Denial
By Chris | February 11, 2010
I normally don’t write short posts, but this was too funny (and sad) not to mention. A Chinese court recently upheld an 11-year sentence for a scholar for “inciting to subvert state power.”
Here is what he did:
At the end of 2008, he co-authored a document calling for stronger civil rights and an end to Communist Party political dominance. About 10,000 people have signed it, though a news blackout and Internet censorship left most Chinese unaware that it exists.
Here is the government’s comment:
Asked whether China’s treatment of dissidents might negatively affect its image overseas, Foreign Ministry spokesman Ma Zhaoxu responded, “There are no dissidents in China.”
Topics: Political Science, Economics | No Comments »
Guard Labor: Why is Inequality Bad?
By Chris | February 4, 2010
Inequality is a hot topic these days. But why is inequality undesirable? Does it just violate commonly held ideals like fairness and equality. Or, does it do more and actually shrink the economic pie? Economist Sam Bowles argues the latter. The following article describes Bowles’ beef with inequality. (HT Marginal Revolution).
Bowles offers a key reason why [inequality holds us back]. “Inequality breeds conflict, and conflict breeds wasted resources,” he says.
In short, in a very unequal society, the people at the top have to spend a lot of time and energy keeping the lower classes obedient and productive.
Inequality leads to an excess of what Bowles calls “guard labor.” In a 2007 paper on the subject (working paper here), he and co-author Arjun Jayadev, an assistant professor at the University of Massachusetts, make an astonishing claim: Roughly 1 in 4 Americans is employed to keep fellow citizens in line and protect private wealth from would-be Robin Hoods.
The job descriptions of guard labor range from “imposing work discipline”—think of the corporate IT spies who keep desk jockeys from slacking off online—to enforcing laws, like the officers in the Santa Fe Police Department paddy wagon parked outside of Walmart.
The greater the inequalities in a society, the more guard labor it requires, Bowles finds. This holds true among US states, with relatively unequal states like New Mexico employing a greater share of guard labor than relatively egalitarian states like Wisconsin.
The problem, Bowles argues, is that too much guard labor sustains “illegitimate inequalities,” creating a drag on the economy. All of the people in guard labor jobs could be doing something more productive with their time—perhaps starting their own businesses or helping to reduce the US trade deficit with China.
Guard labor has a nice ring to it (maybe one day I’ll invent my own catchy economics term). But it’s not very meaningful when you consider its largest component is “Supervisory Labor.” See the breakdown here. We’d still need supervisors if the economy was completely egalitarian. In fact, we’d probably need more supervisors if financial incentives disappeared.
Bowles and Javadev realize this. The author of the article profiling Bowles overstates his claims. In their paper, Bowles and Javadev cover their bases. They admit that it is impossible to establish a causal relationship between inequality and guard labor. They also note that much of guard labor is the result of the conflicts of interest that cannot be covered in contracts. Their proposed solution is hardly revolutionary. “Policies that result in more fully and clearly defined property rights and attenuated conflicts of interest would reduce the cost of institutional reproduction.” Later, however, they insinuate that inequality is responsible for lots of wasteful guard labor.
And, they are right on one account. An unequal society will require more guard labor than an equal one. This is exacerbated by racial and class tensions. I just disagree with Bowles over how best to fix this problem. Certainly we should work on improving schools in the inner cities to give more kids a fair shot at life. We could also try to improve opportunities for young black men who are 7 times more likely than their white counterparts to be incarcerated.
However, I don’t think that the rise in inequality in the last 30 years has contributed to more guard labor. The recent rise in inequality in the United States has been caused by enormous gains at the top while the real income of the middle class has grown much more slowly. People feel the need to protect their possessions when the people around them become poorer. Not the other way around. Millionaires who become hundred millionaires don’t radically increase their “guard” spending.
Thus, we shouldn’t expect progressive taxes on the wealth to have a serious impact on “guard labor”. Transfers to the poor will only help the problem if they have a permanent effect. Bowles makes some acute observations, but clouds the issue by including supervisors in the same category as security guards.
Topics: Political Science, Economics, Education | 2 Comments »
Paradox of Choice
By Chris | November 22, 2009
A friend of mine, an aspiring ecologist with a blog of his own, sent me a link to Barry Schwartz’s 2005 TED talk on the paradox of choice. Schwartz, a psychologist, has written a book with the same title that I have not read. The video is entertaining and thought-provoking. Schwartz argues that too much choice paralyzes us and makes us worse off. He focuses on the four main consequences of too much choice.
- Regret and anticipated regret
- Opportunity costs
- Escalation of expectations
- Self-blame
When we have too much choice we regret what could have been, expect more from what we choose, and blame ourselves when our expectations are not met. His talk reminds me of going to buy snow cones in the summer with my sister. There are hundred of flavors to choose from, many whose names provide little indication of their taste. It’s always very difficult to decide. But, as easy as it is to relate to Schwartz examples, I strong disagree with his conclusions. What follows are some of his claims that didn’t sit well with me:
1. ”It’s not possible to buy a cell phone without bells and whistles.”This is a minor point, but it bothers me. I use an LG VX3300 that I bought used on eBay for $10. It doesn’t have a camera, it can’t play MP3’s, and it won’t connect to the internet. Secondary markets like eBay expand our choices to products of the past. Moreover, even some new phones are tailored to those with basic needs. A quick search yields a list of no-frills phones. My point is that people who don’t want products with many features (choices) can easily find more basic alternatives.
2. “Escalating expectations means you will never be pleasantly surprised.” It does not follow that more and better choices will lead to consistently high expectations. Eventually, people will be let down and adjust their expectations accordingly. People’s expectations are a function of how surprised they were in the past, not the quality of the product itself. It’s impossible to consistently be surprised or consistently be not surprised. If people are never pleasantly surprised, they will lower their expectations and voila! they will soon be pleasantly surprised again. We should only expect surprise to decrease if the variance of product receptions decrease. If anything, the reception of new products is less predictable than ever.
3. “Income redistribution is a Pareto improvement.” Schwartz implies, but never explicitly shows, that less income means less choice. This appears to be a reasonable assumption because if I have less money I can’t buy as many things. But the problem isn’t choice per se, it is choices that leave us with regret and self-blame. These type of choices are more prevalent among poor. Should I buy food for my family or a mosquito net to protect against malaria? That’s breeds much more regret than “Should I buy an iPhone or a Blackberry?” Even marginally less income means marginally greater regret. The middle class family that buys an unreliable car will lament that a better automobile choice would have left enough money for a vacation to the ocean.
Another concern I have with Schwartz’s argument is that we aren’t willing to apply it to other areas of our lives. For example, would anyone prefer a smaller pool of potential marriage partners? Would you voluntarily confine your potential spouses to those in a specific city, state or country? It would be foolish to do so. The plethora of choice when it comes to marriage is daunting. The abundance of options may destroy the romantic notion that there is only one person out there for you. It may cause you to think back about what might have been after you’re married. But, most of us happily trade the increased likelihood of regret for the additional choices that ultimately match us to a more suitable spouse.
Lastly, people always have the option to voluntarily reduce choice. If you buy Schwartz’s argument, why not voluntarily give away much of your money and live a simpler life. I would applaud you. However, reducing other people’s choice through government coercion isn’t okay just because its done for their own good.
People aren’t completely rational. And choices in the world can be daunting. But, freedom is valuable even if it occasionally leads us astray and unsatisfied. We gather more information, adapt, cope and learn to place less emphasis on what could have been. When I buy snow cones with my sister I get a fuzzy navel (peach) and don’t dwell on whether I should have gone with the Eye of the Tiger (who knows what it tastes like) instead.
Schwartz begins his speech by noting that everyone is familiar with the benefits of choice, so he’ll focus on the disadvantages. However, he never comes full circle to weigh the benefits against the costs. Freedom and variety allows us to create the life we want, with the people we want, doing the things that will make us happy. Sorting that out can be messy, but it’s a burden I’m happy to bear.
Topics: Psychology, Behavioral Economics, Markets, College, Economics | 1 Comment »
Ethics of the Truth
By Chris | November 17, 2009
A video circulating around the internet is disturbing. An aspiring NFL cheerleader had a negative reaction to a season flu shot. It activated dystonia disorder. If you haven’t seen the video you should look it up on YouTube. Note: Video previously embedded was removed from YouTube.
YouTube comments express skepticism, compassion, but most of all — fear. I can’t help but wonder how many of the 1.2 million people who watched the video were persuaded to skip this year’s flu shot. How many mothers vowed not to give their daughter the shot that might render her immobile? About 30,000 people die of the flu each year. Vaccines save countless lives. And, yet facts and figures are no match against an image of a beautiful young women unable to control her muscles.It made me wonder what responsibility researchers have for the interpretation and application of their findings. If I discover that the swine flu vaccine is slightly more dangerous than previously thought, should I broadcast that information to a public who will apply it irrationally? Suppose as an economist I document theoretical cases in which trade makes a nation worse off. Am I responsible for politicians who utilize my researcher to advance harmful protectionism? If I discover that different races have different innate abilities, am I responsible for the actions of bigots who use my findings to justify evil.
These are tough questions, and I know I’m not the first one to ask them. Researchers must consider the consequences of their findings, and yet, they cannot be held responsible for the actions of others. It’s impossible to know the bad or good that may come from one’s research. The best you can do is anticipate and caution against misapplications of your work.
Part of what got me thinking about this topic was the whole hoopla about Levitt and Dubner’s global cooling chapter in their new book. I don’t want to comment on the merits of the chapter itself. However, I was intrigued by one of the biggest concerns of critics. They argue, by lending credence to the idea that geoengineering could reverse global warming, Levitt and Dubner empower skeptics of global warming in their political goals. Are the SuperFreaks responsible for the impact of their chapter on public opinion and policy? What if they lead policymakers to conclusions that Levitt and Dubner never intended? In one chapter, the authors discuss how walking drunk is less safe than driving drunk. Are they responsible when an alcoholic takes this as advice, gets in a car, and kills a pedestrian?
Ultimately, scientists are accountable for the truth of their findings. But, that doesn’t mean they can ignore the practical implications of their arguments. The less certain you are, the more you must qualify your findings. The more irrational your audience, the more you must caution your readers. You may not be responsible for the irrationality of the masses, but you you’re a fool to ignore it. Levitt and Dubner may have had the best of intentions when writing their book. They may make some unique contributions to the discussion on global warming and driving under the influence. So, they probably shouldn’t be burned on the stake for ignoring how others may interpret their findings. But, I can’t help but feel they deserve to take a little heat.
Topics: Psychology, Behavioral Economics, Political Science, Economics, Blogosphere | 2 Comments »
Secret Menus
By Chris | September 24, 2009
As happy as I am with the buzz generated by my last post, I feel the need to update so new visitors are greeted with something a little more upbeat. A post about fast food and cable television (the keys to a good life) seemed to fit the bill.
Tyler Cowen recently blogged about secret menus at Chinese restaurants. Often, items are sold to Chinese patrons that aren’t listed on the menu. (I have enjoyed secret dishes at the premier Chinese restaurant in my town.) Tyler suggests this may be an effort to discourage non-Chinese business. I find it more plausible that the practice allows restaurants to cater their menu to American tastes without alienating ethnic customers. Commenter Scott Summers makes the case for an alternative explanation:
There is also price discrimination. Prices are often cheaper on the Chinese menu, as Chinese patrons are often more price conscious. This is partly reflected in the Chinese language options for tables of 4, 6, or 8. In Chinatown one will often see Western couples dining at small tables, while the Chinese often occupy large tables with family or friends. The Chinese pay a lower price per meal. I don’t recall seeing any English prices for multiple entree options.
I was reminded of secret menus while talking with a fellow graduate student about cable television. He enjoyed a 6-month free trial of basic cable through our local monopolist, Cox Communications. When it ran out, he canceled his service and signed up for it again. Cox ran the promotion as the country was preparing to switch from analog to digital television. It hoped to attract new customers wanting to avoid the hassle of switching to the new technology. The promotion was nearly a year old, but he encouraged me to give them a call and ask for it anyway. A five minute phone conversation later I had 6 months of free basic cable.
I love McDonalds. One of my great fears is that McDonalds will stop selling two apple pies for a dollar. Most McDonalds sell double cheeseburgers for one dollar. However, my local McDonalds charges over two dollars for them. Apparently, cheap double cheeseburgers in a college town cannibalize the sales of more profitable items. The other day, while buying some apple pies, I saw an off-duty employee buy an item that wasn’t listed on the menu: the McDouble (pic). The McDouble is a double cheeseburger with only one slice of cheese. Everything else is the same. McDoubles are only one dollar, if you know they exist.
Secret menus are successful means of price discrimination for two reasons.
1) They conceal price information that only the most price sensitive customers will seek out. If I wasn’t so cheap, I wouldn’t have been so intrigued by the McDonald’s employee’s strange order.
2) They require customers to be assertive to receive the preferential price. Timid and/or price insensitive customers may shy away from inquiries that make them appear cheap. It’s a little intimidating calling to ask for 6-months of free cable, when you’ve seen no evidence of the promotion. A roommate in college hated the process of haggling with street vendors. He overpaid for everything. I think this explains the approach credit card companies take with late fees. If you call the company, they will always forgive the penalty for a late payment. However, many customers just pay the fine rather than make an unpleasant phone call.
As long as we’re on food, I learned in this documentary that most McDonald’s food is a product of corn. The movie is a little slow at times, but interesting nonetheless.
Topics: Food, Markets, College, Economics | 2 Comments »
Rape Statistics: 1 in 4?
By Chris | September 11, 2009
My university recently hosted a forum on rape for female college students. They emphasized that rape is a serious issue on campus using statistics. Fact: 1 in 4 college women have either been raped or suffered attempted rape. At least that is what women’s centers at colleges around the United States claim. That’s scary high. Too high. I was suspicious. I care quite a bit about a few college women. How much danger are they in? I decided to check out the figure.
Fortunately, it is bogus. The number comes from a study of sexual assault on campuses done by Mary Koss in 1985 for Ms. Magazine. I was born in 1985 and I’m a young graduate student. How can this study be relevant to today’s college students born in the 90’s? More notably, I found this interesting critique of the study by Christina Sommers of Clark University. She notes that the study asked students:
Have you had sexual intercourse when you didn’t want to because a man gave you alcohol or drugs?
An affirmative answer was counted as rape. In other words, a women who regretted a one night stand after a night of drinking was considered as having been sexually assaulted. The ambiguous nature of the questions and inclusive definition of rape is evident from the following statistics. Only 27 percent of the women Koss counted as having been raped identified themselves as rape victims. Moreover, 42 percent of labeled rape victims, went on to have sex with their attackers at a later date. Clearly, something is wrong. If we just consider women who considered themselves to be raped, the figure falls to a more believable 1/14.
Rape is an egregious wrong. I have no desire to minimize the seriousness of this evil. However, I don’t think women’s advocates advance their cause by using shoddy studies from the 1980’s to make rape seem more prevalent than it really is. We shouldn’t have to lie to young college women to frighten them into taking safety precautions. In fact, making rape seem ordinary is counterproductive. Evidence suggests that young people drink less when they realize that most students don’t binge drink. People adjust their behavior to conform to what they perceive as normal. If women think that 25 percent of their friends have been assaulted, they may be less likely to report it when it happens to them. Moreover, potential criminals may be encouraged. If 1/4 of college women are being raped, that means that a lot of rapists are roaming the streets free. Maybe it’s not that risky of a crime.
So why do journalists, activists, and women’s centers cling to the 1 in 4 figure? It catches your attention. It outrages you. It makes you want to do something. Such responses are good for circulation, donations, and support from the university. But they come at the cost. Sacrificing their credibility for more attention, these “advocates” inadvertently hurt students. That’s a tragedy in and of itself.
Topics: College, Economics | 14 Comments »
Hot Dog Pricing Paradox
By Chris | September 9, 2009
Over Labor Day weekend I visited Chicago and spent Sunday afternoon watching Boston pummel the White Sox. Walking into the ballpark I had noticed a stand selling premium Chicago-style hot dogs with all of the fixings. While I was tempted, the ballpark level prices dissuaded me. Fortunately, on this particular day the ballpark was running a $1.00 hot dog promotion. I have seen similar promotions at other sporting venues. The hot dogs are bare bones: cheap meat, a small bun, served plain, with ketchup and mustard available. As I devoured my frugal treat, I began to think about the impact of the $1.00 promotion on the vendor selling premium Chicago-style hot dogs. Assume that the vendor is a profit maximizing monopolist with no direct competition and the freedom to change its price. Cheap hot dogs are an imperfect substitute and they normally cost $2.50. On $1.00 hot dog days, should the premium hot dog vendor raise or lower its price to maximize profit? The answer is under the fold. Read the rest of this entry »
Topics: Food, Markets, Economics | No Comments »
Lessons from My Laundromat
By Chris | July 15, 2009
In the current hard economic times, most businesses have been lowering their prices. Burger King reduced the price of their daily specials from $4.50 to $3.99. Car companies are offering to forgive your monthly payments if you lose your job. Frito Lay is putting more chips in their bags for free. However, I’ve also noticed two price increases recently.
My university raised the price of the 20-oz pop bottles in its vending machines from $1.00 to $1.25. The move makes a lot of sense given that the convenience stores on campus have been selling the same bottles for close to $1.50. I never understood why anyone bought them from the convenience store when they could save fifty cents by walking downstairs to the pop machine. But, I digress. In microeconomics we learn that a monopolist (the university in this case) can maximize profit by setting marginal revenue equal to marginal cost. The only problem for the university is that it doesn’t know the exact demand for its product. Selling the same good at different prices allows the university to practice price discrimination. Price sensitive students like me can go out of our way to save a little money. Everyone else just pays the higher price. But, different prices also help the university learn about demand for it’s product in general. If no one is buying the cheap pop out of the machine, the university probably can raise it’s convenience store prices. Alternatively, if vending machine sales are high relative to convenience store sales, it might be prudent to lower convenience store prices. They took the opposite approach in this case and raised the vending machine prices. This should increase convenience store sales, but they lose out on gains from price discrimination. I’m bringing my own pop to school from here on out.
My laundromat also raised it’s price recently. It now costs $1.75 to wash a load. Up from a $1.50. Normally, I wouldn’t think much of this. But, about 6 months ago, a new laundromat moved in to the neighborhood. From day one, it charged $1.75. It is still in business and sees its fair share of use. I can’t help but wonder if the owner of my laundromat decided to raise it’s price in response to its competitors entrance. If the competitor was being successful at $1.75, maybe college students were less price sensitive then the owner originally anticipated. Maybe students will go to the closest laundryman even if it’s a little more expensive. The menu costs at a laundromat are high. It takes a lot of time to change the machines to accept a higher payment. And if the response is negative, you may lose customers even if you roll back the prices to their original level. Competition helps remove asymmetric information. Most of this time this is good for the consumer who is rationally ignorant. But, when the producer guesses incorrectly, a little more transparency is a good things.
Topics: Markets, College, Economics | No Comments »
Economics in Wired: Two Articles Worth Reading
By Chris | June 23, 2009
I came across two recent articles in Wired that I found really interesting. Here’s a brief overview and commentary:
Tech Is Too Cheap to Meter: It’s Time to Manage for Abundance, Not Scarcity
It costs Netflix about a nickel to stream a 2 hour movie to your PC. Wired editor Chris Anderson argues that data storage and processing is so cheap that we need to rethink the way we manage it. He ridicules antiquated policies like the one employed by my university’s IT department. Once a student’s small email quota is exceeded, the student is bombarded with requests to delete old messages. Anderson is right on when he says that time is scarce, data is cheap. To go one step further, I’d note that while data is abundant, analysis is scarce. Our ability to determine relevance is getting better, but there is lots of room for improvement. The more data we have, the more important it becomes to filter it effectively.
What Kind of Genius Are You?
This article by Daniel Pink opens with the following excerpt from a Harvard art lecture. “Pablo Picasso did this copy of a Raphael drawing when he was 17 years old,” the professor told the students. “What have you people done lately?” Pink examines the work of University of Chicago economics professor David Galenson. Galenson compared the value of all sorts of rare art to age of the artist at the time of creation. He found two patterns emerging. Successful artists were one of two types: Conceptual or Experimental innovators. The former do their best work early in their career by challenging prevailing trends and radically changing their field. Experimental innovators, on the other hand, work through trial and error practicing their trade until they produce something truly exceptional. I’d like to read Galenson’s work. In some ways his theory seems safe and ambiguous. All great work has to be done at some point in someone’s life. But I’m intrigued by the economic study of creativity. Creativity is the soul of economic growth. Where does it come from? How do we foster it as a society? And how can we be creative in our own work? These are questions worth exploring.
Topics: Psychology, Economics, Opportunities | No Comments »
When Signaling sends the Wrong Signal
By Chris | June 22, 2009
Google became the world’s most popular search engine by radically increasing the relevance of search results. It was able to do so by rewarding sites that received a lot of links from other sites. Links from popular sites were worth more than links from obscure sites. The popularity, or rank, of a site became known as PageRank. This blog currently has a rank of 5. MarginalRevolution.com has a PageRank of 8. PageRank isn’t linear though. Supposedly, a PageRank of 8 is 1,000 times as popular as one with 5. Anyway, after inventing PageRank, Google ran into a problem. People with websites had an incentive to create lots of links back to their pages. Comments and wiki’s became infected with irrelevant links. To combat this problem, Google created a way for owners of websites to signal which links should count and which one shouldn’t for ranking purposes. By tagging a link as “nofollow,” a web site could tell Google to ignore the value of certain links. Today, almost all comments on blogs and all external links on Wikipedia are nofollow links. Spammers no longer get any credit for their backlinks. Problem solved. Or is it?
Nofollow has become increasingly popular. Linking to another site upright conveys upon them a positive externality by improving their reputation. The recipient is helped and the source gets nothing in return. Not surprisingly, it is underprovided. Some websites have a blanket “nofollow” policy. They only give conventional links to recipients that pay. Advertisers pay lots of money to get followed links from credible sites. When signals are bought and sold, they lose their value. Links that are followed are no longer the most relevant, they are the most profitable. On some sites, “followed” links are less relevant than organic “nofollowed” links. When everyone knows the signals, they lose their value.
This has many applications. Signals are constantly evolving. Fashion is a good example. Brands come and go, as a signal is recognized and copied. For example, The North Face is a popular retailer of outdoor clothing and gear. Initially, it was the purveyor of apparel and gear for an elite group of outdoor enthusiasts. If you wore The North Face, it signaled that you skied, hiked, and spent time outdoors. The signal was reliable. But, it was an easy signal to imitate. Americans liked being perceived as outdoor enthusiasts. The North Face become popular with the masses. Today, someone wearing The North Face has some extra money and brand awareness. The signal’s meaning has made a 180.
An acquaintance of mine recently joined the Peace Corps. Before he left, I asked him why he decided on the Peace Corps. “Simple,” he said, “It’s my ticket into a good law school.” The experience is probably beneficial nonetheless, but it’s overt attempt to game the system. Admissions committee are looking for compassionate, interesting people. In the past, the Peace Corps was a good signal about your character. Today, it says less about your character and more about your ambition.
I think this explains why, on a gut level, I don’t like some people who send all the right signals. The guy who is too friendly, dresses too perfectly, has impeccable manners, says all the right flattering things, and is a great student. If you are sending all the right signals — if they are all conscious choices — all I know is that you can play the game well. I don’t know if you are kind, or curious, or interesting. Everyone does this to a certain extent, but most people allow some of themselves out without conscious calculation.
Just because they can be copied, doesn’t make signals meaningless. It just means that certain signals are more important than others. Signals are most valuable when they are costly to send. Job market candidates in economics can send three signals to the schools they are most interested in. These are indeed valuable. A thoughtful gift is a valuable signal. Sticking with an unpopular idea or friend is a valuable signal. We’re constantly on the lookout for such signals.
Does Google need a more complicated signaling system? No, they’re doing pretty well on their own. My guess is they calculate the value of the sites to which a website links. If you link to quality sites (especially sites whose quality is not yet apparent) your signal is worth a lot. If you only link to advertisers, your signal is worth less. Ultimately, in life and on the internet, signals mean the most when we don’t know how to send them.
Topics: Internet, College, Economics, Web 2.0 | No Comments »
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