Month: October 2004

The X,Y, and Z Prizes

The founders of the X Prize are going to offer new prizes “to meet the greatest challenges facing humanity in the 21st century.” But they have not yet settled on exactly what fields or what accomplishments and they are soliciting public input. I’ve already given my suggestion you can give yours here.

The sponsors offer some valuable thoughts on how to choose appropriate fields and prizes:

The X PRIZE competition focused on jumpstarting a private space industry has re-proven the principle – strongly proven in the early years of the 20th century for the aviation industry – that innovation can indeed be catalyzed. ….

Although the idea of using the X PRIZE concept work in other areas is at first glance a simple and attractive one, a great deal of up-front thought needs to go into what challenges/opportunities would be selected. One could argue that there were certain qualities about the challenges and opportunities in both the aviation field and the space field that lent themselves extremely well to a private sector competition of the sorts which have occurred. Variables to be looked at might include:

The maturity (or lack thereof) of the technology around which the competition would be based?
The maturity (or lack thereof) of the related industries from which a new industry would be born
The number of potential “competitors” potentially able to meet the challenge or at least the depth of the pool from which potential competitors could be drawn
The level of the specificity of the challenge
The financial resources potentially available to finance the potential competitors
The financial resources potentially available to finance the Prize itself
How potentially compelling and exciting is the field around which the challenge would be based
The amenability of the target area to a threshold change in public expectation
The replicability of the challenge to other areas?
The level of the presumed long-term benefit to business and society

The list of questions above is by no means exhaustive, but does give a sense of how the selection of a new challenge is not as first as simple as it may seem. It is absolutely key that the right challenges are selected – sufficiently exciting to compel hearts and minds, sufficiently ambitious to reach beyond what is already likely going to occur soon and to have a truly substantial impact, and sufficiently focused to have a good chance of succeeding within a reasonable timescale.

How bad is McDonald’s for you?

Bad enough. But beware the Michelin-starred restaurant as well:

I haven’t seen Supersize Me yet, but since I heard of the idea behind the movie, I thought it was a bit shallow. Of course you can eat yourself ill at McDonalds. I am almost certain I could eat myself ill in the same manner at a Michelin starred restaurant that serves classical French food. For example, take a typical French Michelin starred menu or look through Gordon Ramsay’s or Thomas Keller’s recipe books. To start, I could have some sort of foie gras terrine, for a main course I could have lobster cooked in butter or meat that might be served with pommes puree (which can contain up to 50% of their weight in butter), and then there are the cheese and desserts. Eating this type of food 14 times a week is probably not good for you.

Here is a good commonsense conclusion:

You might have a fast metabolism, be genetically fortunate, or exercise sufficiently to get away with it, but the point is that you can eat unhealthily anywhere. McDonald’s does not have a monopoly here. Since it is probably impossible to force everyone to eat + live healthily, and definitely a waste of resources to try, policymakers (and their lobbyists) should focus on reducing incentives to offload healthcare costs, thereby increasing incentives to live healthily.

Anyway, McDonalds is trying to change + diversifying its menus. You would have thought this is a good thing, or will the anti-McDonalds lot only be happy when the evil Ronald is 6 feet under?

If you are looking for a good blog by a libertarian chef, Peter Rossi is the guy.

Nobel Prize update

Here is new information from the betting market. Ed Prescott has opened up a lead (then Barro, then Krugman), and Thomas Schelling has joined the list. Read my previous comments; the winner will be announced Monday.

As for tomorrow’s literature prize, John Updike, Margaret Atwood, and Philip Roth are the leaders.

Update: Here is the dark horse who won the literature prize, I am not a big fan.

Making money from niche demand

The average Barnes & Noble carries 130,000 titles. Yet more than half of Amazon’s book sales come from outside its top 130,000 titles. Consider the implication: If the Amazon statistics are any guide, the market for books that are not even sold in the average bookstore is larger than the market for those that are… In other words, the potential book market may be twice as big as it appears to be, if only we can get over the economics of scarcity. Venture capitalist and former music industry consultant Kevin Laws puts it this way: “The biggest money is in the smallest sales.”

Here is a good article on how falling fixed costs (my terminology) will revolutionize the world of culture. Thanks to Eric Crampton for the pointer.

Should the government subsidize mortgages?

Fannie Mae has $1 trillion in assets and owns or guarantees more than one-quarter of all American mortages. While the company is owned by private shareholders, its securities have an implicit guarantee from the federal government. In essence private debtholders, through the company, can fund mortgages at lower risk.

It now turns out that the company has engaged in questionable accounting and financial practices; the Wall Street Journal called them “stunning.”

Put aside the details of the current scandal, should Fannie Mae exist at all? Should we privatize the entity and move away from government guarantees?

There are two core arguments for government involvement in the mortgage market:

1. There are external social benefits to home ownership.

2. The mortgage market will otherwise be stunted by credit rationing.

On the first, while I enjoy suburban sprawl, I see no good reason to subsidize it.

How about credit rationing? Are there Americans who, in economic terms, should get homes but could not in a free market? A key assumption of most (Pareto-inefficient) credit rationing models is that you know your probability of loan repayment better than does your lender. (In that case lenders are afraid to extend a full menu of loans, for fear that the “lemons” will borrow the most.) I doubt if this informational asymmetry is true today. In most cases the lender, through statistical profiling, probably has a better predictive sense of the future than do self-deceiving borrowers. And for some skeptical empirical evidence on credit rationing, see this volume. Or just try reading your spam.

Even if some Pareto-inefficient credit rationing exists, I would rather wait for information technologies to alleviate the problem. The Fannie Mae behemoth involves financial risk for the taxpayer and sets a bad precedent for government involvement in capital markets.

The origins of Monopoly

The board game that is, not the economic phenomenon. It appears to have sprung from the Henry George movement. George, of course, was obsessed with land monopoly and its unproductive rents. It is no accident that the board game assigns such extortionary power to landholders:

On January 5, 1904, Lizzie J. Magie, a Quaker woman from Virginia, received a patent (view patent) for a board game. Lizzie Magie belonged to a tax movement led by Philadelphia-born Henry George; the movement supported the theory that the renting of land and real estate produced an unearned increase in land values that profited a few individuals (landlords) rather than the majority of the people (tenants). Henry George proposed a single federal tax based on land ownership believing a single tax would discourage speculation and encourage equal opportunity.

Lizzie Magie wanted to use her game, which she called “The Landlord’s Game” as a teaching device for George’s ideas. The Landlord’s Game and Monopoly are very similar, except all the properties in Magie’s game are rented not acquired as in Monopoly and instead of names like “Park Place” and “Marvin Gardens” one finds “Poverty Place”, “Easy Street” and “Lord Blueblood’s Estate”. The objectives of each game are also very different. In Monopoly the idea of the game is to buy and rent or sell property so profitably that one becomes the wealthiest player and eventually monopolist. In The Landlord’s Game, the object was to illustrate how (under the system of land tenure) the landlord had an advantage over other enterprisers and to show how the single tax could discourage speculation.

When I was young I had a counterproductive obsession with owning the yellow properties.

Here is the full story. Here is an NPR account of the origins of monopoly. I am indebted to an email from Lauren Landsburg and Russ Roberts for the initial historical reference.

Carmel stops licensing new art galleries

Art is dead in Carmel — or at the very least, its growth is stunted.

With a glut of art in the idyllic seaside village — about four out of 10 businesses [out of a total of about 300] are art galleries — the Carmel City Council is taking action to prevent new galleries from springing up.

As expected, the council unanimously agreed last week to impose a moratorium on licensing art galleries in the city.

Here is the full story. Is this a public choice story of old galleries keeping out upstarts? A slow growth movement? A rebellion against the horrible aesthetic quality of so many contemporary Western landscapes? All of the above?

Private Space Travel Takes Off

The $10 million X-Prize has been won.

To win the X-Prize, a privately funded team had to fly a craft at least 100 kilometers high carrying a payload equivalent to three humans, successfully land and then repeat the feat within two weeks.

With this accomplishment, the SpaceShipOne team may have cracked more than space, as it appears that, just as planned, the X-Prize competition has cracked open the door to space tourism.

Sir Richard Branson recently announced plans to use the SpaceShipOne design for a space tourism company to be called Virgin Galactic.

Rutan, Allen and Branson attended the X-Prize’s victory flight.

The returns from innovation

In a recent NBER working paper – “Schumpeterian Profits in the American Economy: Theory and Measurement” – Yale economist William Nordhaus estimates that innovators capture a mere 2.2% of the total “surplus” from innovation. (The total surplus of innovation is, roughly speaking, the total value to society of innovation above the cost of producing innovations.) Nordhaus’s data are from the post-WWII period.

The smallness of this figure is astounding. If it is anywhere close to being an accurate estimate, the implication is that “society” pays a paltry $2.20 for every $100 worth of welfare it enjoys from innovating activities.

That’s from Don Boudreaux at Cafe Hayek. To some extent fame incentives alleviate underinvestment in new ideas. To some extent I advocate favorable tax and legal treatment for innovation.

The Economics of the Intifada

The number of Palestinians who worked daily in Israel before the intifada was more than 150,000; the figure now is fewer than 35,000.

Of the 2.2 million Palestinians on the West Bank, 50 percent now live below the poverty line, compared with 22 percent in 2001; the figure is now 68 percent in teeming Gaza, with its 1.3 million people.

The percentage of Palestinians with savings declined from 70 percent to 13 percent.

Before the second intifada, some $500 million a year was provided in aid; the average annual figure for the last four years is more than $1 billion, about $310 a person, the highest per capita rate in the world.

Some 500,000 of the 3.5 million Palestinians are in dire economic straits, said David Shearer, the head of the United Nations agency’s office here. Some 40 percent now feel insecure about feeding their families; 29 percent feel severely insecure, and half of them are heavily dependent on foreign aid. Some 30 percent are watching their savings dwindle. “They are the new poor, and they are slipping down,” Mr. Shearer said.

Here is the full story.

Yet many Palestinians support the intifada, and obviously some are willing to die for it. I conclude that economists need a better theory of human irrationality. Analogies from expressive voting theory suggest that (many) Palestinians support the intifada because their voices are not decisive. The support is seen as a kind of “cheap talk,” leading to a collective insanity which perhaps no single person intended. But do individual Palestinians who support the intifada really mind that so many other people go along with them? Doubtful, the contrary is sooner true, namely that people prefer that their peers follow their position.

In my (admittedly unorthodox) view the degree of decisiveness is not the key to determining the degree of human rationality. I would sooner believe that the amount of pride at stake is what turns on the irrational part of our brains, whether we are decisive or not. Remember, Stalin was convinced that Hitler was not going to invade anytime soon.

Markets in everything

How about non-matching socks? sells you paired socks with different colors and designs. “That way, you would never have to worry about losing a sock,” says one company spokesperson [exam question: does this violate an axiom of choice theory, if so which one?]. The company, by the way, considers schoolyard bullies to be one of its greatest opponents. Here is the full story, New York Times password required.

It is not the case that each sock is strictly unique; the company is encouraging its (intransitive?) young customers to trade socks with each other, to obtain matching pairs.

Should we prefer a monopolistic or competitive Jihad?

Matt Yglesias asks MR to address whether we would prefer, all other things equal, terrorists organized into a single group, or organized into competing groups. The answer to this question will not be a priori, but here are a few relevant considerations:

1. If terrorists perform their acts for fundraising purposes, or for criminal status, you would probably rather face a monopoly opponent. They are more likely to rest on their laurels.

2. If you think that terrorists are deterrable, at least in principle, you would prefer an easily identifiable monopoly opponent.

3. If you think that terrorists are likely to engage in internecine warfare with each other, you would prefer the more competitive set-up. (I’ll predict that if anyone kills, or has killed, bin Laden, it is one of his own people.) This is especially true when the terrorists are far away from you; they can fight without major spillover effects on your citizenry.

4. Perhaps the production of terrorist attacks involves significant economies of scale. In that case you would prefer the smaller competing groups. Nuclear weapons probably involve such economies, but suicide bombings can be organized on quite a small scale.

My guess: In Iraq you would prefer a smaller number of groups, since there is some chance of striking a deal with them. And there we are more worried about the suicide bombers than a loose nuclear device, so economies of scale do not overturn this conclusion. We are less likely to ever “trade” with al Qaeda and its offshoots, so in that case I would prefer splintering. Furthermore al Qaeda has a greater long-run nuclear potential, so it is more important to deny them potential economies of scale. I suspect we do not much mind if western Pakistan becomes a scene for terrorist infighting, whereas such conflicts could scuttle reconstruction in Iraq.