Category: Economics
What are the most expensive pets?
In the United States, that is:
1. White Lion Cubs – $138,000
2. Chimpanzee – $60,000 – $65,000
3. Lavender Albino Ball Python – $40,000
4. Striped Ball Python – $20,000
5. Reticulated Albino Type II Tiger Python – $15,000
6. DeBrazza’s Monkey – $10,000
7. Tonka Monkey (Baby Female) – $10,000
8. Hyacinth Macaws – $6,500 – $12,000
9. Savannah Cat – $4,000 – $10,000
10. Mona Guenon – $6,000
11. Chinese Crested Hairless Puppy – $4,000 – $5,000
12. Squirrel Monkey – $4,000
13. Snow Macaque – $3,500
14. Bengal Cat – $800 – $3,000
Here is the Forbes story, hat tip to CommonKnowledge.blogs.com.
Royal Purple
Why was purple considered the royal color? The answer lies in economics not in aesthetics. Purple is rare in nature. A Toga’s worth of Tyrian purple die, about 1.5 grams, required the beating, drying and extracting of mucus from the hypobranchial gland of some twelve thousand Murex mollusks.
Legend credits its discovery to Herakles, or rather to his dog, whose mouth was stained purple from chewing on snails along the Levantine coast. King Phoenix received a purple-dyed robe from Herakles and decreed the rulers of Phoenicia should wear this color as a royal symbol.
The practice was later adopted by the Romans; to wear purple, therefore, was to show off your great wealth. Purple is an interesting example of a snob or Veblen good because it is clear that if purple had not been expensive it would not have been greatly desired. Indeed, do we see any great demand for purple today? If purple paint were say 25 or 50% more expensive then people would switch to substitutes but make it 500 or 1000 times as expensive and it becomes a fashion statement.
The quote is from here, more information than you would ever want to know about Tyrian purple is here.
What price lower insurance rates?
In two new tests, car owners will be able to let insurance companies monitor their driving via new technology in exchange for lower rates. The technology will track some combination of when, where, how far and how fast they drive, giving insurers a way to reward low-risk driving. Now just experiments, the technology might be a glimpse of the future of car insurance.
How about this?
In Minnesota, where the highway speed limit is 70 mph, drivers who go over 75 less than 0.1% of the time get an extra 5% discount. Drivers who avoid the most dangerous times – midnight to 4 a.m. on weekends – get bigger discounts than those who don’t.
Not surprisingly, one of the experiments is in Great Britain, the land of near-universal surveillance (I’m still waiting for those camera-based speeding tickets to arrive from Scotland). Insurers on both sides of the Atlantic are watching the experiment closely.
Here is the full story.
My take: I used to think that Amartya Sen’s Paretian liberal paradox had few real world implications. Now I’m not so sure.
Overall I don’t view this as a welcome development [addendum: though I don’t favor regulation]. Better monitoring and quality differentiation can make insurance markets work worse rather than better. In the limiting case, if the company could predict exactly who will have an accident, they won’t sell insurance at all. Plus my libertarian blood gives me “slippery slope” fears about this information ending up in the hands of government. Furthermore it is easy to imagine the practice becoming less voluntary over time. Yes people will drive slower but right now I’ll just say “Nein, danke.”
Addendum: Young women are rapidly becoming much worse drivers.
Strengthening competition in health care markets
Michael Porter offers some suggestions for restructuring competition in the sector:
…competition in the health care system occurs at the wrong level, over the wrong things, in the wrong geographic markets, and at the wrong time. Competition has actually been all but eliminated just where and when it is most important.
We should have more competition for service and innovation and less competition for cost-shifting:
In a healthy system, competition at the level of diseases or treatments becomes the engine of progress and reform. Improvement feeds on itself. For that process to begin, however, the locus of competition has to shift from “Who pays?” to “Who provides the best value?”
This implies some specific proposals, including the following:
1. Greater specialization of providers and facilities.
2. Large deductibles combined with medical savings accounts. But most importantly, copayments should be the same both “within the network” and “outside of the network.”
3. Transparent prices independent of group affiliation.
4. Public availability of provider track records.
5. Better risk pooling for the self-employed. And do not allow premium boosts for the sick.
6. No malpractice suits in all but extreme cases.
7. A federal mandate for minimum standards of health insurance coverage.
In Porter’s view “Attempts to limit patients’ choices or to control physicians’ behavior would end.”
My main worries: Let’s say insurers can’t get rid of people. Won’t they simply decrease the quality of service to their most costly charges? If reputational forces won’t stop insurers from unloading the sick, how will those same forces stop them from treating the sick badly? Yes transparency will be greater, but is such bad behavior today any secret? Can the federal government really regulate every margin of service?
My second worry is how all these changes will be implemented and enforced in a radically decentralized system. We might end up with more centralized control than, say, the Democrats are contemplating. That is unlikely to favor beneficial market incentives. In essence the whole proposal could amount to nationalizing the insurance industry.
Here is one short account of the proposal, with a longer version available for $5.
Cultural diversity and copyright
These are usually considered two separate issues, but now they are moving together:
1. Countries that keep out foreign films with strict quotas, such as South Korea, encourage their citizenries to turn to piracy. South Koreans are perhaps the world’s most notorious illegal downloaders of movies.
2. Lately the French have made a big push for tough copyright enforcement. No, they are not concerned about Madonna’s royalties. Rather they believe that enforceable copyright is a prerequisite of cultural protection. They cannot keep out American culture if the medium is illegal downloads.
3. 16 million songs and one million movies are illegally downloaded in France each day, four times more than are purchased legally (see Variety magazine, July 26 issue, p.11). It is believed that Hollywood movies are the most popular downloads.
4. Given the new option of (illegal) movie downloads, Hollywood filmmakers have more to lose from quotas than before. It will lead foreign consumers to expect to receive movies for free. The foreign market now accounts for more than half of Hollywood box office revenue.
5. It is unusual to see France and the United States so closely aligned on a cultural issue — film and music copyright — albeit for different reasons.
In the United States the major artists typically scream loudest about copyright infringement. They care more about being paid than about being widely distributed. Many niche artists see downloads, legal or not, as a new way to reach audiences.
If niche artists can live with downloads, why cannot the French, who are not a popular culture juggernaut? Most likely, some of the French care more about keeping out American culture than about boosting French niche artists. Their goal is to protect a French mainstream culture, not to enable French innovation. And given these preferences, they hold the consistent albeit disagreeable position of favoring both cultural protectionism and strict copyright enforcement.
Are people becoming happier over time?
We are much richer yet in a survey format Americans do not express greater satisfaction with their lives than they did in times past. What does this mean?
Some individuals suggest that we are pursuing an excess of material goods at the expense of true joys and satisfactions. Arnold Kling offers another interpretation:
Imagine that you could go back a few hundred years and ask people if they are “very happy,” “fairly happy,” or “not happy.” Suppose that this survey showed that happiness was approximately the same back then as it is today. Would it be fair to conclude that the tangible goods that we have today contribute nothing to happiness? People a few hundred years ago had no idea what it was like to live with indoor plumbing, abundant food, and antibiotics. People today have no idea what it was like to live without them. How can a “happiness survey” provide a meaningful comparison of the two eras?
In [Robert] Frank’s view, what the surveys show is that consumers have been behaving myopically, striving for more tangible goods without increasing their happiness. An alternative hypothesis is that in answering the surveys the consumers are behaving myopically, reporting on their happiness relative to a near-term baseline. That is, when you ask a consumer in 2004 if she is happy, she instinctively makes a relative comparison to how she remembers 2003. If she could remember how she felt in 1974, and she were focused on that as a baseline, she might answer the question differently.
Happiness research can be used to account for behavioral failures to maximize utility. Most alcoholics are not happy by traditional standards yet they drink of their own volition. So we might use happiness research to suggest a higher tax on alcohol than on vaccines for children. Or happiness research tells us to get the bad news over with, rather than suffering under its expectation. Happiness research is not a suitable tool for making broad comparisons of well-being over long periods of time.
Here is a useful dialogue on happiness research and economics. Here is Bryan Caplan’s earlier post on the policy implications of happiness economics.
Addendum: Try living with 1954 technology for a mere ten days, thanks to the ever-excellent GeekPress.com for the lead.
Decentral Intelligence Agency
I have yet to see a good argument for creating a new director of intelligence. It’s true that the intelligence agencies failed to share information. But an epi-central director of intelligence doesn’t solve that problem and may make it worse. The implicit model of the 9/11 Commission is command and control – move all the information from the roots of the tree to the top of tree and then one all-encompassing-mind will evaluate it and make the right decision. Does that model sound familiar? Sure it does, that’s the model of economic planning that is currently lying on the ash-heap of history. It’s the model that Mises and Hayek subjected to withering criticism in the socialist calculation debate of the 1930s.
In brief, consider the following two defects of the economic Czar model. First, even if the information were to make it all the way to the top it would be difficult, well nigh-impossible, for a single mind to grasp it all and make it useful. This is especially true when there are no prices and hence no way of aggregating the information into a common unit (the so-called terror market was one way of alleviating this problem). Second, information is lost as it moves up the hierarchy – it has to be because not all information is easily communicable, bandwidth isn’t infinite, and the people at the top demand information loss because as you move up the tree the amount of information becomes overwhelming.
An intelligence-Czar faces exactly the same problems. So what can be done? The intelligence agencies need tools that can spread information rapidly and widely and that are open to anyone with information whether they are at the bottom or the top of the hierarchy…Sound familiar? Yes, blogs and wikis are the right idea. And no I am not being flip. A central information repository that everyone can access may be part of the solution but centralizing information is not the same as centralizing decision making authority (remember “groupthink?” – the solution to our intelligence problems must face the problems of 9/11 and the problems of Iraq which are not the same.) Other ideas are to reward information sharing instead of hoarding – we should probably classify less information not more – and to rotate staff across bureaus in order to encourage collaboration and informal information sharing. Others more expert in this area will have more specific suggestions but my primary suggestion is that the models to follow are those of markets, webs, and networks.
Addendum: See also Tyler’s related and important discussion.
Cyclopaedia of Political Economy
Have you ever wondered what nineteenth century, classical liberal political economy looked like? No, not the classic writers but rather ordinary political economy?
A new web resource answers your question. John J. Lalor’s Cyclopaedia of Political Science, Political Economy collected classical liberal writings on the economic issues of the day, circa 1881. You can now access and read the work in its entirety. Here is information about the book and author.
For one sample, here is the brief article on the political economy of debt. Or try this entry on the balance of trade, still relevant today. The item on the division of labor remains eloquent and insightful. Gustav de Molinari writes passionately on the link between freedom, prosperity, and the arts, a favorite topic of mine. I’ve spent a good bit of time browsing through the book (both recently and much earlier), and it offers surprisingly few clunkers. On social issues it is consistently liberal and progressive.
Kudos to the ever-excellent Liberty Fund for putting the work on-line. Until their efforts, you could buy the book for a mere $675.
Addendum: The links to the previous version of this post have now been fixed.
Has there been a free trade breakthrough?
Remember that old saying, something like “Things are never as bad, or as good, as they seem.” It applies to international trade as well.
Numerous reports suggest that the WTO has achieved a breakthrough. The core deal appears to suggest that many poor countries will lower their tariffs on manufactured goods and the rich countries will limit or eliminate export subsidies and protection for agriculture. But there is more here than meets the eye.
The first worry is an obvious one. There is no date given for the change in agricultural policies. Keep in mind that the rich countries are masters of obfuscation and delay on this issue, if not outright obstruction. Plus the rich countries can exempt “special” products, if they so choose.
Arvind Panagariya suggests that our concerns should run deeper:
Current production and export subsidies flood world markets with the subsidised products and drive their prices down. The removal of these measures will raise the prices of the products in question. This will benefit the exporters and hurt the importers of these products. Food products happen to be among the most heavily subsidised items and as many as 45 of the world’s least developed countries are net food importers, according to calculations by the economists Alberto Valdes and Alex McCalla. Even when we consider all agricultural products, 33 least developed countries are net importers.
A counter-argument may be that, once the subsidies are eliminated and world prices increase, the least developed countries will become net exporters of the products. But this is doubtful for two reasons: such a change can turn at most only a handful of these countries into net exporters and the switch from net importer to net exporter status by itself is not enough to bring an overall benefit. As food prices rise, so will losses on food imports. Only if a country becomes a sufficiently large exporter will it be able to offset these losses.
In other words, even if reform comes about, the main beneficiaries will be the taxpayers in the rich countries. Export subsidies benefit consumers abroad, even if they do not maximize aggregate value.
Nonetheless it is trickier than Panagariya indicates. Many agricultural interventions keep world prices up, not down, by preventing the reallocation of farming to its most productive geographic venues. Nonetheless it is not obvious that the very poor countries would be big winners in any competitive reshuffling of sectoral specializations. In fact we might expect technology to make agriculture increasingly high-tech. We are then back to the case where export subsidies hurt taxpayers in rich countries but help consumers in poor countries.
Also keep in mind that many poor countries already enjoy free bilateral access to EU markets for many agricultural commodities, with rice, sugar, and bananas being prominent exceptions. So if liberalization causes food prices in Europe to fall, agricultural exporters in the poor countries may again be worse off.
I am all for free trade, as loyal readers of MR will know. But it is a common myth to think that agricultural free trade will cause say, Africa, to blossom or achieve significantly greater gains from world markets. Even if African consumers end up paying lower prices for food, African producers will see very mixed results. And how effectively do we expect the damaged producers to be reallocated to other sectors? Africa as a whole could still benefit in the longer run, given the theory of comparative advantage, but this is hardly the scenario that everyone has in mind.
Addendum: Ben Muse offers an analysis and extensive links.
Patents for everything
Or is that Markets in Everything?
Read this patent application for paying people to watch commercials:
Described are methods and apparatus for encouraging viewers to pay attention to television programs, commercials in particular, by offering viewers some incentive to watch. In one embodiment, viewers are notified that they can receive frequent-flier miles for answering one or more simple questions at the conclusion of the commercial. To verify that the viewer paid attention to the commercial, the answer to the question may be based on the content of the commercial. A sponsor might ask, for example, that the viewer identify the name of the sponsor or the color of an announcer’s shirt. A correct answer indicates that the viewer watched the commercial, and that the viewer is therefore entitled to some reward. For example, viewers who watch the commercial may be entered in a prize drawing, or may receive prize points, such as frequent-flier miles. In other embodiments, viewers may verify that they watched a given program by selecting an icon or pressing a button on a remote control.
That’s now owned by Microsoft, by the way, in case you are wondering why they are paying such a huge dividend. Here is the original link from TechDirt.
Safe sex, sells saris
The Indian city of Varanasi is getting through around 600,000 condoms a day, but this is no population control exercise. The weavers of the holy city, home to the world-famous Banarasi saris, have made the contraceptives a vital part of garment production.
The weaver rubs the condom on the loom’s shuttle, which is softened by the lubricant thus making the process of weaving faster.
The lubricant does not leave any stain on the silk thread which might soil the valuable saris.
There are around 150,000 to 200,000 hand and power looms in Varanasi alone and almost all are using the technique.
And every loom has a daily consumption of three or four condoms.
At first, weavers stocked up on condoms from the family planning department under a government scheme to provide them free of cost.
Some weavers even registered with fake identities to get their hands on the precious prophylactics.
Here is the full story. Thanks to Paul N for the pointer.
Econ Journal Watch II
The second issue of Econ Journal Watch is now out. EJW is fast becoming one of my favorite journals (I am an advisor but cannot claim responsibility for the excellent content). Lots of good stuff including:
Economics in Practice: Stephen Ziliak and Deirdre McCloskey examine all the American Economic Review articles from the 1990s, and present systematic evidence of the abuse of statistical significance.
William Davis uses survey evidence to argue that a large portion of professional economists falsify their preferences about economics.
Daniel Klein establishes that Journal of Development Economics authors and editors have extensive ties to the World Bank, the IMF, the UN etc., and asks how such ties affect the character of the field.
Government Sues to Raise Drug Prices
The headline in the NYTimes read “Schering Case Demonstrates Manipulation of Drug Prices.” The article continued:
A $345.5 million settlement by Schering-Plough yesterday to resolve a government Medicaid investigation provides a detailed glimpse into how drug companies can manipulate prices to overcharge state and federal programs.
Government officials have taken a keen interest in how drug makers price and market their drugs in recent years, and the settlement is the latest in a series reached with large drug makers over accusations that they have overcharged Medicaid. Last year, Bayer paid $257 million and GlaxoSmithKline paid $86.7 million to settle similar allegations.
Now you probably think this article is about how drug firms acted collusively in order to raise prices, right? Nope, read carefully and you will see that intense competition from Allegra caused Schering to reduce the price of Claritin. Great! Not according to the Feds. The price reductions violated Medicare’s Most Favored Customer clause which requires pharmaceutical manufacturers to give Medicare the lowest price they offer any other customer.
Most Favored Customer/Nation clauses are routinely analyzed in game theory texts as ways for firms to tacitly collude to raise prices. The idea is simple – it’s easier to commit not to compete if lowering price for one customer means lowering prices for all customers. Indeed, this is precisely why the antitrust authorities often sue to prevent firms from using MFC clauses. The evidence supports the theory, after the MFC clause was introduced pharmaceutical prices rose.
The US Attorney may think that “we’re fighting to keep the costs of health care down for everyone,” but in truth by reducing competitive pressures to lower prices they are helping the pharmaceutical firms to maintain a cartel.
Addendum: Put it this way, now that the government has successfully sued the firms for reducing prices do you think a) the firms will now cut the price to Medicare to match the rebates or b) stop giving rebates?
Has urban architecture declined?
Strolling the streets of Edinburgh, it is hard not to be struck by the beauty and general consistency of the older buildings. It is hard to find post World War II examples where a wealthy Western region has done something comparable. Suburbs have sprung up around the United States, but few of them have architecturally notable exteriors on a consistent basis. There are so many new suburban developments, cannot just one of them be lovely and aesthetically challenging?
What might have gone wrong? I can think of a few possible explanations:
1. Architecture has suffered from the “cost disease.” In this context, a rising general level of wages makes quality handwork more expensive in relative terms. In other words, they don’t handweave many carpets in Silicon Valley. There may be something here, but then why don’t the poorer countries of the world become architectural leaders? And I see home interiors as improving significantly over time.
2. In older times governments at various levels were less democratic. Competition for status within an oligarchy may have upped the incentive to produce beautiful exteriors. This mechanism clearly operated in Renaissance Florence.
3. Perhaps consumers and lenders were less well informed in times past. A nice exterior was a good way to signal the quality and long-term commitment of a business enterprise. Just look what happened to the quality of bank architecture in this country once the FDIC was instituted.
4. Perhaps we idealize times past. The so-called “Royal Mile” is today a leading tourist sight in Edinburgh. In the eighteenth century it was considered “a dark, narrow canyon or rickety buildings, some stacked ten or even twelve stories high, thronging with people, vehicles, animals, and refuse…Sanitation was nonexistent.” (That is from Arthur Herman’s notable book on Scotland.) We may be co-authors in the beauty of the past more than most people realize.
5. Perhaps contemporary suburban developments will be seen as beautiful by future generations. I’ll bet against this one, but we will see.
I am hardly suggesting that architecture is declining in every regard. I love the lights of the Ginza district in Tokyo. And our best stand-alone buildings are no less wonderful than those from times past. But I still wonder why urban architecture no longer yields consistently beautiful urban regions. Anyone who has walked around the major European cities, or even glanced at the Chrysler building, surely has asked the same question. Why is the quality of exteriors declining relative to interiors? Given that nice exteriors are a public good, why were they ever so nice in the first place?
Dumb Delta
E-Loan offers customers a choice of processing their loan paperwork in 12 days using all-domestic workers or 10 days by bringing on some workers in India, 85 percent choose the quicker turnaround.
Delta is now considering something “similar,” charging a fee to have calls handled by U.S. agents. What genius came up with this? You don’t need to be a behavioral economist to predict that framing the deal this way just won’t fly. Instead, offer your customers a new option; lower prices if they choose to use overseas agents. Or, as Gary Leff suggests, offer the customers shorter wait times. “All our US agents are busy right now, would you like to be directed to an overseas agent for immediate service?”