Category: Economics

Brian Loasby.  He has been a Professor of Economics at the University of Stirling, now emeritus.

I read Loasby’s Choice, Complexity, and Ignorance (alas, not to be found in Loasby’s Amazon list) at a very young age.  Here was an "Austrian" theory of choice and the firm that was both dynamic and had empirical content.  Who else started with Marshall and Joan Robinson but integrated Lachmann, Cyert and March, and the best of institutionalist thought, all without falling in dogma?  Loasby also embodied the kaleidic best of G.L.S. Shackle without flying off the rails into analytic nihilism.  If you want a phenomenological description of how firms deal with radical uncertainties about the future, this is the place to go.

Here is an interview with Brian Loasby.  Here is one nice bit, intended as a general point but also in defense of Marshallian reasoning:

I have never been able to question very much at a time, I think.  I got a note somewhere of something that G.K. Chesterton once said, that a man must be orthodox on most things, or he will never have time able to practice his own particular heresy.

When the name on the box says it all.  Alas, my wife wouldn’t be fooled for a minute.

The rules are simple: Two players count "1…2…3…Go!" and then offer up their hand in one of three ways: rock (clenched fist), paper (open, flat hand), or scissors (forefinger and middle finger form a ‘V’).  The winner is decided according to the rules that rock blunts scissors (rock wins), scissors cut paper (scissors win), and paper covers rock (paper wins).  If the weapons are the same, then the game is a tie.

Given the intransitive rankings, a player should try to feign randomness; a predictable strategy is beaten.  Appearing more random than your opponent is in fact the only dimension of competition.  Apparently many find this thrilling or at least humorous:

Rock Paper Scissors is evolving into something else entirely: a genuine, bona fide, almost legitimate sport…
    The World Rock Paper Scissors (RPS) Society – yep, there’s one of those, too – boasts 2,200 members. The winner of this year’s world championship was honored with a parade at Disney World. Simon & Schuster recently published an official strategy guide.
    "I can think of five bars in the Dupont [Circle] area where you can find a money game, $1 to $20," Mr. Simmons says. "It’s the equivalent of pickup basketball."
    Tonight [Friday], Fox Sports Net’s "Best Damn Sports Show Period" will feature an extended segment on October’s world championships, held in Toronto. A British-made RPS documentary film is due in January.

Read this account of gambit strategies; here are gambits in more depth, written by the reigning world champion, Master Roshambollah.  Here are some faking strategies.

Style often corresponds to personality:

Paper is subtle, the choice of intellectual, passive-aggressive types. Scissors are devious, a tool of controlled malice. Rock is between-the-eyes intimidation, preferred by beginners and players who have been backed into a corner.
    "People fall into patterns," Mr. Simmons [also known as Master R] said. "From my personal experience, women tend to open with scissors. There are some other tells I don’t want to go into. But I can see things in the shoulders and the forearm."

Here is the full story.  Here is the world championship web site, which offers T-shirts and books, and of course the exact rules.  Here is the on-line magazine.  Here is an essay on how to coach the game.  The game also has applications in evolutionary biology.

The bottom line: The game is interesting precisely because it is so difficult to be (or appear) random in critical moments.  And being random universally only brings you to the middle of the pack.  On the computational dimension of randomness, read this article.

It works much better than you think.

Stephen Roach comes around to a more optimistic point of view: 

The constructive developments should not be minimized.  The recent plunge in oil prices is nothing short of stunning — 13% alone, for WTI quotes in the first three trading days of December.  I have no idea if this move is sustainable, but it has opened up a $7.50 gap from the $50 threshold that I have long felt would pose great risks to the global economy.  Moreover, the dollar’s weakness — despite the angst of the headline writers — fits the rebalancing script to a tee.  While euro and yen cross-rates are raising discomfort levels in Frankfurt and Tokyo, the dollar’s descent still looks like a well-managed soft landing to me.  In real terms, the Federal Reserve’s broad trade-weighted dollar index is down 15% from Febryary 2002 through November 2004 — a pace that equates to a decline of about 5% per year.  That’s a measured and encouraging adjustment path — provided, of course, the burden of currency realignment now spreads from Europe to Asia, including China. 

Furthermore the Chinese economy appears to be slowing in the appropriate, non-implosive fashion.  Roach’s bottom line?    

Even I have to concede that a number of positives have fallen into place recently.  I am on record of assigning a 40% probability to a global recession scenario in 2005…However, given recent favorable shifts in oil, the dollar, and China, I now believe that it is appropriate to reduce this risk to 25%.   

Note, however, that in his view (and mine) the U.S. still remains on a dangerous consumption binge when for demographic reasons more saving would be in order.  In my view the big problem lies in the long run, not the short run.  Now asset markets have a remarkable ability to compress long run problems into the here and now.  But how will this play out?  Most likely U.S. taxes in twenty or thirty years time will be much higher than today. Yes this will depress current asset prices but it should not, on its own, imply a current implosion or crash. Here is my previous post on economic Armageddon.

A disproportionate percentage of economic activity — both production and consumption — comes in the fourth quarter as Christmas approaches.  Similar trends occur in other economies with major gift-giving holidays.  Yet most economic models imply benefits to smoother production and consumption.  In fact seasonal business cycles look a great deal like regular business cycles.  Major economic variables such as employment, production, and sales move in similar ways across the two kinds of cycles.  Yet we typically disapprove of regular business cycles.  So does it make sense for so much economic activity to be clustered in seasonal fashion?

Here are some con reasons:

1. Congestion: try parking your car at Tysons Corner on a Saturday afternoon in December.

2. Producers must make all-or-nothing bets on new styles, which then either take off or fall flat.  The economy becomes riskier than it need be.

3. The short-run marginal cost curve is (possibly) rising, so it is more costly to produce so much for the final quarter all at once.  Overtime rises as well.

4. Gift-giving may be an inefficient form of signaling with high deadweight losses.

5. The Christmas season encourages undue attention to creating "blockbusters" rather than quality niche goods.  This trend is evident in the book market.

If these hold, on net, we pay an inefficiently large amount of attention to Christmas.  We should tax Santa at the margin.

Here are some pro reasons:

1. Shopping involves fixed costs, so let’s get it all over with at the same time.  The same might be said for tracking consumer demands, or even producing the stuff.

2. New ideas have a better chance of getting a start when we bunch demand in concentrated fashion and increase returns.  Christmas boosts innovation, which is in general undersupplied.

3. Once the season is over, it is over.  We have a simpler mechanism for getting rid of failed products and failed ideas.

4. There is no other way to produce that "Christmas spirit."

I incline toward the "pro" reasons, with emphasis on number two.  Though I do not pretend to have a grip on the empirics of this question.)  But if seasonal cycles are so good, why do I object to regular business cycles?  Can it matter so much that one is anticipated and the other not?  If, statistically, they look so much alike, can it be said that one is based on coordination failure and the other not?

Let’s put aside the simple explanations, such as "Nobody goes there."  Let’s also put aside artificially contrived scarcities, such as for Super Bowl tickets or hot restaurants on Saturday night.  We are left with the following:

1. Some stores put impulse purchases next to where you wait in line.  If the line is too quick you won’t spend any more money.  Borders uses this strategy very effectively, it is harder for Home Depot.

2. The authority of final decision-making is to some extent indivisible, plus managers can only be hired in integer numbers.  Yet some stores require more managerial attention to resolve disputes than others.  I never bicker over price in the supermarket, but ever try to get a late fee waived in a video store?

3. Some stores may use growing and shrinking lines as a substitute for changing prices.  The waiting time in line at my Giant is often longest late at night.  In essence they are charging you a higher price to shop late at night.  The company "wins back" some of this tax by skimping on labor costs.  Perhaps this system of "flex prices" is easier than altering the bar codes or price stickers on an hourly basis.

4. Long lines may serve the cause of price discrimination.  Perhaps the store offers personalized shopper services, free home delivery, or other services at a premium.  These ancillary benefits might be more profitable if shopping takes just a bit of time.  Low-income demanders won’t mind so much, high-income demanders may be pushed to the extra services.

5. Rentals take more time to process than do cash transactions.  Some of the incidence of this burden falls on consumers.  If rentals take twice as long to process, and consumers arrive at random rates, the profit-maximizing solution is not generally to double the number of service clerks.  This would lead to an excess of idle labor during the day.

6. Many consumers are a pain.  But they are less likely to complain or slow down the process when the line behind them is long.  So attempts to shorten the line are to some extent counteracted by the increasingly difficult behavior of your fellow man.  This lowers the store’s return to line-shortening.  The store prefers to capture some of these rents by cutting back on service, rather than allowing their more difficult consumers to push everyone around.

7. Perceptual biases and selection – It feels like you are waiting in line most of the time because you are.  When you are not waiting, the experience ends quite rapidly.

Explanation number two is taken from Caroline Mayer’s "A Perpetual State of Pause," The Washington Post, December 5, not yet on-line. 

A woman’s effort to assuage her 6-year-old son’s fears of his grandfather’s ghost by selling it on eBay has drawn more than 34 bids with a top offer of $78 [TC: the price is now up to 15K, as of Sunday morning].

Mary Anderson said she placed her father’s "ghost" on the online auction site after her son, Collin, said he was afraid the ghost would return someday. Anderson said Collin has avoided going anywhere in the house alone since his grandfather died last year…

Anderson also put her father’s metal walking cane up for auction so she would have something to actually send the winning bidder. The proceeds from the auction will go to buy Collin a special present, she said.

Here is the full story.  Here is the auction.  Here is an elastic supply of copycats.

He [Joe Stiglitz] actually told me that he faced [spoke to] a hundred thousand people at Bombay…I did tell him that he should not get too excited, because I grew up in Bombay and when I went for a walk to the beach, I normally saw about two hundred thousand people! So that doesn’t mean very much in Bombay.

Here is the whole interview, which has numerous interesting bits on India, globalization, and economic development.  Here is my earlier post on population density in Bombay.

The dollar’s share of global foreign-exchange reserves has already fallen from 80% in the mid-1970s to around 65% today. And yet does the dollar really risk losing its status as the world’s main currency? The same question was asked in the early 1990s after the dollar’s previous long slide, but the dollar’s pre-eminence survived. Then, however, there was no alternative to the dollar. Today the euro exists, and could yet emerge as a rival to the greenback.

The requirements of a reserve currency are a large economy, open and deep financial markets, low inflation and confidence in the value of the currency. At current exchange rates the euro area’s economy is not that much smaller than America’s; the euro area is also the world’s biggest exporter; and since the creation of the single currency, European financial markets have become deeper and more liquid. It is true that the euro area has had slower real GDP growth than America. But in dollar terms the euro area’s economic weight has actually grown relative to America’s over the past five years.

Where the dollar has failed is as a store of value. Since 1960 the dollar has fallen by around two-thirds against the euro (using Germany’s currency as a proxy before 1999) and the yen (see chart 1). The euro area, unlike America, is a net creditor. Never before has the guardian of the world’s main reserve currency been its biggest net debtor. And a debtor may be tempted to use devaluation to reduce its external deficit–hardly a desirable property for a reserve currency.

Here is the full story.

My (cautious) take:  The Euro area is rich in accumulated bank accounts but running a massive long-run deficit, most of all on human capital.  Plus what will happen when countries start rejecting the EU constitution in their referenda?  And don’t currency markets have some tendency to long-run mean reversion, suggesting the dollar will make a comeback someday? So I say no, the Euro will not become the world’s reserve currency.  That being said, every prediction I have made about the Euro has been wrong to date.  I said it wouldn’t happen, it can’t last long, and it won’t rise in value.  That is 0-3, must I now step away from the plate? 

Thanks to Kevin Postlewaite for the pointer.