Tuesday, December 16, 2008

Game Console Economics

This post is related to an exam question for my Econ 265 students.

Microsoft, Nintendo, and Sony have all released new game consoles in the past three years (the Xbox 360, the Wii, and the Playstation 3, respectively, and in that chronological order). In each case, these companies apparently sold their consoles for prices below the market clearing price. Upon release, all three consoles sold out quickly, and could be found on eBay for prices significantly higher than their full retail price. Microsoft managed to address the problem fairly quickly with increased production. Sony had the problem solved for them as the high sales were not sustained. The Wii, however, continues to be difficult to reliably obtain, and still sells for a premium on eBay. Why is this? 

To elaborate, the puzzle is as follows: Nintendo could have sold just as many consoles at a higher price, giving them higher revenue with no extra cost--that is, higher profit. Why didn't they sell the Wii for $300 instead of $250? Why not sell them on eBay and get whatever price they can get? Nintendo (and the other companies) is leaving hundreds of millions of dollars on the table. Why?

Tim Harford, who is a better economist and writer than me, tried to answer this question when the Xbox 360 shortages appeared. When I ask this question, I usually get the same wrong answers that he got. Let's first dispose of some answers that cannot be correct.

Bad Arguments:
1) Good will: These companies cannot be forgoing profits to accumulate good feelings from consumers. One reason is that they have to wait in lines to get the product, which probably doesn't make them happy. Another reason is that good will is only so valuable. If Nintendo sells 2 million consoles and foregoes $50 per console, they just gave up $100 million. They've now sold over 15 million Wiis. Again, if they're giving up $50 in revenue per console, that's $750 million foregone. Good will is nice, but it's not that nice. 

2) Market share: It doesn't make sense to say that they're selling at such a low price to gain market share because they could sell just as many at a higher price
-Getting media attention: This surely cannot be an attempt to gain media attention and free promotion, because they could also get attention by selling out all their product at a higher price. Besides, what good is media attention if you don't have any product let to sell?

3) Game console companies just goofed up, picking the wrong price. This raises the question of why they don't just change the price. Sure, it would anger some consumers, but the companies could probably live with that while carrying their extra hundreds of millions of dollars to the bank. On the other hand, they've already got agreements with retailers stipulating the price, so maybe it's just too costly to change it. This still doesn't explain why every console maker repeatedly makes this mistake.

Here are the good arguments that Tim Harford and his readers came up with.

Good Arguments:
1) Microsoft underpriced in order to avoid antitrust scrutiny. By charging a high price, they might be accused of being a monopoly charging a monopoly price. On the other hand, by charging a low price they could be accused of predatory pricing, so I'm not sure this argument works.

2) Customers for each console are extremely price sensitive. At a price of $350, everyone wants the Xbox 360. They'd be willing to pay up to $375, but if the price goes up the tiniest bit above that point, everyone waits for the Playstation 3. Microsoft, which isn't exactly sure of the proper price point, charges $350 to be safe (this explanation was proposed by Alex Tabarrok). It wants to do everything possible to prevent Sony from making sales. This explanation works fine for the Xbox 360, but doesn't explain the Wii or the PS3 very well. 

3) Suppose that game developers are not sure which console manufacturers plan to stick around (because they have confidence in their product), and which ones plan to float their product and then cancel it if the launch doesn't go smoothly. This is important for game developers, as game development is very costly, and involves high fixed costs, which will be sunk and unrecoverable. Then console manufacturers that are confident in their product can signal their confidence by foregoing some revenue on the hardware. They know that they will eventually make up the lost revenue with game licensing fees, and as costs of production fall, they may even be able to make a profit on the hardware at the current price. The longer they plan to stick around, the more profit they can afford to initially forego.

Someone is likely to point out here that Nintendo actually does make a profit on the hardware right now, due to its low cost, but that's not actually the point. The point is that they could make a higher profit by charging a higher price and getting just as many sales. A console maker that is not sure if it plans to stick around for years cannot afford to forego revenue upon launch of the product. For any Econ 307 students reading this, think of the peacock signaling its genetic health with its big tail.

This argument was inspired by a paper presented by Angelina Christie at the SEA meeting this year (her paper was about signaling and IPOs, but it could also apply here). The console maker may also be signaling to consumers, indicating that it plans to support the console and release games for a long time. Consumers therefore feel safer buying the console, confident that they will have new games to buy for years to come.

4) Vinit Jagdish presented a paper at the SEA meeting inspired by this very topic, and his clever argument was also information-related. Suppose that console makers are not sure the extent to which consumers consider their products to be close substitutes. Only after the products are released, and customers buy them, will producers gain information about the demand for these products. If two products--say, the Wii and the PS3 are perceived as close substitutes, then it is hard for the companies to avoid Bertrand-style Competition. That is, a price war might occur, with both companies slashing prices, resulting in lower profits for both firms.

But suppose that Nintendo releases its console at a very low price, so that it can only be rationed by queue. Sony has less information available than if Nintendo charged a higher price. That is, Sony doesn't know if the Wiis are selling because they're a cheaper alternative to the PS3, or because they're just plain cheap. Sony is therefore reluctant to start a price war, because it cannot accurately calculate the cross-price elasticity of demand. 

One possible problem with this argument is that, of the current console generation, the PS3 and the Wii are the least likely to be close substitutes in the first place, given the large gap in prices and abilities of the two consoles. Nonetheless I think it does make sense. 

Can you come up with other explanations? I'll be looking over the exams and posting interesting solutions here.

My thanks to Vinit and Angelina for their interesting presentations at the meeting. 

Sunday, December 07, 2008

Magnum P.I., Evolutionary Philologist?

Or should that be linguist? Etymologist? I'm not sure of the proper term here.

While writing exams I've had episodes of Magnum P.I. playing on Netflix in the background. For those of you who have never seen it (I'm looking at my students, here), it's a good but goofy 1980s detective show, set in Hawaii, starring Tom Selleck. If you can put up with bad 1980s action music, it's worth watching. 

In this particular episode Thomas Magnum is pursuing a cat burglar while working as a hotel detective. He gives the following monologue, which I recall enjoying when I last saw this episode years ago (I forgot all about the story and such, but I remember this bit):
I didn't think the cat-man's taunting note was the height of subtlety, either. And I guess neither is that old adage about killing two birds with one stone. But the reason clichés are clichés is because ultimately, they're either true, or they work. That's why you never hear sayings you've never heard before. Those are the ones that didn't work. Which is all to say why I was hoping this one would.
This is some fun evolutionary reasoning. On the other hand, what are we to make of contradictory clichés, such as "many hands make light work" and "too many cooks spoil the stew"? Presumably we are to balance the two, finding the point where Marginal Revenue Product equals Marginal Factor Cost. I suppose MRP=MFC isn't very pithy.

Thursday, December 04, 2008

It Is Not Your Duty to Spend

My colleague Art Carden wrote  a great editorial on Christmas and consumption. On NPR a couple weeks ago I heard a discussion of consumer spending, and one of the panelists (I wish I could remember a name or the name of the show) suggested that it makes about as much sense to "spend to save the economy" as it does to say that we should all eat cholesterol-rich diets to make sure that cardiologists stay employed. 

Over Thanksgiving a family member asked if we should be spending in order to stimulate the economy. It's frustrating to me that so many people seem to be pushing the view that consumption for consumption's sake is patriotic. There was an editorial in the Tennessean recently exhorting people to spend. I suppose one could argue that there is a sort of prisoner's dilemma in Aggregate Demand falling (if we both spend we could avoid recession, but if you don't spend and I do, then we enter recession and now I'm even poorer than I would have been if I had just saved), but trying to persuade people individually to carry on as usual seems about as productive as telling people to reduce their individual greenhouse gas emissions. 

My advice: Be thrifty. Don't buy for the sake of buying. Do not buy because someone tells you it is your duty. Buy when you see a really good deal on something you need and you can afford it. Frivolous spending on things you don't really want is a waste of resources. This may sound obvious, but the fact that some people exhort us to spend, and some of us listen, suggests that my advice isn't completely trivial. 

Wednesday, December 03, 2008

Used Game Sales Again

I have posted previously about used video game sales. Game publishers and developers continue to take the position that used game sales are harmful to the industry. 

I still cannot understand this logic. Suppose I would be willing to pay $35 to play a particular game. Its retail price is $50. I will not buy it. If, however, I could resell it when I'm done for $20, then my total willingness to pay is now $35+$20=$55. I choose to buy the game, with a net gain to me (a "consumer surplus") of $5.  Every dollar I lose from inability to resell is a $1 reduction in my willingness to pay for the product in the first place. 

It is true that the existence of used games means that some people who would have paid $50 end up paying $20, and that the producer of the game does not get any of this $20. This is not unique to video games, however. This is, in fact, true of all goods and services that can be resold. If you buy a painting for $1,000, and later resell it for $1,200, the painter does not get any of the $1200. Suppose there were a law prohibiting resale of the painting. Then the original buyer would be less willing to buy it in the first place. The painter would make money on resales, but he would make less money on the original sale. 

The same holds true for video games. If I know that I cannot resell my game after buying it, I am less willing to buy--my willingness to pay is lower. Do video game publishers and developers really think they will make a great deal more money selling all games for, say, $30, and prohibiting resale? I don't see how. 

So, then, what is the reason why publishers and developers take this position? Are they simply mistaken? They should know what is in their interest better than I do, but companies do sometimes ignore good opportunities and use flawed reasoning. Is there some other reasoning I missing? Maybe the companies pushing this position feel that reducing used game sales would somehow give them a competitive advantage against other companies, rather than helping all game companies. 


Popes and Private Roads

When I was in D.C. for the Southern Economic Association meeting a couple weeks ago I rode the metro. There was an old notice posted on the train warning that some streets would be closed as a result of the Pope's visit. 

It occurred to me that this is a strange example of the Theory of the Second Best. Suppose the government took a laissez-faire approach, keeping the roads open. If the Pope wants to get people off the roads, he has to pay them to stop driving. Obviously this encourages people to drive in order to be paid to stop to wait for his procession to pass. He could also simply refrain from visiting, but assuming the benefits from society of his visit are greater than the costs, this might be inefficient. 

Given the inability of the market to solve this problem, the second-best (and very un-laissez-faire) solution is to simply ban driving in certain areas at certain times. The first-best solution might be to privatize the roads, if this were somehow possible. 

The two crucial and questionable assumptions in this story are 1) there is no market solution available to the Pope and 2) privatizing the roads is possible and first-best.  Maybe the Pope can, at low cost, take a helicopter everywhere he wants to go, making 1) false. 2) might also be false, if privatizing the roads leads to other market failures. I don't think this is necessarily the case, though. Shopping malls have private "roads" for pedestrians, and they work just fine. Some neighborhoods and businesses maintain their roads privately, although they not enforce traffic laws there. The real trick is how to get there from here. 

Tuesday, October 28, 2008

Ruin in a Nation

Watching a major election is a strange experience for me. People get so excited about two candidates who, in many ways, are very similar. McCain criticizes Obama's plans for income redistribution, but McCain is no stranger to redistribution (including redistribution from taxpayers to failing financial institutions, Medicare, and Medicaid). Obama criticizes McCain's support for the current war on terror, but votes for the FISA changes he used to oppose and threatens to attack Pakistan. Obama is certainly a better speaker, and if we have to listen to someone blather on for four to eight years, I'd rather listen to a good speaker than a poor one. I also will enjoy the figurative thumb in the eye of bigots and paranoid conspiracy theorists will suffer when he wins. On the other hand, I'm a bit worried about one party having such extensive control of two branches of government. We've tried that for a while, and it hasn't worked out well. To put it another way, I greatly enjoyed the image with this blog entry

All this brings me to the strangest part of this election: people get so histrionic over what is likely to be relatively little change, for the worse or for the better. Obama fans should, as the image above suggests, prepare themselves for disappointment, as he's not going to fix all--or many--of our problems. McCain fans are probably right Obama will make some worse--every president has made some problems worse--but the country isn't going to fall apart. Things are going to continue pretty much as they have for fifty years. A capitalist country can withstand a lot of crap and continue growing. The same would be true if McCain were to win.

Adam Smith, the first great economist and author of The Wealth of Nations, was once told by a worried friend that the success of the American revolutionaries at the battle of Saratoga would result in the ruin of England. "If we go on at this rate, the nation must be ruined' his friend wrote. Adam Smith's response was to write back "Be assured, my young friend, that there is a great deal of ruin in a nation".  By this he meant that every nation has in it a great deal of good and a great deal of bad, yet things keep moving along. It is very hard to screw things up very badly and irreparably. 

So Don't Panic. It's unlikely that anything terribly dramatic is going to happen. Don't get me wrong, there are all sorts of dramatic changes I'd love to see happen, and others I wouldn't like to see, but they're not likely. Even this economic downturn will end, the election will end, and things that seem important now will, in retrospect, be puzzlingly quaint. 

Monday, October 13, 2008

Superheroes and Trade

Art Carden and I have a somewhat silly piece on trade here. It's inspired by the time my wife and I went with friends to see the first X-men movie. After we left, one of our friends wondered why the X-men would want to hang around with ordinary people at all, since ordinary people are apparently jerks and the X-men can do everything better than them anyway. This article points out that even if you're able to do everything better than someone else, there are still good reasons for trade. 

Friday, September 26, 2008

The Gas Shortage Spreads

It seems the lack of gasoline at gas stations is spreading beyond Nashville, Atlanta, and Tallahassee. This article beats the price gouging drum, claiming that it's price gouging if "the station is making more profit on gas than they did before the governor declared a state of emergency." How is a consumer to know how much profit a station is making? When gasoline is scarce, the price of gasoline as an input goes up. And what if the station is currently selling gasoline that it bought for $3.50 per gallon, but replacing that gasoline will cost $4.50? To what input cost should we compare the current price? Most importantly, if we limit the price that gas stations can charge for gasoline, should we be surprised when they sell out? A high price encourages consumers not to rush out and buy gasoline in a panic. 

It's still not clear why some places are having these shortages and others are not. It's no longer restricted to state capitals, so that shoots down my earlier hypothesis. I think it is very likely that price-gouging laws and enforcement are responsible, but I do not understand the geographic pattern of shortages. 

Some Readings on the Current Financial Problems

I really don't care for macroeconomics. There are so many competing theories, few of which have predictive power (when it comes to business cycles, fiscal policy, and monetary policy, anyway). Growth theory and the cause of inflation seem to be the only macro areas with a bit of consensus. I also don't like finance, because I find money boring. I'm much more interested in the social science side of economics.

Nonetheless, people keep asking me what I think of the bailout, or who to blame for the "crisis". I don't have an opinion of my own, really--that is, I haven't formulated one from the financial data. I can only read what others have wrote on the subject. Below you'll find some good reading to get you started on trying to figure out what's been going on.

On the collapse:
David Friedman does a great job explaining what Fannie Mae (and Freddie Mac, although he leaves them out for simplicity) do, and why they are now in trouble. 
Tyler Cowen tries to summarize a paper that explains the credit crisis. There are more posts on Marginal Revolution about the crisis, but frankly, they're like this one: useless for laymen. This is a blog for economists (or at least, it is when it comes to this topic). 
Robert Higgs and Alex Tabarrok question whether there really is a credit crunch.
Brad Delong has promised a post summarizing his view of how we got here, but it's not up yet.

On the Bailout:
An open letter from quite a few economists.
Arnold Kling has been posting like mad on this subject. He's adamantly opposed to the current bailout plan (the Paulson plan).  Just go read Econlog and see all his posts. 
Paul Krugman, who is, I think, more in favor of a large-scale government intervention than many other economists, is nonetheless skeptical about the Paulson bailout plan.
James Hamilton agrees that the situation is scary, but doesn't like the Paulson plan.
A group of free market-oriented economists sound off on the bailout on reason.com.
I'm having a hard time finding any reputable economics bloggers who support the current bailout plan. 

If anyone has some more good summaries from economists, send them to me and I'll link to them. 

Tuesday, September 23, 2008

A Possible Explanation for the Gas Shortages?

I can't stop thinking about what would cause these gasoline shortages in Atlanta and Nashville. Why won't retailers raise their prices? My first suspicion was threats by state governments to punish price gouging, but then, why is this happening in Nashville and Atlanta, but not Knoxville and Macon? 

Another possibility is that it has to do with the population--the more people there are, the more likely it is that someone will spot rising prices and raise a price gouging complaint. The problem with this is that it now seems that Tallahassee is experiencing a shortage, too. That is quite interesting, because Tallahassee has something in common with Nashville and Atlanta: It is a state capital. Why would that matter? Governors--the ones issuing statements warning gas stations not to engage in price-gouging--live and work in state capitals. Could proximity to the regulatory authority be the cause of reluctance to raise prices in these cities? Tallahassee authorities are certainly investigating price gouging, although I can't find any advance announcment that they would do so  (state authorities in Nashville and Atlanta announced that they would not tolerate price gouging when hurricane Ike hit). 

This is a nice explanation, since Tallahassee is smaller in population than several other cities in Florida--the "number of eyes watching for price gouging" explanation doesn't work, but the "proximity to regulatory authority" explanation does. Unfortunately, the sample size is small (only three cities have experienced shortage), so I can't rigorously test this. and I still can't explain why only these state capitals have experienced shortages. If we see similar shortages in Montgomery, Alabama or another southern state capital, then I would be nonetheless inclined to believe that this is the explanation. Montgomery would be a nice example, since Birmingham is bigger.

I've been thinking about calling some Nashville gas stations and asking why they don't raise prices, but I can't help but think they'll be unwilling to talk to me. I probably wouldn't even get the owner on the phone. 

Monday, September 22, 2008

The Truth About the Nashville Gas Shortage

Here it is:

Thanks Jonathan Nation. The original movie, Downfall, from which this footage is taken, is really good, by the way. 

More Gasoline Shenanigans

The bizarre gas shortages continue, this time in Atlanta. I was able to drive to Memphis, finding gas about 40 minutes west of Nashville (I was concerned because of the Nashville gasoline shortage), but a friend in Atlanta tipped me off that similar shortages are appearing there. 

What the hell is going on? There are no price controls in Atlanta or Nashville. Why aren't stations raising their prices? My friend in Atlanta, Andy Slack, suggested that it may be the result of social pressure--nobody wants to be the only remaining gas station with gas, and a price of $5.00. This is possible, but if it were true, how did we ever get past $3.50, or $4.00? Why didn't we end up with shortages then? And why has this only happened in Nashville and Atlanta? 

As in Tennessee, Atlanta's governor issued a warning to stations not to price gouge. So why are the problems so localized? Albama has a price gouging law, and the governor of Alabama set it into action on Friday the 12th of September. Why haven't they had shortages? Why do Nashville and Atlanta seem to have stick prices in the face of spikes in gasoline demand? 

This is a genuine economic puzzle. There must be an interesting explanation.

Saturday, September 20, 2008

Nashville's Bizarre Gas Shortage

Gas shortages were common in the late 1970s due to government price controls. The federal government imposed price ceilings, which meant that gas stations could not raise their prices enough to deter some buyers from buying gas, while at the same time the supply of gas was falling (due to action by OPEC) . As a result, people continued buying gas until the gas ran out.

There are no such price controls today. Yet 85% of Nashville's gas stations have apparently sold out. The reasons for this are disputed. CNN claims that a rumor started that Nashville was running out of gas, causing a run on gas stations. Other news sources suggest that a pipeline is not running at full capacity due to the recent Hurricane Ike.

Even if both these things were true, they still can't explain the shortages. The reason the shortage is puzzling is that it's not clear why gas stations didn't just raise their prices. Raising prices in the face of increased scarcity communicates this scarcity to buyers, inducing them to reduce their consumption. Some consumers who were buying gasoline "just in case" might change their mind if they arrived at the station to find that gasoline was up to $5.00 per gallon.

My first guess was that there was some kind of sabre-rattling against price gouging by the city government, that had frightened the local gas stations into freezing prices. There is some evidence of this, but it seems weak to me (the sabre-rattling was state-wide; why is this problem only in Nashville?). Even stranger, the price of gas here has apparently fallen! This is extremely weird. The gas stations are giving up an opportunity to charge higher prices and avoid shortages. Why? If there's one thing Nashville drivers need now, it's higher gas prices. If you want to learn more about the equilibrating role of prices when crises occur, you might enjoy this Econtalk podcast with Mike Munger.

I have to drive from Nashville to Memphis on Monday morning. I hope that the situation has relaxed somewhat by then, as I only have enough gas in my tank to go about 90 miles. The drive is around 200 miles. I may end up taking my wife's Prius instead of my Mazda 3.

UPDATE: Jonathan Nation informed me that Knoxville has apparently had some strange behavior recently. There was a rapid spike, followed by a quick drop--exactly what should have happened in Nashville. What accounts for the difference? I don't know.

Thursday, September 18, 2008

Copyright and One-Hit Wonders

Today we discussed Intellectual Property Law in Law and Economics class, as we've been doing for several days. The students have been very active, asking a lot of questions, and critiquing various arguments for and against Intellectual Property. Intellectualy Property, of course, is the right to control one's creative works. Patent law protects  useful ideas, copyright protects the expression of ideas, and trademark protects recognizable symbols, logos, and other ideas that make up brand identity. 

Eric Hagermeyer, one of my students, had a very clever suggestion after class. It's so interesting that I have to write it down while I still have it clear in my head. 

The purpose of intellectual property law is to encourage the production of ideas. Patents encourage invention. Copyright encourages art, literature, etc. Trademark allows firms to establish a reliable identity that is useful to consumers for assessing quality. The way they do this is by giving the holders of the intellectual property right an effective monopoly over the product, allowing them to earn profits from the work. So, for example, Rush's copyright of "Tom Sawyer" allows them to collect royalties whenever it is played. The classical argument for copyright is that a longer period of copyright protection increases the incentive to create stuff like "Tom Sawyer", because bands like Rush can earn those monopoly profits over a longer period of time. Copyright protection currently lasts for the life of the author, plus 70 years (that is, his heirs or assigns receive the copyright as an asset, and it can be enforced 70 years past the creator's death).

Eric pointed out, however, that it may not work like this for long copyright periods. Instead, lengthening the copyright may encourage some creators to have one big hit, and then rely on it for income for a long time. That is, really long copyright protection might create "one-hit wonders". These creators are, in a sense, substituting leisure for labor. The copyright allows them to earn so much from their hit, for so long, that they need not create anything else. This would tend to make copyright look like less of a good idea; we want creative people to keep creating, after all, rather than resting on their laurels.

But wait, there's more! On the other hand, this long period of profit may increase the incentive for people to try to create these one-hit wonders. So a really long copyright period may reduce the creations from each individual, but increase the number of people creating things. If a diverse array of one-time hits from many people is better than many creative works from a few people, then this could actually be an improvement. It depends on how much people value the diversity, and how much diversity we get.  

This is a difficult theory to test, both because it's hard to measure the value of diverse published works, and because there aren't good natural experiments to test the effect of changes in copyright law on creative behavior. I still think, however, that it's quite clever. Good work, Eric. I do wonder if anyone has investigated this before; I haven't bothered to search Econlit for related papers. Still, this could be a good idea for a senior project, if a way can be found to test it...

Monday, September 15, 2008

Tech Odds and Ends

I'm a nerd when it comes to technology. (EDIT: Actually, I am a nerd in general.) So here are some miscellaneous things that I have been interested in recently.

Google Chrome is amazing. It is now my primary browser. There are a couple things I miss (primarily the ability to use the scroll wheel as a button and then slowly and smoothly scroll up and down by moving the mouse).  Occasionally I'll run into some java thingy or plugin that Chrome doesn't have. Aside from that, it's the fastest browser I've ever used. It has some nice features, too. You can search straight from the address bar. Just type in your search term. I still use Firefox for pages that Chrome won't open, but otherwise I will stick to Chrome.

There's a great Econtalk podcast on the Chevy Volt. It's not just about the neato technology of the Volt; it's also about the corporate culture of GM, and how the Volt is a deliberate attempt to change that culture. I'm not really a fan of GM, but in this case, I'm hoping that they'll pull this off. Oh, and for those who don't know what the Volt is: It is a kind of hybrid car, but it is able to go on batteries alone for about 40 miles. After that it uses a gasoline engine as a range extender, to recharge the batteries. It can also be plugged in. It is therefore likely that most people who drive a Volt will, on most days, never burn any gasoline.

I've been using Vista 64 for a couple months without problems. Because the move to 64 bits allows it, I decided to go from 2GB to 4GB (32 bit Vista cannot address more than around 3.5 GB). Initially I had two 2GB DIMMs in the computer, to run in dual channel mode, but upon the advice of a friend I decided to also stick in the two 1GB DIMMs that I used to have in there as well. So now I have a 3.2 Ghz Core 2 Duo with 6GB of RAM. The question is, what do I do with this thing? So far I've run a GAUSS program on it that crashed the computer in my office. This computer ran it successfully in less than 20 seconds. I've also done some audio editing with it since the upgrade, and found that it's a bit faster than the last time I did that

I've been trying to use Pandora to find new music. I have this problem: I'm incredibly picky about the kind of music I like. I tend to like music that is complicated, with lots of changes of time signatures and difficult to play. For this reason I've long gravitated toward Rush, old Genesis, and other Progressive Rock bands (I also like some ELP, Yes, and Happy the Man--cool video here--although I'm not into much King Crimson). For a while the only new band I really liked was The Mars Volta. I was hoping that Pandora would be able to use my preferences to find similar music. For the most part it failed. It even brought up Elton John a couple times. Elton John! Elton John is nearly the opposite of what I want to listen to. So I was working in my office, annoyed and somewhat insulted ("is the rest of my music this bad?"), when a song came on by Damiera and it quickly grabbed my attention. I'd never heard of them before. The song was M(US)IC from the album of the same name. I wish I could find a decent link to the song somewhere, but it's pretty interesting. Unfortunately it looks like they lost 3/4 of their members after that album, and their new sound is pretty different. It's no longer as interesting or complex (and of course, it's mostly this new music that you can hear on Myspace). Still, I'll give Pandora the credit for finding one new band I like. 

Monday, September 08, 2008

Why Can't Batman Seem to Stop those Darn Organized Criminals?

My wife and I finally got around to seeing the latest Batman movie, The Dark Knight. It was fantastic, just as the reviews suggest

It's dangerous to take lessons from movies, which are, of course, not real. Back when 12 Monkeys came out, I was at a wedding reception and someone said that the movie demonstrated that even if one had a time machine, one wouldn't be able to change the past. My response was  that it was a movie; it doesn't demonstrate any such thing. It's tempting for me to see a movie like, say, Traffic, and say "see, drug prohibition doesn't work"--but that would be a mistake. It's fiction. 

Similarly, The Dark Knight says something about criminals and organized crime. I'm not sure exactly what it says, but it says something. 

What I'd like to bring up is that poor Batman keeps having to fight these criminal organizations. (MINOR SPOILERS:) At the beginning of the movie, Batman, officer Jim Gordon, and the new District Attorney, Harvey Dent, have put serious pressure on the various gangs in Gotham. This somehow attracts a lunatic known as the Joker, who is interested in fighting Batman and sowing chaos, just for the fun of it. The movie seems to suggest that Batman can't win (or will at least have a hard time winning) because of the insanity and dedication of people like the Joker. The real question is, what about those regular, non-maniacal criminals? Why do they stick around? Why do they keep popping up? Why do they exist?

In the real world, the problem for police is not insane sociopaths who enjoy crime for its own sake. Well, mostly not, anyway. Why do actual criminal gangs exist? Why can't police stamp them out? The answer is simple: Organizations like the mafia make a profit providing illegal goods and services that people want. So long as people continue to want these goods and services--prostitution, drugs, gambling, and in the past, alcohol--these entrepreneurs will continue to enter the industry. Squeezing some of the businesses out of the market simply raises the profits of the remaining firms, just as forcing Southwest out of the airline market would make Delta and American and all the other airlines happy. 

The mafia does sometimes participate in legal businesses, such as trash collection. They use their comparative advantage in violence to reduce competition in these industries, raising their profits. I'm guessing that they also use these industries to launder profits, but that's just speculation. They may use the fashion industry to launder money. Such legal rackets are surely small change compared to their trade in illegal goods and services. Of course, the people who are attracted to these markets are those who are good at, and comfortable with, violence. With a penchant for violence, an incentive to use violence to defend their (illegal) turf, and the funds to pay for weaponry, we should not be surprised when violence is the result. 

Unless we're willing to give up the wars on drugs, prostitution, gambling, and other vices, we're doomed to keep fighting these battles over and over. Not even a super hero can prevent this. The problem isn't sadistic, homocidal clowns; it's the very real set of incentives created by the prohibitions we impose. One could make an argument that it is worth fighting this never-ending war in order to achieve some reduction of drug use or prostitution or gambling, but I would hope that the advocate of such a position would be honest enough to admit that those wars will be never-ending and violent. 

Art Carden and I had an interesting conversation about Superman this morning. Hopefully he'll write up a blog entry sometime soon on the subject. 

Sunday, September 07, 2008

Single-beer Bans

There is a movement in Nashville to ban the purchase of single servings of beer in Davidson County. The ban would apparently prohibit sales of beer involving fewer than six bottles or cans. In looking around the web for other stories of towns that have done the same, the intended purposes of the legislation usually involve reducing littering, public drunkenness, drunk driving, and alcoholism.

Let us leave aside the issue of whether or not this is even a legitimate thing for government to be doing. Will this regulation actually accomplish anything? I can't imagine how it would. Alcoholics are not going to give up drinking because of this minor inconvenience. They'll just buy six-packs, or get together with six friends and buy a six-pack together. People with a drinking problem are sick, not stupid. Yes, this regulation may, by inconveniencing some drinkers, raise the costs of buying their first-best choice of alcohol. This isn't going to stop them from buying alcohol, though; it's just going to cause them to buy differently--to substitute toward different alcohol.

This law could even make drunk driving worse. The would-be drunk need merely save up a bit more and buy a six pack, leaving him with six beers in his car, instead of one (granted, single beer portions are often of the 40-oz variety, compared to ordinary 12-oz beer bottles).

Littering could be made worse, too. Suppose six guys get together and buy a six-pack. There are six liquor containers, just as before the ban, but now there is the cardboard container used to hold the six-pack as well. Why would they be any more likely to properly dispose of the cardboard than they would individual beers?

Is there any evidence (and by evidence, I mean actual empirical evidence, rather than anecdotes) to suggest that such bans do anything at all? I will make a prediction: If this ban passes, it will do nothing to curb the problems associated with drinking. Furthermore, no one will care whether or not it worked. No one will investigate its effects, and no one will push to repeal the ban after its failure. We will have yet another alcohol regulation on the books that will sit there for decades, much like the rest of Tennessee's bizarre alcohol sale restrictions.

UPDATE: One more thought. This ban essentially legislates out of competition all the beers which come in four-packs, some of which are artsy expensive imported beers.

Also: This regulation won't affect me one way or the other, since it won't change the likelihood of beer drinkers hurting or inconveniencing me, and I don't drink beer. Personally, I think beer tastes pretty gross.

Thursday, September 04, 2008

Never Trust Someone Who Wants You to Put Country First

The Republicans' new slogan is "Country First". It is intended to praise McCain as a man who put his country before himself or his political interests. It is reminiscent of Kennedy's "Ask not what your country can do for you--ask what you can do for your country speech". For that reason, I am reminded of Milton Friedman's response to that speech from the introduction of Capitalism and Freedom:
The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather “What can I and my compatriots do through government” to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect? Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.
A free man doesn't put the good of the country first. A free man helps friends, family, and other people he cares about, including people who don't happen to be in this country. A fair man doesn't see people who happen to live on the other side of an arbitrary political border as being less deserving of respect, concern, and help.

As for the Democrats, I tried to search Obama's acceptance speech for a similar kind of collectivism. This is the best I could come up with:
The men and women who serve in our battlefields may be Democrats and Republicans and independents, but they have fought together, and bled together, and some died together under the same proud flag. They have not served a red America or a blue America; they have served the United States of America.
That doesn't really have the same sentiment as "Country first", though. It is true that Obama comes up with a laundry list of government interventions, but he seems to avoid "you must serve the country" rhetoric. This line made me laugh, however:
You know, passions may fly on immigration, but I don't know anyone who benefits when a mother is separated from her infant child or an employer undercuts American wages by hiring illegal workers.
I can, off the top of my head, easily think of some people who benefit from the hiring of illegal workers: The illegal workers.  A bit more thought might suggest that consumers benefit, too, but that's more difficult to explain.

Never mind, someone found the John F. Kennedy angle in Obama's acceptance speech. Here it is.

Monday, September 01, 2008

Brace Yourself for Stupid (no economics in this post)

From the Fall of 1993 to the Spring of 1995, my roommate at college was James Redd. James and I selected each other as roommates because we were both into music; he played guitar and I played keyboards. He had a four-track cassette recorder and a microphone.

Over those four semesters we recorded a lot of music. I mean, a lot of music. Most of it was crap. Some of it was intentionally crap. Sometimes we would write something intended not to be crap, but it would turn out to be crap anyway. Sometimes we would write songs trying to crappily imitate the style of a particular musician (I remember we tried to imitate, or ended up imitating, Joe Satriani, Eric Johnson, Eddie Van Halen, and even Adam Sandler).

Sometimes, however, we would write something so gloriously weird that it was actually cool, in a crappy way. Or maybe it was crap in a cool way. Anway, it was.

For years this stuff languished on four-track tapes. Occasionally James and I would get together and rerecord something. We still plan on doing this occasionally (I would really like to rerecord "I'm Slowly Losing My Body Parts"). Recently, however, I dug out the old tapes, recorded them track by track onto the computer, digitally removed as much of the noise as I could, and remixed some of the songs.

The stuff I'm linking below is the interesting crappy stuff. I have not mixed the experimental stuff that didn't work out, or the songs trying to imitate real musicians (not yet, anyway). No, these are just the random, weird songs that we liked and that other people liked. Below you'll find a link to each song, along with a few words about them. They're all intended to be silly, surreal, and stupid. Many of the lyrics were assembled by literally stringing together random words. Do not look for any more meaning than is provided with each song.

Also, the sound quality is poor. There is only so much one can do to fix music recorded on a 4-track that was sloppily recorded as a joke to begin with. There are two songs in here that were digitally recorded more recently, so if the quality of the others bothers you, listen to those. Also, I mixed these using headphones, and subsequently found that they sound very different with speakers. I also forgot to check the level for consistency across tracks, so be ready to adjust your volume. These are only 128-kbps MP3s, so that may also affect quality.

In general, James is playing guitar, bass, and singing. I’m usually doing the drums (using a drum machine or keyboard) and playing keyboards, but some songs were entirely James.

A final warning. This is some F.U.S. (definition 4, also, warning: profanity).

I mean it. You've been warned. The music is not obscene, and no drug or alcohol use was involved in writing these songs. We're just weird people.

Dear Redd
The lyrics to this song were written by me and a classmate, Rebecca Jane Salter (who is now married and probably changed her last name, but I don't know what it is now). For some reason we wrote a letter to James, but we took turns writing each word. So I would write "Rutabagas" and she would write "gallavant", and so on. When I gave James the letter, he used the lyrics to make this song. The last line is supposed to say "Sincerely, Klinging Potatoes", but it somehow got cut off accidentally. You may hear some Primus influence here. This is one of many songs in which we tried to make the music as weird as possible--painful, even.

Also, this song is not from a 4-track tape. It's from a stereo mix, and I couldn't do much cleanup. Therefore this song may have the worst quality of all the ones in this batch.

Big Dog
This is yet another almost-painful song with random lyrics. You can hear James start to laugh at one point during the song (at the part about the lake on the side of the house). There is also a mistake during the song, when I screwed up the drums, and James was unsure what to do on the guitar, yet it comes out sounding like we did it on purpose (at the part about meeting the bear once in the past).

The heavy-metalish bit that appears twice in the song was part of our frequent mockery of heavy metal, with its fast half-step chords and overuse of double-bass.

Key Lime Pie
This song is actually interesting. There are augmented fourths everywhere, but it works somehow. The counterpoint between guitar and keyboard at the beginning, along with the offbeat bass, has always sounded really cool to me. Then there’s the bizarre guitar and bass during the main body of the song. My drum machine playing was sloppy here, but I still think it’s interesting.

There’s a lot of static on the vocal track, but I couldn’t get rid of it without affecting the reverb sound of the vocals. I like to think that this song is about someone who has gone insane thinking about his favorite dessert.

Some day we’ll rerecord this, and replace the “I like grunge” section at the end with something less dated. Maybe “I like salsa” or “I like hip-hop”.

At the very end of the song James makes a horrible scratching/squawking noise with his guitar. We actually ended most of our songs with this noise. I don’t really know why. For some reason, it’s not present in many of the songs linked here.

Birdy in a Tree
Remember how I said there are a lot of crappy experiments that didn’t work? I mixed one just so you could see what I mean. If anyone can think of a better word to describe this song than “stupid” let me know. Let me restate that no drugs were involved in the making of these songs.

The Polka
Having tried a variety of musical styles, we gave polka a spin. I think I have a better version of this somewhere. Our senior year we actually played in the coffeehouse on campus, and we used a computer to play many of our backup instruments (with Shelly Howerton helping out on Guitar on a few songs). Therefore we had to create MIDI files to manage a lot of the songs. I thought I had recordings with the MIDI versions of some of the songs, but maybe not. They’re higher quality and the instruments are in better sync, thanks to a click track. Oh well.

Wheels of Cheddar
This was one of my favorites. It’s fun to play, and to sing, and almost catchy. The lyrics crack me up, too, particularly the “’cuz you know what I’m sayin’” part, since no one has any idea what he’s saying.

At some point we decided that the song wasn’t weird enough, so we made up four words to say during the chorus: Zorlaf, Kipsrack, Elbleneed, Wollaf. We tried to make them sound like plausible words. Apparently that still wasn’t weird enough, because I put them in an audio editor, chopped them up, and played them at half and double speed at various points in the song.

You can also hear one of our recurring themes, “I”. For some reason many of our songs featured James saying “I”. Many of our songs also included the words “I’ve got”.

The mix suffers because some of the tracks were doubled up in order to make room for more tracks. I can’t do much with those combined tracks. Listen for the ZZ Top quote at the end.

I’ve Got
This is the song that features the most use of “I’ve got”. In fact, it’s all about things that we have, including a whale named Jerry and a field of liver. This is the second version of the song. The original was a slow-paced folk song. I think I like the original better, although I haven’t yet found the master tape containing it.

Toward the end of the song there seems to be some confusion about what exactly it is that we have. For example, we say “I’ve got a field of liver, and it has music in its dog (navel)”. This was in fact the result of an error in the original song, in which we got confused about the lyrics. The confusion resulted in two audio tracks with different lyrics. Rather than fix it, we decided it was funnier with the mistake. The same goes for the frog/house confusion.

Funky James
I think the volume is a bit high on this one, so turn it down. . James wanted to write a funk song, but we had a hard time coming up with lyrics. It’s hard to make a song out of things that rhyme with “funky”. There was a track of this song that had James rapping about how funky he was, but it is very improvised and not as funny as having him just say “funky James” over and over again, so that’s what I went with.

Orchestra in a Box, Part 2
I had an E-mu Proteus 1+xr Orchestral sound sample unit. It had tons of orchestral samples, and I wrote a stupid “classical” piece, which I can’t find at the moment. I don’t remember this at all, but apparently James rerecorded it as a rock piece. I must have participated, because I’m pretty sure that’s me playing keyboards. Or maybe I have the order backwards, and this came first, and the classical version came second. It’s embarrassing that I don’t remember this.

The sound quality is absolutely terrible. I suggest you skip it.

Satan is My Plaything
James and I recorded this a couple years ago using his professional equipment. Well, he did almost everything, really. I did help with the original version, so I guess that counts for something, right? Anyway, it’s a song that sort of trivializes Satan. He likes to play lawn darts (on your forehead), he has a secretary, and sometimes he’s out of the office.

The “fon please dle my buttock fon” thing needs some explaining. There is a Monty Python skit called The Dirty Hungarian’s Phrasebook. In it, John Cleese, playing a Hungarian with a flawed English phrasebook, tries to buy some tobacco, but instead ends up saying things like “My hovercraft is full of eels”. In another bit later in the show, another Hungarian says to a person on the street, “Please fondle my buttocks” and he is then given directions by a friendly Englishmen. James found this phrase hilarious, but it’s not weird enough. I put it in the audio editor and chopped it up randomly, and it became “fon please dle my buttock fon”. So the chorus to this song is really just an extremely obscure inside joke.

There’s More to Life than Beavis and Butthead
This was really just a stupid experiment to see if we could make a crowd by adding lots of vocal tracks, combining them, and then adding more tracks. It’s mostly Beavis and Butthead quotes, although I think it also has James and me reading from a textbook.

Flying Bears (original) and Flying Bears (updated)
I’ve saved the best for last. This song, for some bizarre reason, was really popular with my friends. I don’t know if it’s the idea of a flying bear, or the infantile voice James used, but they all loved it. My favorite part is the instrumental interlude.

The flying bear actually comes from Beavis and Butthead. James actually had a Beavis and Butthead book. In it Beavis says that his favorite animal is a flying bear. We thought this was hilarious, but what makes it even better is that in one episode, Beavis sees a bunch of dogs in a music video and refers to them as bears. So, in fact, Beavis’s favorite animal might be a flying dog.

There are two versions here. The original version is from the Spring of 1995, I think. I don’t think I actually did anything at all on this version. James even played the piano part. There is actually a third verse that is a bit off-color and not really very funny. Just as when we mixed it years ago, I cut out everything but the words “Flying bear”, but it’s hard to do this without it sounding cut off. That’s why it sounds strange toward the end.

The newer version was recorded on James’s fancy setup, and portrays some poor lounge singer who is apparently asked to play this song, and who does so using some kind of musical teleprompter, so that he is surprised by the stupid lyrics after he’s sung them. This version is, oh, about two years old.

That’s all for now. I may have more songs in the future.

Saturday, August 30, 2008

Economics Haikus

Art Carden came up with a bunch of great economics haikus for Steven Levitt's contest. I came up with a few of my own, although I think they're a bit on the snarky side:

I have an apple.
I see you have an orange.
Oh, happy exchange!

Rational Voter?
Bryan Caplan loudly says,
"No, I don't think so."

We're irrational.
Therefore, government can help.
...But they're humans, too!

Cut my income tax!
Government is so wasteful!
Wait, where's my handout?

UPDATE (9-16-08): Here's another one.
Free rider problem!
Accurs'ed transactions costs:
The Coase Theorem fails. 

Friday, August 29, 2008

Another Crappy Election

Now we know who all the candidates are, and they all suck.

We've got McCain, a "national greatness" conservative. That means that he doesn't mind expanding government power if it means it makes the country "greater". That means trampling on the First Amendment in the service of campaign finance reform, threatening, invading, and occupying foreign countries, curtailing our civil liberties, and doing little to curtail government spending (I can identify a lot of spending I'd like to cut, but $10 billion in earmarks isn't going to do it).

His Vice Presidential candidate is a mess, too. Sarah Palin is claiming credit for helping get rid of the bridge to nowhere, but that is at least partially dishonest. She is governor of a state with 670,000 people, about the size of Memphis or Baltimore or Austin. Prior to that she was mayor of Wasilla, Alaska, population 8500. I don't see how McCain can criticize Obama's experience after this without being laughed at; the president-in-waiting is way out of her league. She also wants creationism taught alongside science in schools (can I have my favorite creation myth taught, too?), and is perhaps unclear on what it is a Vice President does (in her defense, the answer to that question is usually "not much", which raises the interesting question of "who would want to be Vice President anyway?").

Obama used to be an interesting candidate. Now he seems more like a conventional politician. He used to be somewhat open to the idea of marijuana decriminalization; it's not clear if he is backpedaling away from that (I view "I accidentally raised my hand" somewhat skeptically), and has picked a zealous drug warrior as his VP. He reversed his position on FISA. His health care reform is likely to be very expensive (McCain's is not perfect, either, but I suppose neither plan is likely to actually happen). His instincts were correct on Iraq, but that hasn't stopped him from doing his own sabre-rattling (A side note: Obama has been criticized for predicting that "the surge" would not work, and for failing to recognize that it has. It's not actually clear, however, that the surge is the cause of Iraq's slightly calmer streets. It could just be the segregation of Sunnis and Shiites into separate enclaves--ethnic cleansing of a sort.). Obama's best quality is that it is not very painful to listen to him talk. Given that any president can only accomplish so much, and we have to listen to them talk a lot regardless of how little they accomplish, this perk is not inconsequential. Bush bumbled through speeches, but McCain manages to sound both patronizing and boring. Having a president who speaks eloquently while accomplishing nothing might be the best we could hope for.

Biden, as I mentioned before, is a drug warrior. He's also pretty interventionist (although not necessarily warlike) in terms of foreign policy. Just as Palin was surely cynically chosen to appeal to women (and possibly Hillary Clinton supporters), Biden was cynically chosen to address criticism of Obama's lack of foreign policy experience. That's how these things work, though--politicians are pursuing their vote-maximizing strategies (except for the third parties; heaven knows what they're trying to maximize). Biden also has a history of sticking his foot in his mouth, which makes both VP picks seem pretty risky to me.

Usually I vote Libertarian, or not at all. This year, however, the Libertarian is former Republican Bob Barr. Barr claims to have changed his views since his culture-warrior days (back when he said Wiccans shouldn't be able to be Wiccans while serving in the military). He now favors drug legalization, and has even worked with the ACLU on some civil rights issues. Assuming this story is true, Barr might even win Texas if these things were run fairly (i.e., not for the exclusive benefit of the two major parties--which means the Democrats and Republicans will, of course, get a pass). Still, I'm not sure I can bring myself to vote for him. Perhaps it's an irrational grudge; surely he's not pretending to be a libertarian. But voting for Barr would feel so weird--like if Jesse Helms had recanted his former racist statements before he died and said he was now an open-minded, color-blind citizen of the world. Would you believe him? I would have a hard time, especially if he were up for reelection.

So yet another terrible election arrives, yet it's worse than usual because I'm not sure I can even bring myself to throw away my vote on the Libertarian this time. Maybe I'll just stay home. My vote won't affect the outcome, anyway.

Friday, August 22, 2008


I'm reading a book about bubbles and other mass mistakes called Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, published in 1841. I've only read the first two cases--the Mississippi Company bubble and part of the South Sea Company bubble, with the Dutch tulip bubble yet to come--but so far it's fascinating. Both the Mississippi Company bubble and the South Sea Company bubble deal with speculation in stock issued by companies granted monopoly by their government. The companies exaggerated the profits to be had in the New World, and people bought the stock they issued with excessive optimism. The price of the stock rose, and the companies sold more stock. In the case of the Mississippi Company, the French Royal Bank issued notes with the stock that could be used as currency, resulting in rapid inflation.

What is so fascinating about bubbles is how difficult they are to predict. No doubt many businessmen put a bright spin on their business; why do bubbles appear in some industries and not others? Why does the price go so astronomically high before anyone wises up?

Such bubbles are not always in financial instruments. There was the Beanie Baby bubble of the 1990s, the Comic Book bubble of the late 80s and early 90s, the current real estate bubble, the Internet bubble of the late 90s, and others. Why do they keep happening? Why do people repeatedly fail to see something is outrageously overvalued?

We can't really know there's a problem until it's too late. For example, the internet was a really big deal. Much of the gains were surely real. There may not have been enough information to determine that the internet was not as awesomely profitable as we hoped until it's too late. By definition, really, that's the frustrating thing about bubbles: We don't know they're going to pop until they do. They're bubbles because we don't know that they're bubbles.

It's worth pointing out that blaming speculation or greed is silly. Speculation is happening all the time in all sorts of markets, but it doesn't always lead to bubbles. Similarly, everyone who is looking for profit is, in some sense, greedy, but we don't see bubbles inflating and bursting everywhere. In fact, speculation is often essential to the proper functioning of a market. Speculators use knowledge of things that may happen in the future to make a profit, and in doing so they cause the price today to reflect that information. When a speculator learns that the orange juice crop next year will be poor, and buys up frozen concentrated orange juice futures, he drives up the price of frozen concentrated orange juice. This is good because it communicates to consumers that orange juice is becoming scarcer so they should reduce consumption, and it communicates to farmers that orange juice is becoming scarcer so they should increase production (if possible). This is exactly what prices are supposed to do. The problem in a bubble is that everyone's expectations about the future get out of whack, so prices cease to convey useful information.

This brings me to oil. There has been a lot of...um...speculation about whether or not there is an oil bubble. It seems to me that we can now reject that idea. If it had been a bubble it would have burst. Instead, the price of a barrel of oil seems to be slowly falling. Apparently it's just ordinary supply and demand (in which expectations play a part). I'm guessing oil prices will continue to fall until the winter heating oil demand increase. Maybe oil will get very expensive again next summer--maybe we're beginning to have global "summer driving seasons", resulting in greater variance in demand.

One final somewhat technical point: When most of us think of an auction, we think of what is called an Oral Ascending Price Auction, or English Auction. In this auction bidders increase their bids by calling out or signalling, and the highest bidder wins and pays his or her bid (There are other auction structures, such as the Second Price Sealed Bid used by Ebay). The primary advantage of the English Auction is that when the value of the thing being bid upon is of uncertain value, bidders can see what other people are bidding and use that information to update their own estimate of the item's value. That is, if you see that lots of people dropped out of the auction when the price hit $100, then that is a sign that your estimate of $200 is too high. After all, you don't want to suffer the Winner's Curse, and end up paying $200 for something that is only worth $100.

The reason I bring this up in a post about bubbles is that in a bubble, this information mechanism doesn't seem to work. People don't drop out of the bidding, and their estimates of the value of the item just keep climbing as a result. I realize the analogy isn't perfect; in an auction there's one item up for sale, rather than market with many buyers and sellers, and people aren't really bidding. English auctions have been used successfully by governments in distributing sections of electromagnetic spectrum. Are there any famous examples of bubbles in English auctions?

Yes, the title of this entry is the same as that of an episode of the Powerpuff Girls.

Don't Bail; Let Them Fail

Don't give me a hard time for the title; I'm not very creative.

It seems that GM, Ford, and Chrysler (who I will not call American, because they're not very, and I won't call the "Big Three", since they're not as nearly as big as they used to be) are seeking $25 billion in loans from the federal government, at 1/3 the interest rate they would get from private lenders.

I've said it many times to my students: Business failure is a feature, not a bug. The threat of going out of business disciplines firms, and the failure of a business shows other businesses what not to do. Let them fail. Yes, many people may lose their jobs in the short term. Many of them will get new jobs at the other auto manufacturers who pick up the slack. Others will into non-automotive businesses. More importantly, bailing out these automakers just makes them and other companies more likely to do the things that cause failure (and job loss) in the future. Bailing them out is a tempting short-term fix that isn't worth the long-term consequences. I'm guessing some kind of bailout will happen, though. It may be disguised as research subsidies for alternative-energy engine design, but it's too politically attractive to turn down.

In completely unrelated auto news, this little Ford Fiesta looks pretty nifty. Even better would be the Mazda 2 (Mazda's version of the same car). Better yet, a Mazdaspeed 2. One of the nice things about everyone wanting more small cars is that the more intense competition for that market results in better cars.

Wednesday, August 20, 2008

Puzzling Partisanship

There was a faculty meeting today. Every year, at the first faculty meeting of the fall semester, new faculty are introduced and invited to say something about themselves. There was a recurring theme of faculty briefly promoting their favorite sports team in some way. In some cases the team was that of their undergraduate school, or their graduate school. In other cases it was the team of a school from their home town.

I must confess that this mystifies me. I am almost completely unable to understand partisan support for sports teams. I say "almost" because there is one circumstance in which I can understand such support, and that is when someone I know is playing on the team. I might cheer for them if I am at the game, in case they see or hear me and are encouraged by it (assuming that there isn't too big a crowd--if the crowd is really big, there's no point in cheering). I would prefer to let that person know individually that I wished them luck. The outpouring of support for people I don't know (and in some cases, the hatred for their traditional rivals) simply doesn't make sense to me. It's not as though your local favorite sports team has just survived an earthquake and needs donations and cheering to avoid starvation.

I felt a similar way in high school. On occasion we had to attend ridiculous pep rallies instead of going to class. I would gladly tell a friend "good luck in the game" on an individual basis, but the attempt to get everyone to cheer, as a group, for the collective success of a sports team, was of no interest to me (and nowadays, upon reflection, I find it somewhat disturbing and collectivist). We cheered for the football team and the basketball team, but not, say, the band, or the chess team, or the Latin club. I was similarly unsupportive of sports in college. On the other hand, I do have some affection for my undergraduate school, though that is in part because of my affection for the faculty from whom I took courses, and who remain there. If all of them were to depart, I do not think I would feel so fond of the school.

People like to feel as though they are part of something bigger than themselves. Maybe this explains why people like to support a sports team--they feel like they're making some kind of difference. Yet this is still puzzling to me. Is a sports team a worthy cause? It's not "save the whales" or "protect private property" or a political cause of any kind. "Go Braves" is not a courageous statement indicative of one's moral fiber. I can understand someone who goes to great lengths to "cheer" for their favorite political cause. I just can't understand devotion to a sports franchise. I support various changes in economic policy because I think they will lead to people being happier. I vote Libertarian when I can because they tend to be closer in line with my views than anyone else. Yet I am first and foremost a libertarian, not a Libertarian, and I don't support just any Libertarian candidate. I'm not sure I can bring myself to vote for Bob Barr, the 2008 Libertarian presidential candidate, for example (primarily due to his political past). For that matter, I can't say that I'm especially patriotic. As I've gotten older I've become increasingly uncomfortable with rah-rah flag-waving "America is the best" rhetoric and sentiment. I'm much more comfortable saying "America is pretty great in some ways and not so great in others".

None of this is to say that I do not enjoy watching sports (although I do, for the most part, despise watching political coverage on television). Well, actually, I usually don't enjoy watching sports. I do enjoy watching professional soccer players, although not enough to make any effort to seek it out (if I happen to catch it on by chance, I may sit and watch some of it). When I watch World Cup games, I'm not really cheering for any particular team--not even the U.S. team. I really just want to see skilled athletes play a beautiful game. Soccer is the sport I can enjoy watching because it's a sport about which I know enough to recognize the subtleties of the game. I'm sure if I knew more about baseball and football I would enjoy watching them more. I still don't think I would care who won, though.

So, back to the faculty meeting. I wonder what would happen if one of the new faculty were to say "...and I'm cheering for the people who live on the cul-de-sac at the end of Henderson Street! Let's get those property values up! Go team!" Or perhaps "I'm a big support of the legalization of drugs! Let's all go smoke some dope!" Are those really any weirder than espousing fervant support for people who will run around on a field and hit or kick or carry a ball?

I think David Friedman once argued that a reason people vote might be the same reason people cheer for their favorite team at a big arena. Their cheering, just like their vote, won't affect the outcome--they'll be drowned out by everyone else. Yet they enjoy feeling part of something bigger, supporting the team. People have a taste or preference for partisanship. I feel like this, to some extent, regarding political and social causes I support. My failing is that I just can't understand having the same kind of fervor for a team playing a game.

Wednesday, August 13, 2008

Two for One

Here is a statement that is both normative and positive:

"There's no government like no government."

Can you think of any others?

Wednesday, July 23, 2008

Gapminder for All

I don't know if I heard about this and forgot, or missed it entirely, but the fantastic Gapminder software is now available for anyone to use as part of Google Spreadsheet (which is part of Google Docs). It is now a Gadget called Motion chart.

Here's an example. This is a portion of the data from my dissertation. It consists of emissions of unregulated chemicals by corporations, their revenues, and their lobbying and political contribution expenditures (adjusted for inflation).

I recommend setting the scales to Log, the y-axis to Lobbying, the x-axis to Weighted Emissions (which is the toxicity-weighted sum of a firm's emissions), the size to Real Revenue, and the color to Industry. There is an awful lot of noise in the data. Nonetheless, I think there is evidence of a weak pattern of northeast-southwest movement. That is, it seems to be the case that when firms emit more, they lobby more, and when they emit less, the lobby less. It is not possible to control for firm size rigorously in this graph, but I did include revenue as a variable in the regressions in my dissertation, and found that the tradeoff still persists. Granted, the explanatory power of the regression was fairly low.

But that's not really the point of this post. The point is to say "hey, here's a neat tool for visualizing data, and you can use it too!" A warning: I found the gadget to be a bit finicky. You have to be careful how you enter your time variable, for example (1, 2, 3, 4 won't do, but 1997, 1998, 1999, 2000 work fine). I hope that researchers and teachers will start using this.

Tuesday, July 22, 2008

Save the Previously-Despised Corporate Behemoth!

There was an Econtalk podcast sometime last year (I think; I can't remember which one, and it isn't obvious from the titles. If anyone knows which one it is, let me know.) in which Russell Roberts's interviewee suggested that there would come a day--perhaps in the distant future--when Wal-Mart would become an ailing company. For whatever reason, it will come upon hard times, and possibly near bankruptcy. At that time, customers, employees, and pundits will decry the loss of an American tradition.

It happened for Sears (once the bane of local general stores with its convenient catalog, it grew weaker and weaker from the 1980s onward, and merged with Kmart in 2005). That day hasn't come yet for Wal-Mart, but this is almost as good. Remember when people used to get upset about Starbucks moving into their neighborhood? There was a South Park episode about it (Warning: for anyone who watches that video, it's a normal, hilarious South Park episode, which means it's not work-safe). Starbucks announced a little while back that they were closing 200 stores due to over-expansion and the weak economy. As a result, local "Save Our Starbucks" campaigns are starting in order to keep their local stores from closing.

What people really fear, I think, is change. Once things have already changed, this becomes the new status quo, and people don't fear it any more. They may even appreciate the benefits of what they previously feared. I suspect people would have a similar reaction if Wal-Marts started shutting down.

Speaking of Wal-Mart, my colleague Art Carden has a related op-ed on Wal-Mart's efforts to open an experimental superstore in Memphis.

UPDATE: Russell Roberts has kindly provided the podcast to which I refer at the beginning of this entry. The discussion (with Don Boudreaux) of Wal-Mart comes around the 57 minute mark. Don Boudreaux said:
"...I'm pretty sure that, if we don't live to see it, our children will live to see it: Wal-Mart will one day go bankrupt, and there will be, uh, commentary about how sad it is, about how, uh, the changes in this new economy are destroying a venerable American institution....What is wrong with the American economy when Wal-Mart is going bankrupt?"
On the other hand, here's an interesting contrast: I hear a lot of people express a total lack of sympathy with the big three "American" automobile manufacturers, saying they deserve all the trouble they're having due to their lack of foresight. I wonder what accounts for the difference.

Wednesday, July 02, 2008

WALL-E and Competition

I went to see Pixar's WALL-E last night with my wife and her parents. It is a beautiful, fun, touching film. Take some tissues if you go see it. I'll be getting the DVD as soon as it's available.

(Minor Spoilers) One of the background elements of the story is that a huge corporation took, "Buy-N-Large", over the world, filled it with trash, and then moved all the humans off-planet. (Slightly Bigger Spoilers) After 700 years of luxury, the humans on this ship, The Axiom, have become large, lazy blobs, their every whim catered to by robots. Think of this as Idiocracy with slightly less contempt for the average consumer. Fred Willard makes a couple jolting but hilarious appearances as the pre-recorded President of Buy-N-Large from 700 years ago (He and a few other humans in other videos are the only ones that are not computer generated).

This all reminded me of the old Kenneth Galbraith line, "the trouble with competition is that in the end somebody wins." That quip was intended to criticize economists' love of competition, and the belief that competitive markets can be left alone (absent other market failures, such as externalities). The problem with this quote is that it makes sense in the context of, say, a marathon, or a baseball game, or a round of Battlefield 1942, but it doesn't make much sense in a market context. There is no finish line in a market. There are no forty-five minute halves, no referee blowing the whistle at the end of the game. The market game goes on forever. Even a firm that gets a monopoly is not guaranteed to keep it. Wordstar was replaced by Wordperfect, which was replaced by Microsoft Office, but not even Office is safe from competition. If someone creates a better product, people will switch (I use OpenOffice on this computer because it is free and works fairly well).

The idea of one huge company taking over everything is unrealistic. There simply aren't enough natural barriers to entry to allow a company to get so big in so many markets (without some kind of external help). Furthermore, if it were to happen, I don't think the results would be as pleasant as those suggested by WALL-E. It would likely be far more tyrannical, and more poorly run.

WALL-E is not the first to hypothesize such an end to competition. In Demolition Man Taco Bell has "won" the fast-food wars, becoming the only surviving restaurant. Consider how nonsensical this is. New restaurants are opening all the time. What would stop someone from starting a new business to compete with Taco Bell or Buy-N-Large for such a long time? Only one thing could stop them: government. Yet I do not think that WALL-E or Demolition Man were intended to be a fable criticizing government regulation or regulatory capture. At least Idiocracy has a slightly plausible justification for the world being taken over by businesses: people have become too stupid to do anything about it.

The film also suggests that we are filling the earth up with garbage to such an extent that the entire planet is covered with mounds of it (again, much like Idiocracy). WALL-E's job is to pick it up, compact it into cubes, and stack them to help clean up the mess. This also seems unlikely without some change in policy or human behavior. Lack of landfill space is not currently a problem and will not likely be a problem, aside from local NIMBY difficulties. If it does get scarce, putting trash in landfills will get expensive, which encourages recycling and innovations to reduce the size or amount of material that goes into landfills.

Let me reiterate that WALL-E is a fantastic film, and I am merely quibbling. Go see it.

On other topics, check out Art Carden's blog entry on Gapminder. I show this to students in several of my classes, because the software is just too awesome. Also check out his depressing post on Japanese internment. Removing people from their homes and businesses "as a Democracy should", says the man in the video. Amazing.