Month: October 2013

Precocious Albion: A New Interpretation of the British Industrial Revolution

That is a new paper by Morgan Kelly, Joek Mokyr, and Cormac Ó Gráda, and the abstract is here:

Why was Britain the cradle of the Industrial Revolution? Answers vary: some focus on resource endowments, some on institutions, some on the role of empire. In this paper, we argue for the role of labour force quality or human capital. Instead of dwelling on mediocre schooling and literacy rates, we highlight instead the physical condition of the average British worker and his higher endowment of skills. These advantages meant that British workers were more productive and better paid than their Continental counterparts and better equipped to capitalize on the technological opportunities and challenges confronting them.

The British were fed better, they may have been smarter for nutritional reasons, and they also had a better system of apprenticeships.

Arnold Kling on the problems with the health insurance exchanges

Somebody who had experience with creating a health insurance brokerage business would know that the systems problems are more complicated than just putting up a web site. In the background, the system needs to communicate with the systems at several government agencies and at the insurance companies. That changes it from a simple technical project to a complex, time-consuming, project involving business and technical staff.

You build a complex, mission-critical system through a process of continual negotiations among business units and technical people. You do not treat it as a procurement process. You cannot just write up a spec, put it up for bid, and parcel it out to dozens of contractors.

The development of the computer system probably would fall under operations, but you would want a project executive with a lot of authority to negotiate with all of the business units and to make project decisions. When conflicts arise, the project executive should be able to go straight to the CEO and get them resolved.

The project executive’s main focus is keeping the project’s complexity from getting out of control. The project executive must have the authority to trim features in order to meet deadlines.

You go through a lot of analysis and many painful meetings before anyone writes a line of code. The technical staff have to be able to challenge the business units, because sometimes the business unit asks for something to be done in a really complicated way, when a much simpler solution is available to solve the business problem.

One of the worst things that can happen on a systems project is to find yourself revisiting the business-technical negotiations process after writing a lot of code. If that is what is happening now, this project is in an unbelievable amount of trouble.

5. I suspect that the technical problems are mere symptoms. Probably what is fundamentally messed up in this health insurance brokerage business is the org chart.

There is more here.

The Implications of Behavioral Economics Are Not Obvious

Yesterday’s post, Stayaway from Layaway, elicited lots of comments but less analysis.

Some commentators suggested that people who use layaway plans have commitment problems (self-control problems) but that they are meta-rational and choose layaway programs to help them overcome. The problem is that when people are irrational at one level and rational at another it’s difficult to know which level is in control and which level is being appealed to by firms.

People who have self-control issues may think that they are being meta-rational by entering into layaway programs but perhaps, ala Dunning-Kruger, they are fooling themselves and will soon find it difficult to pay on the installment plan. According to one marketer, “up to 25% of layaway orders, on average, are cancelled.” Canceling exposes the consumer to service and cancellation fees. Moreover, I wouldn’t be surprised if some people never get around to reclaiming their payments. We know, for example, that billions of dollars on gift cards are never used.

We also need to keep in mind the incentives of the seller. Walmart, Kmart and Best Buy offer layaway programs because they increase profit. Are the higher profits a result of selling commitment to the meta-rational? Or are the higher profits the result of getting the less than perfectly rational to buy more? The ultimate commitment plan is to not buy what you can’t afford and layaway doesn’t help you with that problem. What layaway does do is encourage you to commit now to buy at Walmart. In other words, it binds you to Walmart and, fyi, it does so weeks before goods typically go on sale.

The way the programs are often advertised and discussed–layaway in case the store runs out!–is also a classic sales technique to encourage buying by eliciting feelings of (false) scarcity and potential loss.

I would like to see more data but I have not yet seen any reason to revise my belief that layaway plans are often a bad deal for consumers. I have, however, discovered one reason for layaway that does make some sense. Namely, to keep the presents hidden from snooping children.

MasonKorea opens 2014

George Mason University is branching out, adding an undergraduate program in Korea to supplement its Fairfax, Arlington and Prince William campuses.

Mason Korea will begin enrolling undergraduates in March 2014, offering economics and management degrees. Students on the Mason Korea campus will be joined by Fairfax students who will take general education and elective courses during the inaugural period…

There is more information here.  There are pictures of Songdo here, and photos of Songdo Global University here.

Stayaway from Layaway

Layaway plans are immensely popular, a fact I find deeply puzzling much like the popularity of Justin Bieber, Snooki, and homeopathy makes me question the rationality of my fellow human beings.

The typical layaway plan requires a deposit of 10-15% of the price of the good, say a new TV. If the consumer pays the balance over the following 10-12 weeks (i.e. by Christmas) they can pickup the good. If the consumer doesn’t pay the balance they get a refund of payments made less a service fee.

Salvadanaio natalizioWalmart and Kmart advertise their layaway plans heavily. I am shocked, however, that so-called consumer advocates also have good things to say about poor people lending big corporations money:

Consumer advocates say layaway is a great way to manage a major purchase and stick to a budget, allowing consumers to spread the cost of an item over a number of payments without running up a lot of costly debt.

…”The fees, if any, are generally nominal and probably much lower than the interest you’d pay if you purchased those things with a credit card and didn’t pay off the bill for several months,” said Tod Marks, senior editor and shopping expert at Consumer Reports.

Stop the insanity! The relevant comparison is not to buying on credit but to saving. Instead of lending Walmart money, get yourself an old-fashioned piggy bank and avoid the cancellation fee and the hassle of going to the store to make the periodic payments.

Tod Marks, from Consumer Reports (!), also makes this astounding argument:

With layaway, you don’t have to worry that the store will run out of an item you want,” he said.

Are we living in the Soviet Union? Who worries about Walmart and Kmart running out of goods? Occasionally an item will be discontinued but then the replacement is usually better and/or cheaper. Similarly, layaway plans advertise that you can “lock-in” the current price. Right, and if the price goes down or you find a lower price elsewhere you are similarly locked in.

Still not convinced? In the spirit of Tabarrok’s Wager I offer Tabarrok’s Layaway Plan.

Send me $10 right away along with a message telling me what you want, when you want it and the current price. Save your money. If you save enough to buy the good at the requisite time send me a note and I will heartily congratulate you with a $10 reward. If you don’t save enough, thanks for the $10 and better luck next time. Unlike Walmart I will not guarantee the current price but Tabarrok’s Layaway Plan offers significant advantages that Walmart’s plan does not. On the day that you have saved up enough, Tabarrok’s Layaway Plan lets you buy at any store and at the lowest price that you can find! And that’s not all! Tabarrok’s Layaway Plan offers another great advantage, The Tabarrok Switch™. If you find a good that you like more than the good that you had originally planned to buy the Tabarrok Layaway Plan lets you switch to the new good!

Congratulations on choosing the Tabarrok Layaway Plan, the plan with the most options and flexibility of all layaway plans.

Hayek’s liberaltarian essay “”Free” Enterprise and Competitive Order”

I’ve been preparing a class on Hayek for MRUniversity.com, and I was struck by my reread of this essay, which was presented at the Mont Pelerin Society meeting of 1947 (it was later published in Individualism and Economic Order, pdf of the book here).

In this piece Hayek argues the following:

1. It is not enough for classical liberals to seek to limit the state, they also must outline what governments could and should do better.

2. Monetary policy should be used to limit unemployment, albeit in a rules-based framework.

3. Eminent domain is an essential function of government, especially in urban cities, and it needs to be thought through more carefully.

4. Many of the biggest dangers of monopoly stem from patent law and intellectual property protection, rather than from monopoly of the traditional “sole seller” sort.  On this issue Hayek sounds like Alex or Larry Lessig.

5. It is not enough to defend “freedom of contract” in the abstract, rather the details of the law really matter.

6. Hayek questions whether limited liability for corporations is always the right way to proceed.

7. Finally, although inheritance taxes have in the past sometimes been abused, “…inheritance taxes could, of course, be made an instrument toward greater social mobility and greater dispersion of property and, consequently, may have to be regarded as important tools of a truly liberal policy…”

You will recall that in other settings Hayek endorsed the idea of a social welfare state and also the taxation of pollution.

The rise of bookazines?

The number of magazine launches is dropping, but the market for bookazines — high-priced one-shot special issues costing $10 or more — is on the rise.

That’s the observation of Samir Husni, a journalism professor at the University of Mississippi who has emerged as the dean of tracking new magazine launches and even given himself the trademarked nickname Mr. Magazine.

“I’ve never seen so many bookazines launched,” said Husni. “They are definitely replacing regularly published magazines.”

Through the first three quarters ended Sept. 30, there were a total of 591 new magazines, down slightly from the 614 in the first nine months of 2012.

But Husni noted that one-off special issues, often with cover prices in the $10 range, actually rose about 2.4 percent, to 457, compared with 446 in 2012.

…the biggest categories are more niche-oriented and mostly upscale: Food is No. 1, followed by crafts and sports/leisure magazines.

There is more information here.  Here is what you get if you enter bookazine into Twitter.

What is the most philosophical thing that you have ever heard a child under the age of 5 say?

That is a new Reddit thread (apologies, I have forgotten who directed my attention to it).  My favorite answer was this Stigler-Becker approach to the matter:

My little sister handed me a juice box as I was packing to move out and said “No one is really a grown up. They just act old because they have to”

The full thread is here.

Assorted links

1. Scott Sumner on fixed vs. floating exchange rates.

2. How much does an MBA for your dog cost?  No photo required.

3. ACA reinsurance provisions, the next hot topic.  More here.  The key though is not protecting insurance companies profits, but making sure they have the right incentives on the margin with prices.  It seems to me the natural result will be price controls on insurance policies, not offsetting subsidies preventing the “adverse selection death spiral.”

4. The culture that is Japan?

5. Should public universities go private?  And Michael Gibson debates Peter Boettke on the future of education.

6. Doyle McManus at the LA Times on Average is Over.

7. Ross Douthat on Medicaid for all.

Will California’s electoral reforms improve the quality of their government?

Adam Nagourney reports:

Lawmakers came into office this year representing districts whose lines were drawn by a nonpartisan commission, rather than under the more calculating eye of political leaders. This is the first Legislature chosen under an election system where the top two finishers in a nonpartisan primary run against each other, regardless of party affiliations, an effort to prod candidates to appeal to a wider ideological swath of the electorate.

If you read the article, you will see some early reports that this is working out well, and allowing for less partisan decisions.  Focusing on the primaries question alone, I have a few points:

1. If the median voter theorem holds, the nonpartisan primary shouldn’t matter much.  That said, the median voter theorem in this context probably does not hold.

2. Imagine you have an expressive voting model, where a big chunk of the electorate will vote for a Democrat no matter what and will not vote for a Republican in a nonpartisan primary.  In essence that is like allowing Republicans to vote in the (decisive) Democratic primary.  If Republicans vote expressively, they will vote for their own and we are back to this change not mattering.  If some Republicans vote strategically, to pull the Democrats closer to the center, they may succeed in doing so.  That said, if Democrats observe Republicans voting strategically, the Democrats may respond by voting more strategically themselves, to pull their candidates closer to the Left.  Alternatively, Republican candidates may respond by moving to the center, hoping to appeal to the strategic Republican voters.  If the more moderate Republicans become “too acceptable,” they may prevent the strategic Republican voters from voting for Democrats and thus influencing the final outcome.

Multiple equilibria, etc., but it is not obvious that, after a few iterations, you end up with a better or a less partisan outcome.

3. Many electoral changes have short-run effects which differ from their long-run effects.  In the longer run, there is a Beckerian equilibrium of pressure groups and those groups may manage to master the new procedures and reimpose their will on the proceedings, albeit with a lag.  Changes in electoral systems should never be judged too rapidly.

4.  #3 is especially true when an electoral system change alters “what happens within parties” vs. “what happens outside parties.”  It takes a few iterations for parties to adjust to the new rules and change their nature, to adapt to the new equilibrium.

The bottom line: One virtue of federalism is that such experiments can be tried.  I’m all for it.  But it is far too soon to think this is a big deal.

The economics of declining Somali piracy

The number of successful pirate hijackings has dropped since November 2011 when over 40 successful attacks were recorded for that month alone.  In comparison, in 2012 there were only 15 successful attacks off the East African coast, according to UN figures.  The drop has been attributed to increased private armed security on the part of commercial vessels and anti-piracy task forces from foreign governments, which have been supported by enforced prosecution of hijackers.  Maritime law before 2011 did not allow armed security on commercial vessels, but the International Maritime Organization has since added it to itsguidance on best management practices for piracy for high risk areas.  Although the situation has seen improvement, some pirate groups have turned to inland hostage taking and hijacking attempts still continue.

There is much more here.  By the way, I enjoyed Captain Phillips, which I took to be quite critical of the U.S. military and which is best understood as seeing the two stories as running parallel commentary on each other.

The markets in everything angle is this:

Not all of the crew cooperated with the movie, and those who did were paid as little as $5,000 for their life rights by Sony and made to sign nondisclosure agreements — meaning they can never speak publicly about what really happened on that ship.

It’s the film’s version of events — and Hanks’ version of Phillips — that will be immortalized.

There is more here.

Assorted links