Category: Economics
Only in England
This paragraph, from this story, caught my eye:
With no heir, the late Herbert Blagrave, a philanthropic racing figure, left his family fortune to a trust, along with orders that the money should be spent on sick children, the elderly and injured jockeys.
The link is via Rachel Davison, and it concerns the sale of an entire English village. How is this for a sales pitch?
Tim Sherston of Jackson-Stops called the village a "safe and sound investment" despite the economic slowdown.
"You've got an entire village — 22 houses, a cricket pitch, a village shop, a forge and 1,500 acres of farmland, 450 acres of woodland …We think actually there will be a lot of potential buyers for this."
How much will it go for? Here is the website for the Injured Jockeys Fund, note the photo on the top.
Betting your views, follow-up
My claims that you are not required to publicly bet your views have received enough denunciations (mostly commentators on other blogs) that I feel it is time to rub some salt into the open wounds.
First, I have nothing against betting one's views and indeed I've done it with Bryan Caplan, though mostly for fun. No one bets his or her views consistently, or that frequently relative to the number of views, so I am simply pointing out that a default of "no betting at all" is an OK point along that spectrum. In fact it is a homage to the idea of division of labor. Nor have I seen the critics publicly revealing their equity and other asset portfolios, the real bets which matter in financial terms.
More generally, we may wish that researchers express "real commitment" to their views. I don't see betting as an essential part of such a commitment portfolio. "Simply being a certain way" when it comes to inquiry is #1 on my list. Having a good and deserved personal reputation for truth-seeking is another. An emphasis on betting, in my view, represents an odd economistic view that commitments should be viewed essentially or primarily in monetary terms. From a variety of other settings (try giving your wife "cash" for Valentine's Day) we know that signaling commitments through money can backfire. Might that be the case here as well?
Doesn't the very offer to bet signal that your view is possibly based on private, not easily verified-in-public information? Doesn't it signal a lack of confidence in the publicly available information itself?
If I think of the scientists who have influenced me most, or done the world the most good, very few of them were practitioners of public betting. Furthermore that correlation is no accident (I would bet that most of them regarded, or would have regarded, the idea skeptically, or as a kind of public relations stunt). You might think that is a market failure of some kind and maybe it is. But in the meantime, if you do have a truly good idea, maybe the best course of action is to mimic the other holders of truly good ideas and that means not betting publicly on your idea.
I'm not suggesting that such a mimicry strategy is best with p = 1.0, only that it gives you one of a number of rationales for not betting at all.
Patents versus Markets
Long ago Jack Hirshleifer pointed out that markets can reward innovative activity even in the absence of patents (H.'s point was actually that markets could over-reward such activity but the point was clear). If an inventor discovers a new source of energy that requires the use of palladium, for example, he can buy palladium futures, announce his discovery and wait for the price of palladium to increase. Of course, this only works if the discovery is credible so betting (contra Tyler) is an important way to test the credibility of a theory (e.g. here and here and of course Hanson's key paper Could Gambling Save Science).
All this is by way of introduction to a new paper in Science, Promoting Intellectual Discovery: Patents Versus Markets (press release here). Bossaerts et al. compare a patent system with a market reward system in an interesting experimental setting. The innovation is the solution to a combinatorial problem called the knapsack problem. In the knapsack problem there are Z items each with a certain value. You must choose which items to put into the knapsack in order to maximize it's value but each item also has a weight and you cannot go over a fixed weight which is set such that you can't carry all the items. The solution to a knapsack problem is not obvious since it's not always best to include the most valuable items. The authors argue that solving the knapsack problem is like combining ideas to create a new innovation. The authors, of course, know the optimal solution to each knapsack problem.
Rewards for creating the innovation are offered in two ways, in the patent method the first person to produce the optimal solution gets the entire reward. In the market system each participant is initially given an equal number of shares in each item. The item-shares trade on a market. After the markets close a $1 dividend is paid to each item-share if the item is in the optimal solution, other shares expire worthless. Thus, the price of the item-shares can be thought of as the probability that the item is in the optimal solution. (i.e. is palladium in the optimal solution to the energy problem? If so, it will have a high price.) Dividends are set such that the total reward is about the same in the two treatments. Proposed solutions were also collected in the market setting although the solutions per se were not the basis of any reward.
Important findings are that the problem was solved just as often in the market setting as in the patent setting. Indeed, in the market setting more people solved the problem on average. There are two possible explanations. First, the winner-take-all nature of the patent system may have deterred some of the weaker participants from exerting effort. Second, and more interesting, is that the prices in the market system did in fact incorporate information about the optimal solution – thus market prices may have given people hints about the optimal solution, much like seeing a partial solution to a jigsaw puzzle.
Problems are that the market system can work only if there are rents to be had from market prices. A new computer chip design, for example, won't change the price of silicon (although even here side-bets may be possible, the inventor knows the manufacturer to whom he sells the invention for example). Also, the price of an input, like palladium, can be influenced by many things other than the innovation so the market system will typically often involve more risk. Still this is an interesting experimental approach to a deep problem.
Thanks to Monique van Hoek for the pointer.
Betting your views, part II, Nouriel Roubini edition
John dePalma directs me to this article, excerpt:
…Just ask Nouriel Roubini
of New York University, who has a reputation as the most pessimistic
economist in academe. He deserves it. His most recent paper, published
last week, is entitled: "Can the Fed and Policy Makers Avoid a Systemic
Financial Meltdown? Most Likely Not." Nobody is more aware of the
gravity of the financial situation, and nobody has done more to point
out the risks of a systemic crisis. So how are Roubini's
own funds invested? They are 100 per cent in equities. In the long run
stocks do best and he is not yet close to retirement, so he keeps
putting more money into index funds each month. Fully aware of the
gravity of the financial situation, he is also aware of the futility of
trying to take action or to time the market. Those tempted to make the
investing equivalent of a goalkeeper's despairing dive should take note.
That's what I call taking mental accounting to an extreme.
Must you bet your views?
A reader asks:
How about some comments on the refusal by Krugman to bet some of his Nobel money against Mankiw?
Put aside Krugman and Mankiw and let's consider the issue in the abstract. Bryan Caplan believes that scholars should be ashamed if they do not publicly bet their views. In contrast I fear this requirement would become a tax upon ideas. How would you feel about an obligation (if only a moral one) for scholars and commentators to publicly reveal the content of their investment portfolios? Those portfolios are their real bets. Yet I still favor the privacy norm and I should note that Bryan never has (nor need he) revealed his portfolio to others at GMU, much less to the broader public.
Let's say that I, as a prolific blogger, express opinions on hundreds of economic policy topics, often involving either explicit or implicit predictions. Then say that hundreds of people wish to bet with me. Can I not simply turn them all down as a matter of policy and practicality?
If you're wondering, I practice "buy and hold and diversify," with no surprises in the portfolio and a conservative ratio of equity purchases. But those investment decisions don't necessarily reflect my views on any given day. I think it is intellectually legitimate (though perhaps not always prudent) to engage in mental accounting and separate those two spheres of my life. I change my mind lots of times, on many economic issues, but does that mean I have to become an active trader? I hope not and I'm not going to.
On long-run economic growth I'm still an optimist, though I am increasingly uncertain as to how much extant firms will capture those gains. On the short run issue at hand, I am fully with Mankiw, and Megan McArdle, in very much doubting the "rosy scenario" emanating from the Obama budget process.
The economics of prostitution pricing and prostitution bleg
From Allison Schrager, this was striking:
“I only charged $300 when I lived in San Francisco,” Andrea says.
Unlike most industries, escorts can charge higher prices when they are
in greater supply. This is because price is one of the few metrics sex suppliers
can use to convey quality. (In this way it is not unlike the hedge-fund
industry.) There are only about 30 VIPs in San Francisco, but nearly
100 in New York, so Andrea can charge more here. The customer
demographic is also wealthier, and a higher price deters customers from
bargaining, which is considered poor taste.
Alas, I cannot vouch for its accuracy. But in April I am participating in a NYC debate over the morality of prostitution, later to be broadcast on NPR. Notwithstanding my praise for Ross Douthat, I will be defending prostitution (with the Mayflower Madam on my side), against Catherine MacKinnon and others.
My bleg is this: other than Bernard Mandeville, what should I read to prepare? Any and all assistance is appreciated.
Markets in everything: home tending
CW McCullagh sends me this:
Home tending is the practice of allowing someone to live in a home
while it's for sale. Real estate experts say this strategy helps sell homes a
lot faster than vacant homes. It's also a great way for some Houstonians during
these tough times to stretch their dollar.
The first house we saw had a gourmet kitchen, an elaborate chandelier
and a grand master bath. The asking price? Be ready to shell out $794,000.
"The house is mine, while I am here," said home tender Eurika
Coleman.
Coleman tends a River Oaks home. She pays $750 a month plus utilities.
"I am saving money, I am a recession sheik chick," laughed
Coleman.
Coleman started home tending about eight years ago and since then has
lived in lavish homes for a monthly fee.
Inside the Fed
I enjoyed this book, which is written by Stephen Axilrod and has the subtitle Monetary Policy and Its Management, Martin Through Greenspan to Bernanke.
I liked this part:
John Ehrlichman's arrival toward the end of our visit was the main event, unadvertised as it had been. He had something very definite to say to us.
His speech went something like this: "When you gentlemen get up in the morning and look in the mirror while you are shaving, I want you to think carefully about one thing. Ask yourselves, "What can I do today to get the money supply up?" That was it; that was why we were there — not to explain, but to hear.
p.167 has an interesting (though not quite accurate) discussion of what distinguishes some top economics scholars from obsessive-compulsives.
The economics of car towing
Yahel, a loyal MR reader, asks:
What's
the model of towing? I live in Philadelphia, and have noticed one
particular company, Lew Blum, seems to have most of the market cornered
for towing cars parked illegally in private parking spots. How does one
acquire market share? Do the owners of private parking spots pay for
having someone like Lew Blum come and tow the cars that are taking
their spots? Or does Lew Blum offer money for the right to tow their
problematic cars (as they charge the owner of the car $150 to get the
car back, and $25 for every day it sits in their lot.) I can imagine
rationales for either model. On the one hand, Lew Blum is providing
owners of the spots a service by clearing out the vagrants. On the
other, he's guaranteed $150+ for every car he tows, so he (and all of
his competitors) wants to maximize the number of spots/lots they
'protect', and that competition should drive the 'cost' of the service
down to at least $0, if not negative $ (ie paying for the right).
A Google search on "economics of towing" doesn't turn up much. This site indicates that tow trucks were "deregulated" in 1995 and free entry, without traditional municipal permits, became the norm. That same post has a long discussion of "rogue towing," which I suppose is not hard to figure out. In many locales they are supposed to wait an hour before towing your car, even if it is illegally parked.
Here are the San Francisco towing regulations.
I'm puzzled that I can't find any discussions of towing company kickbacks to merchants, for giving them the towing call. Why isn't this more common? Surely the marginal profits on a tow are positive.
Overall towing seems like a "tragedy of the commons" problem, with an incentive for overly rapid and indiscriminate towing. If towing is a natural monopoly, the monopolist may be less quick to tow, because the alternative is that the firm will likely "capture" your car anyway. So if overtowing is a problem, monopoly may be preferred.
What else can you tell us about the economics of towing?
Assorted Links
- Everything you want to know about smart grids from the very smart Lynne Kiesling.
- "In the hubbub surrounding President Obama’s
decision to cap salaries of commercial-bank CEOs at $500,000 (if they
receive future federal funds), the salaries of college and university
presidents have been flying under the radar." Clarence Deitsch and Norman Van Cott look at the President's club.
- Australians denied insurance for genetic reasons. Clearly, a case for genetic insurance.
John Hempton’s radical view of banking
I genuinely do not know the extent of U.S. bank insolvency, but I do wish to pass along this contrary opinion:
Then he [Buffett] says the problem of American banks are not overwhelmingly toxic assets. This is a radical view – but it is in my view correct. The problem with the banks is that nobody will trust them and they have not been able to raise funds. The view that this is a liquidity crisis – and not a solvency crisis – has long been a staple of the Bronte Capital blog. It is radical though. Krugman, Naked Capitalism and Felix Salmon think alike – asserting – seemingly without proof – that the problem is solvency. Buffett doesn’t even think the US banks (on average) require capital – a view that most people would find startling (though again I think is correct provided appropriate regulatory forbearance is given).
And this:
Krugman is finally coming to the view that the important technical question is whether to issue that guarantee [to bank creditors]. He is right. Provided the guarantees can be issued at reasonable cost they should be issued. Both Warren and I think the cost would be reasonable in the USA. By contrast I am not sure the UK has the blanket guarantee option because the UK banks are very large relative to the UK economy and they started highly capital inadequate. US banks by contrast started with a lot of capital.
Here is Hempton's previous radical post. I thank William Utley for the pointer. Perhaps I will be pilloried for posting this, but maybe the conventional wisdom can be wrong twice in a row.
If you want a ray of hope, possibly based on lies, try this article; opening line: "Stocks are rising after troubled Citigroup said it operated at a profit during the first two months of the year."
Markets in everything, if this works it will change the world edition
Cut a deal with anyone, using a website to record the terms and conduct the negotiations.
For instance perhaps (ha) you can convince your wife to turn down the thermostat in the house in return for taking out the recycling bin every Monday. Or, more promisingly, maybe I can promise to Bryan Caplan that I won't make fun of his naive realism in return for his eating Pho with us twice a year. This site gives you a handy written record of the agreement.
Further below you read about training: "Make a sample deal with our interns."
The motto of this very ambitious site is: "Asynchronous Negotiation Favors the Underdog"
Creeping fear of bank nationalization
The blogosphere is starting to realize how difficult it would be for the government to "take over" the largest banks, even if those banks are insolvent by various measures. Here is Justin Fox, who considers the size of Citi liabilities relative to FDIC assets. Ezra Klein considers the fate of the progressive agenda if a bank goes on the government's balance sheet and voters start to blame Obama for what they don't like about banks; the email he reproduces is excellent. Matt Yglesias considers the fiscal implications. Plus nationalization can prove contagious. A related issue (I forget where I saw the link) is whether it is legal to nationalize a multinational bank in light of varying national regulations.
That all said, it is an entirely coherent position to wish the government could take over the largest banks.
Here you will find Krugman defending the nationalization idea.
Insurance markets in everything
Hyundai is gaining market share:
Besides the Genesis, Hyundai is also benefiting from a novel scheme,
launched in January, in which it offers to buy back cars from customers
who lose their jobs within a year of their purchase. (The company
essentially offers a smaller discount and then uses the money to buy an
insurance policy.) This has proved so successful in stimulating sales
that General Motors said on March 3rd that it was considering a similar
scheme.
Counter-cyclical asset: Safes
Here is the anecdote:
…sellers of safes said that business was up as customers confront new fears, be they losing money in failing banks or being robbed by desperate fellow New Yorkers. …”We’ve had customers come in who are putting half a million to a million dollars in cash in a safe in their home,” said Richard Krasilovsky, 58, of Empire Safe in Midtown…