Producers of Structured Indolence

Economics, Travel 2008-08-09 09:28

“There is also the question of competitive advantage. Most nations gain their advantage by making things more efficiently, and at lower cost, than their competitors.

To the extent that the French enjoy a natural advantage, it is in their inefficiency: They are the world’s most efficient producers of structured indolence. They are the kept women of the global economy; their status depends, in part, on their practical uselessness.”

Having just gotten back from a week in France, I can wholeheartedly confirm this. The quote is from the extremely enteratining Sarkozy Forces the French to Join the 1980s by Michael Lewis (by way of Megan McArdle).

Endowment Effect

Economics 2008-07-06 02:42

“From basketball tickets to waterfowl-hunting rights to classic albums, once someone owns something, he places a higher value on it than he did when he acquired it - an observation first called “the endowment effect”. […]

The endowment effect has been seen in hundreds of experiments, the most famous of which found that students were surprisingly reluctant to trade a coffee mug they had been given for a bar of chocolate, even though they did not prefer coffee mugs to chocolate when given a straight choice between the two.”

From It’s mine, I tell you

Creating Economic Value

Economics 2008-03-30 04:46

You know what really bugs me? Activities which don’t create economic value.

Almost everything human beings ever do create economic value - in the broad sense of value equals happiness. Watching a movie, helping your child with their homework, even reorganizing your sock drawer (if you enjoy well-organized socks) all create economic value. This, of course, is in addition to the more common things we’d think of in association with that term, like doing some work for an employer or a client.

But some activities create no economic value, or worse, destroy it. Take the upcoming economic stimulus package. Put aside for the moment whether you think that taxes are too high, too low, or just right. Also put aside whether economic stimulus packages work (though I recommend this podcast if you’re interested in the historical evidence on both sides of that argument).

Instead, ask this: what is achieved by having the federal government take several thousand dollars of your income, shuffle it around between a bureaucrats for the better part of a year, and then mailing you back a check for $600 at the end of it all?

No economic value is created by this activity. You might think - hey, the government employees who shuffled all the money around got paid, how about that? But that would be just another version of the broken window fallacy. Those people could have been paid to do something else - something useful, that creates happiness for others in the world.

When you witness a process in action - business, government, or an activity of your own - take a moment to consider: does this create economic value? And to answer that question, you have to ask: is someone made happy by this? Happier than they could be made by putting those same resources to some other use?

Banks Suck

Economics, Politics 2008-02-01 09:56

Banks suck. I roar these words in frustration at least a few times a year, and you might, too. The reason is not hard to guess: banking is an industry subject to heavy regulation, and such industries tend to be very poor at meeting customer needs. (Other examples include health insurance and air travel.)

Banks make most of their money on consumer checking accounts through two mechanisms:

  • Fees, like check printing and overdrafts.
  • Interest on float. You deposit a check, they get the funds from the other bank in about 24 hours, and then they prevent you from accessing the money for the next three days to three weeks. They collect the interest in the meantime.

Both of these mechanisms for making money put their incentives in direct opposition to that of their customers. It’s in the bank’s interest for you to bounce checks, because those fees are a major source of revenue. So giving you tools to make it easier to know what your balance will be on a given day, for example, would actually hurt their revenue.
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The Long Tail

Hardly breaking news, but I came across this quote recently and was reminded of how happy I am that we now live in the world of the long tail:

“We’ve been suffering the tyranny of lowest-common-denominator fare. Why? Economics. Many of our assuptions about popular taste are actually artifacts of poor supply-and-demand matching - a market response to inefficient distribution.”

From The Long Tail by Chris Anderson

The Next Generation of Air Travel

Economics, Travel, Infinite Series 2007-10-04 01:20

Air travel in the US sucks. Not just because of security checks in the airports: the airlines themselves are all very lackluster, sometimes downright maddening. This is the unfortunate outcome of being a highly regulated industry: the free market is constrained, and consumers of the product (in this case, passengers) get low-quality products and/or higher prices than would otherwise be the case.

There is some hope on the horizon. Southwest was one of the first, and more recently we’ve got JetBlue. Now Virgin America has joined the fray. Here’s a review of their inagural flight, including screenshots of the realtime Google Maps display available in each seat.

Next time you fly, try taking one of these guys. They are cheaper and better in most ways. Keep in mind that Southwest and JetBlue often use smaller airports (i.e., BUR or ONT instead of LAX, OAK instead of SFO). I consider this a bonus, since smaller airports have easier parking and shorter lines.

The Prize

Economics, Politics 2007-04-15 10:51

“The rules by which society decides wheter to select or reject a given invention are part of its institutional structure. Any change in technology leads almost inevitably to an improvement in the welfare of some and to a deterioration in that of others. […] Unless all individuals accept the ‘verdict’ of the market outcome, the decision whether to adopt an innovation is likely to be resisted by losers through non-market mechanism and political activism. […]

‘The old must nearly always win, but the few newcomers that score an upset victory carry away the prize of the future.’”

From The Gifts of Athena: Historical Origins of the Knowledge Economy by Joel Mokyr

When you spot a corporation trying to win its battles through politics instead of in the market, that means the market has chosen against it. That corporation’s product or technology is inferior to some other available choice on the market, and is destined to die in the face of its superior competition.


Economics, Entrepreneurship 2007-02-16 10:12

“Profit is not something that we have to apologize for. Profit is proof that the capitalist has given something to society that it cherishes more than the material wealth it has given to the businessman.”

From Entrepreneurs Are the Heroes of the World (warning: pdf link) by Johan Norberg

The sentiments in this piece really hit home - I suppose flattery works well on anyone, even me. :)

Poor People Live Like Kings

“People in <insert poor country here> live off of less than $1 a day.”

How often have you come across a phrase like this in a magazine or on the news? When we encounter a figure like this, we shake our heads in pity the poverty of these individuals, and give thanks for our own good fortune.

Recently I read an article which described the lifestyle of a family living in India, one of the poorest large nations on earth. The article pointed out that the family was living the exact same way that their great-grandparents had a century ago. Same farm, same farming techniques, same quantity of food, same clothing. Note that their great-grandparents were not poor; it is only the modern individuals (according to the article) who are.

Wait a minute: their lives are almost exactly the same as their ancestors, yet we call one of them poor and the other not? Why? If their lives are the same, shouldn’t they get the same label?
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Helping the Poor

Economics, Politics 2006-06-28 04:00

Arnold Kling tackles some problems with a welfare-state approach to providing aid to the poor. Some choice clips:

“Government programs persist not because they help to alleviate social problems but because they develop political constituencies. Thus, we have a food stamp program, when the number one nutritional problem among the poor appears to be obesity. I am not saying that I don’t think that poor people need help obtaining food. But a program that was focused on poor people rather than as an indirect way to aid the farming constituency would probably operate rather differently than our existing food stamp program. With government, political goals inevitably interfere with what from an idealistic perspective would be the “public good” intent of a program.”

“Charitable organizations are better than government as a source of aid. First, it is easier for donors to hold charitable organizations accountable than it is for taxpayers to hold government accountable. A failed government program can go on forever. An ineffective charity has a more difficult time obtaining funding.”

“Those organizations that work directly with poor people stand a better chance of learning how to meet their needs than people who lobby in Washington on behalf of the poor.”

“Charitable organizations are better suited to dealing with the pathology of poverty. When people get checks from the government, they tend to think of this as an entitlement. They are getting money in exchange for doing nothing. They learn that this is how you get money — you take it from others. Taking money from others is what criminals do. Productive people get money from other people by exchanging something of value.”