A photo of a painting? How derivative!

It’s not news that the rising popularity of ebooks has got the publishing world in a frenzy. This article is on a new ebook model that treats the distribution of books as akin to public radio broadcasting. Content is supported by a minority of people who think that spending money on things they can get for free is worthwhile (signaling patron-ism) while everyone benefits from the content. Even authors seem to benefit by getting a larger share of the profits and exposure to a wider audience. Obviously, success is not guaranteed any more than traditional publishing but the profit incentives are there.

I like the public radio analogy, but I think there is a better one – and that’s from the art world. The production of art is not non-profit, yet the distribution isn’t controlled by major publishers.  Well that might be because original artworks, and even some of the better reproductions are too expensive for most people… But who cares – there is plenty of good art that’s freely available on the web for your viewing pleasure.

Media like radio and visual art have a very different history than book, music and movie publishing (I’d also add beer to that, but that’s a post for another day) but the trend is towards diversification, appealing to a longer tail and quality improvements on the margin. While the industry might be losing money on the whole, this is a clear case of markets tending towards Pareto optimality. Centralized, top-down publishing schemes are becoming more obsolete to be replaced with artist-driven, self or free distribution of content that’s supported by key patrons.

This is not to say that distribution and other jobs not related to content creation are in jeopardy. After all, most authors are not going to be experts on how to design websites, content sharing platforms, etc (In other words, not every author is going to be Cory Doctorow – who’s stance on copyright and tiered approach to selling his novels is the best I’ve seen).

Since authors will no longer be able to take advantage of old publishing networks, authors will need help from idea people, software engineers and social network experts. Exposure to markets will rely on getting picked up by the right circles on twitter or reddit (or where-ever) or to try and get noticed by important and respected bloggers. In other words, Oprah’s role only more distributed. There’s plenty of efficiency and value to add by consultants and there will be plenty of money in the market.

Flying no flag of convenience, the guy uses ice floes around the North Pole to support and cloak highly mobile capital and productive labor; with a flair for anarchy, he disregards all laws of intellectual property to create an abundance of goods that he then feels free to distribute according to a little understood moral code; his superior logistical system flagrantly disregards all national borders and crosses them with impunity…

Read the whole thing: it makes a nice point about what gifts economies of scale have given us.

A group of rich Germans has launched a petition calling for the government to make wealthy people pay higher taxes.

The group say they have more money than they need, and the extra revenue could fund economic and social programmes to aid Germany’s economic recovery.

This is just insane. Why don’t they invest or donate their money if they really want to help recovery?

Seems like they’re overestimating the “G” aspect in the Keynesian C + I + G + X − M = Y(GDP) formula.

Why do we care so much about the “agrarian myth”? Do we really think farmers of old had so much better time than we do? Is tourism and leisure really worse than hard labor?

Not only would those farmers probably not agree with the agrarian myth, those who use it to make some sort of moral argument are usually doing so hypocritically. Maybe the photographer should give up his lens in favor of a plough if he thinks farming is so great. I’ll bet he finds that this life is difficult and (for the farmers who sold off their land to tourism industry) less financially valuable.

Why are we supposed to be morally horrified at the fact that people are richer today and therefore have more time to drink beer and go skiing (though hopefully not at the same time) than during subsistence farming days?

So if Austrian Business Cycle Theory is right, booms of credit promote resource reallocation. But, like Bob, I don’t think Krugman’s point holds any water. All of this was being done on cheap credit, remember, so you don’t really have to reallocate capital to housing sector. As for employment, who says that new jobs in construction and related industries was being drawn from the unemployed sector?

It seems to me that, besides for the people already in construction, we were getting a lot of immigrant labor and ‘teenagers’ growing up into the construction field. The boom doesn’t have to be preceded by unemployment, just shift resources away from potentially sustainable ones (at an opportunity cost of economic stability) to unstable ones.

It found that about half the customers noticed the calorie counts, which were prominently posted on menu boards. About 28 percent of those who noticed them said the information had influenced their ordering, and 9 out of 10 of those said they had made healthier choices as a result.

But when the researchers checked receipts afterward, they found that people had, in fact, ordered slightly more calories than the typical customer had before the labeling law went into effect, in July 2008.

These are fascinating results. People are generally conscious of the change, think they are responding in a positive direction, but actually doing the opposite. I’d be interested to see how people are making more unhealthier choices.

I’d be willing to bet that they are switching to foods that they perceive as being healthier, but actually contain more calories. This could be a result from an information asymmetry. The calorie counts are usually the ‘bare minimum’ of what fast food joints offer, without the fixings, sides and drinks. Perhaps people are switching to lower calorie foods, but getting more of the high caloric ‘frills.’

If we don’t assume rationality, another explanation is that people are unobservant and ignorant about what they’re putting in their mouths.

This also calls into doubt the ability for regulation to achieve the desired affects and highlights the important of price signals, especially because we’re in a recession. People are looking for the cheapest food these days and so will respond to price signals much more strongly than health signals.

HT2 Jeffrey Miron

http://jeffreymiron.blogspot.com/2009/10/calorie-postings-and-food-habits.html

I think McWilliams misses a key point in favor of farmers markets, though. You can buy obscure produce that you just can’t find in most supermarkets.

In addition, the centrality of the market, competition is more direct and should theoretically help lower prices. Anecdotally, from my own experience as a consumer and seller in a farmer’s market, most customers don’t feel bad walking away from your booth without trying anything… even after you offer a free sample.

I like farmers markets and the competition they provide for grocery store produce isles, though not for any particular love for locally grown produce.

In my portrait Twitter consists mainly of social benefits yet it offers few private gains for many generators of the content.  So why do so many people do it?  Maybe it tricks our instincts for sociability or connection.

We can use the information generated by Twitter in interesting ways. What’s not so clear is what the Tweeters get out of it.

There are no financial costs to using the service, but it does have to compete with other social networking sites (so there is an obvious opportunity cost) and time costs to using the service.

In terms of evolutionary adaptation, what are the benefits of using twitter to improve fitness (what are the proximal psychological causes)?

Population health did not decline and indeed generally improved during the 4 years of the Great Depression, 1930–1933, with mortality decreasing for almost all ages, and life expectancy increasing by several years in males, females, whites, and nonwhites.

I’m a bit skeptical about this. Prychitko mentions that there could be a lag effect, that ill health effects didn’t show up until after the scope of the study. I think this is probably right. After all, health statistics aren’t health statistics measured by hospital visits?

During a recession, particularly during the Great Depression before widespread health insurance coverage, even the very sick probably avoided hospital visits.
I wonder how many diseases went undiagnosed until after the depression was over, just because people couldn’t afford the doctors visits?
This would have two affects: give the appearance that there is less illness during the depression and give the appearance that health declined significantly after the Depression. This would make the population look even healthier during the bad economic times by comparison.

I’m not ruling out the findings of the study, of course, but I would appreciate more skepticism on the matter.

This is because the long tail consists of diverse tastes and personalities which only a medium like the internet can cater too. As businesses realize that this is a great potential source of revenue, the sector expands and even more people discover long tail products that they didn’t know they liked.

I got this story from Tyler Cowen, which is no surprise because this type of collecting and ordering of tastes via the internet is the kind of thing he loves, and talks about in great detail in his new book: Create Your Own Economy.

Economist.com reports favorably U.C.-Berkeley researcher Malcolm Potts’s claim “that slowing population growth is essential if poverty is to be eradicated.”

On what basis do the Economist.com reporter and Mr. Potts believe that a larger population is necessarily incompatible with the eradication of poverty?  The standards of living of at least 4 billion of the approximately 6.8 billion people alive today are incomparably higher than were the standards of living for nearly everyone who lived prior to the industrial age

He’s coming to almost the opposite conclusion of Robin Hanson, where population growth is necessary for economic growth, not its downfall.

I understand his point as well: people are productive so the more people there are, the more overall productivity their is. In addition, we need a young healthy population to take care of the elderly and maintain a high standard of living for all.

However, I don’t see net population growth as being essential to economic growth, at least not in a future economy. Fresh blood always is good for economic growth, but as long as we at least maintain our numbers, there should always be a new supply of talent and the old codgers can die off or retire.

I think the original article may be mistaken GDP, which will grow when population grows regardless, and GDP per capita. The per capita term is a far more important measurement of individual (and therefore national) wealth. Who cares if GDP growth is slow if our personal incomes are growing fast, but population is staying steady?

Most of the population growth is from poor nations and, presumably, when those nations get richer they will stop reproducing so much. An unproven, but not a bad, prediction that has been observed many times in the economic development of nations.

I think Hanson should have phrased his point a different way: are there physical limits to improving efficiencies of resource use and technology gains?

I don’t think anyone can say for sure if humans will ever approach the physical limits of existing matter of the universe, but every generation predicts that resource use efficiency will max out… whereupon the technology is improved, allocation becomes more efficient, or new material is invented or discovered that supersedes the need for the resource completely.

Furthermore, our forecasting abilities to predict this new tech is very bad and some of the more important tech would probably be considered Black Swans.

Its interesting to think about what efficiency limits we might face with current technology and try to envision how virtual reality might play out after the singularity. But to predict the end of humanity in 10 thousand years?

I bet futurist cave men where doing the same thing.

2. Tyler Cowen talks about the saliva market in South Africa. Apparently, its very competitive.

3. Brazil plans on restricting sugar cane production to prevent deforestation of the Amazon. I guess biofuels aren’t as ecofriendly and environmentalists would like to think. However, I don’t understand why Brazil doesn’t just subsidies rather than legislating more bans. If the costs farmers had to pay where closer to their natural costs, farmers would cut back on their own.

4. Open Economics blogs asks “What is Socialism in 2009?” and is Obama really a socialist? The answer of course is ‘no.’  But, then again, modern liberals are not classical liberals and capitalism was originally a derogatory term, so we’ll see if they left comes to accept the term and try to redefine it for themselves.

5. Toro’s Running of the Bulls blog tackles the large question of market rationality.  It’s a great post, but I think he misstates Jeffery Friedman’s point though. Friedman is trying to point out in the case of the crisis, irrational exuberance came out of government incentives, not market forces. People acted stupidly, but not necessarily irrationally, under the traditional assumptions of what rationality means: they where simply reacting in a predictable way based on the available information. The information turned out to be wrong, but that’s not the fault of 99.9% of investors.

We where talking about how apartment owners overcharge for rent in New York City. He said something along the lines that it was ridiculous that with the housing market what it is, that landlords could justify such a high rent.

What the broker missed was that the part of the housing market that collapsed is the demand for mortgages. That is, owning homes. If fewer people are owning homes, that means more people should be renting. This drives prices up, not down, like my broker thought.

This may be less true for certain markets in New York, where Wall Street and finance people are left in droves. But, I’m not looking at these high rise condos anyway.

I’m not sure if Hanson is continuing our discussion in this post in Overcoming Bias today, but he reaffirms this position, extending it pretty much all of nature:

Yes, nature would be saved if we destroy ourselves without destroying nature in the process, but hopefully we’ll avoid this scenario.  We might also somehow coordinate to prevent competitive growth.  For example, we might empower a world government to protect nature, prevent innovation, or prevent population growth.  But I honestly see little prospect of this.  We now live in a very competitive world, and even governments mainly just redirect competition, toward controlling those governments.

I find it a little odd that he would say this. It contains elements of truth… at what point will governments stop promoting ecological conservationism at the cost of economic competitiveness?

But I think he misses another element. I don’t think it will escape the attention of capitalist that they rely on the earth for natural resources and that technological advanced will decrease, not increase, our reliance and impact on nature and not the other way around.

People have been falsely predicting that we’ve reached the earth’s carrying capacity for centuries, and they’ve all been wrong. This is not because of government incentives (well, not totally) but because of market forces.

I think Hanson’s assumption of continuing population growth is also incorrect. As economic competition produces wealth throughout the globe, population levels will steady out without having to approach the earth’s physical limits. Add the technology of lessening out eco footprints and I don’t think there’s anything to worry about.

Hanson is being alarmist – some will say economic growth needs to happen anyway, so government interventions are just delaying, and worsening, the inevitable, while others will say that we need to stop “progress” to protect the natural rights of mother earth.

As an economist, I find it odd that Hanson would imply that population will keep growing but technology will reach a limit.

I find it much more likely that, in astronomical time, the human population will dwindle out into nothing because we no longer feel the drive to reproduce than we’ll reach the physical carrying capacity of the entire universe.

Clyde Prestowitz makes his case for higher tariffs by slaying a strawman (”Obama can help free trade with tariffs,” Sept. 10).  According to Mr Prestowitz, the case for free trade relies on the validity of “the assumptions that the markets are perfectly competitive, that exchange rates are not manipulated, that there are no economies of scale, that there is no cross-border investment or cross-border transfers of technology, and that there are no government subsidies or export requirements.”

Bordeaux is hinting at a larger point here, I think. Neo-classical models of free trade do indeed rely on these assumption, but even though these assumptions are demonstratively inaccurate doesn’t mean that free trade doesn’t work and that slapping on high tariffs are a good idea.

This is a sort of composition fallacy. He concludes that an economic principle is incorrect based on some of assumptions being incorrect. Just because a common model is flawed, doesn’t mean the principle doesn’t work it practice – it may just mean we don’t yet understand why it works.

Jeff Harding from Daily Capitalist blog is already calling Obama’s proposal of new financial regulations (which are really more like hints of a proposal) New Deal V. 2.0 (hint – in austro-capitalist land, this is a bad thing).

I’m willing to reserve judgement to see what he wants to passed and what actually gets through Congress, but I share Harding’s general distaste for the thing. If there’s one sure way to screw up regulations, it’s to let the economists draft it and the politicians pass it.

Because I’m reading Taleb (sorry to keep bringing this up), I can’t help thinking that new regulations will not help us deal with the “black swan” that was the financial crisis. Regulation is retrospective and is not likely to help us forsee new problems.

They’re using one tried and true way to build a successful blog: stack it with econ and poli science professors from top universities and nobel laureates.

Thinkmarket blog has a list of the contributers.

Daron Acemoglu (MIT)
Viral V. Acharya (NYU) and Matthew Richardson (NYU)
Amar Bhide (Columbia U.)
David Colander (Middlebury College)
Steven Gjerstad (Chapman U.) and Vernon L. Smith (2002 Nobel laureate)
Michael Goldberg (U. of New Hampshire)
Juliusz Jablecki (Polish Central Bank) and Mateusz Machaj (Wroclaw U.)
Katerina Juselius (U. of Copenhagen)
Thomas Lux (U. of Kiel)
Joseph E. Stiglitz (2001 Nobel laureate)
John B. Taylor (Stanford U.)
Peter J. Wallison (American Enterprise Inst.)
Lawrence J. White (NYU)

Any top-tiered econ professors are more than welcome to contribute a post or two to our blog as well.

While nature shows and nature lovers often give lip service to the wonders of natural selection, in fact they mainly love the particular species alive now.  When nature adapts to recent changes, nature lovers mostly disapprove.  Most folks react similarly when economic competition creates winners and losers; they say they approve of the competition that led to our current wealth, but they disapprove when new winners, e.g., Walmart or Borders, displace old losers, e.g., small stores.

Hanson’s general point is well taken – competition in the natural world produces new winners and these new winners may not satisfy our aesthetic values. Hanson seems to think we should just over this.

Ecology is not so simple though. Human development is changing the environment on a different order of magnitude than evolution works. Species that are well suited to human changes may actually do longer term harm to the environment than local (in time and space) successful adaptations may suggest.

For example, a bird species may nest well in tall buildings and so their numbers grow, straining the resources of the local fish stocks. These downstream affects may adversely affect ecosystems, causing other species to die off – including the original birds. Population explosions that represent temporary success are not necessarily stable. We may only be seeing the upswing of a population bubble that will dramatically burst. Or maybe we’ll see a slow decline in environmental integrity that affects our own fitness.

As an economist, I’m surprised Robin Hanson isn’t considering the long term affects of over-enthusiastic growth.

Hanson wants to draw a parallel between our capitalist systems and other ecosystems. And while many exist – it’s based on the same principles after all – he forgets that animal societies lack institutions that keep capitalism running by protecting property rights (which prevents the type of over-exploitation that invasive species are famous for).

“Following implementation of the act, the trajectory of the economy changed materially toward moderating output decline and job loss,” the president’s Council of Economic Advisers told Congress.

It looks like somebody needs a lesson in post hoc ergo propter hoc. I’m sure their statistics are all nice and tidy, though.

Instead, “woofie” is given based on mutual respect (whether its for a job well down or a good conversation). Woofie is used as the de facto currency, and will buy you anything you need, but it also seems to be self-reproducing. In other words, I don’t have to give up my own woofie to give some to another.

It’s a neat idea, and it makes sense in a society where one’s social capital is more important than one’s labor skill. It seems to me, however, that this would produce hyper-social societies, where “loners” are doomed to be poor, and only the super-rich can afford to take a social holiday.

Harvard Law Professor Cass Sunstein leaning suggestively on a doorframe

I spent most of the afternoon yesterday obsessing about Cass Sunstein, whose views on just about everything from free speech to animal rights confuse the heck out of me on first glance.

In general, that means it’s time to learn more.

Here’s what happened: a friend of mine on Facebook, yelling about other things, was gracious enough to share this The New York Post :

Advance copies of Sunstein’s new book, “On Rumors: How Falsehoods Spread, Why We Believe Them, What Can Be Done,” have gone out to reviewers ahead of its September publication date, but considering the prominence with which Sunstein is about to be endowed, his worrying views are fair game now. Sunstein is President Obama’s choice to head the White House Office of Information and Regulatory Affairs. It’s the bland titles that should scare you the most.

[...]

Sunstein was appointed, no doubt, off the success of “Nudge,” his previous book, which suggests that government ought to gently force people to be better human beings.

Fascinating! I haven’t read Nudge, either (this is what happens when one’s book budget goes down the drain) but from what I know, Sunstein seems to enspouse a modified form of libertarian paternalism.

The Post column has actually made me more interested in Sunstein’s work. Considering the press Pop SocSci authors like Malcolm Gladwell get, it seems to be not very well understood outside of law and behavioral economics.

I guess I should stop ignoring the guy.

Most brazen part of this: I have a copy of Cass Sunstein‘s 2007 book Worst Case Scenarios sitting right in front of me.

The beer is gone, but the book remains unfinished.

Jeff Harding from The Daily Capitalist writes:

Peter “As Seen on TV” Schiff is another. He runs EuroPacific Capital and made a very big name for himself predicting the collapse of the economy. There are many film clips on YouTube where he famously embarrassed many Wall Streeters and economists by his insight into the economy. Peter is of the Austrian School of economics and does an excellent job in articulating these ideas.

There is one hitch to Schiff and that is in making money for his clients. He predicted global equities would be the place to be after the crash and he also predicted that we’d be in hyperinflation. Neither of those things worked out well for him. While I enjoy his film clips, I have tuned him out.

According to this standard Austrian story (or at least how Peter Schiff interprets it) inflation should be heavy and gold prices should be through the roof. However, neither of these things are happening yet. One reason may be because banks aren’t lending out the stimulus money yet and that much of it has yet to be spent.

As the months drag on, however, this story seems less reliable. So here’s my question:

When will Austrians abandon the idea that we’re still heading into hyperinflation – or how much would they bet that it will occur if given reasonable odds?

One possible answer: just in time for hyperinflation to kick in, allowing free market capitalism to get blamed for the mess again.

Robert Murphy shares this piece from Larry Kudlow:

In Hayekian and Misesean terms, bad investment and spending decisions are being remedied through the free-market corrective process. And, greased by easy money, today’s market correctives may produce a much stronger V-shaped recovery than the stock-market consensus expects.

Talk about misrepresenting a position! According to Hayek and Mises, using easy money to grease the wheels is the exact opposite of market correction. This is exactly what creates monetary inflation and unsustainable bubbles. So what looks like V-shaped recovery is actually, on the recovery end, only the illusion of recovery.This easy money gets funneled into bad investments which eventually come crashing down when the market can no longer support them.

This is like saying the Yankees are going to start scoring more points by trimming all that dead weight from behind the plate – by getting rid their pitching staff. He’s got some idea of how to win a baseball game, but only pays attention when the Yankees are at bat. In other words, he’s only understanding half of Austrian Business Cycle Theory – the part where easy money creates a boom, but doesn’t see the long term, stable strategy.  He’s analyzing a complex situation but only looking as far as his nose – while trying and failing to throw some peanuts towards the ‘free market’ crowd.

What would yours be?

Here’s mine -

1. Wealth of Nations & Theory of Moral Sentiments – Adam Smith
2. Principle of Political Economy and Taxation – David Ricardo
3. The Constitution of Liberty – FA Hayek
4. General Theory – JM Keynes
5. Capitalism, Socialism and Democracy – Joseph Schumpeter
6. Principles of Economics – Greg Mankiw
7. Growing Artificial Societies – Axtell & Epstein
8. Human Action – Ludwig von Mises
9. Principles of Economics – Carl Menger
10. Monetary History of the United States – Milton Friedman

*disclaimer – I haven’t read all of these yet, but they’re on the lineup.

I’m going to try a recurring thing, where I link to other blog posts and make very quick comments about them. We’ll see how weekly Friday posts work for this.

1) Robert Murphy praises Paul Krugman – a huge turn of events from a man who is usually (and often correctly) hypercritical of the Nobel Laureate. I guess Austrians and Keynesians can find some common ground – namely when they’re attacking assumptions made the Chicago school.

2) Tyler Cowen tries to get Peter Boettke to admit that the financial bailouts were a good idea. Boettke predictably refuses, stating that Cowen is misstating what it means to be a libertarian. Cowen hits back with the notion that letting banks go bankrupt instead of bailing them out would still increase the size of government – because you need the court systems to deal with all the fallout. Steve Horowitz weighs in on the Austrian Economics blog, saying that Tyler is confusing increasing the scale of government (which would be necessary to deal with increased work load associated with bankruptcy from bank failure, but would not give government new powers). Horowitz points out the the bailouts increased the scope of government – creating a the feds precedence to use new powers.  I think this last view is essentially correct. I’ve stopped thinking of Cowen as a libertarian for a while now. Stay tooned, because I’m sure this debate is not over.

3) A strange case where the Dutch government has taken legal guardianship over a 13 year old girl, who is trying to become the youngest person to sail, solo, around the world. Her parents are ok with it, but the nanny state has intervened. Possible violation of freedoms or just negligent parents (or both)?

4) My father has a new education related blog, but has yet to post. He keeps trying to get me to teach him, but I everything I tell him he forgets in a couple weeks and asks me to repeat myself. I’m not holding out much hope that his blog will be very successful, but we’ll see. He has some good ideas about providing resources to fellow educators – something he knows a lot about.

The cafeteria in the hospital where I work, has a half a dozen cashiers. The people queue up with their food and are directed to the next empty cashier by a dedicated line management director (who, for some reason, wears a doctor’s white coat as his uniform). This caused me to think about why the hospital – the catering services department in this case – felt that this type of signaling was necessary.

If there was ever a case where the traditional economic assumption of rationality is probably correct, it’s here. Consumers, who quite obviously don’t like to wait on long lines, have a very clear goal: to maximize their utility function of food consumption. They want to reduce the amount of time on line and maximize the time they can relax on their lunch break, socialize or get back to work if they need to. Information here is quite clear. The cashiers are set up in such a way that scanning the available cashiers will reveal the next available one. There are ropes clearly marking where individuals should stand, single file, to wait for a cashier. So why are they wasting resources on hiring a line manager, who’s sole apparent purpose is to tell the next person in line which cashier to go to?

Assuming that my employers are themselves rational and have compared the cost/benefit analysis of smooth operation with and without a line manager, I must assume that without the ‘central planning’ of the line, there would be enough disorder that it hurts diners’ experiences and therefore profits.

What this brings to mind is something fellow FS blogger, Robert Simione, said to me the other day about the economic assumption of rationality:

…[E]conomists label “rational agent” as someone who wishes to maximize their monetary gains (or whatever you wish to call their pool of money).  I was thinking about where this assumption comes from, and… about how all through history, philosophers since Aristotle stated that everyone’s goal is to maximize their happiness. Then economists took this idea and consider the monetary value of various happiness costs, and they say: “People trying to maximize happiness is like people trying to maximize the use of their money.” So now I wonder, what if this idea, that “rational” people always try to maximize their general happiness, what if this idea isn’t true? …I think the Efficient Intentions Hypothesis is not always true, and I think that you are right, that we may not be particularly good at finding a path to optimal happiness.

This is an astute analysis that I want to take even further. Even if people are rational, are good at – or don’t even bother trying – maximizing their happiness (which doesn’t appear to be the case), individualist goals under self motivated behavior to reach some new happiness potential does not necessarily produce the most efficient outcomes in aggregate group behaviors.

Its like a story I picked up from Tyler Cowen from Marginal Revolution (via Jason Kottke and other sources). Individuals may choose the shortest route to their destination when driving, but this doesn’t necessarily produce the best outcomes for anybody. Everyone wants to take the shortest routes, but the resulting traffic slows everyone down (the solution, by the way, is to intelligently close certain roads). My cousin-in-law, who is a traffic engineer for the NYC-NJ Port authority, pointed out to me that this is why the NYC’s plan to cut off traffic in parts of Broadway in Times Square and Herald Square was such a good idea. Instead of being stuck in traffic, drivers must take multiple alternative routes through midtown Manhattan, which effectively relieves congestion (and leaves more room for pedestrians).

This is an analogous, though not exactly parallel, story to my line management problem. We have the problem of self interested behavior creating chaos, rather than the smooth order predicted by the invisible hand. But, unlike driving, lunch-goers can see all of their options and select the fastest route accordingly. In this case, picking the cashier with the shortest line prevents congestion at the other registers. It’s not as if consumers are picking out one register just because its the closest or has the most attractive cashier (though this could still be a problem). If people are acting rationally and have no problem acting upon their preferences, I would predict that no line manager should be necessary.

It remains a problem to know exactly how rational people are and if they have enough information to pick a route that maximizes their utility to their expectations. Automobile operators, particularly ones that are well informed about pure route distances but not traffic patterns, may not be entirely rational or have enough information to produce beneficial outcomes. I don’t believe this is true for a lunch line.

In economics, these problem exists, as well as the ever important fact that the central planner has even less information than the markets. So while the aggregate result of self-interested, irrational behavior may be chaos, the outcome may still be preferable than a planned economy under technocratic rule.

During Father’s Day this year, my father, brothers, and I went to the horse races at the Belmont Race Track. With an interest in economics, this was going to be a fun opportunity to observe and play in a prediction market (legally). You have several different places for information on the odds of each horse winning. But these fall in to two categories: There are those predictions of the experts, which can be found in any newspaper. And then there are those predictions of the masses, plebians, or “the free market” if you will. These are the odds the track uses to determine your winnings. Not because the track is run by radical free market types, but because its the only way to ensure that the house doesn’t lose any money.

So I tried a little Keynesian experiment:

Hypothesis: An intelligencia could work better than a bunch of rationalist, self-interested bastards.

Equipment: Horse track, odds predicted by experts, horses, odds offered by the teller/free market/proletariat masses, beer.

Method: Whenever the odds offered by the teller are mispriced favorably according to the experts, place a bet on that horse.

Possible sources of error: luck, organized crime.

The result: After 9 races, a few of them won big. In the end, a cool $25 turned into a hot 43 dollars!

Conclusion: We proved that central planners always beat the free market.

Anyway, you might like to independently verify these results.

Big HT2 Scott Sumner.

In a very good review of Tyler Cowen’s new book Create Your Own Economy (which I purchased but haven’t started to read yet) Sumner says in the comments (in reference to framing effects)

They remind me of a personal experience I had that I ask my class about. I bought a Springsteen ticket in 1978 for $10. As I was about to go in someone offered me $50. I ask people “what did it cost me to see the show?” Almost nobody says $50. Oddly, some people say $40. (They are also surprised by how cheap tickets were back then. It was a small show in a Chicago movie theatre. Very cozy. And in 1978 Springsteen was a very charismatic perrformer in an intimate setting.)

I understand the inclination to say the costs as $40. I posed this scenario to several non-economists and got an answer of either $10 or $40. Of course, $10 represents the sunk cost of the ticket and this is obvious. Once the ticket is purchased, there is no opportunity for resale and so no costs of opportunity. But the $40 profit represented by the scalper represents an opportunity cost: the potential gains foregone to pursue a preferred task. The total costs are, therefore, represented by the opportunity cost plus the sunk costs for a total of $50.

This is a confusing concept… why aren’t the sunk costs subtracted? Because the sunk cost (at least in this scenario) are non-refundable. I can’t can’t my initial $10 back, but forgoing the profit I could make from the ticket sale comes costs a $40 profit.

Of course, we must also consider non-monetary costs and benefits… If you consider a Springsteen concert experience more than even $50 in total costs. This makes opportunity costs different to express in real scales and on temporal scales. One commenter (known as “philo”) points this out on Sumner’s blog: opportunity costs are time scale relevant. Framing effects, available choices and preferences over a given time, are important.

Stay tooned: In my next post, I discuss opportunity costs further with fellow False Symmetry blogger, Robert Simione.