Viva Marginal Revolution

Tag: Viva Marginal Revolution

Economics of Innovation in the New “Pamphlet” Era

This week seems to be innovation week for me, as I am reading two short books on the heels of The Great Stagnation. Reading these pieces, I can’t help but get the feeling that the economics profession is hurtling into a blog-soaked, pamphlet-era frenzy. First up for Econ 100 is Alex Tabarrok’s Launching the Innovation Renaissance (review here), where Tabarrok makes a case against patents, holds out promise for prizes, and makes a plea for broad educational reform in both primary and secondary education. For the Reading Group crowd we have Erik Brynjolfsson and Andrew McAfee’s Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy, and with a subtitle like that, who needs a description?

So for those of you who have read one and need a primer on the other, here you go:

As a warm up to Renaissance, here is Tabarrok giving his TED lecture. Here’s a bit on education. (If you follow all the links at Marginal Revolution, you can pretty much read the whole book).

Here are Brynjolfsson and McAfee summarizing their argument in The Atlantic. See also Professor Finkler’s recent plug.

I’ve read both and recommend both. We’ll see what my Econ 100 students think. Thought provoking all around.

See Euro Future

Here’s Charlie Calomiris from back in 1999, predicting a bad end to the Euro.

I predict that the euro will be a weak currency (one that will not retain its value against the dollar), and that it will not be a permanent currency. Ultimately, the euro will most likely be remembered neither as a textbook example of the social gains of properly defining the optimal currency area nor as the harbinger of global exchange rate stability, but rather as an illustration of the importance of fiscal discipline for monetary credibility, and as a monetary example of the tragedy of the commons.

European union will likely strengthen the attraction of the dollar as a numeraire and a store of value. Countries outside of Europe will continue to peg their exchange rates to the dollar. And when the European Monetary Union ultimately collapses, it will itself provide a positive shock to the real dollar exchange rate that will hurt countries that have pegged to the dollar. All of this is unfortunate from the standpoint of global macroeconomic stability—an example of how political constraints that limit rational policy and encourage public profligacy make the global economy less stable than it otherwise would be.

I picked that up from Marginal Revolution, where Tyler Cowen points out that economists from Paul Krugman to Milton Friedman were pessimistic on the long-term prospects.

Here’s Freidman:

I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy. On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time.

If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give
it time to develop its troubles.

The snake?

At any rate, Cowen’s point is that economists may have whiffed the financial collapse, but they seemed to hit the ball on the Euro.

Black Friday View from Briggs 2nd

I just looked out my window and saw a flock of seagulls (no, not that Flock of Seagulls) antagonizing one of the resident bald eagles.

I guess this isn’t all that unusual from the seagulls. Did you know:

Herring gulls dive-bomb predatory birds at a steep angle from above and behind, as they make a piercing shriek – “kaiow!”.

Some gulls also defecate or even vomit on the predator for good measure.

My emphasis, as if any was needed. Ick.

Click the pic for the full story and a bigger picture.

Via MR.

The Economics of Black Friday

Is Black Friday a day to give thanks for low prices, or a symbol of the gross excesses of retail capitalism? Robert Frank discusses:

In recent years, large retail chains have been competing to be the first to open their doors on Black Friday. The race is driven by the theory that stores with the earliest start time capture the most buyers and make the most sales. For many years, stores opened at a reasonable hour. Then, some started opening at 5 a.m., prompting complaints from employees about having to go to sleep early on Thanksgiving and miss out on time with their families. But retailers ignored those complaints, because their earlier start time proved so successful in luring customers away from rival outlets.

Frank is in the “race to the bottom” crowd, and while even if the bottom is economically “efficient,” it seems to me that he would disagree with the distributional implications — low-income wage earners being exploited, crass consumerism running amok, dogs and cats living together, etc…

Champion of commercial culture, Tyler Cowen, counters:

This is portrayed as a zero-sum or negative-sum game, but I view the matter, at least in efficiency terms, more optimistically. The alternative to waiting in line and fighting the crush is to go shopping some other day, hardly a terrible fate. More analytically speaking, the average return in other endeavors limits how bad these rent-seeking games can get, otherwise just switch and stay home and read your blogs, as some of you perhaps are doing right now.

In fact it seems that early December has in general the cheapest prices of the year, not Black Friday.

Dare I suggest that some people like waiting in those lines with their thermos cups and stale bagels. You could try to argue they are “forced to do so,” to get the bargains, but in a reasonably competitive world each outlet will (roughly) try to maximize the consumer surplus from visiting the store, including the experience of waiting in line.

Whole thing here.

Contrary to popular belief, black Friday is not the day I turn in my grades. But now that the term is over, we will have some time to do some blogging!

Third Annual Predict the Economics Nobel Contest… Wait, what?

Well, I didn’t manage to get the contest running this year and, lo!, the Nobel Prize in Economics committee met anyway and made its awards.

I’m no macro guy (who is these days?), but the Nobel Committee saw fit to award this year’s prize to Thomas Sargent and Christopher Sims for their work in empirical macroeconomics. As per usual, Tyler Cowen at Marginal Revolution is all over it.

Sims here and Sargent here.

Though I disavow any knowledge of it now, I had Sargent for my macro texts back in grad school — known as black Sargent and red Sargent because one was black and one was red (I forget which was which). For some of us, the mathematics was on the challenging side, and we had to spend a lot of time solving those spectral analysis problems. I remember this like it was yesterday, one of my classmates asked if there was a “Cliffs Notes” version of black Sargent.

The professor replied, “Black Sargent is the Cliffs Notes.”

UPDATE: Tim Taylor has a very readable, conversable even, commentary at his new blog.

Dividing the Pie — Made in China, Sold in the U.S.

This just across the Marginal Revolution wire, via the Federal Reserve Bank of San Francisco, is an estimate of who gets what piece of products made in China:

Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the “Made in China” label.

So who gets what?

Table 1 shows that, of the 11.5% of U.S. consumer spending that goes for goods and services produced abroad, 7.3% reflects the cost of imports. The remaining 4.2% goes for U.S. transportation, wholesale, and retail activities. Thus, 36% of the price U.S. consumers pay for imported goods actually goes to U.S. companies and workers.

That’s a potentially interesting figure that suggests something we probably all know intuitively — that the firm that makes something isn’t necessarily the same firm that captures the value from its sale.

Last year I poked around for information like this when we were looking at what went into the price of shoes and found Rodrige, Comtois, & Slack’s breakdown in The Geography of Transport Systems.They split up the “cost of a $100 shoe made in China” (click to expand) to the various factors of production, and provide an explanation here.

The analysis suggests that a $100 shoe has about $12 worth of labor and materials in it, almost none of that paid to labor ($0.40). I assume “profit” goes to the corporation (e.g., Nike, Earth Soles) and the “retailer” percentage includes both retailer costs and retailer profits.

Here’s an important point — the difference between Walmart and Footlocker for a given pair of shoes would probably come out of that 50% retailer percentage. Lower rent, lower personnel costs, lower profit per unit. So where does the difference in shoe quality come from? It seems to me it comes out of that $12 in labor and materials.

Do you see what I mean? If a typical $100 pair of shoes has $12 of parts and labor, then how much does a typical $37.50 pair of shoes have in terms of parts and labor? Somewhere between $0 and $12, I suspect. For the sake of argument, let’s say you could cut those by 25% to $9. That suggests Walmart could offer the same quality shoe (that is, a $12 shoe) by bumping the price up by $3 to $40.50…

Why can China produce at such low “costs”? The chart at the right shows the figures for manufacturing generally — 40% of the cost advantage stems from lower labor costs. My intuition was that labor costs were a major portion of the product costs, but that was incorrect. It is, however, a substantial source of the lower costs. So, to illustrate this point, suppose Indonesia could assemble these shoes for $12.50 — $0.50 more. Of the $0.50 Chinese cost advantage, 40% ($0.20) would be due to lower labor costs.

I would guess that the cost advantage is nowhere in the neighborhood of $0.50. If China produces 8 billion pairs of shoes annually (16 billion total shoes), then a penny per unit in labor savings is $80 million into someone’s pocket. An $0.08 labor cost advantage translates into well over a half billion dollars.

And here’s the iPod for comparison.

Of course, the lesson from the Fed and from Rodrige et al. is that the total amount paid for imported goods is not the same as the amount actually being paid to the country of origin.

Producers Still Hate Competition

Tyler Cowen at Marginal Revolution thinks this story might be a parody. Here’s the gist: a Berkeley store has decided to compete with its fellow merchants.

The relationship between the new management and the community seems to have got off on the wrong foot soon after Fujimoto left. Before long, the small local merchants were hearing reports from customers that Monterey Market was selling the same specialty products as they were, but at lower prices.

“We only have a 30% mark-up”, said Ng, adding that she doesn’t understand how Monterey Market can sell the same products so much more cheaply.

So, are they saying that Monterey Market can’t sell the same product? Not at all.

Asked why Monterey Market should not have the right to pursue a business model that includes selling what it wants, Ng said: ”Sure, but they don’t have to carry exactly the same products. It’s not that there was no competition before — we carried some of the same items — but we had matching pricing,” Ng said.

And the story doesn’t end there.

The decision by Monterey Market to stay open on Sundays, which it started to do in November last year, has also had a direct impact on sales, according to Ng and Rosales. In the days of Bill Fujimoto, opening hours used to be coordinated among the merchants, according to Ng.

Same products, lower prices, greater convenience. Sounds like competition to me. And producers still hate it.

Measurement Error

Edwin Heathcote of the Financial Times asks, why is it that cities voted “most liveable” are not cities where people actually want to go live?

The most recent surveys, from Monocle magazine, Forbes, Mercer and The Economist, concur: Vancouver, Vienna, Zurich, Geneva, Copenhagen and Munich dominate the top. What, you might ask, no New York? No London? No LA or HK? None of the cities that people seem to actually want to emigrate to, to set up businesses in? To be in? None of the wealthiest, flashiest, fastest or most beautiful cities? Nope. Americans in particular seem to get wound up by the lack of US cities in the top tier. The one that does make it is Pittsburgh. Which winds them up even more.

So I moved away from the most liveable city to be with you guys? Yikes.

via Marginal Revolution.

Causes of Demand Curve Shifts — Expected Price Changes

The first thing to remember about the law of demand is “all else constant.” What we are holding constant includes expected future prices. This from the Financial Times:

Chinese consumers, increasingly alarmed at the rising cost of living, cleared supermarket shelves this week of shampoos, soaps and detergents after state media said four consumer goods companies … would raise prices by between 5 per cent and 15 per cent.

Via Marginal Revolution.

Is Amazon Going to Give Away Kindles?

The answer is yes. The only question now is, to whom?

Okay, so that’s not the only question. Another question might be, why on earth would they do that? Tyler Cowen suggests a durable goods monopoly (what’s a durable goods monopoly?), while his commenters break into a fascinating discussion on platforms and other possible competitive dimensions.

The graph and some discussion are courtesy of the undoubtedly fine folks over at The Technium. Though the story is more than a year old, the current superior Kindle is $137 and has been since December.

Okay, so maybe the answer isn’t yes, either. In fact, in the short term the answer is a resounding no. But the idea that they would bundle them with Amazon Prime membership seems reasonable.

You Can’t Cut the Internet ‘Signal’

There seems to be a very tumultuous situation in Egypt. In the face of mass protests being labeled “Angry Friday,” Jeff at the Cheap Talk blog and Tyler Cowen at Marginal Revolution assess the strategic implications for both protesters and for the government.

Here’s Jeff:

The decision to get out and protest is a strategic one. It’s privately costly and it pays off only if there is a critical mass of others who make the same commitment. It can be very costly if that critical mass doesn’t materialize.

Communications networks affect coordination. Before committing yourself you can talk to others, check Facebook and Twitter, and try to gauge the momentum of the protest. These media aggregate private information about the rewards to a protest but its important to remember that this cuts two ways.

If it looks underwhelming you stay home, go to work, etc. And therefore so does everybody who gets similar information as you. All of you benefit from avoiding protesting when the protest is likely to be unsuccessful. What’s more, in these cases even the regime benefits from enabling private communication, because the protest loses steam. Continue reading You Can’t Cut the Internet ‘Signal’

Moral (Among Other) Hazards

Continuing on with our Halloween theme, here’s an old story just posted at Marginal Revolution that illustrates the basic problems of moral hazard.

L.W. Burdeshaw, an insurance agent in Chipley, told the St. Petersburg Times in 1982 that his list of policyholders included the following: a man who sawed off his left hand at work, a man who shot off his foot while protecting chickens, a man who lost his hand while trying to shoot a hawk, a man who somehow lost two limbs in an accident involving a rifle and a tractor, and a man who bought a policy and then, less than 12 hours later, shot off his foot while aiming at a squirrel.

“There was another man who took out insurance with 28 or 38 companies,” said Murray Armstrong, an insurance official for Liberty National. “He was a farmer and ordinarily drove around the farm in his stick shift pickup. This day – the day of the accident – he drove his wife’s automatic transmission car and he lost his left foot. If he’d been driving his pickup, he’d have had to use that foot for the clutch. He also had a tourniquet in his pocket. We asked why he had it and he said, ‘Snakes. In case of snake bite.’ He’d taken out so much insurance he was paying premiums that cost more than his income. He wasn’t poor, either. Middle class. He collected more than $1-million from all the companies. It was hard to make a jury believe a man would shoot off his foot.”

It’s not often that I come across source material like this that I will use every single time a topic comes up in class. I tested it out on Econ 300 today and I daresay the image is a lasting one.

Beer Distributors Apply Political Economy Herbicide

It is a good couple of weeks for those interested in the economics of (and innovation in) illicit drug markets. First, HBO started up its mega super miniseries, Boardwalk Empire, about how an Atlantic City official built an organized crime empire following the enactment of the 22nd amendment prohibiting the production and sale of alcohol.

Then we find out that there is an online “weed” price clearinghouse.

And, now, via Marginal Revolution, we learn that the beer distributors actively oppose marijuana legalization in California. So quick 100 and political economy question — do beer distributors think marijuana and beer are more like complements or substitutes? To date, there is no word on whether manufacturers of Cheetos have taken a public stance on the isssue.

Interestingly, the teachers union supports legalization because of “the revenue that could be raised for the state.”

Motivating Econ 101

Alex Tabarrok talks to NPR about the story he uses to motivate his 101 class at George Mason. It is a tale of the English shipping their prisoners off to Australia, with the sorry result that many of the prisoners perished during the sea voyage. Yikes. How could they have prevented this sorry fate? Oh, I just wonder.

Cowen and Tabarrok are authors of an introductory textbook that I am willing to endorse, at least on the micro side. They also blog at Marginal Revolution.

The Price is Right? UPDATED, TWICE!

The Summer marches on, and that means it’s time for some more summer reading. My recommendation this week is from George Mason economist and Marginal Revolution blogger extraordinaire, Tyler Cowen. His latest book is The Age of the Infovore.

So, I was poised to pick up a copy for my wife at Amazon for what seemed to be a bargain price of $10.88, but then noticed that the hardcover version, Create Your Own Economy, was selling for only $4.64. It’s the same book, but the title changed when the paperback edition was released.

But then I thought, maybe she’d want the Kindle version instead. But the Kindle edition of Create Your Own Economy is $12.99, whereas the Kindle for The Age of the Inforvore is $9.99. Huh. So I’m paying a premium for a Kindle version of a hardcover version of the book, but I enjoy a steep discount if I actually purchase the hardcover.

Then I thought, well, maybe I’ll get her some perfume.

I think Yoram Bauman is right – choices are bad.

UPDATE: I sent this pricing info to Professor Cowen and he sent me a copy of his book with the inscription, “How is $0.00 for a price?” Thanks!

UPDATE 2: While trolling the EconTalk archives, I came across an episode of Roberts and Cowen talking about the book.

Don’t Feel Like You Have To Become a CEO

News from the research front that (some) economics majors are going places. To wit, “the share of graduates who were Economics majors who were CEOs in 2004 was greater than that for any other major, including Business Administration and Engineering.”

Here’s the paper, appropriately titled “Economics: A Good Choice of Major for Future CEOs,” and here’s from the abstract:

We find evidence that Economics is a good choice of major for those aspiring to become a CEO. Economics ranked third with 9% of the CEOs of the S&P 500 companies in 2004 being undergraduate Economics majors, behind Business Administration and Engineering majors, each of which accounted for 20% of the CEOs. When adjusting for size of the pool of graduates, those with undergraduate degrees in Economics are shown to have had a greater likelihood of becoming an S&P 500 CEO than any other major. That is, the share of graduates who were Economics majors who were CEOs in 2004 was greater than that for any other major, including Business Administration and Engineering. The findings also show that a higher percentage of CEOs who were Economics majors subsequently completed a graduate degree – often an MBA – than did their counterparts with Business Administration and Engineering degrees.

I nicked that from Marginal Revolution, and I’m certain there will be plenty of snarky commentary over there about it.

Some other interesting data over there. For example, the total number of business majors is split pretty evenly between males and females, but economics is 70% male. Of course, females now make up 60% of the undergraduate population.

Happiness is a Scarce Resource

You new majors have probably been wondering why you have been a little more cheerful, had a bit more bounce in your step, a little extra rational exuberance, so to speak.

The answer, my friend, is that economics students are generally a happy bunch.

At least in Germany:

Justus Haucap, of Heinrich Heine University of Düsseldorf, and Ulrich Heimeshoff, of the University of Bochum, surveyed 918 students of economics and other social sciences in 2005, then estimated how studying each of the different fields affected individual life satisfaction…. The news is good — for economics students, anyhow… [T]he researchers identified a positive relationship between the study of economics and individual well-being.

Read all about it.

For those of you looking for a boost of good cheer, look no further than right here.

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