Saturday, March 22, 2008
Howard S. Katz's Portfolio Returns 20% in Two Weeks
I have been subscribing to Howard S. Katz's newsletter The One Handed Economist for about 3 years. Howard tracks what a "conservative" portfolio. He bases his analysis on Austrian economics as well as technical analysis. The portfolio tracks from 1999. During this period the major stock indexes have gone up and down but now are not much higher than in 1999. In contrast, by the first week of March 2008 Howard's conservative portfolio was up about 115% over the nine-year period. Howard's latest edition came out a few minutes ago. In the past two weeks his portfolio went up better than 20%. It was about 215 in early March when he called a top in precious metals. He moved into several construction stocks which brought the portfolio up to 260. Wow! This was the kind of thing that until now I had read about but not directly experienced. Yay Howard!
Firms' Goals and Pricing
Walter Nicholson. Intermediate Microeconomics and Its Application Third Edition. Dryden Press, 1983.
I have decided to treat myself to review some basic economics this evening. It's been 20 years since I looked at my last economics textbook. What better way to brush up than my 1983 copy of Walter Nicholson's Intermediate Microeconomics and Its Application textbook? In this blog I will briefly review his thoughts on costs.
Costs (chapter 9)
Economists view historical costs as sunk costs. The implicit cost of a machine is what someone else would pay for it, i.e., its "rental rate". To minimize production costs firms choose inputs such that the rate of technical substitution is equal to the ratio of input costs. Thus if wages are w and machinery rental rates are v then:
Rate of Technical Substitution = wage rate/rental rate = w / v
That is, the rate of technical substitution is the rate at which one input may be traded off against another in the production process while holding output constant and that rate is the same rate at which they are traded in the open market.
In other words, the rate of technical substitution of labor for capital is the ratio of the
marginal product (labor)/ marginal product (capital)
so that each input should provide the same additional output per dollar spent and if they don't, firms will trade some of the less productive input for the more productive.
Short versus Long Run
In the short run production capacity is fixed. In the long run production can be curtailed. Fixed costs are fixed in the short run.
Short run average total costs = (total costs) / (total output)
while
Short run marginal costs = (change in total costs) / (change in output)
In the very short run price purely rations demand. This is because supply cannot be increased. But generally in the longer run there is a supply response to changing demand. In the short run (longer than very short run) the number of firms is fixed but firms can adjust the amount they are producing.
Theoretically, marginal and average costs ought to increase in response to increases in output but most studies fail to show increasing average or marginal costs but rather find that marginal and average costs are constant over large ranges of output.
Long Run
In the long run all productive inputs are variable. Nicholson makes the point that some factors may be difficult to alter even in the long run. The rate of technical substitution must equal the ratio of the input prices.
The long run total cost curve is found by considering all short run total cost curves and choosing the lowest one for each possible output level. "The locus of all these cost minimizing choices is called the long-run total cost curve..."
Under the assumption of constant returns to scale, the long term total cost curve is a straight line and average and marginal costs are constant and equal (equal because of the assumption of constant returns to scale which means that the marginal cost equals the average cost).
If there is a fixed input, average costs fall as variable inputs are added, but then rise again as the fixed input causes diminishing marginal productivity.
At the minimum piont of the Long Run Average Total Cost Curve the Long Run Marginal Cost Curve = Long Run Average Total Cost Curve = Short Run Average Total Cost Curve = Short Run Marginal Cost Curve
In reality, many empirical studies find declining long run average costs for smaller size with a flattening minimum average cost beyond a threshhold.
Changes in input prices will tilt the total cost lines. Changing input prices will change the isoquants on which the total cost curves are based and change the ratios of inputs.
I have decided to treat myself to review some basic economics this evening. It's been 20 years since I looked at my last economics textbook. What better way to brush up than my 1983 copy of Walter Nicholson's Intermediate Microeconomics and Its Application textbook? In this blog I will briefly review his thoughts on costs.
Costs (chapter 9)
Economists view historical costs as sunk costs. The implicit cost of a machine is what someone else would pay for it, i.e., its "rental rate". To minimize production costs firms choose inputs such that the rate of technical substitution is equal to the ratio of input costs. Thus if wages are w and machinery rental rates are v then:
Rate of Technical Substitution = wage rate/rental rate = w / v
That is, the rate of technical substitution is the rate at which one input may be traded off against another in the production process while holding output constant and that rate is the same rate at which they are traded in the open market.
In other words, the rate of technical substitution of labor for capital is the ratio of the
marginal product (labor)/ marginal product (capital)
so that each input should provide the same additional output per dollar spent and if they don't, firms will trade some of the less productive input for the more productive.
Short versus Long Run
In the short run production capacity is fixed. In the long run production can be curtailed. Fixed costs are fixed in the short run.
Short run average total costs = (total costs) / (total output)
while
Short run marginal costs = (change in total costs) / (change in output)
In the very short run price purely rations demand. This is because supply cannot be increased. But generally in the longer run there is a supply response to changing demand. In the short run (longer than very short run) the number of firms is fixed but firms can adjust the amount they are producing.
Theoretically, marginal and average costs ought to increase in response to increases in output but most studies fail to show increasing average or marginal costs but rather find that marginal and average costs are constant over large ranges of output.
Long Run
In the long run all productive inputs are variable. Nicholson makes the point that some factors may be difficult to alter even in the long run. The rate of technical substitution must equal the ratio of the input prices.
The long run total cost curve is found by considering all short run total cost curves and choosing the lowest one for each possible output level. "The locus of all these cost minimizing choices is called the long-run total cost curve..."
Under the assumption of constant returns to scale, the long term total cost curve is a straight line and average and marginal costs are constant and equal (equal because of the assumption of constant returns to scale which means that the marginal cost equals the average cost).
If there is a fixed input, average costs fall as variable inputs are added, but then rise again as the fixed input causes diminishing marginal productivity.
At the minimum piont of the Long Run Average Total Cost Curve the Long Run Marginal Cost Curve = Long Run Average Total Cost Curve = Short Run Average Total Cost Curve = Short Run Marginal Cost Curve
In reality, many empirical studies find declining long run average costs for smaller size with a flattening minimum average cost beyond a threshhold.
Changes in input prices will tilt the total cost lines. Changing input prices will change the isoquants on which the total cost curves are based and change the ratios of inputs.
From Progressivism to Conservatism
Having just read a few books on mugwumps, the evolution of political thinking from mugwumpery to progressivism, the legal reconstruction of American capitalism and the philosophy of progressivism, I have admittedly just begun to scratch the surface of the source of the generic failure of American politics to produce responsive and flexible solutions. Today, on the right, the promise of limited government has been betrayed and given the Republican Party's progressive history, which followed through Rockefeller Republicanism to President Bush's mangling of conservatism, the Republicans had traditionally had a big government impulse and so they are unreliable representatives of the small government view. However, the question needs to be traced through Warren G. Harding and Calvin Coolidge. Coolidge was a teenager when the Mugwumps bolted to vote for Grover Cleveland in 1884, so he was not a Mugwump, but he was very much in the Mugwump tradition. On first glance it seems there is more EL Godkin than Herbert Croly in Coolidge, but I need to learn how that played out in Coolidge's thinking--did he outright reject Progressivism and return to the late 19th century view (and if so why did he not repeal at least some of the Progressive legislation). In general there is a question as to why the Mugwump tradition in American politics has been able to reassert itself vocally but not practically. Reagan adopted free market rhetoric but behaved like a Progressive. Did Calvin Coolidge establish the pattern of twentieth century Mugwump timidity? Or is the timidity simply a reflection of the American public's commitment to the Progressive model? Perhaps special interest theories such as Mancur Olson's can explain the clash between Republican rhetoric and action as simply a reflection of economic self interest on politicians' part. They believe in free markets but know that if they betray special interests they will lose elections. The special interests believe in free markets for everyone else, but inevitably see themselves as an exception. Thus, American politics has become a tragedy of the town commons, where everyone believes in freedom but aims to repeal it for a special favor for themselves.
Hometown Pictures III March 6-8, 2008
Our Cabin
Emerson Hotel
Our Cabin (Freda Navigating Slippery Ice)
Freda at Emerson Hotel
American General Store is closed but not forgotten.
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