In a recent Harry Hole mystery novel, The Leopard, Jo Nesbø (an economist as well as novelist) has Harry ask someone, “Where would you go to get it [a particular anesthetic] now?” and is answered, “Ex-Soviet states. Or Africa….The producer sells it at bargain-basement prices since the European ban, so it ends up in poor countries.” When rich countries ban something, they increase its supply to poor countries that refuse to ban it. Prices are lowered to consumers there. Rich countries’ safety is enhanced, poor countries’ worsened, with the only consolation that consumers in poor countries become able to obtain the harmful substance at lower prices. Are people in each country better off, worse off, or what?
I just got a letter saying the American Economic Review was including me in a published list of exceptionally diligent referees. I suppose I should be proud, but this “honor” has problems. It is a signal to other editors that could increase the demands on my time. Worse still, it indicates that I view my time as having relatively little value; and in so much of modern American society, signaling a high value of time (seeming very busy) is a status symbol. The only virtue is that, being very senior in my profession, this additional signal adds very little new information for most observers. One friend requested that I be one of four people doing a tenure review on an assistant professor; and, after I agreed, the friend wrote back, “I have no doubt that I’ll get your review first.”
(HT: PG and MR)
We watched some of the Diamond Jubilee celebration and loved it. The only disturbing part was to see media comments that the U.K. would have been better off if people hadn’t had the Monday holiday for the Jubilee (much less the Tuesday holiday that some workers also had). The argument was that GDP would have been higher without the holiday.
Perhaps, but workers often make up for lost output when they return from holiday. Much more important is that no nation’s purpose should be maximizing output (and income). Instead, maximizing utility is what societies should be about. While well-being is much less readily measurable than output, measurement difficulties should not seduce us into becoming market fetishists. Perhaps if the U.S. emulated the U.K. (and Europe generally), and we took longer vacations and had more public holidays, our country would be better off (even if output were slightly lower).
People multitask (in economists’ language, “engage in joint production”) in a surprising variety of ways. A neat example appeared in Brussels Airport, with a sign saying “charge your phone and laptop.” But the charging was done by you sitting on a saddle and peddling a machine that generated the power charging your device. This combination of activities illustrates the difficulty in classifying activities: Was it work or was it leisure (exercise), to pick two of the major aggregates that I use in my research? Was it an investment of time or was it consumption? In this and many other ways, changing technology renders rapidly obsolete the categories we have created to classify things and activities.
Belgium prides itself on being “The Land of Beers.” A Belgian student tells me that this pride leads to some unusual pricing policies among the less well-known breweries. Apparently, many charge a higher price for their products when they are sold within the local area around the brewery, since people are proud of their local brand. This is a clear example of demand-based price discrimination. The average cost of selling locally is probably below that of selling elsewhere (lower transportation costs); but locals’ pride in the native tipple gives the brewers some monopoly power, which they are happy to exploit. The brewers are made better off (higher profits) by the locals’ behavior; and the local people must be better off, otherwise they would choose different brews.
It’s a beautiful Memorial Day weekend, marked at the American Military Cemetery in Margraten, the Netherlands by American and Dutch flags on the graves. There are many visitors, almost all Dutch, on this solemn occasion, with the only Americans apparently us and the U.S. military personnel here for the occasion.
The site brought to mind the commonality of culture and purpose that prevailed in America during World War II, and that many Americans seemed to feel again after 9/11. The role of a common culture and mutual trust in facilitating the operation of markets by lowering transaction costs cannot be overestimated. Their effect on the civility of political discourse is also crucial. It’s sad that we moved away so rapidly from that commonality so quickly after 9/11.
Equilibration in a competitive or monopolistically competitive market is slow. It takes time for new businesses to perceive excess profits and to enter the market. But not always.
Like many major European venues, the Plaza Mayor in Madrid has many buskers operating. One busker had a particularly clever shtick: Dressed up like an infant in a stroller, he would squeal and squawk, especially whenever someone put money his jar. Many kids, and even this adult, did exactly that. In the 5 minutes I watched at least 10 people gave him something. BUT: Near the end of that time, other buskers, who had been observing him, moved their routines closer to his. His flow of customers diminished, with some going to the other, now nearby buskers. He still was attracting more money than the others, but his excess profits had been reduced by the new competition.
An FDA panel just approved the first drug recommended for preventing infection by, rather than limiting the effects of the HIV virus. Part of the discussion by panel members was classic economics, expressing concerns that the drug’s availability would reduce people’s willingness to take as much care, in particular that it might reduce condom use.
The same issue has been mentioned and analyzed in various economic studies, including old ones about the effects of mandating car seat-belt use on automobile accidents, and about the impact of sex education on teenage sexual activity and pregnancy. Any insurance or safety measure generates a moral hazard; the important issue is the net effect on the outcome of interest — in this case, HIV infection.
I’m convinced that shame can in many cases provide stronger incentives than a monetary penalty uncertainly enforced. At a parking place in Luxembourg, the sign on the handicapped parking places reads: “Here is parking for a very handicapped person or a very inconsiderate (unscrupulous) person.” This might motivate a lot of people better than a $50 fine should they happen to get caught parking there.
As of May 1, it is illegal for foreigners to buy soft drugs in three border provinces of the Netherlands. This new constraint is especially restrictive in Maastricht, which lies only 20 miles from the larger German city of Aachen and only 60 miles from Brussels, Belgium. Before May 1, foreign “drug tourists” flocked to the 14 “coffee houses” in the city, paying €3 or so for a joint and lighting up (since this activity is illegal in neighboring countries). In protest against the law, all 14 houses have closed.
In the last minutes before we depart to the airport, our clothesdryer breaks down, potentially leaving our housesitter high but not dry. Murphy’s Law states: “Anything that can go wrong will go wrong.” This well-known aphorism ignores the crucial fact that things go wrong at different times, and that the opportunity cost of our time varies. I don’t mind if things break down when I have time to worry about and solve the problem. But that doesn’t happen.
We are installing over 30 solar panels on our roof. The City of Austin currently offers a rebate up to $15,000 of 60 percent of the cost, and the federal government gives a 30 percent credit on the remainder. With those subsidies the rate of return on our own investment is 17 percent, making this is a superb deal for us.
A neighbor in the Netherlands has 4 solar panels on his roof, a strangely small number. I asked why. His answer: The Dutch government pays up to €1500 if you install a solar installation. Each solar panel costs him €450, with a fixed cost of about €200 for the installation. Thus his average rate of return on his 4 panels is about 25 percent, a great investment.
I watched a Law and Order SVU re-run last night, remarkably one that I hadn’t seen before. In the episode, an infant dies of measles contracted from another child whose parents refuse to vaccinate her. (Infants are not vaccinated against measles.) This is a classic case of whether concerns about potential negative externalities outweigh the desire to keep the government from dictating private behavior (vaccination). We already permit both approaches: we mandate vaccines for children to enter public school, and allow parents (as in this TV show) the choice of not vaccinating pre-schoolers.
The New York Times of March 30 reported that a California junior college planned to set two levels of tuition for some of its classes. Many colleges set differential tuition based on in-state residence, level of class, or type of course. But this plan would have explicitly set tuition differentially in order to fund additional offerings that would not otherwise be provided. Essentially, the college was trying to move up the supply curve of courses, recognizing that demand far exceeds supply at the current (very low) tuition level. The plan generated an outcry among people bothered by the pricing of education and was “indefinitely postpone[d].” But higher education requires resources; and if taxpayers refuse to pay taxes but insist on services, this seems like a perfectly reasonable way of meeting demand. I expect that, as in so many areas, California will once again lead the nation, this time into an expansion of additional differential pricing of course offerings in higher education.
The same folks who stunned the world in 1972 with a prediction that economic growth would soon cease because of resource constraints are back again, predicting resource constraints will lead to global depression in 2030. Growth did not end by 1990, and it will not end in 2030. As before, prices will change to make economizing on increasingly scarce resources good business policy; and, as before, technology will change to lead businesses and consumers to substitute away from relatively scarce resources.
The interesting question is why this same nonsense continues to get so much attention. Is it that people forget the absurdities of the past arguments? Or do we have a substantial, never-satisfied demand for schadenfreude? Regardless, this stuff is just as bad economics as it was when The Limits of Growth first appeared.
In a recent column in the New York Times, Jane Brody quotes a nutrition professor lamenting the fact that “restaurants have resisted her suggestion to serve half the amount of food for about a third the price.” The professor might have thought more about economic behavior. (Even if she had suggested cutting the price to half for one-third the food, it still would not have been good economic analysis. The labor costs of preparing and serving half the food are probably nearly identical to those of serving the full amount.)
In his posthumous novel The Pale King
A sign on the wall at an exhibit of René Magritte paintings noted, “Magritte repeatedly painted variants of his subjects, mostly to satisfy demand in the art market.” Even artists are selling their products, just as businesses do. When the demand for their product increases, it calls forth a supply. We also see this in popular literature, where a highly successful mystery writer winds up in a rut writing minor variations of an earlier hit. Sadly for us economists, this doesn’t seem as easy to do—the premium is on originality and novelty; if today’s demand called forth minor repetitions in what we supply, we soon wouldn’t get the stuff published very well!
“Audit studies” have been popular in labor economics research for 10 years. The researcher sends resumés of artificial job applicants in response to job openings. Typically there is a crucial difference in some characteristic of the person that indicates a particular racial/gender/ethnic or other group to which one person within a pair of resumés belongs while the other does not. The differential response of employers to the difference in the characteristic implied by the resumés is taken as a measure of discrimination in hiring.
Is this ethical?
Sometimes what might not seem like complements become such because of location. I came across a restroom in a Vienna underground station that had the sign “Opera Toilet” above the entrance. Clearly, the City must believe that natural bodily functions and listening to arias are complements, at least for customers in this most operatic of cities, the residence of Beethoven, Mozart and many Strausses. Presumably in Nashville now or soon, one will find the “Country Music Toilet.” What other such complements exist?
Went to a one-star Michelin restaurant in Bonn last night. One of the best meals I’ve ever eaten. Three of the four of us ordered the five-course prix fixe all-vegetarian menu. As we left, I thanked the chef-owner — who responded “Despite it being vegetarian!”
He seemed slightly upset about serving this menu. Was it because his revenue from it was only €63 compared to €91 for a five-course regular menu (which had one meat and one fish course)? Maybe. But I don’t believe the vegetarian menu used less labor, nor was there a €28 difference in materials cost.
Got a haircut at the beauty parlor down the street in Bonn, Germany. The young lady washed my hair first and dried it after very carefully — neither of which is done at home. The whole thing cost only €10, much less than I pay at the beauty parlor that my wife patronizes in Austin. On the price list, though, no price was as low as €10. I asked why, and was told they give a special price to those who are (as we might say in the U.S.) follically challenged. I observed a hirsute fellow in the next chair, whose haircut lasted much longer than mine. Clearly, the shop was engaging in cost-based price discrimination.
The picture on this t-shirt is a joke. It states: “Always give 100% at Work: 12% Monday; 23% Tuesday; 40% Wednesday; 20% Thursday; 5% Friday.”
But it’s interesting that its creator chose not to spread the work evenly across the week. His/her view of labor supply suggests a temporal dimension that seems sensible: More work on Monday than on Friday, more on Tuesday than on Thursday, with peak work effort on Wednesday. In terms of labor productivity, this does not seem very far wrong.
The American League believes in comparative advantage, and has a designated hitter bat for the pitcher. I prefer this: I believe in comparative advantage and division of labor (and being a White Sox fan from age 5, I like the American League anyway).
This afternoon we heard a performance of Pagliacci, before which an announcer informed the audience that the soprano was ill, but would act the role while another—the designated soprano—sang from the side of the stage. The acting was better than usual, and so was the singing—an illustration here of comparative advantage. The overall effect wasn’t good: Opera is both acting and singing, and it was absurd and disconcerting to separate them. The production function for opera requires one person doing both—division of labor makes no sense in this case.
(HT to FWH)
Lucas Cranach the Elder’s painting The Unequal Couple (Old Man in Love) illustrates exchange in the marriage market. An unusually looks-challenged old man, holding a gorgeous necklace, embraces a beautiful young woman, who seems pleased with the arrangement.
Nearly 500 years ago, Cranach recognized that in the marriage market men typically exchange their earning ability for a woman’s looks and reproductive ability. That is probably less true today than in Cranach’s time (early 16thcentury), but the evidence shows it is still partly valid.
A friend of ours had her purse, containing her driver’s license and passport, stolen in a German train station. She reported it to the local police, who told her that she may well get the purse back — minus any cash. Homeless people in the stations troll the trash bins for food and other goodies. When they find purses, wallets, etc., they turn them over to station police. In exchange the police do not roust them out of the stations, which they use for shelter and warmth. In fact, the police were right — the friend did eventually get some of the lost items back.
In his book Washington: A Life, Ron Chernow quotes a letter that speaks to the hoary economic historians’ debate about the profitability of slavery. Washington noted that in his time Virginia estates were forever doomed to lapse into debt, “as Negroes [sic] must be clothed and fed and taxes paid…whether anything is made or not.” Even if slavery were on average profitable, Washington noted that slaves represented a fixed cost of production.
The Austin City Council is about to outlaw the paper and plastic bags you get at the grocery store. Retailers don’t like the ban. One particularly clever argument by liquor retailers is that it will encourage people to buy less — not a good thing, so they argue, when unemployment is high.
This is a bad argument for so many reasons: 1) Booze demand and bag provision are at most only a tiny bit complementary — one can always carry the six-pack out by hand; 2) To argue that high unemployment is a reason for anything other than macro stimuli is totally self-serving. I think all universities should hire more economists to reduce unemployment (although others may differ). The best argument against the ban is that it is not efficient—the environmental improvements don’t justify the extra resource cost of schlepping reusable bags into stores. I don’t find even that argument to be very persuasive.
(HT to TC).
The Los Angeles City Council may require condoms in porn movies produced in the city limits. How will this affect the market? Whether companies stay in L.A. or leave, costs will rise (condom costs if they stay, the costs of relocation, loss of agglomeration economies, if they move outside the city limits). If costs do rise, will that matter to producers? I imagine product demand is fairly inelastic, and they can easily pass the cost increase onto consumers. But even if costs were unaffected, consumer demand might shift far leftward if producers remained in L.A., since customers may not wish to view protected sex. Industry members lobbied strongly against the bill — perhaps because they feared the direct drop in demand rather than the cost increase.
One of the private-sector retail stores adjacent to the main Austin cemetery sells grave monuments and related items, while another is a major gardening center. These are sensible location decisions—these retailers provide convenience to customers who will be using the cemetery.
A similar example is provided by the locational choice of our sons’ orthodontist—directly across the street from the local middle school. These are examples of agglomeration economies, but are in the retail sector and based on consumer demand, not production.
I wonder what are other good/bizarre examples in which small retail firms’ locational choices are determined by the fixed location of a major public facility that attracts potential customers? Brothels next to seaports?
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