Month: February 2004

Stock market facts

1. The earliest known example of an organized market for equities dates from Rome, second century B.C.

2. Nathan Mayer Rothschild arranged his own personal transportation to the Battle of Waterloo, which he viewed from a distance. He bribed a ship to hurry him back to London, where he traded on his information of a British victory.

3. In 1913, 52.3 percent of all traded securities in London were non-British in origin. Great Britain exported seven percent of its gdp in the form of foreign investment, a figure which no developed nation has equalled since.

4. In 1929 less than two percent of all American households were buying stocks on margin. At the peak of the boom the average P/E ratio for NYSE-listed stocks was 16 to 1, which is not especially high by subsequent standards.

5. In 1958-9 dividend yields on stocks fell below bond rates in the U.S. and U.K., for the first time. They have stayed below ever since. At the time this was a source of shock and worry, the Modigliani-Miller theorem was not yet widely understood.

The above facts are from B. Mark Smith’s engaging The Equity Culture: The Story of the Global Stock Market.

Addendum: Michael Ward writes:

I recently came across a passage that identifies an even earlier example than second century BC Rome. Archeologists have uncovered evidence of what amounts to a stock market operating almost 2600 years ago. The following passage is set in a discussion of life among the subject peoples of Cyrus the Great, 559-530 BC, but also refers to archeological findings from the late Chaldean period and early Achaemenid period, roughly 650-500 BC. The passage reads:

“One more feature of contemporary economic life is strangely modern. In earlier times the high temple officials obtained as perquisites of their offices the right to certain of the sacrifices on certain days. These prebends were now bought and sold on the open market, not only for a given day, but for a small fraction of a day. The temple had become a huge corporation, shares of which could be transferred on what almost corresponded to our modern stock exchange.”

[A.T. Olmstead, History of the Persian Empire (Chicago: The University of Chicago Press, 1948), p. 85]

Second Addendum: The Rothschild fact is wrong, thanks to Jay McCarthy for the right answer.

N. Gregory Mankiw vs. John Kerry

Free-trader Daniel Drezner offers full coverage of Mankiw’s pro-outsourcing testimony before Congress. Brad DeLong defends Mankiw, free trade and outsourcing. John Kerry attacks Mankiw’s words and his campaign. He also dismisses a voter-calling service that had been routing its phone calls through Canada.

My idea: Unless a candidate supports free trade, his party can only drive supporters to the polls with American-made cars.

Update: The Kerry family fortune operates 57 factories in foreign countries.

The new Michelin winners

The Michelin dining guide will upgrade three restaurants, all in France, to three-star status. One three-star restaurant will be demoted to two stars. The Michelin three-star designation is the highest a restaurant can obtain, right now there are only twenty-seven three-star restaurants in the world.

Perhaps it is no accident that only three stars are used for the world’s most rigorous restaurant system (Gault-Milleau, in contrast, has a scale up to twenty). The smaller the number of stars, the harder it is to inflate the standard. If the scale has one hundred steps, no one can really tell if a “73” restaurant is pushed up to a “75” rating by mistake. Ratings inflation can slip in over time. But everyone knows if a restaurant is elevated to three-star status by mistake.

Michelin precommits to quality rankings and takes great care to preserve its name as a restaurant “gold standard.” It is commonly believed that the number of three-star restaurants in France is capped, in fact it has remained close to twenty-one since the mid-1930s. Furthermore it is harder to get back a third star once you have lost it, than to win it in the first place, see the first link for more information.

French cooking may be suffering under excess taxes and labor market regulation, but French food criticism is alive and well, in this case under corporate auspices and subsidy. The Red Guide does not make money on its own terms, but rather serves to advertise the parent company and burnish its image. It is a classic instance of the private production of public goods.

So the next time that Roger Ebert gives a movie either a “thumbs up” or a “thumbs down,” this is a signal that he is offering a truly important evaluation.

The Economic Report of the President

The Economic Report of the President (warning, 4 mb PDF) has just been published. Brad DeLong has already written about 9 posts sniping on just one number from the report – the more than optimistic employment forecast.

My suggestion is to ignore the forecasts and anything said in direct support of the President’s economic policy (this is good advice in any year). Instead, read the ERP because it contains some of the best examples of well-written, jargon-free, economics.

Chapter 4, for example, contains an admirably clear explanation of tax incidence theory (who bears the burden of a tax). Beginning with the classic example of a sales tax, the ERP moves on to a careful discussion of payroll taxes (mostly borne by workers) and capital taxes (a significant fraction born by workers in the long run). The ERP nicely summarizes, “the incidence of a tax depends upon the law of supply and demand, not the laws of Congress.” This chapter would make excellent reading for many econ classes.

You don’t have to read to far between the lines of Chapter 2 to realize that the economists on the CEA reject most of what the administration says about manufacturing. As I noted earlier

Jobs in the manufacturing sector are disappearing and have been doing so for 30 years. The reason this has occured, however, is not because we have “sent the good jobs overseas” and it is not because our manufacturing sector is “rusting.” Jobs have disappeared because the manufacturing sector has been spectaculary successful.

The ERP lays out the data. (Nice to see also that they went out of their way to repudiate China bashing.)

Chapter 11 on the Tort System is also excellent. Critics of the tort system often focus on outrageous examples of the system run amok (e.g. here, here, here, and here) but a larger issue raised by the ERP is that the tort system is an inefficient way of compensating injured people – many people are left uncompensated and the “transactions costs” (read lawyers) eat up a large fraction of any transfer. Health insurance is a much more important and better compensation system. Ironically, tort law is one of the factors making the health care system more expensive.

Markets in everything, part III

Had your fill of But lacking in guts today? Try an on-line break-up. Did you know you can hire someone to do it for you?, founded in 2002, offers a range of options for heartbreakers who have $50 but not, as cofounder and president Ren Thompson puts it, “the nerve, or the know-how,” to write their own good-byes. According to Thompson, between 1,200 and 1,500 men and women annually turn to the Dublin, Calif.-based company for a custom-tailored “Dear John” or “Dear Jane” letter with that special admixture of grace, verve, tact, and distance.

For the less old-fashioned, Thompson or one of his six breakup representatives also break the news by means of a “Happy Ending counseling call” lasting roughly 15 minutes on average. The conversation doesn’t always begin on a happy note. The most common reactions, Thompson says, are “Is this some kind of joke?” or “Are you recording this?” But once people get over the skepticism, Thompson says, it’s a learning experience. “They have an inkling there’s a problem. Now they have some real closure with real answers. We try to help them look at it as a new beginning.”

Starting afresh is also behind the philosophy at and its male-oriented counterpart For $89, New Jersey-based scribe Erica Klein (who works by day as a direct-mail copywriter) will conduct a telephone consultation and compose “The Gentle Breakup Letter,” which she e-mails to the client to write out in his or her own handwriting. Would-be heartbreakers answer eight key informational questions on the order form and then choose from three “emotional styles”: “Light and Casual,” “Straightforward But From the Heart,” or “Super-Romantic” (though Klein can’t recall any client opting for the latter).

“We’re good at caring and compassion,” noted Klein.

Just look at one company’s client testimonials:

I met what I thought was a sweet girl. We dated a couple of times then I realized she was completely psycho. She would not take any of the hints I gave as I didn’t want her around but one phone call with a follow-up letter from did the trick I never heard from her again. Thanks! Charlie M.

One of the companies also performs furniture and pet retrieval, for fees ranging up to $400.

Here is a previous installment of Markets in Everything.

Victory songs are for the birds

Sports fans are not the only ones to celebrate a win with a rousing tune – a chirpy African bird does the same, researchers have revealed.

Mate pairs of the tropical boubou belt out their special victory song after they have deterred would-be invaders from their territory, suggest Ulmar Grafe and Johannes Bitz at the University of W├╝rzburg, Germany.

The discovery was made by accident, the scientists happily admit. They were investigating the birds’ musical repertoire in the Ivory Coast when they noticed that whenever they packed up their equipment and left the bird territories, the birds would trill a particular tune.

To investigate this further, Grafe and Bitz then tried broadcasting recordings of the duets commonly used by boubous in territorial confrontations. They found most mate pairs that stood their ground against the recorded intruders burst into song shortly after the tape was switched off.

“There’s a whole neighbourhood of birds listening into these conflicts, so it’s important to advertise a victory,” says Grafe, a behavioural ecologist. “We think it’s not only to let the loser know they’ve lost, but to let others know that one has been victorious – it serves to lessen further conflicts over territory.”

He adds that there are few animals which vocally celebrate a win in this way. And the tropical boubou is the first documented to perform a duet. “It’s sort of like a rugby team, a whole team display – I don’t know of any other animal example,” he told New Scientist.

I’ll really be impressed when they can hum “We Will Rock You.”

Here is the full story. Thanks to for the pointer.

The economics of newspapers

Brother Weinberger writes,

“Dan: The real threat to traditional journalism isn’t blogging. It’s eBay, the largest classified ads publisher.”

Anyway, he is absolutely right. Classified advertising accounts for 50 percent of the profits of newspapers, and eBay is taking that franchise away. Without classifieds, newspapers are not a business. They are charity cases.

From the ever-perceptive Arnold Kling.

Improving RSVP rates, continued…

Yesterday I asked whether we might increase the rate at which people RSVP, thereby improving the planning of parties.

Bob McGrew of suggests a system of raffles. Give out tickets to people who RSVP yes early on and at the actual event choose a winner. Ridicule the winner and do not grant the prize if it turns out he did not show up for the party. Arianto Patunru proposes a related idea. You receive a ticket in the mail, which you activate by calling in a positive RSVP. You then need the ticket to get in the front door. The tickets are read by a machine, so you can’t make personal pleas to be forgiven. And of course you can’t take cell phone calls from your stranded non-RSVPed friends at the entrance.

Bob McGrew also suggests allowing people to respond with a probability of acceptance, rather than a simple yes or no. (It is an interesting question whether people will undershoot or overshoot with their expressed probabilities, I would predict undershooting so the host feels good when the guest actually comes.) Allowing more information might seem like a no brainer but it runs risks as well. People who would otherwise give a definite answer might instead defer their decision and send you a number like 0.84681. And what do you do with all the numbers you get? Estimate a probability density function?

How about the straightforward approach? The old-fashioned Will Baude suggests a greater reliance on social conventions.

My best idea? Have fewer parties. So many social affairs are about signalling in the first place, and we all know that market economies overinvest in costly signals. Stay home and read your favorite blogs.

Haitian life

Haiti remains mired in possible civil war, but this was not the most depressing Haitian news story of the day. The Washington Post reports on water supplies in Haiti:

…three times a day, she [a mother] fills a five-gallon tub, balances it on her head and walks steadily and gracefully back up to her one-room house, careful not to spill a drop. The water may not be safe to drink, but it is precious.

She said she has no alternative to drinking tainted water, which kills thousands of people in Haiti every year. This is her test for the daily water: “If it is clean, nothing will happen. When the water is not clean, my children get diarrhea.”

It is a risk that millions of Haitians must take each day. Although there has been a public campaign to teach people how to drop a small quantity of bleach into their buckets to purify the water by chlorinating it, no one has been able to instruct families on what to do if they have no money to buy the bleach. So some Haitians decide on their own. “Sometimes,” Zilice said, “I use lemon.”

“When we see the doctor, the doctor will say, ‘Take precautions for the water. Put Clorox so you can drink it,’ ” she said. But when there is no bleach, she said her children sometimes become sick with fever. That is when she boils the water if she can. Boiling water is a luxury for the rich. “I don’t always have money to buy charcoal or gas to boil the water,” she said. “I know it is a risk but I have no choice.”

Or how about this?

“Sometimes you see small children go at 5 in the morning to get water before classes. If they do not walk for water they die.”

Sixty percent of Haiti’s 8.5 million people do not have clean drinking water. It puts this whole RSVP business into perspective.

Oscar odds

There is more betting on the Oscars than ever before. Variety magazine reports that on-line betting on the Oscars has grown 300% over the last three years. The U.K. site has led the way and expects more than one million dollars worth of Oscar wagers this year. The most heavily wagered category, surprisingly, usually is “Best Director.” Presumably there is too much agreement about what movie will win Best Picture in a given year. Here is one set of odds, not surprisingly Lord of the Rings is a favorite for best picture and director. Sean Penn (Mystic River) and Charlize Theron (Monster) are favored to win leading actor and actress respectively.

“I’d like the genetically modified organic food, please”

It turns out that much of the organic food in the U.K. has genetically modified components, usually soya:

Transgenic soya was found in ten of 25 organic or health food products tested by Mark Partridge and Denis Murphy, biotechnology researchers at the University of Glamorgan in Pontypridd, Wales. Eight of the ten were labelled either as ‘organic’, which should indicate the absence of transgenic ingredients under Soil Association rules, or explicitly as ‘GM-free’.

My take: Who cares? But the study does show just how arbitrary categories and labeling distinctions can be. “It’s all made out of matter,” I am fond of saying.

Pricing airline slots

Lynne Kiesling, after expressing her travel frustrations, offers some good proposals for pricing slots at airports. In response Gary Leff notes the following:

Slot pricing and exchange empirically works quite well, even in the absence of fully developed property rights. As I noted a few weeks ago, one of the more interesting market innovations in airline slots is the ‘grey market’ that has developed at London Heathrow.

Slots ostensibly aren’t property. If an airline gives up the slot it should revert back to a local authority which would then be charged with divvying out that slot. In practice, however, transferable property rights exist. That’s because the slots are “exchangeable” — an airline with a peak afternoon slot can trade with an airline with a useless late night slot. In a completely unrelated action, that airline with the undesireable slot can also send along lots of cash.

Variable pricing to consumers is also a fairly advanced activity already. Airlines already offer peak and off-peak pricing. Usually that’s determined not by peak travel time but is a function of which flight times face competition from low fare carriers. It wouldn’t be difficult for airline pricing to reflect the varied costs facing each flight based on the cost of takeoffs and landings for that given flight.

Gary sees the privatization of air traffic control as a high priority. He also calls for plane-to-plane communications, and greater decentralization more generally, as a means of limiting air traffic control problems. In other words, he wants to make planes more like cars.