Equilibrium Issue 03

Nov.2015

look inside the equilibrium

issue 03

A perfect fusion of Economics and Art.

We are a publication produced by students, for students.

Our goal is to make economics more accessible to young people.

Editor-in-Chief Sara Moon, NLCS Jeju Editor & Art Director Jane Lee, NLCS Jeju

Writers Jinn Park, Minki Park, Ashley Park, Jiwon Woo, Adrianne Hwang Designer Lucia Kim, NLCS Jeju

Artists Hwayong Jeong, Daeun Lee

Issue 03 Cover Art: Jane Lee Publisher: Equilibrium Magazine Publication Date: 28 November 2015

CONTENTS Contents

3

Funconomics

4

Honey Butter Chip Crisis

Global Economy Is China Next G2?

The Economist of the Edition

5 10

John Maynard Keynes

Economics in Movie

13

Special

15

Moneyball

Why Give?

Honey Butter Chip Crisis

Writer: Jinn Park Artist: Daeun Lee Jane Lee Lucia Kim

Once upon a time, in a far off kingdom of South Korea, a yellow bag of potato chips with 'French gourmet butter and Akasian honey infused' was almost synonymous with a bar of gold. Witnesses who worked in convenience stores testify that the moment the box was opened and a flash of yellow was revealed through the shop window, a sudden mass would appear out of nowhere screaming, “shut up and take my money!” This particular bag of chips revolutionised not only the potato chips industry but the snack industry as a whole; nowadays, we see practically every single possible item of snack ranging from icecreams to cup noodles having the similar yellow glow and the national catchphrase, “Honey Butter-or-Cheese-or-Mustard-or-” You get my point.

Despite the fact that it is only a ‘bag of chips,’ the Honey Butter Chips (a.k.a. HBC) was phenomenally successful in winning over many people’s hearts. In fact, the demand for HBC was so high that a ‘shortage’ occurredin economic terms, the quantity demanded of HBC significantly outweighed the quantity of HBC supplied to the market. To put it plainly, there was overwhelming number of people who wanted to buy this particular chip while the producers (i.e. the factory) did not have sufficient number of chips to meet the soaring demands.

Although in a general economic model, such increase in demand will result in increase in price as the new equilibrium price will be reached- which in turn will result in increase in supply as the firm sees more profit in producing more of the good. However, in the case of HBC such natural shift of equilibrium did not happen; Haetae, the producer of HBC was unable to instantly increase the production because it lacked resources to do so. In other words, the supply failed to rise to meet the increased demand of the market. So naturally, a black market formed.

By a black market, I’m not referring to the dark backstreet shops with secret doors that lead you to a sinister underworld. The term black market is used to describe any ‘economic activity that takes place outside government-sanctioned channels’. Basically, some clever consumers realised that there are certain dates on which HBC is supplied to the stores and waited until that date to buy all of HBC available. Hence why when you arrive too late, the store wouldn’t have any supplies left. Disappointed, the consumers who lost the speed game will desperately try to buy it online, where the fastest consumer now turns into the black market supplier who sells a bag of HBC at a price as high as triple the original price. In an effort to stop this kind of monopolizing consumer behaviour, many stores even set a rationing quota; one consumer could only buy two bags at a time, and in the big stores where they have boxes of HBC, real fanatics would line up again and again to buy just two more bags.

So what is the true reason behind such craze over what is only a yellow bag of potato chips? Well, ironically, the key factor that fueled the dramatic rise in demand was the ‘craze’ itself. The social trend where HBC is idolized as a rare and precious product led to a situation

where the consumer buyed it simply because it was a ‘trend.’ The countless photos with #honeybutterchip were uploaded onto the Social Networking Services (SNS), setting off a ‘buzz’- it invoked curiosity amongst people who have not yet tasted it, and as more and more people craved to be a part of this ‘trend,’ they started an active search to buy it.

It may seem stupid that the consumers would buy simply because others did- but there is an even more bizarre reason why people sought after HBC so fanatically. It lies in the simple fact that it was ‘hard to find.’ Some say that those who play hard to get are more attractive than those who are too ‘easy,’ and this proved to be right in the case of HBC. As Haetae failed to meet the excessive demand of the consumers, the amount of HBC supplied remained restricted. What this meant was that the consumers were now in competition with others; as demand outweighed supply, consumers had to ‘fight’ to buy the good they want. So when you serendipitously come across a bag of HBC in some little seaside shop, you would not think twice about buying it. The simple possession of HBC made you a winner, so even if you didn’t really need it, you would have bought it just for the sake of holding that yellow bag of chips in your hands as others look on you with glowing green eyes.

Although it enjoyed overwhelming popularity for some time, its exclusivity did not last; the market’s’ Invisible Hand soon stepped in for adjustments. Other snack firms, after witnessing the unbelievable success of the HBC immediately started to produce their own HBC, the most famous one being the Honey Mustard Chips from Nongshim. They saw that the demand for HBC was high and therefore knew that they would profit if they could substitute the HBC with their cheaper, more easy-to-get products similar to the original. The competition gradually cooled down the frenzy over HBC as more and more people discovered that they were better off eating a little spicier chips than struggling to find a mythical bag of the ‘original’.

The Honey Butter Chip Crisis is one of the clearest representation of how the free market system works.

The rise and fall of demand, formation of black market, competitors joining to produce substituted goods- it’s all here, in a golden yellow bag of sweet potato chips.

Is China next G2?

Writer: Minki Park

Artist: Hwayoung Jeong

China, a rising star in the world economy, benefiting from successful economic development, is getting people to regard it as the potential G2 (group of 2), the two most influential, and powerful countries in the world. China reached an economic growth rate of 14% over 30years. China’s economic success could be attributed to China’s great Paramount Leaders with Deng Zha ao Ping and current premier Xi Jinping at the head. In center of public attention, Xi Jinping threw away China’s past diplomatic principle, “keeping a low profile”, and instead adopted a new grand strategy, “great rejuvenation” also known as “Chinese Dream”, emphasizing the need to be active and creative in foreign affairs.

This means China is going to be more open in global affairs and contribute more in international issues.

China began to demonstrate its global leadership recently. Despite its recent failing financial system and the fact that it is not yet a superpower like United States, China is very influential in Asia and has great power to have an impacts on global events. For example, China entered into FTA with ASEAN (Association of South-East Asian Nations) and offered huge Chinese market, which caused other nations to be drawn into China’s economic orbit.

Not only signing FTA with Asian economic zone, China also saved Asian economy by maintaining its exchange rate when other Asian countries enter into currency devaluation competition after 1997 economic crisis in Asia. If China, devaluated its currency rate, as everyone concerned, Asian economy would have been bankrupted. China became important economic pillar to Asian economy. China has adopted a “one belt, one road strategy” which shows how influential China is on nations in Asia. One belt, one road strategy, also known as 21st century Silk Road, aims to connect Eurasian countries to form a huge economic belt which allows more proactive cultural exchange, building infrastructures and broadening trade.

China also forged links with other nations; especially, the Sino-Russian alliance partnership has deepened.

Russia has been put under economic sanctions by the West, which made China-Russia alliance even deeper.

Despite all of these positive aspects, George Friedman, a 21st century Nostradamus has predicted that China’s economy may collapse in next 50 years. Like China, Japan was the 20th century rising sun. However, Japan faced a failure of financial system behind its tremendous growth; Japan could not cope with the rapid escalation of real estate and stock value, and the unstable inflation of real estate and stock market provoked “Japanese asset price bubble”.

Fortunately, Japan was able to overcome the economic bubble by buying many foreign assets and lowering the rate of growth. China is going along the same path as Japan and is already showing analogous aspects. Its stock value once showed a rising trend and recently faced a stock market crash. The real problem with China’s current economy is that China does not have power to endure unemployment. China’s main sector in economy is secondary, in which people work in manufacturing; therefore, it requires US and other European countries to buy its products to maintain its economy. In extent, China is trying to shift into a higher value added business but prominent nations like Germany, Japan and South Korea are taking firm stands and impeding its progress.

Moreover, China is facing various home grown problems: unfair trade practices, artificial currency of devaluation, intellectual property theft, local favoritism due to oligopoly by the communist party of China and environmental issue, and these problems are now catching up China’s growth.

Macroeconomic trend shows the economic recession. The growth rate of GDP dropped from 14.2% to 7.4%. Unemployment has risen, and people are in large debt about 250% of China’s GDP because since Deng Xiao Ping’s open market reform, new venture business has outpaced the control of government. It became uncontrollable. The growth of business does not always act as helping hand. The

mounting competition and poor oversight caused business to take drastic measure to increase the profit margins. Chinese businesses are buying different firms from developed countries like United States. For instance, Lenovo, world’s best PC manufacturer bought Motorola’s firm. Wan Xiang, China’s greatest automobile’s car supplier bought Fisker, an electric car business that was issued with Tesla. China’s businesses are buying other foreign business to adopt new technology and products as well as spending the dollars, they had accumulated, and this shows the increasing influence of China Money. However, this also means that China’s business has potential to lose its creativity, and without creativity, it will be difficult to survive in global market.

When Chinese stock exchange launched, China’s economy was on fire, and its stock have followed as a bull market. Its stock value reached over 5100 points but recently, its value fell 32%. The Chinese government put great effort into stopping the nosedive. However, as if it is proving the stock market maxim, “in the stock market, artificial pump priming policy never works”, the stock began to lose its value. There are two facts which arouses an assumption that China’s stock market could be from into bear market: firstly, China’s stock market has already encountered first collapse, and secondly, in the space of three weeks, the stock value dropped by 30%. There are two facts which arouses an assumption that China’s stock market could be from intobear market: firstly, China’s stock market has already encountered first collapse, and secondly, in the space of three weeks, the stock value dropped by 30%.

Simply put, the reason why stock market crashed in China is irresponsible consumption from Chinese proletarian. Millions of Chinese people bought stocks by borrowing money. About 9 million people bought China’s stock because they believed that this will be the only chance to earn a great amount of money out of Chinese stock.

Therefore, the stock value jumped greatly. If the businesses’ performances were great, these actions will boost the economy to the next level.

However, the problem was that businesses flinched in what turned out to be a stock market crisis. Investors who got loans had to sell their stockholdings and take losses. Stock firms offered credit guarantee investment to naïve individual investors, and the government interestingly pretended as they do not know about its effect. If the government informed the citizens about the possible damage about citizens’ consumption, they could have prevented the depression. Because these investors were naïve, they sold their stocks after they got a call from their stock firms. Another crisis is very likely to happen in future and if the Chinese government does not stop the crisis, not only China but also other countries in South East Asia will be also affected.

To this extent, the problems that China is facing are severe and will possibly hold back China from becoming G2. Unless China resolves these problems in the next 50 years, China will be unlikely to be the next G2. However, China’s economic potential is just being realized and the new proactive reformer, Xi Jinping has only been premier for 2 years, so there are lots of possibilities to raise its position to G2.

John Maynard Keynes

Writer : Ashley Park

John Maynard Keynes (1883-1946), a progenitor of the Keynesian economics, has been taken center stage as the most influential person in the field of economics during the 20th century. His theory is one of the major breakthroughs in economics and has influenced the world not only economically, but also politically and socially. Even today, the Keynesian economics is acclaimed by many people and is adopted by many notable political figures such as Barak Obama and Gordon Brown as a measure to achieve successful fiscal and monetary policies as well as political stability.

Though the basics of his principles and theories have rooted from the already established traditional theories, it is undeniable that he brought a revolution on the idea of ‘government intervention’, completely undermining the conventional theories regarding it.

Having experienced two world wars and a disastrous economic depression, Keynes, in his theories, covered impacts of aggregate demand on recessions, the postwar economic conditions, and the relationship between investment, employment, wages and interest.

In principle, Keynesian economics relies on government spending for economic growth during heavy economic depression. Keynes strongly believed that economy is consisted of consumer spending, investment and government spending, and his theory points out that government expenditure can enhance the economic situation without consumer spending or business investment. His magnum opus – The General Theory of Employment, Interest and Money (1936) – presents a direct response to the Great Depression, that government has a duty to keep the economy safe in times of recession.

Keynes thought that government should spend less money and save during times of economic prosperity and spend more during the downturn. He believed that excessive savings and decrease in aggregate demand cause depression, thus advocating increase in government spending and low taxes to instigate demand and recover global economy during recession. The term “aggregate demand” can be defined as the total spending on goods and services in an economy, in other words, the combination of consumption, investment, government spending and net export. If aggregate demand falls, flow of revenue to producers of goods and services also falls.

Friedrich August Hayek, another prominent econ-

omist during the Depression era, opposed Keynes idea and promoted that the crisis results from over-investment relative to the supply of savings. He believed that the economy was self-regulated-that even in times of economic trauma it would automatically raise employment and economic output to optimum levels as time pass. Keynes, however, denounced such theory and suggested an alternative view that during the downturn government intervention is the only way to boost the economy. He argued that government should boost the economy by borrowing cash and investing it on public infrastructure projects like building roads, railways, hospitals and schools.

Decline in interest-rate could also alleviate the recession.

The idea of “multiplier” was a key to his argument.

Also known as the “Keynesian Multiplier Effect”, it is an increase or decrease in autonomous spending leading to a larger that proportional change in the real GDP. As for example, building a new railway creates work for construction firms, whose employees would go out and spend their money for self-interest, buying food, goods and services, instigating consumer’s propensity to consume, which in turn helps the economy to develop. His theory demonstrated that any government spending encourages the cycles of spending, which boosts employment and prosperity regardless of the form of those expenses. Thus, this relationship between investment and income shows that an initial increase in investment creates larger increase in final aggregate income.

Keynes’ theory actually seemed to provide a solution to the Great Depression in the 1930s. After Franklin D. Roosevelt realizing the need to increase government expenditures to put people back to work, he introduced the New Deal to pump up its economy by spending billions. This can be seen during his speech in Pittsburgh in 1936 when he quoted, “We accepted the final responsibility of Government, […] to spend money when no one else had money left to spend.”

As a result, from 1933 to 1937 unemployment had been reduced to 25% to 14%, showing a vast improvement. Yet soon after he returned to the fiscal orthodoxy of the time, reducing emergency relief and public works spending to balance budget, this led to another collapse, so-called the “Roosevelt Recession”. **Emergency relief: America’s first major-relief legislation, adopted by FDR as part of his New Deal, which released funds for public works projects

His main achievement was explicitly on the establishment of the revolution in economic theory. And based on it, he had introduced his key principle of the importance of government spending, and has sparked off a transformation in the economic market, changing people’s perception towards government intervention and policies to handle recessions. His success can be seen when several nations have adopted Keynesian economics to establish economic stability. During the 1960s, John F. Kennedy and Lyndon B. Johnson fully embraced Keynesian Theory and therefore by the middle of the 1960s, the US and world capitalist economy again started to boom with the US unemployment level falling towards low. His theory was also adopted by all major political parties of Western Europe and Japan. Indeed, Keynes has also inspired many economic policy makers worldwide since the end of the Great Depression until the mid-1970s.

To point out some strengths within his theory, Keynesian economics explains a good deal of real world, as in the economic history we find numerous important cases where the major problem has been a shortage on aggregate demand, which includes consumption, investment and government spending. This could be seen during the great depression when the shortfall of aggregate demand, consumer spending especially, demonstrated a downfall on economic epic. Hayek, the critic of Keynesian theory, stated that less government intervention would give more economic freedom so that problems such as recessions would automatically be solved reaching “full employment” in long-term. But his theory had been blamed, as the economy had not recovered for a long period of time during the Great Depression.

Whereas, Keynes proposed that the government investing in infrastructure would inject income into the economy, leading to increased spending by the public. His theory had been successfully proven by FDR’s attempt to put Keynesian ideas into practice.

“Ideas shape the course of history.”

-John Maynard Keynes

However, Keynesian economics also has some flaws.

Due to the complexity of the economy, it is sometimes difficult to tackle the economic recession solely by controlling the aggregate demand. Depending on the situation, economic recessions would need to be

solved through various measures, which would tackle several causes of recession such as an excessive supply, stock market crash, deflation and many more.

Moreover, Keynesian economics is often thought to be better a diagnosis than a cure. Keynesians particularly recommend activist monetary policy, activist fiscal policy to get an economy out of a downturn. However, history has shown that fiscal policy does not work very well because in the 1970s one of the main arguments was that governments couldn’t respond quickly by regularly adjusting fiscal and monetary policy to keep employment high.

The gap of time between recognizing the need of the policy and the policy actually taking into effect is just too big.

Ronald Reagan, the 40th President of the United States, had abandoned Keynesian theory and instead embraced the new, modern supply side economics, which focuses on impetus for increased production to restore economic growth and prosperity, rather than increased demand. As a result, inflation was quickly subdued and contributed to a long-term economic boom from 1982 to 2007. Such issues regarding economic downturns had been, according to history, dealt with many different ways based on various economic theories. A solution for a specific economic recession may be varied depending on each situation, as during the Great Depression Keynesian economics has gained a great success while during the 1970s it did not. Economics is the continuum of trial and adjust; hence it is impossible to point out the answer that can justify the causation and a solution of an event. We should take differentapproaches so that perhaps in the future bettereconomic theory can be invented based on the results.

Moneyball Writer: Jiwon Woo Artist: Hwa Young Jeong

“People are overlooked for a variety of biased reasons and perceived flaws. Age, appearance, personality. Bill James and mathematics cuts straight through that. Billy, of the twenty thousand knowable players for us to consider, I believe that there is a championship team of twenty five people that we can afford because everyone else in baseball undervalues them.” – Peter Brand, from the film Moneyball

Moneyball, an American film based on the real story of the Oakland Athletics baseball team, is about ‘winning the unfair game’ in Major League Baseball. ‘Unfair’ in that context indicates the wealth gap between the MLB teams. Billy Beane, the general game manager (who trades off and sack players) of the Oakland Athletics, challenges the system of richer clubs dominating the league for years. So, How did $39,722,689 worth Oakland A’s and $114,457,768 worth Yankees can play the equivalent baseball?

Relating to microeconomics, professional baseball teams can be considered as firms that produce services, a game of baseball. In order to produce baseball, of course they need factors of production; such as labour of 25 baseball players. Therefore, they will have to purchase labour from the labour market, the players. Some players have higher price than others, and it is because they are more demanded by teams. For instance, a batter with last season’s top homerun record will be wanted by many teams. As such players are scarce, teams bid high transfer fees and salary to attract them. Eventually, players who pursues the personal incentives will move to a team that purposes the highest value for them in most of the cases. Generally speaking, teams with the most expensive players are likely to be on the top of the league table at the end of the season. At least it was believed like that for most of the people.

However, after Billy Beane met Peter Brand, a postgraduate who majored in Economics at Yale, he learns that this was not the case. He was convinced to believe that ‘teams should buy victory, not players’. He thought teams such as New York Yankees are focusing too much on buying expensive players, not building a team that will win the games. Billy and Peter valued

the players based on statistical analysis, and worked out certain records are significant to win the games.

For example, they valued on base percentage (rate of going on base, by either hit, base on balls, or dead ball) higher than superficial home run records or hit rates. That challenged the conventional view of scouting in baseball.

Through their analysis, they rebuilt a squad with undervalued players which the team can afford. Those undervalued players, who are referred as ‘island of misfit toys’ in the film, cost less because they are less demanded by the teams. The reason for their inexpensive price was because the players are too old, not very handsome, have bizarre stance when they are pitching, or have bad reputation because of their private life. Oakland Athletics ignored those prejudices and bought players who have attributes that they valued more. Unbelievably, they won 20 consecutive games and broke the record of the most winning streaks in the American League history with those players. This suggests that how people value other people is not always accurate, isn’t it?

Although they did not made to the World Series, Billy Beane was scouted to Boston Red Socks to be their general game manager after a successful season. John Henry, the owner of the Red Socks, praises Billy: ‘You won the exact same number of games that the Yankees won, but the Yankees spent 1.4 million per win, and you paid 260 thousand.’ From an Economist’s perspective, which their goal is to efficiently allocate the scarce resource, Billy Beane and the Athletics defeated the Yankees in that season. They revolutionized the old regime that dominated baseball that teams which invest more, will win more games.

At the end, Billy rejected the world’s most expensive offer from the Red Socks, and stayed with the Athletics until now, still striving to win that unfair game with his ‘Moneyball’ strategy. Surely there are some things that money cannot buy, and that is what we love about these sports.

Why Give?

Writer: Adrianne Hwang Artist: Jane Lee

Donations of billions of dollars from Bill Gates or Mark Zuckerberg, or even Kim Yuna, are quite unsurprising to us. They are almost annual rituals on televisions, and some people even go as far as to think any famous, wealthy person is obliged to return to society in such manner. On the other hand, some call them hypocrites: they only give an almost insignificant proportion of their asset to have a good reputation, or to reduce the amount of tax they have to pay. These perception is not extraordinary, in a society where we regard capitalism and liberalism as the most functional, or at least the most feasible, economic foundation. Liberalism presumes that people’s selfishness to operate the society.

Performances of altruism seems irrational, and unprofitable, unless there is some kind of “dark, evil treachery to benefit from it.” Now, are all donators, as Holden Caulfield would put it, utter phonies? Or is it another conspiracy theory involving Soviet Union against the innocent philanthropists? Or, in fact, is the attempt to put judgement on their motives quite nonsensical for an economist? Because, through analyzable process, donations increase the net happiness of society.

Why an economy exists, and presumably why any human activity exists, is to make people happy and better off. This is called maximizing social welfare. And an important part of this process is evaluating the amount of utility people gain in a society. Utility is the unit of happiness, or at least the unit of economic satisfaction one gains from consumption. An important characteristic of it is that it is not strictly proportionate to the monetary price paid in return.

The more of the same item a person buys, less utility, or satisfaction is gained at each extra purchase. For example, the first hamburger at the canteen would be very fanciable, but after eating only hamburgers for the whole week, it would not seem so attractive the next day.

This is the law of diminishing marginal utility.

This law does not only apply to consumable goods and services, but to the money itself as well: because money is unit of general consumption. The significance of 5,000 won for someone who has 1 billion won and someone who is penniless would be different; not that they would be able to purchase items of different value with it, but that the utility gained from the purchase would be different. A billionaire

could buy a burger with 5,000 won, but it would not give much happiness to him because he has the ability to consume it many more times, and possibly already has. But for the penniless the utility gained from a burger is greater, as it would have been initially impossible to purchase it.

This is how redistribution of wealth, from the wealthy to the impoverished, is important for society’s goal is to maximize the total utility of people. If the same value of money bears greater utility in the hands of the latter, then the reallocation is necessary. Yet, one might still question, then why not let governmental policies and taxation handle the problem on its own?

Again, we can come back to the matter of utility.

People attain further internal satisfaction by acts of altruism. It is not a religious or moral recommendation, but a tendency supported by data. Scholars assumed that people will simply be interested in the amount of money that is transferred to the lesser as for the sake of total societal utility. They expected that people would stop their donations when they were taxed for the same purpose. It was unless they will contribute very large sum of money, which would make them prominent. This predicted phenomenon was named “crowding-out.” However, the result stated that many people still gave privately to charities regardless.

If donors were solely interested in the direct economic gain of receivers, the amount of total transfer would have remained identical.

The incentive to this extra contribution is an internal pleasure they attain from their own contribution: an effect scholars call “the warm glow.”

In short, donations from millionaires to the less fortunate is a socially helpful process. True, that they may gain personal utility through it, which is of self-interest. But, nethertheless, selfishness is an unnegligible part of humans, and it is not necessarily immoral, either. Adam Smith, followed by myriads of philosophers and economists, believed that humans could build a satisfactory society with the force of selfishness. To which degree are humans are dictated by selfishness, and to which degree are some specific donors are dictated by it, could be left to the hands of philosophers. An economist may answer: does it really matter if everyone is happy?

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