Category: Uncategorized
Price discrimination
Johnson insisted the casinos have only themselves to blame for their losses, opening the door by offering him high-stakes gambling. They also agreed to discount 20 percent of his blackjack losses as an incentive to get him to play, he said. For instance, if he lost $1 million, the casinos would forgive $200,000.
He ended up winning $15 million. The article is interesting throughout, and hat tip goes to Steve Silberman, more on the math here from Kid Dynamite.
Assorted links
1. Do positive fantasies make it harder to achieve your goals?
2. Via Chris F. Masse, Peter Thiel’s whiz kids.
3. Interview with Emmanuel Todd on the Arab Spring and whether Germany is in the core of Europe.
4. Recommended Spanish-language novels, and all the good books coming out this year.
5. The black middle class is more likely to reach the NBA.
6. John Tomasi will be guest-blogging at Bleeding Heart Libertarians.
What I’ve been putting down
The Great Sea: A Human History of the Mediterranean, by David Abulafia.
Religion in Human Evolution: From the Paleolithic to the Axial Age, by Robert Bellah.
These are very good books for large classes of readers, just not for me. They have garnered, or will be garnering, stellar reviews. The former, for my taste, covers too many eras, has too much detail on matters I don’t care about, and ultimately chooses the wrong organizing principle for its material. The Economist, however, loved it. The latter has too much general material and doesn’t get to the cutting edge points in a sufficiently ruthless manner. For many people, though, it may be the best introduction to the general area.
By the way, I just pre-ordered Ezra F. Vogel, Deng Xiaoping and the Transformation of China, which looks to be an important book.
What is the economic value of the internet?
There is a new and very interesting study out from McKinsey on this topic. If you get past the press release, however, and give it a closer read it is consistent with stagnation hypotheses, contrary to some claims. The study shows a few things:
1. Most of the economic benefits of the internet are in fact captured in current economic statistics, which I’ve already argued do not look so fabulous. The point is not to blame the internet, as without it things would have been worse. The point is that the internet gains, in absolute terms, haven’t been large enough to produce a rosy picture overall.
2. The direct and indirect economic effects of the internet account for 3.8% of U.S. gdp, as currently measured (p.15). That’s less than many people think and that value is already incorporated in the current gdp measure. The good news — and it is good news — is that there is lots of room for future growth from internet impact. We’ve yet to really organize our economy around the internet, as we someday will, and then the gains will be enormous. In the meantime we are waiting.
3. What about the unpriced consumer surplus gains from the internet? The study considers that too:
In general, this surplus is generated from the exceptional value users place on Internet services such as e-mail, social networks, search facilities, and online reservation services, among many others. This value far outweighs the costs, both actual costs such as access and subscription fees and annoyances such as spam, excessive advertising, and the need to disclose personal data for some services. In the United States, for example, research conducted with the Interactive Advertising Board found that consumers placed a value of almost €61 billion on the services they got from the Internet, while they would pay about €15 billion to get rid of the annoyances, suggesting a net consumer surplus of about €46 billion.
A nice gain, but in an economy with a $14 trillion gdp it’s not that big a deal. It’s also less than the previous Goolsbee and Klenow estimate of about two percent of gdp, for the consumer surplus from internet use. That is not nearly enough to refute the view that median income growth is much slower in recent times, and that’s without adjusting for the problematic status of expenditures on health care and K-12 education. Arnold Kling and Bryan Caplan stress this point — the unpriced benefits of internet use — but I don’t see them offering a better number than this rather paltry calculation, now confirmed as low, at least relative to the claims of internet boosters, by two differing sources.
In fairness, I should note that I cannot trace the study cited above. It may be wrong. The Goolsbee and Klenow paper may be wrong, and it is somewhat out of date, from 2006. I think a consumer surplus estimate of three or four percent is entirely plausible for 2011. We’re still left with relative stagnation. After all, penicillin had some consumer surplus too.
Assorted links
1. The wisdom of Garett Jones and Reihan Salam.
2. Are they raising a gender-free baby?
3. The story of economics, a three-minute video, via Tim Harford, quite good I thought and also pleasingly philosophical.
4. Thwarted markets in everything: Denmark bans Marmite.
5. Do medical patients have an excess status quo bias?
Assorted links
Assorted links
Do our intuitions about deadweight loss break down at very small scales?
I’ve been thinking about high-frequency trading again. Some of the issues surrounding HFT may come from whether our intuitions break down at very small scales.
Take the ordinary arbitrage of bananas. If one banana sells for $1 and another for $2, no one worries that the arbitrageurs, who push the two prices together, are wasting social resources. We need the right price signal in place and the elimination of deadweight loss is not in general “too small” to be happy about.
But at tiny enough scales, we stop being able to see why the correct price is the “better” price, from a social point of view. Think of the marginal HFT act as bringing the correct price a millisecond earlier, so quickly that no human outside the process notices, much less changes an investment decision on the basis of the better price coming more quickly. (Will we ever use equally fast computers to make non-financial, real investment decisions in equally small shreds of time? Would that boost the case for HFT? Is HFT “too early to the party”? If so, does it get credit for starting the party and eventually accelerating the reactions on the real investment side?)
HFT also lowers liquidity risk in many cases (it is easier to resell a holding, especially for long-term investors, as day churners can get caught in the froth), and thereby improving the steady-state market price, again especially for long-term investors. That too could improve investment decisions, even if the improvement in the price is small in absolute terms.
Some decisions based on prices have to rely on very particular thresholds. If no tiny price change stands a chance of triggering that threshold, we encounter the absurdity of there being no threshold at all. We fall into the paradoxes of the intransitivity of indifference and you end up with too many small grains of sugar in your coffee.
So maybe a tiny price improvement, across a very small area of the price space, carries a small chance of prompting a very large corrective adjustment, with a comparably large social gain. Yet we never know when we are seeing the adjustment. The smaller the scale of the price improvement, the less frequently the real economy gains come, but in expected value terms those gains remain large relative to the resources used for arbitrage, just as in the bananas case. It’s not obvious why operating on a smaller scale of price changes should change this familiar logic. Is the key difference of smaller scales, combined with lumpy real economy adjustments, a greater infrequency of benefit but intact expected gains?
In this model the HFTers labor, perhaps blind to their own virtues, and bring one big grand social benefit, invisibly, every now and then. Occasionally, for real investors, their trades help the market cross a threshold which matters.
I am reminded of vegetarians. Say you stop eating chickens. You are small relative to the market. Does your behavior ever prompt the supermarket to order a smaller number of chickens based on a changed inventory count? Or are all the small rebellions simply lost in a broader froth?
What is the mean expected time that HFT must run before it triggers a threshold significant for the real economy?
Aren’t the rent-seeking costs of HFT near zero? Long-term investors do not have to buy and sell into the possible froth. HFTers thus “tax” the traders who were previously the quickest to respond, discourage their trading, and push the rent-seeking costs of those traders out of the picture. More fast computers, fewer carrier pigeons. Are there models in which total rent-seeking costs can fall, as a result of HFT? Does it depend on whether fast computers or pigeons are more subject to production economies of scale?
Assorted links
Assorted links
1. One paywall to rule them all?
2. The irrational voter with endogenous turnout (pdf, think of it as an attempt to refute Caplan. The result is hard to believe, and it is just published in gated form here).
Incentives, installment #1438
I think we’re going to find a reversal in the next few years: Sexual harassment will creep up the corporate ladder as men try to protect themselves by harassing only women who have careers they need to protect.
Assorted links
More Assorted Links
1. The CDC explains how to prepare for a Zombie apocalypse. Yes really, the CDC.
2. The Business of Bounty Hunting on Freakonomics radio, includes yours truly and legendary bounty hunter Bob Burton. It’s always interesting to me to hear how easy the professionals Dubner and Ryssdal make excellent radio sound.
3. Matt Yglesias warns (?) us about the Rise of the Robot Proletariat. Is this the beginning?
Assorted links
1. PBS Newshour segment on The Great Stagnation, including an excellent MIT critique by Erik Brynjolfsson.
2. How David Brooks fits into Britain.
4. Famous science fiction writers recommend science fiction.
6. Tim Harford on unexpected and underappreciated economics books.
What do we know about population and technological progress?
Bryan Caplan writes:
The more populous periods of human history–most obviously the last few centuries–clearly produced more scientific, technological, and cultural innovations than earlier, less populous periods. More populous countries today produce many more scientific, technological, and cultural innovations that less populous countries… Here’s a challenge for you: Name the most credible measure of idea production that isn’t at least moderately positively correlated with population.
Is this about the absolute number of ideas generated or ideas as a percentage contributor to economic growth? If we are estimating the costs and benefits of greater population, or the future of economic growth rates, the latter is arguably the more important variable. In any case, most plausible theories of economic growth imply that higher populations should lead to higher rates of ideas generation, as measured in terms of value. Ideas are non-rival and can be enjoyed by the entire group, thus yielding a higher social rate of return. There are also larger markets to pay for the ideas or award more fame to the inventors.
Here is a famous Michael Kremer paper arguing for a version of Caplan’s position. That all said, it is far from obvious that Caplan is correct:
1. The measured rate of technological progress, as it contributes to gdp, seems to have peaked in the 1930s. At that time total population, including the population of scientists, was much lower than today. “Effective” total population was yet lower, given the backward nature of transportation and communications and trade at the time, compared to today.
2. A recent paper by Ashraf and Galor (it’s also worth reading for other reasons) concludes: “…population density in pre-industrial times was on average higher at latitudinal bands closer to the equator.” Yet the countries closer to the equator did not end up being the drivers of industrial progress, even though they sometimes had higher rates of progress in agricultural times. Northern Europe, with the exception of the Dutch Republic, was never the star for population density. This paper also indicates that technology drives population growth — more than vice versa — and that “time elapsed since a region’s neolithic breakthrough” predicts later technological progress fairly well.
If you add an extra baby to most societies, ceteris paribus, the rate of expected idea generation does indeed go up in theory. But how important a factor is that, compared to other influences on ideas generation?
Or: at very gross time scales (“the last few hundred years” vs. “the dark ages”) a positive relationship holds between population and ideas production, or at very gross numerical comparisons (“one million people” vs. “ten people”). But viewed at finer granulations (by the way, the evidence in the Kremer paper is quite gross; e.g., pp. 710-712), the relationship isn’t nearly as strong as one might expect. In the time series, it’s been largely a negative relationship for the last eighty years or so, as mentioned above.
What model might give you a positive relationship between population and innovation at grosser scales but not finer scales? Let’s say there are various technological “platforms,” such as “fire,” “agriculture,” and “fossil fuels,” and maybe someday “uploads.” At any point in time, growth rates depend on how much a region has exhausted the potential of its current platform. This is largely independent of current population. That said, larger population areas may have a greater chance of progressing to the next platform, so there is a long-term, gross correlation between population size and levels of technology. Furthermore, if all regions have more or less exhausted the current platform, the larger region has a greater chance of leading the next breakthrough and thus being first to have the new and higher growth rate, even if most of the time it doesn’t have a higher growth rate for technological progress. That view is hardly anti-population, but it explains why you will find screwy population-innovation correlations all over the place. Finally, further breeding, as a recipe for progress, is an extreme lottery ticket and it only works at some special margins.