Tag Archives: markets

The trouble with economics, part 92

Posted on by

I’ve had a busy week, to say the least. So I’ve only been inching my way very slowly through the very interesting [amazon_link id=”0691155240″ target=”_blank” ]Fragile By Design[/amazon_link] by Charles Calomiris and Stephen Haber.

On Monday at the OECD Forum, though, as well as talking about my own book, [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief But Affectionate History[/amazon_link], I had a very interesting debate with Marie-Laure Djelic and Yves Flückiger about economics and economics education. They were both critical of economics, for familiar reasons – many of which I agree with.

However, Marie-Laure made one really interesting point I hadn’t thought of before. She was talking about Michael Sandel’s [amazon_link id=”0241954487″ target=”_blank” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_link]. A weakness of the book, in my view, was its failure to answer the question about where those limits lie. Sandel criticises the fact that people pay other people to stand in line for them to pick up free tickets for plays in Central Park. But why is that worse than paying people for their time in other ways, like babysitting? Marie-Laure argued that he should not have tried to specify the limits of the market, however – she sees it as a collective, political decision, not a question to which there can be a technocratic answer.

[amazon_image id=”0241954487″ link=”true” target=”_blank” size=”medium” ]What Money Can’t Buy[/amazon_image]

I only partly agree with that. Of course political imperatives should be able to override a market – think of the civic need for rationing during wartime even though it fuels a “black market”. However, it seems clear to me that instincts or political outcomes should be tested from the perspective of what a market outcome would look like. Take the example of emissions markets: there are people, maybe many people, who think markets and the environment shouldn’t mix at all, but that’s just perverse if a market process can lead to a better environmental outcome. And if there is a strong moral instinct not to allow payment for queuing, the moral philosophers should try to explain why it does differ from other forms of payment for labour time.

 

Fortune tellers, astrologers and economists

Posted on by

[amazon_link id=”0691159114″ target=”_blank” ]Fortune Tellers[/amazon_link] by Walter Friedman is a provocative title for a book about economic forecasters – or perhaps not. For many people would agree about the resemblance between the two activities. Besides, this is the tale of the early forecasters who preceded or perhaps more charitably laid the foundations for the model-based, computerised macroeconomic forecasting of our own times.

[amazon_image id=”0691159114″ link=”true” target=”_blank” size=”medium” ]Fortune Tellers: The Story of America’s First Economic Forecasters[/amazon_image]

The first character to stride onto the stage is literally a fortune teller. Evangeline Adams was an astrologer who offered stock market tips and predicted business trends for affluent New Yorkers in the early 20th century. Her enormous influence was cemented by the claim to have correctly forecast the 1929 stock market crash. Friedman writes: “Even in her own time, many regarded Evangeline Adams as a fraud and a scam artist. Her success, however, points to a profound anxiety about the future. Capitalism, after all, is a uniquely future-oriented economic system.” The other characters range from the more respectable Roger Babson, whose forecasts prefigured technical analysis, based on charts and trends, to the highly respectable Irving Fisher, who based his forecasts on theory and models, and John Moody, who collected masses of detailed data and analysed the figures, founding what would become the famous ratings agency.

The book is a great read, based as it is around the personalities of these early forecasters. A surprising number were sufferers from tuberculosis – it is hard to resist the amateur psychology of speculating that they particularly wanted to foresee the future, living as they did in the shadow of mortality. They were inventive and entrepreneurial. Babson (who founded Babson College in Wellesley*) built the world’s largest relief map of the United States. Fisher patented a precursor to the Rolodex and invented a prize-winning tent to aid the treatment of tuberculosis. He also built a machine showing the circular flow of income in the economy, well before the famous Phillips Machine.

These men (Adams is the only woman) founded businesses, wrote books, travelled around giving lectures and promoting themselves. I can see a terrific movie in the ‘forecasting wars’ of the 1920s as these larger-than-life, quintessentially can-do Americans competed with each other to call the stockmarket, win followers and make a fortune. Leonardo di Caprio, Benedict Cumberbatch, and George Clooney, with Tilda Swinton as Evangeline Adams. It would be a great way to tell the story of the bubble and stockmarket crash. It was an era of such forecasting mania and desire to know the future that even AT&T and Macy’s started generating their own economic forecasts in the 1910s. The government, too,  got into the business, through Herbert Hoover and Wesley Mitchell in the mid-1920s.

I spent a couple of years in the late 1980s producing macroeconomic forecasts, enough time watching the sausages being made to put me off eating them. Nate Silver’s book [amazon_link id=”0141975652″ target=”_blank” ]The Signal and the Noise [/amazon_link] has an excellent chapter on economic forecasts, comparing and contrasting them to weather forecasts. The problems are similar – non-linear dynamic systems of great complexity, although economics is harder because the ‘particles’ are conscious human beings. Weather forecasting is much improved at very short time horizons but still not good longer term, despite the huge increase in data collection and processing that has occurred. It is foolhardy to think economic forecasting will ever be accurate. Forecasts are no more than a tool for thinking about current trends. Still, as Friedman points out, the appetite for forecasts will never diminish, and that demand will always create a corresponding supply.

* Corrected from earlier thanks to Edward Hadas

The curious case of second hand markets

Posted on by

When I was growing up in a Lancashire mill town in the 1960s and 70s, every Friday evening we went to the fish and chip shop to buy our meal. The particular delicacy was an upside-down pea mixture: mushy peas on top of the chips, which were then soaked through and green. But this post isn’t about British culinary delicacies, but rather about what the transaction included. Because it was the practice to take your plates and dishes to the shop, where the food was placed on them and wrapped in newspaper. You were buying fish, chips, peas and some paper. This is a contrast to today’s practice of buying in addition a polystyrene tray, and a contrast to buying a meal in a restaurant, or beer in a pub, where you are buying the food and renting the plate or glass.

These reflections about the nature of the property being exchanged in a market transaction came about because I read an article in the Financial Times about a plan for a second hand market for digital goods in Europe, to be launched by ReDigi, which is running one in the US already. It sells for 60 cents songs already bought online for 99 cents. Needless to say, the company has been taken to court in the US) by Capitol Records), for breaching ‘intellectual property’ rights.This is entirely in line with the instinct of the “content owning” industry – witness the way games companies have tried to restrict the second hand market in physical games by adding one-time only codes, and requiring purchasers of pre-owned games to also buy a new code to unlock the game.

The outcome of the ReDigi case will be fascinating: the question is whether something that is ‘property’ in the initial transaction ceases to be property for the purposes of a secondary transaction. Ultimately, it might be the case that digital purchases of books and music become more explicitly a rental model, as the capacity and claimed willingness of vendors such as Amazon to delete purchased e-books or enforce restrictive DRM already hints. Digital goods are a special case because there is no degradation of the second-hand compared to the new item. There are none of the information asymmetry ‘market for lemons’ problems arising from the unknown quality of a physical good such as a car (although not a physical book or garment, which can be inspected in the charity store).

Browsing around about this subject, I’m surprised to find how little research on second hand markets is available. The few journal articles I found – mostly dating back to the 1990s or early 2000s – suggest that second hand markets can increase rather than decrease the size of new goods markets, because consumers will upgrade more often if they can recoup some of their earlier purchase from selling them second hand. What’s more, it would be incorrect to assume anyway that used goods cannibalise new sales, because at least some consumers would never buy them at the higher, new prices. (Cory Doctorow picked up this point in the context of e-books in a 2005 piece.) And of course, we apply different standards, and different concepts of property, in different markets. There is the digital/physical divide, but also the divide between, for example, books, first edition or antiquarian books, and art – rarity determines not only whether second hand cheaper or more expensive, but also our cultural attitudes to buying in the used-goods market.

In the real world, second hand is huge. It’s huge in developed markets – see, for example, this Guardian article about the post-Christmas surge for charity shops – especially during a recession. It’s bigger still in developing country markets, where clothes and other goods such as mobile phones from the richer countries are sold on a large scale in the markets. This may be one of the all-too-frequent examples of a subject not being studied by economists because there’s no readily-available online data set on the OECD or World Bank websites. The one book I managed to find on contemporary society on Amazon is a 2003 anthropological study of [amazon_link id=”1859736726″ target=”_blank” ]Second Hand Cultures[/amazon_link]. (There is also [amazon_link id=”0230229468″ target=”_blank” ]Modernity and Second Hand Trade: European Consumption Cultures and Practices 1700-1900[/amazon_link].)

[amazon_image id=”1859736726″ link=”true” target=”_blank” size=”medium” ]Second-hand Cultures (Materializing Culture)[/amazon_image]

If anybody knows of relevant books in any social science discipline, I’d love to know.  This subject is a dog that hasn’t barked, but maybe that will change.

First movers and fast second

Posted on by

I was reading my dear husband’s blog post about the new iPad mini and the Microsoft Surface, the latest entrants to the tablet market. It reminded me about a terrific book co-authored by one of my mentors, the late Paul Geroski. The book is [amazon_link id=”0787971545″ target=”_blank” ]Fast Second[/amazon_link], written with Constantinos Markides, written int 2005 so it pre-dates tablets. But the hypothesis may apply.

Their argument is that in a radically new technology, the supposed first mover advantage may be ephemeral: “The firms that end up capturing the new market are those firms that time their entry so they appear just as the dominant design is about to emerge…. For big, established firms contemplating entry into a new radical market, this is the best strategy to follow.” This is what they mean by fast second – neither first mover, nor second-mover i.e. waiting for a clearly dominant design and standards, and offering a cheaper me-too product.

The examples in the book include IBM in mainframes, GE in CT scanners, Canon in cameras, Sharp in faxes. I don’t know whether the iPad challenger tablets would count in Paul’s view, or whether the iPad mini will fend off fast seconds, but it’s worth pondering.

[amazon_image id=”0787971545″ link=”true” target=”_blank” size=”medium” ]Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets (J-B US non-Franchise Leadership)[/amazon_image]

No limit to markets in the slum

Posted on by

Katherine Boo’s [amazon_link id=”1846274494″ target=”_blank” ]Behind the Beautiful Forevers: Life, Death and Hope in a Mumbai Slum[/amazon_link] is a wonderful read. It recounts a series of  dramatic events that occur in Annawadi, a slum next to Mumbai Airport, where she spent months meeting residents and observing their lives. Like all good reportage, it gives the reader a vivid impression of place, and Boo has a novelist’s ability to convey character. In fact, my one complaint about the book is that she uses the novelistic device of voicing the characters’ inner thoughts – for me, this undermined the authenticity of the detailed reporting of the physical conditions, the work, the danger, the smell and dirt and noise, and so forth. On the other hand, the focus on character makes it a very enjoyable book.

[amazon_image id=”1846274494″ link=”true” target=”_blank” size=”medium” ]Behind the Beautiful Forevers: Life, Death and Hope in a Mumbai Slum[/amazon_image]

The business at the centre of the tale is recycling rubbish, which also featured in the episode of Welcome to India I watched last week. I won’t spoil it by giving away the ‘plot’. However, I was particularly struck by the absolutely central role monetary transactions play in everyday life. It is a commonplace to say corruption helps trap countries like India in poverty. I suddenly realised that there is a vicious circle, because poverty also traps people in corruption. The sort of favours and kindnesses that people in my society wouldn’t dream of demanding payment for all require handing over cash in the slum. Money is so short that nobody will do something for nothing. Besides, there is a chain of transactions to sustain. Policemen are paid so little that they demand bribes, a slum entrepreneur needing to pay the bribe to keep the police from closing her business as it lacks a permit therefore has to ask for cash to help out a neighbour, and so on.

Anyway, it was thought-provoking to realise how monetised all these relationships were in the light of having read recently Michael Sandel’s [amazon_link id=”184614471X” target=”_blank” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_link]. Behind the Beautiful Forevers makes it brutally clear that these moral limits are income-contingent: a very poor community has far less scope for scruples than a wealthy western one with a social safety net.I think Sandel’s widely cited example of the immorality of paying people to hold your place in a queue would be met with simple bemusement in Annawadi.

Worth reading alongside this book: Sukhetu Mehta’s [amazon_link id=”0747259690″ target=”_blank” ]Maximum City: Bombay Lost and Found[/amazon_link]; [amazon_link id=”0199794642″ target=”_blank” ]Working Hard, Working Poor[/amazon_link] by Gary Fields; and [amazon_link id=”0691148198″ target=”_blank” ]Portfolios of the Poor[/amazon_link], which uses diaries to record how people with almost no money use what they have. There are some good background features on Katherine Boo like this one in The Daily Telegraph and this New Yorker video.

Annawadi