Category: Economics
Who would have guessed?
Who would have guessed that when taking drive-thru orders at a McDonald’s it’s more efficient to send the order not 25ft into the restaurant but 900 miles away to a call-in center which then relays the order via computer to the workers inside the restaurant making the food. To avoid errors, the system also takes a digital picture of the customer to accompany each order (the picture is destroyed once the order is complete). That’s the way it’s done at a Cape Giradeau, MO restaurant and at some dozen others which send their orders to a call center in Colorado.
The system has cut order time by 30 seconds, reduced errors by 50 percent and saved on labor. Who would have guessed that this system would work? Not me and I’d wager not most people, but Steven Bigari, a McDonald’s franchisee gave it a shot – an interesting illustration of why a decentralized, capitalist system furthers innovation. The system is now spreading – at some McDonald’s customers can call their order in from their table, pay by credit card, and have their order “delivered” minutes later.
It’s from small improvements like this that a productivity miracle is born.
Pay or pray?
Many people give money to their churches and then go less often. Jonathan Gruber writes:
I find strong evidence that religious giving and religious attendance are substitutes: larger subsidies to charitable giving lead to more religious giving, but less religious attendance, with an implied elasticity of substitution with respect to religious giving of -0.92. [TC: If your giving goes up by one precent, your expected attendance goes down by about 1.1 percent.] These results have important implications for the debate over charitable subsidies. They also serve to validate economic models of religious participation.
Here is the abstract; you can buy the paper there for $5. Here is Jonathan Gruber’s home page.
The question for policy is whether you want churches to be wealthier or fuller. I’ll vote for wealthier, so I have no trouble endorsing the tax break for church giving. It spurs donation but apparently keeps some people at home as well. The irregular attendees are the ones whose behavior tends to vary with dollar donations.
One story is that the irregulars are guilted into going and that we should give them an easy way out, namely a donation. A cash transfer substitutes for a real time investment, which is efficient. Let’s also not forget the intra-family externality on the kids; many would rather play than hear a sermon. An alternative story is that getting these people into church, in the bodily sense, will create a positive social externality. If that’s your view, stop doing fundraising for your church. Perhaps you should stop giving money as well.
Speaking of the economics of religion, this site, put together by my colleague Larry Iannaccone, offers systematic links to the field and its scholars.
Teaching with a blog
A few days ago I reported on an educational experiment; David Tufte taught his undergraduate economics class by making them write blogs. David has now posted his assessment of the pluses and minuses of the experience, and how to make it work. If you’ve ever tried the same, please write in and share your experience.
Obesity now an illness
Medicare now considers obesity to be an illness. In other words, Jenny Craig could soon be receiving government funds to treat obese patients. Medicare and Medicaid are already busting the fiscal scales and with nearly 30 percent of Americans already obese and some 60 percent overweight this now adds another burden to the system.
More on the economics of obesity here and here. A short review of the economics of obesity written by myself can be found here.
Addendum: Thanks to Daniel Akst for adding more weight to my discussion.
Fishy fraud?
While learning in a course how to extract, amplify and sequence the genetic material known as DNA, University of North Carolina at Chapel Hill graduate students got a big surprise. So did their marine science professors.
In violation of federal law, more than 75 percent of fish tested and sold as tasty red snapper in stores in eight states were other species. How much of the mislabeling was unintentional or fraud is unknown, said Dr. Peter B. Marko, assistant professor of marine sciences at UNC’s College of Arts and Sciences…Our work has a margin of error of 17 percent, meaning that between 60 percent and 94 percent of fish sold as red snapper in the United States are mislabeled,” Marko said.
Here is the full story. It is unknown how much of the mislabeling is fraud and how much is human error. They tested 22 fish, albeit from a few different states. Furthermore it is commonly known, however, that what is called “scallops” is often generated from the wing of a skate ray, using a cookie cutter. That is probably not human error.
How much should we, as economists, worry about “mistakes” of this kind? After all, I’ve bought “snapper” many times, and never been disappointed, at least not relative to expectations. The real problem comes when some customers want higher quality fish, or “real snapper,” as opposed to “snapper as we have grown to know it.” Perhaps those customers are willing to pay more, but they simply cannot be sure they are getting what they want. So they don’t go buying at all.
Do you know anyone who is searching around for higher-priced kinds of fish? I don’t, although this may reflect my lack of a home in Aspen. I was happy to buy a pound of catfish [or was it?] for $7.99 this afternoon. But if anyone is suffering from this fraud, she probably earns much more than I do.
Many fraud problems have this structure. Yes, you get screwed over but the price falls too. Costs arise when everyone substitutes into lower quality. Is your auto mechanic cheating you? Well, wait a long time before visiting him — then you know there is something wrong with your car. In the meantime, some cars will break down, thus the costs of fraud. But in this case? In the meantime, some wealthy people will go without real snapper, suffering with the indignity of having to eat instead “snapper as we know it.”
Addendum: I’m still trying to figure out what “scrod” is; no dirty rejoinders please.
Markets in everything?
I cannot verify this one, but it popped up in this week’s News of the Weird:
China Daily reported in May that businessman Hu Xilm, who claims that a housefly in food 10 years ago ruined a big business deal for him, has since spent thousands of dollars on an obsession to eliminate as many flies as he can; with help from a team of volunteers he recruited, he claims to have killed 8 million.
My question: What does it cost to kill eight million flies? [And should it be a labor-intensive activity? Should it in fact be outsourced to China? Were the “volunteers” acting out of charitable motives?] If I knew the true cost, I would hold a lottery among MR readers, with a big prize for the winner.
Has the real standard of living fallen for the poor?
Don’t look at wage data, look at consumption data. The ever-wise Arnold Kling summarizes some of the evidence. For instance in 1970 only 45 percent of all households had a dryer. As of 2001 45 percent of poor households had a dryer. Three-quarters of poor households had a microwave oven, again circa 2001.
Kling writes:
Given these statistics, what explains the fact that, adjusted for inflation, the pay of the lowest-wage workers has not increased much over the past thirty years? There are a number of factors involved, but I suspect that the largest component of the explanation is a shift in the composition of the low-wage work force. In the 1970’s, many of the people at the bottom of the wage scale were heads of households. Today, many low-wage workers are providing second or third incomes to families.
The important point to bear in mind is that “the bottom fifth of the wage distribution” does not represent some permanent group of people. Instead, it signifies the earnings of workers who at that time have the lowest levels of skills and experience. My college-age daughters, doing temporary clerical work, are in the bottom fifth. But even if the income of the bottom fifth were to stagnate over the next twenty years, my daughters will earn higher incomes as they acquire valuable knowledge.
Read the whole thing, as they say.
Addendum: Here is another Kling post on productivity; it also has links to excellent pieces by DeLong and Postrel.
Minimum wage update
Eric Rasmusen offers an update on recent minimum wage controversies in the blogosphere; you’ll find the relevant links in his post, including to my own views.
Teaching with blogs
That’s right, make your students write a blog. I suggested this idea some time ago, now David Tufte has tried it. Here is the result. Keep in mind they are undergraduates. Here is one cynical but not totally inaccurate post about “bad economists.”
The advantages of this teaching method? People tend to remember and care about what they write. And getting students to write regular short bits is probably better than giving them a procrastination-inducing longer paper.
The disadvantages? There are not enough constraints on blather and fallacious reasoning. And perhaps the students decide that whatever they wrote is in fact true, a kind of lock-in bias. [Not that we professional bloggers ever have this problem…]
Here is Tufte’s own blog, and he directs my attention to this post. It is reported that only ten percent of published Journal of Money, Credit, and Banking papers can be replicated by outside parties.
Is economics a science? Yes, but let’s keep in mind that being a science, taken alone, doesn’t get you very far.
Investment advice
Brad DeLong gives a correspondent some good investment advice. Here is the entry in full.
I don’t think I’m qualified to give investment advice, so I don’t. But if I did think I were qualified to give advice, I would say:
1. Large house–a bit larger than you think normal–financed by a fixed-rate mortgage. (Unless you are in New York, DC, SF, or LA, where things are weird right now.)
2. 401Ks–as much money as you can put into them and other tax-shielded vehicles.
3. Additional savings–automatic, and a few steps more than you are comfortable with: the future if very uncertain, and there may well come a point where you will want to have more money than you thought you might possibly need.
4. Vanguard, I say. Put your money in one of the equity-heavy Vanguard index funds, one that places a large share of its assets overseas. Vanguard’s fees are very low. You get all the risk-reducing benefits of diversification, and you get a high expected return. You can do better only if you are a professional investor–and only then if you are in the top fifth of professional investors.
5. For intellectual background… start with Burton Malkiel’s Random Walk Down Wall Street and Benjamin Graham’s The Intelligent Investor. For something more amusing, try Adam Smith [George Goodman’s] The Money Game. For something heavier, try Graham and Dodd’s Security Analysis.
My two bits: The reason for the house is that it is a forced savings plan with tax advantages. An obvious point but one overlooked by many (but not MR readers, I suspect) is that if your firm offers any kind of investment matching you must, must, must invest at least as much as the matching amount. Yes on Vanguard – Brad, in fact, is being generous to professional money managers (see here, for example). In addition to Malkiel’s A Random Walk Down Wall Street, I recommend Taleb’s Fooled by Randomness. Read these books so you will have the courage not to do dumb things.
Living on Pennies
Here is a heart-breaking series of stories about living in poverty in the third world. The Congo is so poor there are no jobs just “se debrouiller – French for getting by, or eking a living out of nothing.” Sweatshops in these countries would be a blessing but corruption, war and violence keep foreign investment away.
Even the corruption, however, is sadly understandable. The government has no money and so pays its workers with the opportunity to take bribes. And thus the country is trapped. The corruption tax prevents the people from starting businesses and accumulating capital, corruption can’t be fought without funds to pay workers but there are no funds because corruption prevents the earning of income.
But even a society living on the edge needs civil servants. Men with government seals, such as Pancrace Rwiyereka, a grandfatherly former schoolteacher who runs Goma’s Division of Work, engage in their own version of se debrouiller.
They don’t bring home an actual salary, but the majority still show up for work every day. A government job gives them the opportunity to demand money from businesses and members of the public. Their official jobs are a charade.
“Bribes are the answer,” said a mid-level government employee in the finance department. “Why do you think we would never give up our jobs or strike to get our salaries?”
Authorities require entrepreneurs importing goods to obtain stamps from at least six agencies: the main customs office, an immigration office, a health agency, a separate health office that certifies goods for consumption, the governor’s tax revenue office and a provincial office that collects money from truckers for nonexistent road rehabilitation.
Thanks to Marc Andreessen for the pointer.
What are the most expensive pieces of real estate?
Currently on the market, that is. Here is the list, along with a separate tally of top “equestrian properties.” Oddly there is only one of the homes that I would prefer to my current (modest) abode in Fairfax, Virginia. I simply do not wish to live in Aspen, Palm Springs, Palm Beach, or Long Island, no matter how luxurious the quarters. If I had billions, I would buy in New York, Los Angeles, Freiburg, and Mexico, and otherwise opt for hotels.
You may notice that the post is from a new and intriguing economics blog, CommonKnowledge.blogs.com, run by two graduate students out of our own George Mason.
Gordon Tullock triumphant
My colleague Gordon Tullock, along with Thomas Schelling, is one of the most deserving scholars never to have received a Nobel Prize [Ed Prescott and Eugene Fama are also obviously deserving, though they are much younger].
A new Liberty Fund series may help rectify this injustice. In ten cheap volumes ($12.00 for the first, 450 pp.) we will receive the greatest hits of Tullock. The first book, just published, presents Tullock’s best essays, including his classic article on rent-seeking behavior; read this summary as well.
Gordon’s degree is in law, many of his formative experiences were in post-WWII China (some say he was a spy), and he took only a single economics class, from Henry Simons at Chicago. Nonetheless Gordon is an economist to the core and full of intellectual surprises.
Gordon is best-known for his co-authorship of Calculus of Consent, which set the foundation for how economists think about voting rules and “politics as exchange.” But I think as much about his lesser-known contributions. He wrote early works on the economics of scientific organization, the economics of trials, and the economics of animal societies, including insects. These works have yet to be mined for their full insights. His Politics of Bureaucracy remains a classic.
Gordon is very much a systematic thinker, although he is oddly reluctant to admit this fact. I take his central insight to be the importance of law, but also that real laws are given by economic incentives, rather than by what is on the books. Here is Gordon’s 46-page vita, with a brief written introduction.
Kudos to Charles Rowley for having edited the volumes, and here is a more general link to the Liberty Fund publishing program.
Eight empirical propositions I used to think were correct
Just below I claimed that economics is a science. If that is so, we should expect to see empirical progress. Here are a few issues where I (and many others) have been swayed by the data; I will state these in the form of untrue claims which I no longer believe:
1. We can both control the price level and keep interest rates stable by targeting the monetary base. Twenty years ago I believed this, but even the Swiss have not stuck with monetary targeting. A better solution is to broadly target the price level but allow for mild inflation.
2. Minimum wage boosts will generally put many low-skilled workers out of work. I covered this one a few days ago.
3. Investment is highly elastic with respect to observed changes in real interest rates. I’ve seen a few good studies that generate significant elasticities, typically using taxes as an exogenous instrument. But more often than not you can’t get this result. Short-term cash flow is often a better predictor of business investment.
4. Free capital movements for developing countries should usher in macroeconomic stability. Ask Argentina, Thailand, and Indonesia. Sometimes this proposition will be true, it is simply not as true as we once thought. If you don’t do all your reforms to perfection, and perhaps even if you do, international capital markets may put you through the wringer. But note, I am not endorsing capital controls, which have problems as well, most of all corruption.
5. Immediate privatization is more important than establishing the rule of law. Arguably the jury is still out on this one. We haven’t observed the other sequencing in many cases (when has rule of law come first?) and thus we do not have the relevant counterfactual. But privatization alone is less effective than we used to think, pick almost any ex-Communist country as an example.
6. It is relatively easy for a disinflation to be credible, provided the government sticks to its guns. So expect some nominal wages to remain sticky and some unemployment to result. People simply won’t believe a government, can you blame them? Of course the disinflation may still be worth doing, but the costs are higher than we used to think.
7. Fairness perceptions, envy, and a stubborn attachment to the status quo have little to do with nominal wage stickiness. OK, this one remains up for grabs. But the evidence is mounting in favor of the importance of fairness perceptions; furthermore this is strongly consistent with my real world experience. We used to look more toward long-term contracts and efficiency wage theories to explain sticky wages.
8. Human beings maximize expected utility in the same way, regardless of context. But now, alas, I despair as to how general a science economics can ever become. The non-economist may not be shocked here. Still we now have a wide body of knowledge about the importance and specifics of framing effects.
Remarks:
All these results share some common features. All have real world policy implications. All spring from a variety of economic methods, but most prominently from direct observation and economic history, informed by fairly straightforward theories and simple approaches to data. Rarely have fancy-schmancy empirical methods, on their own, led a radical reshaping of our understanding.
Is economics a science?
Yes, says the Royal Society, the most prestigious scientific body in the world; no, says Cambridge, the UK’s leading science university which still considers it part of the arts.
What might appear an arcane academic argument has suddenly assumed huge significance following the election of Sir Partha Sarathi Dasgupta, an economics professor at Cambridge, as a fellow of the Royal Society which was founded in 1660.
From Venice, where he has been attending a gathering of the European Association for Economists, a delighted Dasgupta told The Telegraph: “This is a bigger honour for me than my knighthood. I believe I am the first economist in 350 years of the Royal Society to be made a fellow.”
He added: “Until now, economists have been considered social scientists eligible for membership of the British Academy, of which I am a fellow, but not the Royal Society, which was only for scientists and mathematicians.”
Each year, the Royal Society can elect 44 new members, which this year includes Dasgupta.
An official statement from Cambridge University proudly declared: “He is the first economist elected to the Royal Society.”
Here is the full story. Here is a press release. Here is Dasgupta’s home page. I’ve long been an admirer of how he blends microeconomic technique and philosophic reasoning about welfare economics. I would have voted for him without reservation. That being said, he is an odd pick in the sense of being less “scientistic” than most traditional empirical economists. He is not an ideal test case to broach the precedent.
And in my view economics is surely a science. We produce empirical knowledge which is subject to process of testing, broadly interpreted, and feedback; see my post above. We even now have controlled experiments. And look at some of our competitors. String theory is not yet empirical. Environmental science and ecology are rife with ideology. Astronomy doesn’t have controlled experiments. And isn’t chemistry just plain outright boring? There is plenty of empirical economics I don’t trust, but usually it is for quite hackneyed reasons (e.g., data mining), rather than for “intrinsic to economics” reasons.
Addendum: Here is a neat description of economic historian Niall Ferguson.