Alex Tabarrok

In Defense of the Company Town

by on January 27, 2015 at 7:25 am in Economics, History | Permalink

In my EconTalk with Russ Roberts on proprietary cities I only mentioned company towns in passing. Even the great Milton Friedman got company towns wrong, however, so it’s worthwhile spending a little time to dispel some myths.

Take company stores. Why did mining companies often own the town store? The standard answer: to squeeze every nickel from the workers so they would “owe their soul to the company store.” But that lyrical argument makes no sense and the truth is actually closer to the opposite.

The mining towns were isolated geographically but they weren’t isolated from the national labor market. The number of workers in these towns moved up and down in response to the price of coal and the workers often traveled long-distances to work in the mines, sometimes from other states or other countries. The company towns were isolated not because the workers couldn’t get out but because few people wanted to live where coal was abundant. As a result, workers had to be enticed to travel to and to live in these towns. Oil rigs are similarly isolated today and once on board the workers have nowhere to go but the company restaurant, the company theater and the company gym but that hardly means that the workers are exploited.

Since the mine workers weren’t isolated from the national labor market they had to be paid wages consistent with wages elsewhere and indeed on an hourly basis wages in mining were higher than in manufacturing (not surprising since these jobs were riskier). Moreover, workers weren’t dumb and so–just like workers today–they would consider the price of housing and the price of goods in these towns so see how far their wages would take them. All of this suggests that workers would not be fooled by high wages and really high prices at the company store that nullified those wages. And indeed, prices at company stores were not especially high and were similar to prices at independent stores in similar locations.

It was possible to find examples of a good at a particular company store which had a markedly higher price than at a particular independent store but this was cherry picking, (I am reminded of the exam question about two rival supermarkets both of which advertise “the average consumer at our store would pay 20% more if they shopped at our competitor.” The question asks how it can be possible that both stores are telling the truth.) Comparing identical baskets, prices at company stores were not higher than at similar independent stores.

I said that the traditional story actually gets things backward. We can see how by asking why the companies owned the stores. First, independent stores had to bear a lot of risk because they would be selling in a local economy that was dependent on a single mine. That risk was better born by the mining firm itself because it knew more about coal and fluctuations in the price of coal, its own plans, the time the mine would be expected to be open and so forth. Thus, it was cheaper for the mines to own the stores than for independents to own the stores.

Second, if an independent store did open they would have a monopoly and would want to charge a monopoly price but–and this is key–the higher the price charged by the independent store the higher the wages the coal mine would have to pay to compensate the workers. Thus monopoly independents would be bad for the workers but they would also be bad for the owners of the mine. If the mine owned the store, however, they would have a greater incentive than the independent store to lower prices because that meant they could save on wages. Overall, both workers and mine owners would be better off with company stores (A classic example of the double marginalization problem).

Similar arguments apply to company owned housing. On the one hand, this did mean that during a lengthy strike the firm could evict the workers from their housing. On the other hand, would you want to buy a house in an isolated town dependent on a single industry? Would you want to own a major asset that was likely to fall in price at the same time that you were likely to lose your job? Probably not. Rental housing meant that workers had the freedom to leave town easily when better work opportunities were available elsewhere – i.e., it meant that the workers were less isolated from the national labor market than they would be if they owned their homes and were tied down to a single place and a single employer. Moreover, the fact that the housing was company owned meant lower prices than if the housing was owned by an independent monopoly developer, the most relevant alternative (again because of the double marginalization problem).

The bottom line is that far from being an example of the abuse of monopoly power, the company town was an effort to constrain monopoly power.

References: The best source for an accurate view of the company towns in the mining industry is Price Fishback’s Soft Coal, Hard Choices: The Economic Welfare of Bituminous Coal Miners, 1890-1930. The book is based on a series of papers (JSTOR).

The company towns built by the mines weren’t especially pretty but some of the other company towns, especially those which employed high-skilled workers, were professionally designed by the leading architects of the day and they came with parks, playgrounds, retail areas, public transportation, churches and a variety of services. In essence, these company towns were doing what Google does today, competing for workers with amenities. Margaret Crawford’s book, Building the Workingman’s Paradise, is an interesting history showing how company towns pioneered a number of architectural and planning innovations that later found there way into many post World War II home developments.

Based on my paper, Lessons from Gurgaon, India’s Private City (with Shruti Rajagopalan) I discuss private cities with Russ Roberts over at EconTalk this week.

I think the conversation went well but I haven’t heard it yet so let me also take the time to point you to my favorite recent EconTalk, Russ interviewing Greg Page, the former CEO of Cargill, the largest privately-held company in America. Their discussion covers the global food supply, false definitions of national food security, the role of prices, comparative advantage and more. It’s a great discussion.

The Peltzman Effect on the Golden Gate

by on January 24, 2015 at 11:49 am in Economics | Permalink

A safety barrier on the median was just installed on the Golden Gate Bridge; unintended consequences follow.

…in the days since the more secure movable median barrier was installed, the average speed of drivers on the approach from the north has jumped even though the speed limit was lowered from 55 to 45 miles per hour.

“We’re really seeing unreasonable speeds on the bridge, much faster than before,” said Priya David Clemens, a representative for the Golden Gate Bridge District. For whatever reason, including the possibility that drivers feel safer knowing a car won’t come barreling at them from the opposite direction, “we’ve noticed speeds going up,” Clemens said. “That’s why we asked the CHP to help us.”

More on the Peltzman effect.

Hat tip: Carl Danner.

The Supply Curve

by on January 23, 2015 at 7:25 am in Economics, Education | Permalink

Here is our video introducing the supply curve from our principles of micro-economics course at MRUniversity. Supply, Demand and Equilibrium are available now. Next week, elasticity!

Tom VanAntwerp looks at political donations by the staff of the top-ten think tanks. Some findings:

Think tank employees overwhelmingly give to Democratic causes. Nearly 78% of all political contributions from think tank employees went to Democrats. 208 think tank employees gave a total of  $452,589 to Democrats in 2012;

Discussions of bias via donor base don’t match actual employee partisanship.Comparing the most obviously ideological think tanks, employees of both Heritage Foundation and Center for American Progress gave vastly more to political groups than did employees of Cato Institute. While the Wikipedia discussion of Cato’s funders was over three times longer than the same discussion for either Heritage or CAP, only 3.5% of Cato’s employees made partisan donations compared to 8.7% for Heritage and 8.2% for CAP. The total amount Cato employees gave was also dwarfed by Heritage and CAP employees: $10,200 versus $76,653 and $100,747.

In another post, VanAntwerp shows that even though the staff at Cato don’t give very much to politicians and are not especially partisan by other think tank standards, media discussion’s of Cato’s funding and funders are far more common and extensive than that of any other think tank. My guess is that conservatives give Heritage a pass, liberals give Brookings, CAP, and Pew a pass but both liberals and conservatives are suspicious of Cato. Liberals think Cato is in bed with the corporations, conservatives think Cato is in bed with gays and marijuana users. Both sides think Cato is with the opposition and, as a result, Cato generates lots of media discussion about funding “bias.”

chart2

In widely reported article the Washington Post says a Majority of U.S. public school students are in poverty. The article cites the Southern Education Foundation:

The Southern Education Foundation reports that 51 percent of students in pre-kindergarten through 12th grade in the 2012-2013 school year were eligible for the federal program that provides free and reduced-price lunches.

Eligibility for free and reduced-price lunches, however, depends on eligibility rules and not just income levels let alone poverty rates. The New York Times article on the study is much better:

Children who are eligible for such lunches do not necessarily live in poverty. Subsidized lunches are available to children from families that earn up to $43,568, for a family of four, which is about 185 percent of the federal poverty level.

The number of children eligible for subsidized lunches has probably increased in part because the federal Agriculture Department now allows schools with a majority of low-income students to offer free lunches to all students, regardless of whether they qualify on an individual basis or not.

Frankly I suspect that this study was intended to confuse the media by conflating “low-income” with “below the poverty line”. Indeed, why did this study grab headlines except for the greater than 50% statistic? It is very easy to find official numbers of the number of students in poverty according to the federal poverty standard. Here is what the National Center for Education Statistics says about school-age children and poverty (most recent data):

In 2012, approximately 21 percent of school-age children in the United States were in families living in poverty.

The number of school-age children living in poverty today is relatively high and not surprisingly did increase with the 2008 recession and its aftermath (green line in figure below – the numbers here differ slightly from NCES but the time line is longer). But recent numbers do not look like especially remarkable compared to the history.

It’s certainly worthwhile discussing why poverty has increased. The economy is one possible reason as are issues to do with family formation and marriage rates. Another possibility is immigration. A higher poverty rate caused by the immigration of more low-income children is compatible with everyone becoming better off over time and not necessarily a bad thing. Those are just a few possible topics worthy of investigation. I don’t claim that any of them are correct.

I do claim, however, that we won’t get very far understanding the issue by shifting definitions and muddying the waters with misleading but attention grabbing statistics.

The first randomized controlled trial of police body cameras shows that cameras sharply reduce the use of force by police and the number of citizen complaints.

We conducted a randomized controlled trial, where nearly 1,000 officer shifts were randomized
over a 12-month period to treatment and control conditions. During ‘‘treatment shifts’’
officers were required to wear and use body-worn-cameras when interacting with members
of the public, while during ‘‘control shifts’’ officers were instructed not to carry or use the
devices in any way. We observed the number of complaints, incidents of use-of-force, and
the number of contacts between police officers and the public, in the years and months
preceding the trial (in order to establish a baseline) and during the 12 months of the
experiment.

The results were that police use of force reports halved on shifts when police wore cameras. In addition, the use of force during the entire treatment period (on shifts both using and not using cameras) was about half the rate as during pre-treatment periods. In other words, the camera wearing shifts appear to have caused police to change their behavior on all shifts in a way that reduced the use of force. A treatment that bleeds over to the control group is bad for experimental design but suggests that the effect was powerful in changing the norms of interaction. (By the way, the authors say that they can’t be certain whether the cameras primarily influenced the police or the citizens but the fact that the effect occurred even on non-camera shifts suggests that the effect is primarily driven by police behavior since the citizens would not have been particularly aware of the experiment, especially as there would have been relatively few repeat interactions for citizens.)

It is possible that the police shaded their reports down during the treatment period but complaints by citizens also fell dramatically during the treatment period from about 25-50 per year to just 3 per year.

Here’s a graph of use of force reports before and during the treatment period.

cameras

Police cameras will have some negative effects. When a police officer is accused of something will lawyers have the right to subpoena years of camera footage looking for anything problematic? Think about the OJ case. Perhaps tape should be erased after one year.

Nevertheless, the results of the study are impressive. More generally, I worry that there is no solution to the problem of government mass surveillance but at the very least we can turn the cameras around and even the playing field.

Kevin Drum on Charter Schools

by on January 12, 2015 at 3:04 pm in Economics, Education | Permalink

Kevin Drum reports two factlets.

First: Neerav Kingsland says that SAT scores of new teachers are rising and that most of them are staying in teaching for at least five years. He comments: “If I was going to bet on whether American education will improver, flatline, or get worse — I would look very hard at the academic performance of teachers entering the profession, as well as how long these better qualified teachers stayed in the classroom. The aforementioned data makes me more bullish on American education.”

Second: Adam Ozimek says we’re selling charter schools short when we say that on average they do about as well as public schools. That’s true, but there’s more to it:

I would like to propose a better conventional wisdom: “some charter schools appear to do very well, and on average charters do better at educating poor students and black students”. If the same evidence existed for some policy other than charter schools, I believe this would be the conventional wisdom.

….The charter sectors’ ability to do better for poor students and black students is important given that they disproportionately serve them….53% of charter students are in poverty compared 48% for public schools. Charters also serve more minority students than public schools: charters are 29% black, while public schools are 16%. So not only do they serve more poor students and black students, but for this group they relatively consistently outperform public schools.

Our newest MRUniversity online course in economics is now starting, Principles of Microeconomics! Tyler and I have created what we think is our most engaging course yet — featuring high production quality videos filled with great examples to illustrate key concepts.

We’ll cover all of the important topics in microeconomics, such as competition, monopoly, price discrimination, externalities, public goods and more. There are practice questions along the way to test your knowledge, and don’t hesitate to post your questions on each video page.

Check out our video introducing the course and economics more generally. We begin with a great story about incentives!

The Daily Beast, Business Insider and The Washington Post all argue that leaked information about Jennifer Lawrence’s pay on American Hustle indicates gender discrimination. Here’s the Washington Post:

If Jennifer Lawrence doesn’t get paid as much as her male colleagues for the same work, ordinary women don’t stand a chance.

Sony’s hacked e-mails have revealed a troubling truth — that even the wealthiest and most powerful women among us are burdened by the ever-present gender pay gap.

jennifer-lawrence-the-hunger-gamesThe picture these articles present is one of poor, little Jenny Lawrence being taken advantage of by powerful, male studio heads who are laughing all the way to the bank. Time for a reality check.

When it comes to business, Jennifer Lawrence isn’t a woman she is a multi-million dollar enterprise. Lawrence Enterprises is run not by Jennifer alone but also by a bevy of managers, agents, publicists and lawyers. If Lawrence is underpaid each of these people (quite a few of them men, by the way) are also underpaid. In particular, Lawrence is repped by CAA of which the WSJ recently wrote:

Within the entertainment industry, the glass-and-steel headquarters of Creative Artists Agency LLC is called the “Death Star,” a reference to its occupants’ reputation as cold-hearted Hollywood power brokers.

Do you think the cold-hearted Hollywood power brokers of CAA are leaving money on the table? No effing way. Which is one reason why Jennifer Lawrence is number 12 on Forbes Celebrity 100 list, coming in just below Steven Spielberg. By the way, 5 of the top 10 on the Celebrity 100 are women and number 1 on that list? Beyonce.

Here is a bit more on the poker story Tyler mentioned yesterday.

An important variant of poker, heads-up limit hold’em (HULHE), has been essentially solved–meaning that a computer can now play the game so well that it wouldn’t lose much and might even win against a theoretically perfect player over a lifetime of play. Solving the game required new algorithms and significant computational power.

HULHE has 3.16 × 1017 possible states the game can reach, making it larger than Connect Four and smaller than checkers. However, because HULHE is an imperfect-information game, many of these states cannot be distinguished by the acting player, as they involve information about unseen past events (i.e., private cards dealt to the opponent). As a result, the game has 3.19 × 1014 decision points where a player is required to make a decision….There are two challenges for established CFR variants to handle games at this scale: memory and computation.

The solution supports some conventional strategies but also contains new insights:

Human players have disagreed about whether it may be desirable to “limp” (i.e., call as the very first action rather than raise) with certain hands. Conventional wisdom is that limping forgoes the opportunity to provoke an immediate fold by the opponent, and so raising is preferred. Our solution emphatically agrees (see the absence of blue in Fig. 4A). The strategy limps just 0.06% of the time and with no hand more than 0.5%. In other situations, the strategy gives insights beyond conventional wisdom, indicating areas where humans might improve. The strategy almost never “caps” (i.e., makes the final allowed raise) in the first round as the dealer, whereas some strong human players cap the betting with a wide range of hands. Even when holding the strongest hand—a pair of aces—the strategy caps the betting less than 0.01% of the time, and the hand most likely to cap is a pair of twos, with probability 0.06%. Perhaps more important, the strategy chooses to play (i.e., not fold) a broader range of hands as the nondealer than most human players (see the relatively small amount of red in Fig. 4B). It is also much more likely to re-raise when holding a low-rank pair (such as threes or fours) (44).

Why is this important? The only previous games of any difficulty that have been solved are perfect information games–games where each player knows everything that has previously happened. Tic-tac-toe and chess are perfect information games because everything that has happened is summarized in the state of the board. In imperfect games there is hidden information, such as in card games where the opposing players cards are hidden.

It’s clear that most games in the real world (and that includes “games” of nuclear strategy, bargaining, and detection and monitoring) are imperfect information games. Even though the sample space for HULHE is very large it’s smaller than these real world strategy games (and smaller than other forms of poker). Nevertheless, it’s clear that people are “solving” the real world games not by working through the sample space but by pruning it. A combination of search and heuristic pruning in the perfect information game of chess has already produced computers that are better than any human player. What the solution to this relatively small and somewhat unimportant imperfect information game indicates is that the computers are soon going to be better than you and I at the “human” capabilities of threat, bluff and deception.

The third edition of Modern Principles of Economics is now available! Modern Principles is the best written and most interesting economics textbook and it has a wonderful new feature which puts it far ahead of its competition.

The third edition features over 30 beautifully produced videos each carefully chosen to integrate perfectly with Modern Principles of Economics. A majority of the videos are newly written and designed by Tyler and myself and all are linked in the text with URLs and QR codes. The videos will also be available in Macmillan-Worth’s learning management system, LaunchPad, along with the e-text, grading system and assessment tools.

The videos integrate perfectly with Modern Principles but they also work great with any textbook, Most importantly, we will be making all of the videos available to anyone in the world completely free of obligation or charge (more on that next week!).

A new chapter in Modern Principles covers asymmetric information so here is our video on adverse selection featuring Groucho Marx and George Akerlof!

MRU Collectibles!

by on January 3, 2015 at 10:40 am in Uncategorized | Permalink

Come to the MRU booth in the exhibit hall for at the AEA convention for coffee between 2 and 4pm today and collect economist cereal boxes!

Adam-Smith-Box-800wide

The Flat White Comes to America!

by on January 2, 2015 at 7:35 am in Food and Drink | Permalink

In my 2013 report on Australian policy innovations I wrote:

The world owes Sydney baristas (New Zealand also) an enormous debt for the flat white, perhaps the best form of coffee yet perfected. The flat white has made its way to London but is only now becoming available in a few high end coffee shops in New York.  I eagerly await for this trend to extend to Fairfax as I am already jonesing for another.

Eater reports that I have only a few more days to wait:

In what appears to be an effort to regain some of its coffee credibility after years of slinging sugared up lattes and Frappuccinos, Starbucks is adding a Flat White to its menu. The espresso-based drink — which was created in Australia in the 1980s — has started to gain a serious American following over the last year.

Do I expect the Starbucks version to be as good as what I had in Australia? No. But I do hope that this move will increase coffee innovation throughout the market, pulling us closer to the Australian model. The Great Stagnation ends in 2015!

Top Ten MR Posts of 2014

by on December 31, 2014 at 7:20 am in Economics | Permalink

Here is my annual rundown of the top MR posts of 2014 as measured by page views, tweets and shares.

1. Ferguson and the Debtor’s Prison–I’d been tracking the issue of predatory fining since my post on debtor’s prisons in 2012 so when the larger background of Ferguson came to light I was able to provide a new take on a timely topic, the blogging sweet spot.

2. Tyler’s post on Tirole’s win of the Nobel prize offered an authoritative overview of Tirole’s work just when people wanted it. Tyler’s summary, “many of his papers show “it’s complicated,” became the consensus.

3. Why I am not Persuaded by Thomas Piketty’s Argument, Tyler’s post which links to his longer review of the most talked about economics book of the year. Other Piketty posts were also highly linked including Tyler’s discussion of Rognlie and Piketty and my two posts, Piketty v. Solow and The Piketty Bubble?. Less linked but one of my personal favorites was Two Surefire Solutions to Inequality.

4. Tesla versus the Rent Seekers–a review of franchise theory applied to the timely issue of regulatory restrictions on Tesla, plus good guys and bad guys!

5. How much have whites benefited from slavery and its legacy–an excellent post from Tyler full of meaty economics and its consequences. Much to think about in this post. Read it (again).

6. Tyler’s post Keynes is slowly losing (winning?) drew attention as did my post The Austerity Flip Flop, Krugman critiques often do.

7. The SAT, Test Prep, Income and Race–some facts about SAT Test Prep that run contrary to conventional wisdom.

8. Average Stock Returns Aren’t Average–“Lady luck is a bitch, she takes from the many and gives to the few. Here is the histogram of payoffs.”

9. Tyler’s picks for Best non fiction books of 2014.

10. A simple rule for making every restaurant meal better. Tyler’s post. Disputed but clearly correct.

Some other 2014 posts worth revisiting; Tyler on Modeling Vladimir PutinWhat should a Bayesian infer from the Antikythera Mechanism?, and network neutrality and me on Inequality and Masters of Money.

Many posts from previous years continue to attract attention including my post from 2012, Firefighters don’t fight fires, which some newspapers covered again this year and Tyler’s 2013 post How and why Bitcoin will plummet in price which certainly hasn’t been falsified!