Category: Economics

Beware Free Apples

You can get rid of the market but you can never get rid of competition.  Goods not allocated by market prices have to be allocated somehow and so long as goods are scarce there will be competition to obtain them, if not by outbidding competing buyers with money then by outbidding them in time spent waiting in line, doing political favors or some other method.

What happened in Henrico county is the same type of thing that happens when there is a price control.  The diagram below explains.

Rentseeking_1 

At the controlled price the quantity demanded exceeds the quantity supplied so buyers compete to obtain the good by, for example, arriving early and standing in line (or stomping on their competitors!).  Waiting in line is costly so the total price rises above the money price by the time price.  The total price for the marginal consumer will tend to rise so that it equals the marginal value of the good – only when the total price is equal to the marginal value (at the controlled quantity) is there no excess demand. 

It’s very important to notice that that the shop owner gets your money but does not get your time.  Thus, money expenditures are a transfer but time expenditures are a waste.  Money expenditures = controlled price times*controlled quantity.  Time expenditures = time price*controlled quantity so the shaded area indicates the waste.

It’s also important to notice that the total price is higher than the market price!  A price control, therefore, doesn’t even necessarily reduce prices! 

Markets in self-constraint

The website, meanwhile, has had millions of visitors who can download free accountability software called X3. When installed on a computer, X3 sends an e-mail every 14 days to a chosen friend or friends with a list of the websites visited by that computer. The site also features testimonials from porn addicts, prayer and Bible study resources, and an open forum called "The Prayer Wall," with hundreds of thousands of posts from addicts, spouses of addicts, and more recently, porn stars themselves.

This article (courtesy of www.politicaltheory.info) has many good bits:

Lately, XXXChurch.com has moved into helping those within the porn industry. The ministry has received letters from porn stars wanting to get out. One said she was trying to decide whether to e-mail them or Jerry Springer.

Markets in guilt reduction

If you’re feeling guilty about driving your giant sport utility vehicle (but not so guilty that you’d ever give it up), salvation is at hand. For a yearly fee of around $80, a company called TerraPass will offset the damage your SUV does to the atmosphere by spending your money to reduce industrial carbon emissions and to promote the spread of clean energy. They’ll also send you a decal and a bumper sticker, so everyone in the neighborhood will know that your gas guzzler has been sanctified.

Here is the full story, which details other options as well.  Of course we need not stop with SUVs.  Have your life taped and recorded, and submit the results to certified third-party arbitrators (who, by the way, will safeguard your confidentiality).  They will tell you how much of a cancer you have been to the body politic, and suggest offsetting charitable contributions.

Addendum: Read this also, thanks to Graham Lawlor.

Pornographic Giffen goods?

Well, not exactly, but the logic remains interesting:

At least one major voice in the porn world thinks a small tax — well below 25 percent — might actually have the unanticipated effect of helping the adult industry.

"As soon as we get a universal or national porn tax, we get what we’ve always wanted — that comfort zone of respectability that cigarettes, alcohol and gambling have," said Bill Margold, a former porn performer who now advocates for adult performers.

Margold suspects the "greedy" adult industry will oppose any kind of tax, even if it’s in the 1- or 2-percent range. But "in the long run, they’ll see it’s the best thing that ever happened to them. It is respectability, and respectability has a price tag."

Consistent with this argument, the religious right opposes the idea of taxing porn; here is the storyAddendum: Ben Wieland directs my attention to this earlier post on taxing brothels.

Famous economists’ grave sites

Here is the link, which includes information on location and sometimes epitaphs, courtesy of Rafe Champion and Andrew Norton, via Jacqueline Passey.

Biographies aside, I agree with the views of Thorstein Veblen:

It is my wish, in case of death, to be cremated, if it can conveniently be done, as expeditiously and inexpensively as may be, without ritual or ceremony of any kind; that my ashes be thrown loose into the sea, or into some sizable stream running to the sea; that no tombstone, slab, epitaph, effigy, tablet, inscription, or monument of any name or nature, be set up in my memory or name in any place or at any time; that no obituary, memorial, portrait, or biography of me, nor any letters written to or by me be printed or published, or in any way reproduced, copied or circulated.

Remembering Who Was Right

We spend endless hours arguing who is right in current controversies, but minutes or less remembering who was right before.  Oh we sometimes brag about selected cases, but we rarely collect systematic statistics.  (Rare exceptions include weathermen, business analysts, and sports punters.)

Yet such track records are just what we need to figure out who is right today.  You might think it enough to know which side is smarter or better informed.  But a janitor can consistently beat his arrogant CEO, if the janitor is careful to only disagree on topics where he clearly knows more.  When disputants are aware of each others’ opinions, it is those who better know when to defer and when to stand their ground that should be right more often.

Yes it would be hard to track and score everything everyone says, but we could do a lot more than we now do.  Widespread idea futures or David Brin’s prediction registries could help us estimate which individuals tend to be right more often.  And it should be even easier to evaluate standard demographic categories.

When a husband and wife disagree, who tends to be right?  How about a parent and child, a student and teacher, a boss and employee, a liberal and conservative?  For a few thousand dollars, we could bring dozens of such pairs into the lab, ask them various questions together, and see who is right when they disagree.  Perhaps lab disputes differ from field disputes in unknown systematic ways, but it would be a great first step.

Perhaps even more useful, we could take a sample of real media disputes and see both who tends to take which side, and which side seemed more right in the end.  I have just finished one such analysis, on the dispute over the policy analysis market (PAM), a.k.a. terrorism futures.  Four readers rated 555 media articles on which gave favorable or unfavorable impressions of PAM, and these ratings were regressed on sixteen features of articles, publications, and authors.

The result?  Since five strong indicators of more informed articles agreed on a more favorable rating, the favorable position looks like the “right” one here.  In the case of PAM, these groups were right more often: men, conservatives, web or broadcast media over print and books, and those who talked to people with firsthand knowledge, wrote longer articles, wrote news as opposed to editorials, and wrote for specialty publications with larger circulations and more awards.

Of course we need to look at more disputes to see which of these indicators holds more generally.  But a few tens of thousands of dollars should pay for that.  And with good indicators in hand, we could in real time predict which sides are probably right in current disputes.  Wouldn’t that be something?

Tantrums as Status Symbols

Once upon a time one’s social status was clearly signaled by so many things: fragile expensive clothes, skin not worn from work, accent, vocabulary, and so on.  As many of these signal have weakened, one remains strong: tantrums.

CEOs throw more tantrums than mailboys.  Similarly movie stars, sports stars, and politicians throw more tantrums than ordinary people  in those industries.  Also famous for their tantrums: spoiled young wives, bigshot patriarchs, elite travelers, and toddlers.

These patterns make sense: after all, beautiful young women and successful older men are at their peak of desirability to the opposite sex.  If you are surprised that toddlers make the list, perhaps you should pay closer attention to the toddler-parent relation.  Parents mostly serve toddlers, not the other way around.

Of course, like a swagger, the signal is not so much the tantum itself as the fact that someone can get away with it.

Addendum: Todd Kendall has a data paper on this for NBA players.

The economics of droplifting

Droplifting occurs when small bands "anti-shoplift" their CDs onto the shelves
at music stores.  They take shelf space without paying or asking, presumably to recruit future fans. 

This is a Pareto improvement if you think there is slack in the system.  The store has one more CD (book?), and no one is harmed.  Alternatively, you might believe that CDs are "queuing" for shelf space and that something gets pushed out, if only probabilistically.  The question is then whether your slotting is welfare-maximizing, relative to the retailer’s choice.

The retailer will care about expected profit from sales.  If you are a band, you care about your own income and fame.  This may or may not be closer to consumer surplus than is expected profit; on average I predict it is further away (e.g., The Beatles didn’t need to droplift).

If you are a listener discarding a previous purchase, odds are you didn’t like it much.  For the typical listener/discarder, this loser CD will lower social welfare, since on average others share your tastes.  But when it comes to books, what if you only give away your best reads…?  Now we are getting somewhere…

Thanks to Mark Atwood for the pointer.

Self-Deception Explain Lying Ease?

A July 30 New Scientist article (sub. rec.) on lying reports:

A succession of studies using tests like this have shown that most of us are not very good at spotting if someone is lying. Even people whose job it is to detect deception – police officers, FBI agents, therapists, judges, customs officers, and so on – perform, on average, little better than if they had taken a guess. … But a few people seem to be the exceptions that prove the rule. … In a range of studies that totalled about 14,000 people, … The researchers identified 29 “wizards” of deception detection, who are now the subject of intensive study … One of the studies, published last year, investigated women’s skills at detecting men who were pretending to have appealing attributes … a man claiming he owned the Ferrari outside, rather than admitting he had borrowed it from a friend for the night. … single women seemed to be better at detecting men who were faking good than those who were in a committed relationship. “Women have a kind of radar for deception in men, which they switch on or off, depending on the context.”

So sometimes we are bad at detecting lies because that serves our interests.  Tyler taught me the centrality of self-deception in human affairs, and so I wonder: could our need to be good at believing lies explain why we are surprisingly bad at detecting lies?  Are those wizards of lie detection the vanguard of a future humanity, or do they pay a high price in their relationships, finding it hard to support the  lies that fill daily life?

Why no one has a good approach to animal welfare

Surely it seems reasonable to count the welfare of animals — or at least selected high-cognition animals — for something rather than nothing.  But this throws moral calculations into a funk.  Even if you count individual animals for very little, there are many billions of them.

Was it a good idea for humans to have settled the New World?  I’ll answer yes without hesitation.  But what if billions of other mammals died — in net terms — as a result?  I don’t want my answer to depend on my relative weighting scheme for animal vs. human welfare.  Nor would I kill a good friend to save the lives of a million cats.  Or a billion cats for that matter.  Yet I still wish to count cats for something positive.  The Humane Society is not a waste of resources.

We might argue that the value of animal lives, as we sum them up, hits some asymptotic limit.  But if that limit binds, we are back to not caring about individual cats — evaluated at the relevant margin — much more than epsilon.

It is disquieting that so many fascist thinkers have held animal welfare in high regard.  Once we start counting animals in our moral theory, we too easily get used to the idea that violent conflict is an inevitable part of nature.  Human vs. rat, and of course tiger vs. deer as well.  How can we segregate this apparent endorsement of violence away from human-to-human affairs?  Life as a secular moral thinker is difficult.

The issue of animal welfare provides the strongest available case for moral holism.  It would solve many problems to evaluate states of affairs as wholes, rather than adding up, or otherwise weighting, goods and bads from the constituent parts of those wholes.  But being an individualist at heart, I am reluctant to extend such holism to human affairs.  And even holism must resort to additive consequentialist reasoning to address a variety of practical questions at the margin.

Alternatively, we might develop a moral theory which is neither strictly lexical nor strictly additive in terms of how it treats value.  For that achievement we would have to award a Nobel Prize for moral philosophy…

Hanged for Accuracy

Alex posted a few weeks ago about India prohibiting competing monsoon forecasts.  I came across an even more dramatic example of such thinking in Dava Sobel’s Longitude (1995:11-12):

Returning home victorious from Gibraltar after skirmishes with the French … the English fleet … discovered to their horror that they had misgauged their longitude … the Scillies became the unmarked tombstones for two thousand of Sir Clowdisley’s troops.  [Admiral Sir Clowdisley] had been approached by a sailor,  … who claimed to have kept his own reckoning of the fleet’s location during the whole cloudy passage.  Such subversive navigation by an inferior was forbidden in the Royal Navy, as the unnamed seaman well knew.  However, the danger appeared so enormous, by his calculations, that he risked his neck to make his concerns known to the officers.  Admiral Shovell had the man hanged for mutiny on the spot. … In literally hundreds of instances, a vessel’s ignorance of her longitude led swiftly to her destruction.

Even though shipmates had a strong common interest in knowing their longitude, other social incentives apparently prevented them from sharing their information.   As a consultant on the use of prediction markets within organizations, I’ve also noticed that managers are often surprisingly uninterested in the prospect of more accurate forecasts and more informed decisions.  Could these phenomena have similar explanations?

The Wisdom of Your Crowd

Newsfutures.com pitches their prediction markets by saying “Our decision markets let you aggregate the wisdom of your crowd”, riffing on previous Marginal Revolution guest James Surowiecki‘s provocative book The Wisdom of Crowds.  But it is worth noting that we often fail to use much simpler ways to draw on the wisdom of our crowds.  When we make our biggest choices about careers or significant others, we rarely consult more than a few of our closest associates, and often not even them.

Having just got tenure here at GMU economics, I tried to seek the wisdom of a larger crowd on my first big post-tenure project.  I wrote up a paragraph on each of ten options, and emailed the set to lots of friends, family, and associates, asking for advice.  56 wrote back, and I coded each response as assigning a number from zero to one for each option.  Four different ways of weighting the responses gave the same answer: writing a book on disagreement was just a bit better than writing a book on idea futures.  And so that is what I will do.

No one I’ve talked to has heard of anyone doing anything similar.  Why?  I can think of two reasons:

  1. Asking widely for advice is taken as a sign of weakness and ignorance.
  2. Asking someone for advice on an important decision is taken by them as a signal of intimacy; ask too many people and you are an advice “slut.”

Some people did think doing this reflected badly on my character, and some were miffed when they found out how many people I had asked.  So why did I do it?  I feel like the father who has more children than he can afford to feed, but can not bear to be the one to choose who must go out into the cold.  Like a politician afraid to make a risky decision, I choose to delegate instead.

Addendum:  My original email and the numerical scores are here.