.

I'll keep you posted...

Tuesday, November 11, 2008

God is Dead

It is okay to post "God is Dead" on your door now, as this article shows. However, don't you dare post a sign saying The Flying Spaghetti Monster is Dead. You will be denied a heaven possessing a bear volcano.

Laissez-Faire Higher Ed

The college of ag at OK State does a magnificent job of teaching and advising. Many students obtain agribusiness degrees instead of business degrees simply because ag econ professors are better teachers and more caring advisors. They come here for "the personal touch."

I have been told that enrollment in our ag college increased this year, but because enrollment fell for the university as a whole, our college had to suffer a cut in funds.

The University of Cincinnati is drafting a plan where programs would receive more money for greater enrollment and receive cuts for falling enrollment. Programs who find ways to cut costs even get to keep a portion of those savings. Read more here.

Some are obviously concerned about what a market-based approach to higher education would produce. Colleges and departments could easily boost enrollment by offerring more classes, which may not raise costs much if you hire cheap adjuncts to teach them. And of course, the best way to attract students is to make your classes really easy. At OK State, many students walk across the street to Northern Oklahoma College where classes are easier and the teacher gets paid only $1,800 a course. If you only paid me $1,800 per course, I would give each student A's on the first day and tell them, "it was nice meeting you, take the rest of the semester off."

Remember, though, there is much more to a market than the revenue and cost stream for any one year. There is always a reputation effect. Engineering students are smarter than agribusiness students. Agribusiness students are smarter than some other majors. Students at Stanford are smarter than OK State students. Dumb down a program and you lose your reputation.

Yet, reputation only works to ensure quality control if the school is able to profit from the reputation. If a school decides to maintain higher standards, and suffer some enrollment as a result, wouldn't it have to charge their students more to capture the value of the higher standards?

I'm not sure the market for college graduates works that efficiently. But never underestimate the ability of a market to see what arrogant professors like me cannot see!

Secretary of Ag Michael Pollan

Michael Pollan is a great writer. He knows how to warp truth in a manner that makes it sound like a great story. He does it in a way that if people ask me, "is Pollan right?" I certainly can't say yes, but I can't deem him an outright liar either.

A recent article suggest Obama is somewhat influenced by Pollan. Scary :(

The Fatal Conceit

Anytime you drive a tractor or use fertilizer that creates greenhouses gases. It is then better for the environment to produce grass fed beef, right? But now it appears that grass fed beef produces more methane from the mouth of cows than corn fed beef. So now corn fed beef is better for the environment. But wait, this doesn't account for the greenhouses gases emitted from the corn production!

Anyone who thinks they can figure out the one best and only way to produce cattle commits The Fatal Conceit (look it up) through their hubris. I imagine the "best" way is a combination of corn and grass fed cattle, but I don't know. And neither do you.

(And no, the best method is not to abstain from beef! At least, not in my world of pastrami sandwiches on rye bread.)

Monday, November 10, 2008

Steven Horwitz's An Open Letter to my Friends on the Left is a superb read for people under the impression that free markets caused the financial mess, and for people sick of hearing others blame free markets.
We may begin hearing increased support for a bailout of automobile manufacturers. The graph below suggests a bailout may not be supporting firms susceptible to the recent financial woes, but firms who have been unable to compete and deserve to be weaned, or at least, rid of its unions.

For a more detailed and eloquent discussion, see this WSJ editorial.
HT: Carpe Diem

Cattle, Hog, and Egg Prices: 1920-2002

I have always wondered how cattle, hog, and egg prices have changed during this century, but have never seen anyone graph these prices in the years before 1970. The reason is that those prices are difficult to obtain.
Today I spent all of this morning going through old statistical abstracts entering these data and made the following graph. Note that the prices are real 2002 prices. Egg and hog prices have fallen faster than cattle prices, but all have fallen significantly. The decline in egg prices is especially noticeable, and is due to modern production techniques such as advanced feed formulations and confined production facilites. Also especially noticable is the decline in price volatility from the 1980's forward.

Steinbeck Talks About Food

Travels With Charley: In Search of America.
by John Steinbeck
First Published in 1962

Even while I protest the assembly-line production of our food, our songs, our language, and eventually our souls, I know that it was a rare home that baked good bread in the old days.

Page 83.

At the roadsides I never had a really good dinner or a really bad breakfast. The bacon or sausage was good and packaged at the factory, the eggs fresh or kept fresh by refigeration, and refrigeration was universal. I might even say roadside America is the paradise of breakfast except for one thing....A freshly laid egg does not taste remotely like the pale, battery-produced refrigerated egg. The sausage would be sweet and shart and pungent with spices, and my coffee a wine-dark happiness. Can I then say that the America I saw has put cleanliness first, at the expense of taste?

Pages 108-109

Sunday, November 9, 2008


Below is an interesting dialogue I read from Greg Mankiw's blog. One of my Christian friends once made a similar remark. In talking to group of Christians, he remarked how you cannot say that, "religion is unscientific", because that very phrase "religion is unscientific" is not a scientific statement. He and his audience thought it made perfect sense.

I, however, was perplexed. A phrase is language, a means of communication. Language works if it communicates the intended information, regardless of the fact that it did not undergo a peer reviewed process or hypothesis testing.

I always thought I misunderstood him, but Mankiw's narrative below suggests I did not. Their arguments are either sophistry, or my mind works differently from theirs. It may be the latter. I tried reading about Zen Buddhism several times but found it silly.

From Greg Mankiw's blog on Nov 8, 2008.

I have been rereading Robert Pirsig's Zen and the Art of Motorcycle Maintenance. This passage really sticks with me:
After a while he says, "Do you believe in ghosts?"
"No," I say.
"Why not?"
"Because they are un-sci-en-ti-fic."
The way I say this makes John smile. "They contain no matter," I continue, "and have no energy and therefore, according to the laws of science, do not exist except in people’s minds."
The whiskey, the fatigue and the wind in the trees start mixing in my mind. "Of course," I add, "the laws of science contain no matter and have no energy either and therefore do not exist except in people’s minds. It’s best to be completely scientific about the whole thing and refuse to believe in either ghosts or the laws of science. That way you’re safe. That doesn’t leave you very much to believe in, but that’s scientific too."

Horrible Ideas

Below is a horrible idea that Barack Obama wants to implement. This is from his website.

The Obama Administration will call on Americans to serve in order to meet the nation’s challenges. President-Elect Obama will expand national service programs like AmeriCorps and Peace Corps and will create a new Classroom Corps to help teachers in underserved schools, as well as a new Health Corps, Clean Energy Corps, and Veterans Corps. Obama will call on citizens of all ages to serve America, by developing a plan to require 50 hours of community service in middle school and high school and 100 hours of community service in college every year. Obama will encourage retiring Americans to serve by improving programs available for individuals over age 55, while at the same time promoting youth programs such as Youth Build and Head Start.

National service is a great way to take people away from a position where they create value for society, like a job, to a place that has little to no value, like community service. You are paid to do a job because that job is valuable. Community service is achieved through volunteering because the service is not valuable enough for anyone to pay for it.

I would rather vote for a politician that urges everyone to make as much money for themselves as they can than one who urges everyone to volunteer as much as they can. The poor is much, much better off under the first system.

Thinking About Graduate School?

See this link for excellent information about attending graduate school in economics. Much of it applies for agricultural economics programs, except that receiving financial assistants in ag econ is much easier. Being a professor in an ag econ department is much better too...less classes to teach, down-to-earth colleagues, etc.

Economists Are Brilliant!!!!

I have long tried to convince people I am smart. Nobody seems to believe me, but at least with the table below, I can show them that economists are smart!

Though I got a Ph.D. in Economics, most of my colleagues received a Ph.D. in Agricultural Economics. Since I don't see agricultural economics in the list below, I can only assume I am smarter than Jayson Lusk and Brian Briggeman.

HT: Greg Mankiw's Blog

Thinking Like An Economist

It has recently been claimed that Sarah Palin was unaware that Africa was a continent, not a country. Though I am no Palin fan, I expressed skepticism to my friend and colleague Jayson Lusk that this was true. It just doesn't seem plausible.

Jayson noted that it was her aids/consultants who started this rumor. After Palin lost, her aids became unemployed and certainly wanted to maintain their reputation as consultants for future elections. Given their client lost, to protect this reputation, perhaps they spread the rumor to convince people that it was Sarah's fault, not theirs, that Obama won the election.

That is thinking like an economist.

I was never convince John McCain was really running for president. I assumed it was just his attempt to "get it on" with Sarah Palin. If you read anything about McCain when he was young, you would know that chasing skirts was indeed his highest priority!

Picking Winners

People generally do not have faith that private markets will adequately provide for our future energy needs. Except for libertarians and economists, people believe that government must employ the services of experts, and use taxes and subsidies to "pick" which energy sources are best for the future.

An example is OK State's patron saint T. Boone Pickens, who has spent millions of dollars in television advertising to convince the public that wind energy and compressed natural gas are indeed the "winners" we should pick. Yet government must pick this winner, must force the public to adopt these sources through taxes on energy sources the market favors, and subsidies on wind and gas, which the market disfavors.

Experts such as Pickens may know much, but their knowledge is miniscule compared to the knowledge possessed by the market. Markets will reward the true winners with fortunes and punish the true losers swiftly. Markets brought us Google and Amazon. I wonder what the internet would be like if only government could decide what would be posted?

Remember the Great Leap Forward? China's communist leaders developed specific plans for modernizing China. Rather than relying on markets and the people who work in agriculture daily, the government forced farmers and food processors to produce food in a way the government thought was best. An example is forcing households into collective cooperatives, where they were forced to share their tools and draft animals. Intended to boost harvests, it instead produced famines. A more absurd example was when China's leader, Mao, decided steel should be produced in peoples' backyards rather than large factories.

A story you probably have not heard took place in Japan. In the 1970's and 80's the Japanese widely thought that for an industry to become successful, it needed the backing of the government to "boost" the best firms ahead of the inferior firms. The Japanese government decided they needed to shave off a few automobile firms by picking two "winners". The winners would then be subsidized by the government, allowed to grow larger, and this would allow them to capture economies of scale and produce at a lower cost.

The two winners that were picked where Toyota and Nissan. The losing companies were urged to produce something other than cars. One of those losers begged the government simply to be allowed to produce cars, even though he wouldn't receive those subsidies. He had a particular form of engine that he thought was superior. This form of engine was not deemed a "winner" by the Japanese government, but the market did. I am talking about the automobile manufacturer named Honda. They are the best cars in the market. I have two Hondas in my garage.

Speaking of Honda, I seriously doubt any government would pick a car design like the oddly shaped Honda Element as a design that would be a winner in the marketplace. Yet of the two Hondas in my garage, one is an Element.

The great economist Hayek coined a term "The Fatal Conceit." It describes the condition where someone like T Boone Pickens or Al Gore believes so fervently in their knowledge, they wish to force their beliefs about energy onto society at large. Yet there are many other people knowledgeable about energy. Individuals in the oil industry have superior knowledge about the oil reserves left. Individuals making advanced car batteries have superior knowledge about what batteries will look like in five or ten years. Firms building windmills in Western OK have superior knowledge about the cost of wind power and how that cost will change in future years. All of these individuals and firms are making bets about how world energy consumption will change and how their competitors will perform. Those with the most knowledge and the most confident about their knowledge will raise the most investment money, and will have more power to shape the future of energy. Yet no one is dictator, no one is immune to failure.

The best energy policy is one which aggregates all of these individuals' knowledge in a way that allows feedback to the individuals on how their beliefs compare to others. The best energy policy switfly punishes energy sources that perform poorly and bestows fortunes on those who perform well. The only policy that performs these two activities well is markets unfettered by government policy. The best energy policy is one that simply allows markets to make decisions, based on who makes money and who doesn't. The market knows more than T Boone Pickens and Al Gore, and the market is quick to admit when it is wrong. That is why anyone who wants to make sure their children have lights to read by and cars to drive should give more reverance to the efficiency of the market than the self-annointed saviors such as Pickens and Gore.

Just look at ethanol. Government received a mandate from groups who believed government should pursue an alternative form of domestic energy. Politicians used this mandate to deliver money to powerful constituents - corn farmers. Virtually everyone who knows anything about ethanol will attest that it is a horrible program with huge costs and virtually no benefit. Worst of all, because it is a government program, it is almost impossible to end it.

I admire T. Boone Pickens' concern for the future, and greatly appreciate his support of my magnificent university. Pickens has donated millions promoting his plan and donating to OK State to make the world a better place. Yet, in my opinion, if he really wanted to ensure a more pleasant future, he would use all his money in an effort to make more money by investing in the energy source that he thinks the market will choose. If he is wrong, he only loses his money. If he is right, he may save the world.

Additional References:
Cato Daily Podcast, Pickin on Pickens, July 22, 2008
Cato Daily Podcast, Big Visions for Energy and The Fatal Conceit, August 5, 2008
EconTalk Podcast, Private vs. Public Risk-Taking, 10/3/06

Thursday, November 6, 2008

An Overview of the Agribusiness Degree

Tomorrow I am giving a talk to students in Mexico (via teleconference) regarding the agribusiness degree, with special emphasis on the types of jobs our graduates take and the type of skills they are expected to possess. Below is the general talk I plan to give, written in the form of an outline, not a speech.

When a student graduates with an agribusiness or agricultural economics degree, what skills should they possess? The answer is social, business, computer, and communication skills, plus a unique understanding of agricultural markets and futures markets.

Social Skills: Graduates must have the appearance of a competent professional; including a firm handshake, a confident demeanor, professional manners, and actions that demonstrate responsibility and congeniality. The graduate should understand how to dress for the specific occasion, how to run a business meeting, how to network, speak with proper grammar, and understand the other person’s needs. These social skills prepare them for a career in sales of any good. We graduate students who sell pesticides and students who sell artificial knee replacements.

Business Skills: Second, they must possess the tools of a competent business person. This includes an intimate knowledge of accounting, finance, marketing, and management principles. Accounting ratios and balance sheets should be second nature, and so should net present value and loan amortization. Numerous graduates work in the banking industry and in the accounting department of firms. Finance and accounting are skills that depend on each other; finance skills without accounting skills are of little value, and vice-versa. Though they cannot be prepared for every marketing or management job, graduates should possess the basic fundamentals that allow them to learn their job quickly. Many graduates find themselves in positions managing goods from wheat in elevators to building doors for homes. A significant portion also lead marketing careers, typically but not always in the marketing of food items.

Computer Skills: With today’s advanced information technology and the ubiquitous presence of Microsoft Office, they should be proficient in Microsoft Excel, Word, and Power Point. Excel is especially important. The graduate should be able to sort and summarize data, and calculate basic statistics such as frequencies and averages. Learning tools such as PivotTables in college gives the student an advantage over coworkers with fewer computational skills. If there is one skill that should be considered the most important to possess, it would be proficiency in Microsoft Excel.

Communication Skills: An ability to communicate effectively is a high priority. Graduates should be able to write basic business documents such as emails, business letters, and business reports without an abundance of grammatical errors; the reader should also find the writing succinct and clear. However, it should be noted that graduates are not expected to be excellent writers, only that their writing should not be embarrassing to the organization. Of greater importance than writing are oral communication skills. An ability to present information in an organized, clear, and succinct manner is of paramount importance, as is to give the aura of confidence during the presentation. This includes formal oral presentations, perhaps using Power Point, and informal oral communications such as phone conversations.

Agribusiness Skills - Understanding Agricultural and Futures Markets: All of these aforementioned skills are general skills, and would be expected of any business major. Agricultural economics and agribusiness majors have the additional advantage of a unique understanding of agricultural markets. They should have a unique insight into the long- and short-run supply and demand relationships for agricultural products, fundamentals which extend nicely to other commodities whose supplies are fixed in the short-run, such as oil and natural gas. For example, one of our graduates participates in a weekly meeting called a supply and demand meeting. All such majors learn the intricacies of futures markets, including speculating, hedging, and the use of futures to predict prices. This understanding of futures naturally extends to futures trading of non-agricultural commodities such as oil and foreign currency.

How does the department of agricultural economics at oklahoma state university instill these skills?

Social Skills: The responsibility for instills social skills rests primarily on AGEC 3323, Agricultural Product Marketing and Sales. This class largely focuses on teaching students how to “sell themselves” and develop personal relationships with people, as well as other skills useful as a career in sales. A variety of other social skills are addressed. For instance, the class hosts a formal dinner where students are able to learn and demonstrate table manners.

Business Skills: Students take a variety of courses in management, marketing, accounting, and finance. Most of these courses are in the agricultural economics department, except for accounting. Students who focus on a specific area such as finance or marketing will take additional courses on that area in the business college.

Computer Skills: All students are required to take Quantitative Methods in Agricultural Economics which focuses on developing Excel skills, and the communication courses discussed below shortly integrate both Word and Power Point into the class activities.

Communication Skills: While communication activities are present in a majority of classes, students take six courses that focus specifically on written and oral communication skills.

Agribusiness Skills: From the introductory agricultural economics course to its more advanced counterparts, students gain a unique insight into the supply and demand of agricultural and food products. All students take Agricultural Marketing and Price Analysis, which studies futures markets extensively. A variety of senior level courses allow students to specialize in particular agribusiness topics, whether it be an additional course focusing solely on futures markets or a course learning how to calculate crop insurance premiums.

What are some examples of jobs taken by past graduates?

Marketing – Lindsey Cheek works at Damian International, a marketing firm. The firm’s clients include food producers who seek advice on how to promote and advertise their food products.

Manufacturing – Randis Galloway, Lindsey Kuzma, Amber Houser, Shea Griffin, Jeffrey Clark and other graduates work at Koch Industries where they primarily analyze market and accounting information to help Koch determine business strategies. For example, students may track sales of gasoline to identify potential markets for refined oil, or gather information on the cost of carpet production for rival firms.

Commodity Trading – Many former students (Melinda Shults, Tim Cassidy) work for firms like ADM where they buy or sell agricultural commodities such as soybeans and soybean oil. Some graduates actively speculate on commodity prices.

Chesapeake Oil and Gas – This employer routinely hires our students and asks them to perform a number of functions. For example, Lacy Mann was once charged with taking data on oil well depth and oil well costs and develop a model they could use to give potential customers estimate on the cost of drilling oil wells.

Government – Some graduates like Justin McConaghy work in Extension, and others like Allison Sherle and Curtis Stock work for the National Agricultural Statistics Service.

Interest Groups – Megan Provost worked for American Farm Bureau, where she ran equilibrium displacement models to analyze the impacts of potential trade agreements on American agriculture.

Sales - This is one of the largest categories of agribusiness employers. While many have sales careers in agriculture, such as Monsanto pesticide salesman Travis Fenderson and ConAgra animal feed salespeople, many others sell non-agricultural goods and services such as life insurance and prosthetic knee and hip replacements.

Finance – Never a year goes by without a number of students taking jobs at a bank, often as a loan officer. Some are private banks, some are government-affiliated banks such as Farm Credit.

Self-Employed – One of our most successful graduates, Aaron Hughes, utilizes his business skills and personal motivation to develop land.

Higher Education – Many others go on to attend law school, vet school, graduate school, and medical school.

When an employer considers an agribusiness graduate for employment, what are they looking for?

For most jobs, the skills the student obtained from classes in college is small in importance next to the student’s personality. Employers are largely looking for students who have a high moral character, have a passion for their career and life, can work well with others, and can communicate effectively. Specific skills can be learned on the job.
How does an employer determine whether a student possesses this personality? It is determined largely through the personal interview. The employer places more importance on the personal interview as a judging tool than the students’ resume – much, much more. The second most important attribute employers want to see is that the student has participated in an internship or gained valuable work experience. This signals to the employer that the graduate works well within an organization. Finally, they will want to see that the student held a leadership position in a university organization, and the student made decent grades. Typically, the employer only cares that the student had a B average or better, though some employers like Koch Industries target students with high grades.
For some careers the employer specifically targets agribusiness students for the skills they learn in college. Some employers prefer our graduates because they understand commodity markets well, and some due to their more advanced Excel skills, compared to graduates from other departments.

Tuesday, November 4, 2008

Financial Crisis and Lending to the Poor

Many teachers have shyed away from discussing the current financial problems in class. Part of the reason is that very few people truly understand it. Recently, I have learned that the halls of an agricultural economics department is the LAST place for good macroeconomics!

Another reason is that the subject is quite technical and mysterious. Discuss the financial crisis often involves discussing prices the common person is unfamiliar with (e.g. federal funds interest rate) and economic relationships the common person does not confront (e.g. the relationship between the fractional reserve system and the money supply).

Recently, however, I ran across a superb article that hurdles all of those esoteric barriers and gets right down to the real issue. The essay, What crisis? This is creative destruction, in Prospect Magazine notes that when firms are left alone, they figure out how to loan money to the poor. Just look at the splendid success of microloans in developing countries. I myself periodically lend money to For example, I recently loaned $25 to four African women each, who used the money to start a soap business and an ice cream business. I will not earn much interest (3%, I think), but I will get my principal back and the interest.

In America, we have not left banks alone to determine how they should lend to the poor. Government decided to do it their own way with institutions such as Fannie Mae, Freddia Mac, and Farmer Mac. Government dictated how banks should deal with the poor, and government's incentives are different from business.

In a recent EconTalk podcast (Sept 29, 2008), economist Arnold Kling discusses how risky investors were making house loans to poor Americans. They did so knowing there was a significant risk of foreclosure, but that the potential return justified the risk. Politicians then pressured Fannie Mae into making the same loans, arguing that if Wall Street wizards were making mortgages to the poor, why couldn't Fannie Mae?

So in the end, Fannie Mae made business decisions not by business criteria, but political criteria. Politicians wanted to take credit for making housing available to the poor, but instead, have bankrupted the nation.

At the same time, my $100 loaned over the internet to four African women are doing great, because it was managed by businesses with the incentive to learn how to loan to the poor.

Becoming a Great Teacher: Part 8

In previous posts on this series, I discussed how personal interviews with students revealed that being a dynamic lecturer is the most important trait of a great teacher. That is, when we asked students what attributes define a great teacher, without giving them a list to choose from, being a dynamic lecturer was the most frequently mentioned attribute.

Making students identify attributes off the top of their head, without a list to help, has advantages and disadvantages. It prevents them from anchoring (survey instruments always alter the person being surveyed), but the student may just happen not to think of the attribute that they feel is truly most important.

To test whether these attributes would differ if I gave students a list to choose from, I made a list of attributes (attributes chosen from the aforementioned interview data) and asked the students to select the four attributes that best describe great teachers. A total of 24 students took the survey.

The results are strikingly different! Now, being a dynamic lecturer is one of the least most important attributes. By far, the two most frequently chosen attributes are cares that students learn and get to know students in class.

Fortunately, getting to know students in class was also one of the most important attributes from the personal interviews. So some results are robust to the survey design.

The bottom line is that my research clearly indicates that the most important thing a teacher can do is to get to know their students. This is good news. While we cannot all be humorous and witty in the classroom, we can all learn names!

In Part 7, I discuss an interesting class activity to become acquanted with your students, one very popular with my students.

Sunday, November 2, 2008

We are all Socialists (1/3, at least)

The recent financial bailout and presidential elections has spurred an unusual amount of talk about socialism. None of it very intelligient, of course. Yet it is still welcomed by me, as it gets economics in the news.

Our students should know two things. The first is that both Republicans and Democrats love big government, and have no desire to shrink it: see this excellent article by Reason Magazine. There is no evidence that Republicans desire a smaller government. They only prefer to pay for the big government through borrowing instead of taxes.

Second, while the tax burden in the U.S. is low compared to other countries, government spending is still a whopping 30% of total spending (see graph here). Most of this spending is for redistribution purposes. So you see, the U.S. is roughly 1/3 Socialist and 2/3 Capitalist.

Trading Class Notes

See the email below I recently received.

Hey fellow OSU students!
I heard about this new site on the news! It lets students buy and sell notes from each other for free. Upload your notes or papers and make some money when other students download them!
It also finds THE lowest prices for textbooks and e-textbooks on the web and allows students to buy and sell textbooks from each other on campus for free! I posted all my books up, post yours up today and make some money!
Here’s the link for the news video ( the video is on the right side)
Jessica Richards has invited you to join - 'A Simple Textbook Solution'.----------------------------------------------------------------------------------------------------------------------------
Click to join: will need a .edu email address to sign up. is an academic network that allows you to....
1. Buy/Sell Textbooks and notes from your classmates2. Compare book prices from Amazon,, and Coursesmart3. Network with Students, Faculty, and Alumni

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