Category Archives: Economics

The Costanza-Hoover Principle

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Herbert Clark Hoover listening to a radio {{de...

We really are in uncharted waters as far as the current crisis goes. No one knows what will work, if anything, but Jim Manzi over at The American Scene sums up the best argument for the stimulus in just a few words.

The strongest argument for the stimulus (and the one that I think, in their heart-of-hearts, most supporters actually hold) is what could be called the Costanza-Hoover Principle: do the opposite of whatever Herbert Hoover did. In a world of limited knowledge, this isn’t as crazy as it might seem, at least as a starting point. It sure seems like Hoover screwed up; and hopefully we can avoid his mistakes. This pretty much boils down to: avoid a tariff war; don’t try to balance the budget right now; don’t restrict the money supply (that gold standard thing is right out); and, most importantly, prevent a collapse of the banking system.

via The Costanza-Hoover Principle | Economics | The American Scene.

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Make fewer products, but make them great

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Matt Burns writes a great piece over at CrunchGear on how Apple’s success is tied to the fact that it doesn’t confuse customers with too many choices.

There really aren’t that many products: One cellphone, four iPods, three notebooks, and three desktop computers. Now look at HP’s, Dell’s, or even Garmin and TomTom’s product lines. Apple does something different and hopefully others are taking notes.

Apple’s secret sauce: A simple product line.

This reminds me of a section in Barry Schwartz’s book The Paradox of Choice. Here is Christopher Caldwell writing about it in The New Yorker:

Research in the wake of Kahneman and Tversky has unearthed a number of conundrums around choice. For one thing, choice can be “de-motivating.” In a study conducted several years ago, shoppers who were offered free samples of six different jams were more likely to buy one than shoppers who were offered free samples of twenty-four. This result seems irrational—surely you’re more apt to find something you like from a range four times as large—but it can be replicated in a variety of contexts. Students who are offered six topics they can write about for extra credit, for instance, are more likely to write a paper than students who are offered thirty.

If Banks Were Railroads…

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Monopoly (game)

In these hard economic times, it’s always great when someone can produce some humour from our suffering. Over at the Washington Post, Tim Harford (whose work is always a favourite at Lively Thought) has produced a piece that explains the current crisis using the game of Monopoly as a metaphor.

As Harford explains, Monopoly is a perfect analogy because the whole game is a giant real-estate boom with vague rules and easy money, thanks to an overly-generous central bank. Properties can always be mortgaged instantly, and when the bank runs out of money, they just print up more by scribbling numbers on a piece of paper.

Plenty of nice little Easter eggs as you work your way around the interactive board that the Post has put together.

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Save Us Warren Buffett, You’re Our Only Hope

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Warren Buffett speaking to a group of students...

Warren Buffett is everywhere these days. In fact, he’s behind you right now. Boo!

First there was The Snowball a 1,000-page authorized biography that was just released. (Portfolio is reviewing it section-by-section for those of us who can’t dedicate that sort of time to the project. They’re mostly unimpressed, so far. With the writing, of course, not with Buffett.)

Then Buffett, stepped in to help shore up Goldman Sachs and General Electric to the tune of $8 billon. Next, there was John McCain, bringing up Buffett’s name on Tuesday night as a possible choice for Treasury Secretary, and going out of his way to remind everyone that Buffett is an Obama supporter. Now, articles like this piece in Slate by Daniel Gross comparing Buffett’s actions today with J.P. Morgan‘s actions in 1907 and this piece by Steve Lohr in the New York Times which makes the same point, have started to pop up.

It would be nice to think that one man really could do something about the current crisis, but that’s just not the case this time around. The problems today are a lot bigger than the situation in 1907, and Buffett doesn’t have nearly the comparitive wealth or sway that Morgan had at the time. As a voice of reason in frightening times, however, he does serve us well.

Buffett’s conversation with Charlie Rose, as mentioned in the Times piece, is worth watching in its entirety. Buffett compares the current crisis with Pearl Harbor and suggests that government action on the same scale is needed to respond. He loves Paulson, loves the Bailout, and sees opportunity where everyone else sees disaster. He thinks that, long-term, buying up distressed assets will be a money-maker. In fact, he’d like a piece of the action, and if there’s anyone who knows something about making money over the long term, it’s Buffett. As always, his credo is: “Be fearful when others are greedy and greedy when others are fearful.” The best thing we can do right now is keep that in mind.

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An immigration marketplace vs. free migration

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Book cover of The Undercover Economist

Tim Harford has a wonderful talent for communicating economic ideas. In his latest piece at The Undercover Economist, he uses a great story to illustrate the difference between centrally controlled economies and free market economies:

Shortly after the Soviet Union collapsed, a Russian bureaucrat travelled to the west to seek advice on how the market system functioned. He asked the economist Paul Seabright to explain who was in charge of the supply of bread to London. He was astonished by the answer: “Nobody.”

Harford tells this story is in aid of explaining just how confused we are when try to control immigration by establishing quotas for various job categories. As an alternative, and this is always Harford’s alternative, he thinks the UK should set up an immigration marketplace, a sort of eBay for work permits.

Here’s a crazy alternative: the government could restrict immigration simply by auctioning the right to work in the UK. Permits would have various durations (a month, a year, in perpetuity). Citizens would get a free lifetime permit; non-EU residents would have to pay, or persuade their employers to pay. The price of the permits would depend on their scarcity, a decision that might just be within the competence of the state.

As well as allowing employers and migrants to decide for themselves whether they would get enough out of the match to justify the price of admission, the auction system would raise money to help pay for the public services migrants are so often blamed for clogging up.

Before explaining my problem with this plan, let me just say that from a number of perspectives, it makes a lot of sense to establish an immigration marketplace. The demand for spots to work and live in Western Europe and North America vastly outstrips the supply of spots the governments of those nations offer. People wait years and even decades in order to come and contribute to these economies, or they pay thousands (and sometimes tens of thousands) of dollars to smugglers to bring them in illegally. A work-visa auction would definitely help solve a great number of the problems associated with the current immigration systems as they are established throughout the western world.

No, my problem with Harford’s plan isn’t that it doesn’t make sense. My problem with it is that it doesn’t go far enough. In a world where we are constantly moving towards the free movement of goods and capital across the globe, it’s time that we finally start taking the notion of free migration seriously. If we admit that free trade and globalization make sense, then we also have to concede that people should be allowed to move as freely as jobs and money.

What Harford is describing with his auction idea is dismantling the bureaucratic barriers to immigration and replacing them with what is essentially a massive tariff. What we really need, however, is a world where people can freely pursue jobs anywhere they like. When people complain about their jobs being shipped overseas, they should keep in mind the fact that it is far easier in the world today to ship a job away than it is to bring in a worker to do that job. Companies don’t ship jobs away because they want to have workers all over the globe, they do it because they have little other choice.

The barriers to immigration are costly. Running our immigration system and enforcing the penalties against illegal immigration do nothing to advance to our economy. We lose out on skilled workers who would love to come to the west and contribute, if only it weren’t for the massive barriers that stand in their way. Companies that cannot find skilled workers locally are forced to set up shop overseas. Conversely, workers in the west also lose out on opportunities to work their way across Europe or Austalia, or seek opportunities in the fastest growing economies in the world.

The arguments against more liberal immigration are nearly always based on xenophobia, protectionism, and misguided ideas about the burden that immigrants place on the social welfare systems we’ve established. Yet, nearly every serious economic study of migration finds that more liberal immigration policies benefit both labour exporting and labour importing nations. It’s time to get past our fear and realize that freer migration is in the best interests of us all.

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It’s Not Easy Being Free

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For a number of observers, one of the most confounding things about Radiohead’s In Rainbows experiment last year was that even after the band allowed fans to download the album from their website, a huge number of people decided to download it via bit torrent instead.

Forbes noted, “But for hard-core music pirates, even free hasn’t been enough of a draw. According to music industry analysts, hundreds of thousands of Web users who frequent copyright-infringing file-sharing sites, including The Pirate Bay and TorrentSpy, have chosen to download In Rainbows illegally, distributing their contraband around the Internet just as they might with any other pirated album.”

Now comes the news that even though the season premier of Prison Break was available for free on Hulu.com and Fox.com, more than a million people decided to torrent it instead. Cue hysteria. Betty Shiffman over at Wired quotes Robert Rosenberg, president of Insight Research:

“This is a group of people who define themselves in part by the technology they use and the application of that technology. Chances are that this is only happening in a defined age group. You’d be hard-pressed to find 60 year-old guys passing this stuff off to their buddies.”

This is just plain wrong. Downloading a movie via bit torrent instead of watching it on Hulu has nothing to do with a technology identity or a pirate mindset. First of all, I’d be willing to bet that a lot of those downloads came from outside the US, where content on Hulu and Fox is blocked. If you’re in Canada or overseas and people are talking about the new episode of your favourite show, then of course you’re going to bit torrent it, you’ve given these people no choice. It’s not that they identify as techno-pirates, they identify as fans of the show.

Next, what this whole issue really comes down to is two competing products. One is available in the same place as all the other products someone downloads (a bit torrent search engine) and one you have to go out of your way to get. Given two identical products, people will choose the one that’s more convenient for them. It’s the difference between going to a butcher shop to get your meat or a grocery store. A lot of people don’t mind going out of their way to go to a butcher, and even paying more, but in return they have to get a better product.

It’s not enough to take your product, make it free, and throw it up on the Internet. If you want to complete with piracy, you have to offer a better product than the pirates offer. One way to do this, for example, would be to build a robust community around the website for fans of the show. That way, fans who missed an episode could watch the show at the same place they get their fix of spoilers or speculation and chat with other people who love the show. So far, the networks have done a terrible job of creating online communities, getting their asses handed to them by sites like Television Without Pity.

The Wired article also quotes Eric Garland, the CEO of Big Champagne.

The networks haven’t necessarily improved upon the experience on pirated sites, so users don’t have much incentive to leave those sites.

This is dead on. Media companies have to figure out ways of improving the product they offer on-line. If they do that, people might even be willing to pay for access, the same way people long ago chose to pay for cable instead of relying on over-the-air broadcasting. Give us better choices and a better product and we don’t even mind if the butcher puts his thumb on the scale every now and then.

I, for one, Welcome our Big Government Overlords

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Every election cycle, men and women who have dedicated their lives to government come before the electors and decry at length the failures of government. They promise to reduce its size and its reach. They realize, they say, that government does not have all the answers to their problems, so they promise “less government” and “lower taxes.” These are no longer solely shibboleths of the right; they are the most mainstream of ideas.

The appeal of Ron Paul, particularly among the young, technocratic elite, demonstrates just how attractive these ideas are, even in their most extreme form. Paul would dismantle the EPA, the FDA and the Federal Reserve, just for a start. For, in the minds of Libertarian extremists, there is nothing that government provides that could not be better handled by the all-knowing, all-powerful free market. This is an article of faith with these people. They are the Christian Scientists of economics. “Forget about trying to solve your problems,” they say, “just put your life into the hands of the free market and everything will be just fine. Its will be done.”

Today, in the Ideas section of the Boston Globe, Jeff Madrick mounts a vigorous defence of big government and provides an indictment of the accepted wisdom that low taxes lead to economic growth. Madrick points to the work of mainstream economist Peter Lindert, quoting from his 2004 book, Growing Public: ”It is well-known that higher taxes and transfers reduce productivity. Well-known – but unsupported by statistics and history.”

According to Madrick:

Lindert’s work surveyed a century of data across numerous countries and found that high taxes and social spending did not slow the growth of productivity or GDP. Statistically speaking, Lindert found no relationship between the level of social spending and economic growth. High tax nations like Norway grow rapidly and produce high standards of living. Even the income per hour of work in nations like France and Germany is equal to or even exceeds America’s.

We’ve become so cynical about the government, so embittered by our interactions with less-than-competent public officials, so disenchanted by sex scandals and broken promises, that we forget that public services, despite all their failings, power the economy, regulate its abuses, and increase the standard of living for all us.

From building the railroads and the highway system, to developing our universal educational infrastructure, right up to the government research and leadership that gave us the Internet (thanks, Al Gore – no, really!), government programs and social spending are often the engine that drives progress.

Madrick, whose latest book, The Case for Big Government, will be released in November, sums up like this:

There is no rich nation in the world today, including America, that has grown wealthy without significant government involvement. And there will be no rich nation in the future that can stay wealthy without robust government, either.

It’s obvious that government can’t solve all of our problems, but neither can the market. It is only a healthy balance of both that is capable of making the kind of future that we want. Now all we need is a government that we can believe in for a change.

Free-conomics & copyright law

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Over at The Long Tail, Chris Anderson has a great post outlining the various models a business can employ to make money even when they find that their main product is being distributed for free.

The list comes from a 2004 paper by Hal Varian, Google’s chief economist. The paper starts with a great overview of the history of copyright, which is well worth the read.

One of the arguments advanced by the paper is that in the 18th and 19th centuries, while the US was still a “developing nation”, the American courts refused to recognize international copyrights. When, and only when, the US economy advanced to the point where it was in their best interests to see their copyrights respected overseas did they start to respect the copyrights of others.

The U.S. Copyright Act of 1790 was modeled on the Statute of Queen Anne, and offered a 14-year monopoly to American authors, along with a 14-year renewal. Note carefully the emphasis on “American.” Foreign authors’ works were not protected by the American law. In contrast, many other advanced countries such as Denmark, Prussia, England, France, and Belgium had laws respecting the rights of foreign authors. By 1850, only the US, Russia and the Ottoman Empire refused to recognize international copyright.
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The US was a developing country in the nineteenth century, and it was hardly surprising that it found it attractive to free ride on the intellectual products of other, more developed countries, such as Britain.

Considered in this light, copyright and patent infringement in China and the developing nations of the world today is a lot harder to condemn. 

Some Links:

Kevin Kelly gives a great rundown of ways to compete with free business models.

Here’s Anderson’s seminal piece in Wired, on why “free” is the way of the future.

And here’s a piece I wrote (for the now sadly defunct TQ Magazine) on why content providers stand as much to gain from piracy as they stand to lose.