Markets in everything — Omar Shamshoon

by  Tyler Cowen in

An Arabized "Simpsons" — called "Al Shamshoon" — made its debut in the Arab world earlier this month, in time for Ramadan, a time of high TV viewership.  It uses the original "Simpsons" animation, but the voices are dubbed into Arabic and the scripts have been adapted to make the show more accessible, and acceptable, to Arab audiences.

Homer, by the way, has given up beer and bacon.  For more detail, see The Wall Street Journal, Marketplace section, 14 October.  Here is one negative review, apparently by an Arab.  He is still angry.

The future of classical music?

by  Tyler Cowen in

Via ArtsJournal, a good piece by Marc Shulgold on classical downloading. Shulgold writes: "Naturally, we’re not talking huge volume here: According to [Naxos’s Mark] Berry, classical downloads account for only about 6 percent of the total of all music downloaded on the Internet." But note: classical music has had 3 percent of the CD market in recent years. So it’s twice as popular on the Internet, and growing. The death of the death of classical music continues. By the way, Naxos’s $19.95 offer – which gives you Internet access to their entire catalogue for a year – is quite a deal.

Here is the link, from my favorite music blog, www.therestisnoise.com (here is his Rameau review). The obvious prediction, of course, is that classical composers will start writing — will have to start writing — more very short pieces. 

But what price will markets sustain?  Classical music performances are, to most listeners, interchangeable.  When will they offer the Beethoven symphonies again for free?  Music companies were not happy.

The Undercover Economist

by  Tyler Cowen in

Companies find it more profitable to increase prices (above the sale price) by a larger amount on an unpredictable basis than by a small amount in a predictable way.  Customers find it trouble some to avoid unpredictable price increases — and may not even notice them for lower-value goods — but easy to avoid predictable ones…

Have you noticed that supermarkets often charge ten times as much for fresh chili peppers in a package as for loose fresh chilies?  That’s because the typical customer buys such small quantities that he doesn’t think to check whether they cost four cents or forty.  Randomly tripling the price of a vegetable is a favorite trick: customers who notice the markup just buy a different vegetable that week; customers who don’t have self-targeted a whopping price rise. 

I once spotted a particularly inspired trick while on a search for potato chips.  My favorite brand was available on the top shelf in salt and pepper flavor and on the bottom shelf, just a few feet away, in other flavors, all the same size.  The top-shelf potato chips cost 25 percent more, and customers who reached for the top shelf demonstrated that they hadn’t made a price-comparison between two near-identical products in near-identical locations.  They were more interested in snacking.

That is from Tim Harford’s new The Undercover Economist: Exposing Why the Rich are Rich, the Poor are Poor — and Why You Can Never Buy a Decent Used Car (don’t trust Amazon, the release date is November, not January).  This book is one of the very best introductions to the economic way of thinking.   "Required Reading," says Steve Levitt, what better endorsement could you want?

Here is Tim’s home page, including his FT "Dear Economist" columns.  Here is Tim’s Private Sector Development Blog.  Here is Tim’s recent FT piece on Thomas Schelling.  Comments are open, in case you have other examples of comparable supermarket tricks.

Are savings overrated?

by  Tyler Cowen in

Here is another good exam question for my macro class:

Let’s do the calculations. Over the past 10 years, the U.S. has run up an accumulated goods and services trade deficit of roughly $3 trillion. Sounds like a lot of money, doesn’t it?

Now let’s suppose those dollars had been used for good rather than evil. That is, rather than buying imported cars, toys, and handbags, thrifty Americans would have saved their money. It’s reasonable to believe that about half of that $3 trillion would have gone into financing productive purchases here in the U.S.–new factories, power plants, office computers and the like–$1.5 trillion worth.

So what would be the payoff from all that thriftiness? A reasonable rate of return on investment, after depreciation, is roughly 7%. So $1.5 trillion in extra assets would have a return of about $100 billion a year.

That $100 billion is roughly 1% of an $11 trillion economy. Over ten years, then, complete elimination of the trade deficit might–might–have added a tenth of a percentage point to growth.

That’s a good measure of the size of the virtues of savings–roughly a tenth of a percentage point on growth. That’s 0.1 percentage points.

To put that in perspective, the estimates of long-term productivity growth have risen roughly a full percentage point over the past decade. The effects of technology more than swamp the effects of savings.

That’s Michael Mandel, from Business Week.  True, false, or uncertain?  Dig in, comments are open, and you don’t have to be in my class to offer an opinion.

What kind of tax increase can you expect?

by  Tyler Cowen in

According to today’s Wall Street Journal, Bush’s tax overhaul commission will recommend capping the value of the mortgage interest deduction at $300,000 (the current limit is $1 million).  This may include grandfather clauses for already-purchased homes (hey, your capital value still falls and mobility is limited) or a gradual introduction over ten years.  There is also talk of ending the preferential tax treatment for employer-supplied health insurance and distributing tax breaks more evenly across all income levels.  The commission is expected to recommend against a value-added tax.  The report is due November 1.  Of course whether the recommendations will pass is another matter.

Addendum: Andrew Samwick offers more.

Is game theory a dead end?

by  Tyler Cowen in

Writing about the new Nobel Prizes, Michael Mandel argues:

Game theory is no doubt wonderful for telling stories. However, it flunks the main test of any scientific theory: The ability to make empirically testable predictions. In most real-life situations, many different outcomes — from full cooperation to near-disastrous conflict — are consistent with the game-theory version of rationality.

To put it a different way: If the world had been blown up during the Cuban Missile Crisis of 1962, game theorists could have explained that as an unfortunate outcome — but one that was just as rational as what actually happened. Similarly, an industry that collapses into run-amok competition, like the airlines, can be explained rationally by game theorists as easily as one where cooperation is the norm.

I can think of possible responses:

1. Behavioral approaches will flesh out how humans actually behave.  Game theory will end up with clear predictions, just give it time.

2. Computational approaches will flesh out how humans actually behave.  Game theory will end up with clear predictions, just give it time.

3. Evolutionary approaches will flesh out how humans actually behave.  Game theory will end up with clear predictions, just give it time.

4. Experimental approaches will flesh out how humans actually behave.  Game theory will end up with clear predictions, just give it time.

5. The real world is in fact indeterminate or close to indeterminate.  The indeterminacy and multiple equilibria of game theory are not a problem, but rather reflect how closely the theory mirrors reality.  Yes you might prefer sharp, clear predictions, but tough tiddlywinks, you’re not going to get them.  Faithfulness to reality is more important than fulfilling abstract methodological strictures.

Any one of these answers would suffice and allow us to push full steam ahead, or in the case of #5 declare victory and go home.  The problem is that we don’t know which one is true. 

The bottom line: Like so much of economics, the strongest argument for game theory is simply to chat with someone who doesn’t know any.

More evidence on immigration and wages

by  Tyler Cowen in

The best of current investigations continue to support the conclusion that immigration does not hurt American real wages.  Here is part of the abstract from a recent NBER working paper:

Because U.S. and foreign born workers belong to different skill groups that are imperfectly substitutable, one needs to articulate a production function that aggregates different types of labor (and accounts for complementarity and substitution effects) in order to calculate the various effects of immigrant labor on U.S.-born labor. We introduce such a production function, making the crucial assumption that U.S. and foreign-born workers with similar education and experience levels may nevertheless be imperfectly substitutable, and allowing for endogenous capital accumulation. This function successfully accounts for the negative impact of the relative skill levels of immigrants on the relative wages of U.S. workers. However, contrary to the findings of previous literature, overall immigration generates a large positive effect on the average wages of U.S.-born workers. We show evidence of this positive effect by estimating the impact of immigration on both average wages and housing values across U.S. metropolitan areas (1970-2000). We also reproduce this positive effect by simulating the behavior of average wages and housing prices in an open city-economy, with optimizing U.S.-born agents who respond to an inflow of foreign-born workers of the size and composition comparable to the immigration of the 1990s.

Here is my previous post on the topic; try this one too.

How do feelings of mortality change your behavior?

by  Tyler Cowen in

Randall Parker has the scoop.  Here is one excerpt, quoted by Randall:

…when confronted with thoughts of death, people tend to act in ways that will boost their self-esteem. They also have fewer cognitive resources to resist behaviors that are not central to their self-image. People for whom being slim or fit is important to their self-image, for instance, will not be as likely to overeat, but if physical appearance isn’t as important, the willpower to resist that fudge sundae will plummet.

Here is my previous post, with an assist from Robin Hanson, on the same topic.  Let me note in passing, this is one reason why I would expect a bimodal response to a major crisis such as avian flu.  Most people will behave quite heroically; those who take pride in being social rebels/misfits will act like scoundrels.

Facts about Thomas Schelling

by  Tyler Cowen in

1. Jorgen Weibull — who does evolutionary game theory — chaired the committee this year.  Addendum: Here is the full list of wise men, thanks to Dennis Josefsson for the pointer.

2. If you wanted to see much of Tom, you had to agree to meet with him on Saturday mornings.  This was my preferred time too.

3. Before The Strategy of Conflict, game theory was for the most part an abstract desert.  It is not easy to find concrete economic propositions in von Neumann and Morgenstern or for that matter in Nash.  Tom brought game theory into the real world.  The magnitude of this shift is hard to appreciate from the vantage point of today.

4. Schelling’s early research was on open economy macroeconomics.

5. He loves Bach, and The Art of the Fugue in particular, most of all the Grigory Sokolov version.  This is indeed a desert island set of discs.

What did this Prize mean?

by  Tyler Cowen in

Yes it is Thomas Schelling and Robert Aumann, wonderful picks.

The Nobel website says: "for having enhanced our understanding of conflict and cooperation through game-theory analysis."  Here is the NYT article, no permalink yet.  FoxNews offers similar information.  Both men clearly deserve the prize.  I view this year’s award as a welcome swing back to the philosophical, theoretical, and speculative dimensions of economics.  In recent years the Committee seems to have gone out of its way to reward the scientistic approach to economics (Heckman and McFadden, for instance).  All these earlier picks were good ones, but I am happy to see Schelling — a fruitful generalist if there ever was one — and Aumann, a deeply philosophical thinker, get the nod.  Aumann I don’t know personally, but there are few scholars I admire more than Thomas Schelling.