Category: Economics

Virtual economies

What does it mean to have property rights and prices in the virtual world of computer games? Did you know that you can buy a “virtual sword” on ebay? Did you know that the male avatars sell for more than the female avatars, despite having the same capabilities? What are virtual economies all about? Read this article, fascinating but sometimes incoherent as well, for a take on these new developments.

How high are transportation costs?

“Cities, Regions and the Decline of Transport Costs”, a 2003 working paper by Edward Glaeser and Janet Kohlhase, provides stimulating reading. They build a model, overturning standard location theory, under the assumption that transportation costs are zero.

Does that sound crazy? They estimate that for machinery, electrical equipment, and transportation equipment, transportation costs are no more than 1.2 percent of the value of the product. 36 percent of all shipments, measured by value, fall into this cost category. Transportation costs for goods have been falling for a long time, and will continue to fall.

It is moving human beings that is expensive, not moving goods. Traffic congestion is an increasing problem. It is now less important to live near natural resources, and more important to live in good weather and under good government. Plus people want to live near other people, leading to greater population concentration in SMSAs. But within metropolitan areas, people are dispersing themselves more, they want to be close but not too close. Don’t buy real estate in Duluth (once a vitally important port) is, I think, the final lesson.

A contradiction in my (previous) views

I used to (i.e., last week) believe the following two claims:

1) Taking the government policies of country A as constant, more trading opportunities with country B will make country A better off.

2) International competition will force countries to improve their economic policies, otherwise they will be “left behind.”

I know many classical liberals who believe both propositions, as did I. But it is not so easy to square the circle. If 2) is true, that must mean that if country A faces greater international competition, and does not improve its economic policies, it must be worse off (admittedly the phrase “left behind” is vague, but what else could it mean?). Which means that 1) cannot be true as stated.

You might argue for a different version of 2): “2a) International competition will force countries to improve their economic policies, competition benefits the citizens no matter what, but it will starve the government of revenue, presumably because of resource mobility.”

But 2a), while possible, is a funny claim. If the citizens are better off, you might think that gdp is higher, and thus you might think that tax revenue is higher as well. Rising standards of living tend to produce rising tax revenue. You could spin a scenario where capital flight, combined with goods reimportation, raises living standards while lowering tax revenue, but it will be hard to find this empirically.

Alternatively, you might argue for a better version of 1): “1a) More trading opportunities are good for country A, in part because they force country A to improve its economic policies.” This will work, but it is a weaker argument for free trade for country A than we are used to.

So what gives? I suggest two adjustments. First, free trade can sometimes make country A worse off, even if it benefits countries A and B in the aggregate. Second, international competition may motivate countries to make reforms by threatening a loss of relative international status, but it won’t make the citizens in country A worse off in most plausible cases. My views are thus revised.

How different is Canada?

I’ve been enjoying Globalization and the Meaning of Canadian Life, by William Watson. His main point is that globalization does not prevent countries from increasing the size of their governments, if they choose to.

As late as 1958, the U.S. and Canada had similar percentages for government spending and taxes. Canada then increased its size of government, although the two countries moved economically much closer over the same period of time.

The book is full of interesting facts, although they do not always fit together into the same picture. What are the ten most generous states or provinces in terms of welfare benefits, in the U.S. or Canada (p.146, note that the book is from 1997)? Surprise, all ten are in the U.S. They include New York and California, hardly small parts of the country. If you are curious, Quebec comes in at number 38 on the entire list. The author argues that Canadians are not always as different from Americans as they like to think.