I swear I know how to use the Internet in general, but I somehow managed to type my name in the wrong place when trying to access my Facebook page, which mysteriously lead to Googling myself. (I don’t care how completely that verb enters the popular lexicon, it will always sound dirty.) Anyway, those of you who have ever, well, Googled anything know that a few image search results show up near the top of the first page- I noticed one of the photos and was like “heh, I don’t remember taking that photo…” Luckily, that is because the photo was originally part of a video and not because I am ridiculously unaware of stalkers, given that I was looking at the camera in said photo:
Anyway, the video…I did a few videos a while back for a production company that was looking to put together subscription-based materials for introductory econ classes, and the company made the video on natural monopoly one of their free preview videos, which you can see here. (Hopefully, watching this video will help you understand why I am posing with a Verizon truck, if it wasn’t already obvious.)
Or, tl;dw (didn’t watch, get it?): Regular monopolies get to be monopolies because of some usually artificial barrier to entry such as intellectual property protection. Natural monopolies get to be the only game in town because their fixed costs have already been paid (and are therefore sunk) and their marginal costs are low, so they can lower price in order to make it unprofitable for others to enter. In related news, the cost structure of natural monopolies means that it makes economic sense for only one to exist in an industry at a time, but regulation is often a good idea, since natural monopolies left to themselves result in the same inflated prices and reduced supply that regular monopolies do.
Tags: Econ 101
Okay, so my last post mentioned my desire for an Economist political party, but I don’t think that this is what I had in mind:
(See here if you are feeling procrastinatory and want to watch the second part of the segment.)
First off, I can’t help but focus on the fact that Rate My Professors is apparently fair game for information sleuthing, so, in all probability, the student review that said I would make a good wife if only I learned how to cook will come to light if I ever become famous and/or infamous. (And yes, I’m still pissed that the little sh*t incorrectly assumed that I can’t cook.) More generally, this story is making the ambivalence center in my brain hurt. Let’s take a quick inventory:
- David Brat is in fact an economics professor at Randolph-Macon College, and he has a Ph.D. in economics from American University. (Yay!)
- David Brat also has a degree from the Princeton Theological Seminary. (a bit odd given the other facts, especially the Ayn Rand thing that we will get to, but neither here nor there)
- The above facts imply that the Tea Party isn’t entirely terrified of intelligent and/or educated people. (Yay!)
- None of the economists I talked to had any idea who David Brat was before this event. (technically not terrible, but potentially worrisome) I’ll let you all judge his CV for yourselves.
- Accoring to TPM, “Brat is also the director of the school’s BB&T Moral Foundations of Capitalism Program, a bank-branded program intended to give “free-market principles” — and Ayn Rand’s philosophy of Objectivism in particular — a leg up in the classroom.” (*facepalm* Am I the only one who finds it hilarious that anything having to do with the moral foundations of capitalism has a corporate sponsor? I am incredibly suspicious of these sorts of programs and centers because I feel pretty strongly that good scholarship can’t promise to give anything “a leg up.” In addition, Brat does realize that Ayn Rand was an atheist, right? I kind of want this to be a dealbreaker in my pro/con analysis, but most people gave Alan Greenspan the benefit of the doubt regarding his Ayn Rand obsession, so I will try to withhold overall judgment.)
- As the above article’s comments note, we can now look forward to the existence of a “Brat PAC.” (Yay! I like bad puns.)
- Regardless of how you feel about his policies, you have to admit that Eric Cantor is kind of an obnoxious twerp. (Yay!)
- It’s pretty appealing to root for the underdog (seriously, Cantor, more on steak than Brat spent on his whole campaign?), and, as one who studies incentives, it’s nice to see effort be rewarded and entitlement be punished. (This reminds me of the Coakley/Brown election for Ted Kennedy’s senate seat in Massachusetts where Democrat Martha Coakley made arrogant comments about how shaking hands with people outside Fenway Park was beneath her and subsequently lost to Republican Scott Brown in a very blue state.) (Yay!)
- Brat’s position is that Cantor is too liberal, specifically where immigration reform is concerned. I’m pretty sure I read somewhere that Brat wants to build a giant fence. (Yikes, especially since this suggests that Brat doesn’t fully appreciate the opportunity cost involved in resource utilization.)
- As Justin Wolfers notes, Brat is one of very few politicians who will actually admit when he doesn’t have an answer for something. (Yay!)
Overall, I don’t think I agree with Brat’s ideology (though I will admit that he does have his moments), but I do think that he’s better than the Tea Party label suggests. That said, I am frustrated that one side effect of this development is that everyone watching cable news is getting the phrases “Tea Party,” “economics professor,” and “Ayn Rand” in close proximity over and over, so I do understand and feel the desire to point out that this guy’s views don’t represent those of the typical economist. Especially as far as immigration is concerned.
The more I read about this, the more interested I become in how UNH’s Dan Innis will fare in his Congressional bid.
Tags: Policy · Uncategorizable
This is from a book on climate change, but the principle definitely holds more widely…(click for larger)
(thanks to EconLog for the images!)
This concept- that researchers don’t have the luxury of always running randomized controlled experiments (i.e. randomized controlled trials, or RCTs) to determine what affects what- is what leads a growing number of microeconomic researchers to search for good instrumental variables in order to, to a degree, simulate some form of randomization. In addition, researchers in microeconomics have been increasingly able to go out and perform field experiments in order to have a good deal of control over the data that they create and collect- just ask John List or Esther Duflo, for example.
In macroeconomics, however, it’s hard to even conceive of how experiments to answer most questions would be carried out. Say you want to analyze tax policy- do we tell people that if their social security number ends in an even number then they get a tax break (and that if it ends in an odd number they don’t) and then see what happens? In an immediate sense, I don’t need to do the experiment to tell you what’s going to happen- some combination of rioting and a deluge of of those petitions that the White House has to respond to if they get enough signatures, depending on how much initiative the nation is feeling at the time. Even in an economic sense, though, this experiment wouldn’t be very useful- after all, in order to get a clean result, we’d basically have to have the tax break consumers only interact with one another and the non-tax-break consumers to only interact with one another. (Just imagine the strife this would cause in households where one spouse has an even social security number and the other has an odd one.)
The experimental logistics problem only gets worse when we look to answer questions regarding economic growth- can we form an econ army and take over a country, divide it randomly in two, subject the two parts to different institutions or capital investment and observe what happens over time? Probably not, though the idea does dovetail nicely with my suggestion of an Economist political party. Luckily, we don’t have to, since countries like Korea have pretty much done this for us, in a way, and they provide interesting natural experiments to study.
If you don’t think that being limited to observational data is bad enough, just consider the fact that government economic policy is usually endogenous to the economic situation at hand- people think I’m crazy when I advocate for a government that conducts monetary and fiscal policy in an unpredictable manner, but that would actually be a big win, for research purposes at least. (Insert lame joke about the government seeming to want to help out researchers here.)
Tags: Fun With Data · Macroeconomics · Policy
It’s no secret that many economists believe in the efficiency of markets- in fact, there’s a fairly well-known joke that goes something like the following:
Normal person: Hey look, somebody dropped $20 on the sidewalk.
Economist: Nonsense- that can’t be a real $20 bill, since, if it was, somebody would have picked it up already.
More generally, one feature of efficient markets is that all transactions that are profitable for all parties involved actually happen. This, however, doesn’t mean that no one can profit in an efficient market (which is why the economist in the joke’s logic is absurd), it just means that profit opportunities aren’t left on the table indefinitely in an efficient market.
The efficient-markets hypothesis puts a bit more structure on this concept, especially as it relates to financial markets (i.e. markets for stocks, bonds, etc.). The efficient-markets hypothesis, at its core, suggests that asset prices are “correct” in that they properly and rationally reflect all available information. This feature of efficient markets, according to economists, occurs precisely because market participants quickly take advantage of all of the ways to profit from asset mispricings, and these actions bring prices to their proper levels.
In another context, then, the efficient-markets hypothesis taken to the absurd extreme gets us this:
Full disclosure: I helped with this one, so you should probably blame me if you don’t like it. Also, my economist friends and I found a $10 bill on the ground at the zoo last week, and we actually picked it up- good thing I’m a behavioral economist, otherwise I might worry that my economist membership card would get taken away. (Then again, we did have a longer than reasonable conversation about how we should split the $10, so perhaps not.)
In related zoo news, economists understand the value of scarcity as it pertains to animals:
Also, I need this sign for my office…
…mainly because it would mean I get to research the economics of pandas.
First off, I will be the proud owner of this in 4-5 business days:
In related news, Stephen Colbert offers up an explanation for the above item as it relates to Thomas Piketty’s Capital in the Twenty-First Century:
In case you haven’t been following along, allow me to get you up to speed: French economist Thomas Piketty wrote a book that is essentially 600 and some odd pages on wealth inequality in French, it got translated into English and became the number one seller on Amazon. (Not number one in economics, number one overall, as Colbert notes. Colbert made a Harry Potter joke, but you can basically think of of the book as 50 Shades of Economics, though better written than the original- not that I would know. This is actually a big deal if for no other reason than it follows a lot of discussion on how nobody pays attention to economic scholarship.) Various scholars and media outlets, most notably the Financial Times, have accused Piketty of errors reminiscent of the Reinhart-Rogoff austerity paper debacle, but Piketty responded with what basically amounts to an intellectual smackdown. (You can read a far more elegant summary here.)
The r and g, as Piketty uses them, refer to the return on property and investments and the rate of economic growth, respectively, and he argues that r being larger than g leads to increasing concentration of wealth. This is mostly reasonable but initially seemed a little odd to me from a notation perspective, since, if I remember my macro correctly, r generally represents the real interest rate and g generally represents the growth rate of technological progress. BUT…I suppose that the real interest rate if capital markets are competitive is equal to the return on capital (i.e. the marginal product of capital minus depreciation) and, along a steady state balanced growth path, the growth rate of the economy is in fact equal to the growth rate of technological progress. (Now who’s deathly boring, Colbert?)
Let’s go to Piketty directly, since he can obviously explain himself better than I can do so on his behalf:
Actually, the book is more interesting and nuanced than that interview suggests (at least the beginning of it), since Piketty certainly does a lot more than rehash the minimum-wage debate.
While watching the Colbert segments, I couldn’t help but giggle at Colbert’s choice to commiserate with Tony Stark, since Stark and the actor that plays him show up in a related work on the subject of income inequality:
Yes, the Wealthy Can Be Deserving
by N. Gregory Mankiw
In 2012, the actor Robert Downey Jr., played the role of Tony Stark, a.k.a. Iron Man, in “The Avengers.” For his work in that single film, Mr. Downey was paid an astounding $50 million.
Does that fact make you mad? Does his compensation strike you as a great injustice? Does it make you want to take to the streets in protest? These questions go to the heart of the debate over economic inequality, to which President Obama has recently been drawing attention.
I’m not sure whether I would rather think that the significance of the bit was a conscious choice or that the world just happens to come full circle when appropriate. (Who am I kidding- I absolutely want the Colbert writers to read as much of the econ interwebs as I do.)
Tags: Economic Growth · Macroeconomics
Traditional economic models assume that the utility, or happiness, one gets from consuming an item depends only on how fundamentally useful the item is to the consumer. Under this model, an item’s utility must be independent from the price that the consumer paid for the item, since it’s hard to envision a scenario where the price paid for an item actually affects how useful it is (holding item quality and such constant, of course). Our own intuition, on the other hand, suggests that we get psychological warm fuzzies (or, conversely, cold…uh, slimies?) when we feel like we got a good deal on an item.
Behavioral economists recognize this phenomenon, and they even have a name for it- “transaction utility.” Under the behavioral model, the total utility that that an individual gets from an item is the sum of “acquisition utility” (roughly speaking, what traditional economists just call utility) and “transaction utility.” This model is interesting because it suggests that consumers can be convinced to buy stuff that they don’t rationally like enough to buy by making them feel like they are getting a good deal. (I think I’ve mentioned before how I am convinced that transaction utility is what keeps Christmas Tree Shops from going under.)
Economist Richard Thaler discusses the concept of transaction utility in his paper “Mental Accounting Matters”. In this paper, he gives the following anecdote to illustrate the irrational behavior that transaction utility can cause:
A friend of mine was once shopping for a quilted bedspread. She went to a department store and was pleased to find a model she liked on sale. The spreads came in three sizes: double, queen and king. The usual prices for these quilts were $200, $250 and $300 respectively, but during the sale they were all priced at only $150. My friend bought the king-size quilt and was quite pleased with her purchase, though the quilt did hang a bit over the sides of her double bed.
So let’s think about this- from what we know, we can probably infer that the double size quilt would give the friend the highest level of acquisition utility, since people generally like to have items that fit on the other items they are designed to go on. But the consumer is lured away from that choice by transaction utility, which is likely highest with the king-size quilt, since it had the biggest discount. (More specifically, the king-size quilt has the highest sum, or total utility, even though it probably doesn’t have the highest acquisition utility.)
Now that you are primed with this lesson, let me ask you a hypothetical question: What would you do if you got a coupon that would give you any drink at Starbucks for free? If you answered this, you’ve likely missed the point of the above discussion:
Apparently that is a sexagintuple vanilla bean mocha Frappuccino, and it has a regular price of $54.75. (The container for said drink, in case you were wondering, is a vase that the customer brought from home.) I am very tempted to think that this beverage is the equivalent of the king-size quilt, since what person in his right mind actually finds this beverage to be coincident with rational optimal consumption, even when taking cost out of the picture? That said, I am willing to reconsider my judgment, given the subsequent news that the customer actually drank the whole thing…eventually. In related news, let’s discuss how this beverage and gout medication are likely to be complementary goods.
Tags: Behavioral Econ · Buyer Beware