Rent-seeking 101

Here's an editorial from today's edition of The Wall Street Journal that describes the process simply.

Voting, Externalities and an "Invisible" Hand?

I've been too busy lately. I've found some time to read, but precious little to blog.  So this is about a week overdue. This article (HT to Marginal Revolution) is really a wealth of opportunity. You can connect all kinds of economic concepts to voting. The author makes some excellent arguments for voting and not voting. It is the latter that are most intriguing. In some instances, the author seems to be relying on normative judgments about what is a good policy.  In other instances, the argument of common good runs up against rational self-interest.

Do you agree with the author?

Causation, Correlation or Coincidence

And we were only talking about subsidies and their effects on markets the other day in my class. I wish I had this at that time. (HT to Division of Labour).

If You Tax Something,

you get less of it. I seem to remember reading that someplace...oh, yeah. It's in almost every economics principles text.

This article from The Independent in the U.K. (HT to Carpe Diem) could be very useful when you discuss tax wedges. It could also be used when discussing taxes and elasticity, willingness to sell and incentives.

I'm planning on using it. What do you think? Does it have potential for your class?

Conservation as Conspicuous Consumption

Yesterday, I heard a very interesting interview on Marketplace, the public radio program. The interview was with Stephen Dubner, coauthor of Freakonomics and host of Freakonomics Radio. Dubner talked about the idea of conspicuous conservation. 

Now you probably know about conspicuous consumption. The phrase was coined by Thorstein Veblen who stated that one reason we spend money can be to show off our wealth. Basically what we buy can signal our wealth to others and can, presumably, have an effect on our status or how others view us.

I often ask my students why they buy certain brands of clothes, etc. when other cheaper brands would provide the same function. This leads to a discussion of utility and an understanding that many people place a high value on the perceived ability of certain products to impress other people.

This brings us back to the interview. As I said, Dubner was talking about conspicuous conservation - how certain people will buy certain things to show how "green" they are, and he cites some research by a pair of economists that indicates the payoff for making these choices can be quite high in certain communities.  In essence, the purchasers may be willing to pay a higher price in order to secure higher prestige in a given community.  This offers a great opportunity to discuss value and utility. Because certain choices may not necessarily be the best in terms of actual effect, but may have a higher value as "conspicuous conservation/consumption." Let me know what you think of the interview.

This May Not Help...Much

There was a useful article in Monday's edition of The Wall Street Journal (free content at this writing) that discussed a pending deal in Congress. It would trade a temporary extension of the Bush era tax cuts temporarily for an extension of unemployment benefits. On the surface, this would seem to be a great example of classical Keynesian economic policy.

However, there are a number of additional directions you can go with this. One can use the fact that the extension of tax rates is temporary and that people know this. Essentially, they are being told that taxes will go up in the not too distant future. Consequently, what is the likelihood that people will spend the extra money vs. saving it to offset future tax increases? Does it make a difference that we are in a recession? Does the incentive to save differ for those who are still struggling - perhaps with part-time work because they can't find a full-time job? If you're still unsure about your job going forward, how will that impact your decision to spend vs. save?

As for the extension of unemployment benefits, there has been research that indicates the length of time the benefits are available has a connection to duration of unemployment - the longer the benefits period, the longer the duration of unemployment. Other economists believe that people who are unemployed try to seek employment quickly - even at lower wages or positions that would previously have been unattractive.

For either tool, a case can be made that passage will help the economy. And a counterargument can be made that it won't. At the moment, the discussion is basically academic because nothing has been passed. But that makes it a perfect intellectual exercise – lots of room to play. And as neither side is planning on cutting other programs to pay for what being proposed, it will add to the deficit. You can even begin discussion of "crowding out." What do you think?

Not Really a Whole Lot More to Say

Two on Fiscal Policy

Here are a couple of resources to go along with the teaching of fiscal policy. First, today's post on Greg Mankiw's blog lifts a bit from Life, the new biography by Rolling Stone Keith Richards. It seems that the members of the group make/made a number of decisions based on the tax effects. Needless to say, this means that they have used resources avoiding taxes that would have been available to governments had the policies been better designed.

Of course, this shouldn’t be a surprise given that Mick was a student at the London School of Economics. I’m sure he learned early on that You Can't Always Get What You Want (scarcity is fundamental).

This next bit is a bit over the top. It's a dark and somewhat disturbing advertisement about the national debt from the 1980s...oh, and it was directed by Ridley Scott, the person who gave us Alien. (HT to Marginal Revolution.)



HT Marginal Revolution

People Respond to Incentives...or the Lack Thereof

I don't have any links for you on this one. Largely that's because I suspect some of your students could provide better references than I could.

I think the ongoing legal problems of a certain young starlet could provide a very real example of how incentives (the positive and negative reinforcements provided to correct behavior) or the lack thereof lead to certain predictable behaviors.

This certain starlet has been hauled before judges on various charges over the past few years and has had sentences passed. The sentences are then reduced or commuted to provide for help with problems. That help has been frequently ignored or cut short and the cycle repeats.

If there are no negative consequences for behavior, what makes the behavior stop? Personally if the process doesn't change, it will stop only when the actress does herself or someone else great bodily harm. I'd welcome your thoughts.

Follow-up on Haiti

One of my ongoing themes this year appears to be Haiti. (I won't bother you with a bunch of links. It's easier if you just put Haiti in the search at the upper left corner of the blog.)

Here is a follow-up courtesy of the folks from Planet Money at National Public Radio. It seems that entrepreneurial spirit can accomplish wonderful things - even overcoming bureaucratic barriers of all kinds.

Incentives Matter

Finally, here is something from the Incentives Matter Department. It seems that prices affect behavior. (Who would have guessed?) First, prices can lead to more crime. (HT to Division of Labour)

And second, according to this piece from Planet Money, prices can improve treatment of passengers. Who would have thought that prices can be such powerful messengers?

Incentive Systems

People respond to incentives...even very young people. At least that's the lesson we take away from this entry on NPR's Planet Money. And they can be very ingenious when it comes to working them to their advantage.

Institutions and Choices

If you read this blog regularly, you know one of my areas of interest is institutions. The rules and organizations that are put in place, either formally or informally, have a significant impact on our decisions. Whether they arise from legislation, commercial agreement or voluntary action, once they are accepted and become part of a regular mindset, they influence our choices. The incentives may be financial, temporal, or even imaginary. Nevertheless, they shape our decisions.

A couple weeks ago, Richard Posner and Gary Becker had an informative discussion in their blog about the role of institutions in the current U.S. economy. Specifically, they discussed the impact of unions. (You can read Posner's post here and Becker's post here.) Both agreed that the institutions were shaping both policy choices and business choices, and both felt there was an impact on the current economy, in some cases negative.

In an article in today's edition of The Washington Post, we get another view of institutions and the role they play in shaping choices. But unlike the institutions of discussed in the Posner-Becker discussion, these are much older. These institutions date back to Han Dynasty of China, some 2,000 years ago. And the institutions are largely geographical in nature. Yet they have an impact on the choices available to many citizens - providing positive and negative incentives for activities and opportunities.

I found all of these informative. And they can be used a number of ways. They could be used to augment discussion the role of institutions in shaping an economy in macro, or the role of government regulation in the marketplace in micro. In either case, students can discuss both the intent of the institution and its result or consequence. I would think the article from The Post could even be used in a world history class when discussing Ancient China.

I welcome your thoughts.

Conditional Cash Transfers

The new edition of The Economist contains a pair of articles that are worth your time. (You can find them here and here.) They're short and they address issues of incentives, income distribution, productive resources and economic development.

The focus of the articles is a relatively new idea in economic development programs, conditional cash transfers (or CCTs). The idea is that the poor are paid for certain activities: getting their children vaccinated or making sure their children are in school. It appears to be successful in many areas, although it is more successful in rural areas than in urban areas.

While I'm not sure to what extent you address economic development (that's an "end-of-the-course" topic that too frequently gets left out, either for lack of time, lack of interest, or lack of understanding); I do suspect you discuss incentives, and possibly income distribution or productive resources. I would be interested in your assessment of these articles.

Wal-Mart and Small Farmers

As long as I'm referencing NPR, let me talk about another story.  Last week, I put up a post on positive externalities attendant to a new Wal-Mart. Somehow, I missed this story from National Public Radio about Wal-Mart and its effect on local agriculture (HT to Carpe Diem).

My local Wal-Mart has been featuring produce grown in-state recently. And quite frankly, I don't expect it to be able to provide all kinds of local produce all year round - comparative advantage and specialization are operative concepts the last time I checked. But I am happy to see locally grown food at an affordable price in a convenient location.

That's what I call form, place and time utility. And when I can get all three at a good price, I will take advantage of it.

What are your thoughts?

Haiti Update

A few weeks back, I posted on the unintended consequences of foreign aid. Specifically I highlighted a story on National Public Radio about how food aid to people in Haiti who had been impacted by the earthquakes earlier this year was affecting local rice farmers.

NPR did an earlier story (which I did not see or cover) about a Haitian woman who was in danger of losing her small business, which had been devasted by the earthquake, because she did not have the funds to make a loan payment.

But her life has changed. Many NPR listeners sent her money - more than enough to make the payment. She has taken the bulk of the extra funds and reinvested in her business. It's a great story, and speaks to the positive side of aid to developing countries - and especially to the power of small amounts of capital to change a life.

Now in NPR's Friday podcast, there is a follow-up on that story. You can listen beginning at about the 3-minute mark. I see it as an interesting variation of an unfettered market. Funds did not have to go through a government bureaucracy, and they provided a benefit to both parties - the donor and the recipient. The recipient’s business is clearly better off, and the donor "profits" although not in a monetary sense. Rather the donor feels better knowing they have done some good. This is similar to what I try to teach about Adam Smith. It is not just about The Wealth of Nations, but it is also about The Theory of Moral Sentiments. (However, suffice it to say, there is a trade-off to success. But I don’t want to give it away.)

In that same podcast, there is another story about economic success in Haiti, beginning at about the 14:45 mark. In this case, it involves an economic development project to help Haitian mango farmers. The previous attempts by various governmental and non-governmental entities failed. But through the combined efforts of the villagers who benefitted, the work gets done - apparently including digging up and replacing 27 miles of pipe to bring water to a newly-built processing center.

I recommend this. If you can’t sit and listen, download and put it in your personal device and listen while you jog, while you work in the yard, or around the house. It will be time well-spent.

Economics of Fahrenheit 451

My good friends know I find economics in a wide variety of “unusual” places. I enjoy finding cartoons, movies, music, literature and historical narratives that can help illustrate economic concepts. Consequently, I am always pleased to other sources that do the same.

Marginal Revolution recently provided a link to this paper on the economics of Ray Bradbury’s Fahrenheit 451. Chances are pretty good that you read this novel at some point in your academic career or that you saw the movie. I did both…several times. But I never saw the connection.

The authors of the paper have now shown me why. It seems I was looking at the work through neo-classical eyes. What I should have done is used the lens of von Mises and John Stuart Mill. (I’m not as familiar with either of these, although I am trying to learn more.) Using Misian analysis, you can see the main character's choices as a quest for fulfillment.  Using Mill, we can see a utilitarian view as the same character strives for happiness.

If, like me, you like finding economics in “non-economic” situations, I suggest reading the paper and re-reading the book or seeing the film. Who knows? If your students are reading or have read Bradbury’s classic for another class, you might even be able to do a little interdisciplinary work.

I'm Not Sure This Is the Answer to the Resource Curse

A couple of days ago, I wrote about "the resource curse", referencing an article in the Planet Money web site. As a follow up, here's another story on NPR's Planet Money about a proposal by some economists to distribute the proceeds and break the resource curse.

I don't think it would solve the problem of the curse. It removes the incentive for the people to develop anything new. They have a steady stream of income (at a level that may well be above what they have now), and it comes in without any real effort on their part. It may remove the government as the funnel for the funds, but it doesn't create any incentive to diversify.

Economics of the World Cup

While I know most of you are out of school, you may still be looking for interesting graphics to use during the forthcoming school year.

If you have soccer players, coach soccer, or like soccer, here is a very good graphic courtesy of The Mint. It shows some of the economics of the World Cup. This could be especially useful when discussing the economics of big events or sports facilities.  One could even dig further by researching the economics of previous World Cups or Olympics.  (One of my students said he had heard a story that the Athens Olympics was one reason Greece was in the condition it is in. We had a good, short discussion on whether or not that might be true.) 

***UPDATE***
Here is a link (free access at this writing) to a story in today's (6/17/10) edition of The Wall Street Journal that seems to confirm my student's comment.

People Respond to Incentives....

...but which incentives?

In economics class, we teach that people respond to incentives. Then we frequently add that sometimes incentives don't work. The truth is when an incentive (negative or positive) doesn't work it usually means it was the "wrong" incentive to motivate a particular individual. Sometimes it's not about money. It can be other "non-economic" - or more correctly "non-monetary" - factors that provide incentive. I often use the term "psychic income" to explain some of these factors. But I have been looking for something that could provide a better explanation.

Barry Ritholz at The Big Picture posted this very interesting video animation on this topic, which can help. The video has taken a presentation by Dan Pink, the author of Drive, (which I have added to my carousel, at left) and edited and illustrated it. It's short. It's interesting. And while not complete, it provides a good platform. (If you're interested in a longer version of the talk - 41 minutes - without the animation, you can find it here.)

On Barry's blog, many of the comments were insightful and/or useful. (That's where I found the link to the longer version.) The animated version doesn't address negative incentives. Nor does it include other positive incentives such as recognition and status - both of which can be powerful positive incentives.

I recommend both the short version (for possible classroom use) and the long version (for self-edification). I would be interested in your thoughts, as well.