December 22, 2017

QotD: Economic lessons from Christmas toy shortages

Filed under: Business, Economics, Quotations — Tags: , , — Nicholas @ 01:00

Toy marketing on this elite level — Canada should be proud! — creates enraged parents. Hatchimals disappeared from stores altogether many weeks ago, and the high prices commanded in the resale market have created an industry of colorful social-media abuse. Hatchimal hoarders (who can now command C$120-$140 on eBay for one egg) are alleged to be greedy monsters, ruining Christmas for single moms — that is, by making the toy available at a premium at a time when toy stores and the makers of the product are no longer any help. (If the toy had never been invented, or were otherwise unavailable at any price, there would be no cause for complaint.)

What we have here is the familiar operation of a strong human superstition: the belief in an illusory “just price” for a product. It is the same superstition that makes some music and sports fans angry at scalpers. But it is exacerbated in the Christmas-shopping milieu by the innate predicament of the parent, always an emotional hostage to their offspring.

The complainers know perfectly well their kids will survive if they have to wait a couple of months for a Hatchimal. They know they could buy many equally good (and equally ephemeral) toys for half what they might pay a Hatchimal hoarder. They probably even know, if I can play the obtuse childless know-it-all for a second, that an authoritative, confident parent could explain the situation to a child, and make them live with the explanation.

Parents always want Christmas to be just so, but in the people who are castigating Hatchimal resellers, you can hear the hints of desperation, maybe even bad conscience. The problem, angry moms and dads, is not the hoarders. They just saw the real problem coming, and it is you.

Colby Cosh, “How the Hatchimals Christmas craze got me to own up to my irrational baseball complex”, National Post, 2016-12-16.

June 17, 2015


Filed under: Economics — Tags: , , , , , — Nicholas @ 04:00

Published on 8 Feb 2015

Speculation is often considered to be morally dubious. But, can speculation actually be useful to the market process? This video shows that speculation can actually smooth prices over time and increase welfare.

Speculators take resources from where they have low value and move them through time to where they have high value. We also take a look at speculation in the futures market — for instance, can orange juice future prices help predict Florida weather? Let’s find out.

June 12, 2015

QotD: Gresham’s Law

Filed under: Economics, Quotations — Tags: , — Nicholas @ 01:00

Gresham’s Law states that bad money drives out good money. This can happen in both inflationary and deflationary monetary environments. Basically, it must means that people will spend their “bad” currency first to get the maximal value out of it, and save the “good” money for the future because it will not depreciate as fast. That’s why you see socialist government inveighing against “hoarders”, “wreckers”, and “speculators” — the good money is biding its time and flushing out the bad money first.

For example, consider the US fifty-dollar gold coin. These coins are collected for their numismatic value and not their currency value. In fact, these coins are useless as actual currency. Why? The value of the gold and silver in the coins far outstrips the face value of the coin. Gresham’s Law would drive the coins out of circulation — either they would be melted down for bullion, hoarded, or traded as barter (not currency!) for objects of similar value.

Monty, “Inflation, Deflation, and Monetary Policy”, Ace of Spades HQ, 2014-07-11.

April 3, 2015

The rise and fall of the Beanie Baby bubble

Filed under: Business, Economics, USA — Tags: , , , , — Nicholas @ 03:00

City Journal‘s Laura Vanderkam looks at the amazing and unlikely fad that swept much of North America until the wheels came off:

In the last few years of the twentieth century, speculative mania gripped seemingly normal Americans. People debated prices in online chat rooms. They devoured literature claiming that sound fundamentals, not froth, led to sky-high valuations. The frenzy grew and then, suddenly, the bubble burst. People lost everything.

This describes the dot-com crash, but it also describes a less-remembered mania for adorable plush toys known as Beanie Babies. In The Great Beanie Baby Bubble, journalist Zac Bissonnette blends the unlikely economics of an asset class encompassing Kiwi the Toucan and Happy the Hippo, and the unhappy tale of Ty Warner, the ruthless tycoon behind them, into a saga far more entertaining than a business book deserves to be.

Like many in the toy industry, it turns out, Warner had an unhappy childhood. His father abused his sister; his mentally ill mother would later steal Warner’s car. Perhaps to compensate, Warner developed an obsessive attachment to stuffed animals. After beginning his career as a salesman, he threw himself into getting the details of the animals he designed for his eponymous toy company right. The eyes in particular had to lock on a buyer. He once borrowed an employee’s pearl necklace to be sure the pearlescent color of a product’s fur was correct. He wanted all his toys to be worthy of bearing his name, “Ty,” on the ubiquitous heart-shaped tags.

From the beginning of his entrepreneurial journey, “his two biggest competitive advantages — obsessive attention to detail and trade-show charisma—outweighed his myriad disadvantages: lack of scale, no advertising budget, a small and not especially competent sales force, a limited product line, and little in the way of a track record with retailers,” Bissonnette writes. Warner would sell only to small stores — a declining market — because he never wanted to see his precious animals end up in a big-box discount bin. Yet the resulting difficulty this created for customers wound up adding to the mystique. People like a hunt. Fortune was kind to Warner for a while, and the limited availability, coupled with strategic “retirements” of desired Beanie Babies, boosted demand. A few collectors started re-selling rare Beanie Babies on eBay. As they made money and told their friends, a mania ensued.

April 10, 2013

If there’s a “Bitcoin bubble”, it doesn’t predict long term success or failure for the currency

Filed under: Economics, History, Technology — Tags: , , , , , — Nicholas @ 12:55

In Forbes, Tim Worstall explains that calling the current rise in Bitcoin value a bubble does not actually pass a judgement on whether Bitcoin will be a long term success:

And yes, I’m still of the opinion that Bitcoin is in a bubble. You know the walks like a duck, quacks like a duck idea? If it does those then it’s a duck. And the price changes that we’re seeing in Bitcoin make me and many other observers think that Bitcoin really is in a bubble. Indeed, there’s some nice work here showing that many of the Bitcoins in existence are being hoarded and that in itself is bubble behaviour.

However, do let me make one more thing clear: whether or not Bitcoin is in a bubble or not doesn’t mean that Bitcoin will succeed or not. They are entirely different questions, as different as is your wife Welsh or is your dog female? They really have no connection with each other at all.

Let us take the standard bubble example always used, the Dutch tulipmania. We could use others, the South Sea Bubble, the dot com boom, or we could even use an entirely different set of examples, say the introduction of the automobile. That last being when a new technology arrived without a speculative bubble around it.

The point of the first three, and let’s stick with tulips, is that there really was a quite obvious bubble in the prices of them. Most of the participants in the bubble (as with the other two) knew quite well that it was a bubble too. Prices were way out of line with any sort of “true value”. However, do note this very well: the tulip did indeed go on to become an important part of the Dutch economy. Indeed, it’s still there right now. Vast fields of tulips are grown there every year to supply cut flowers and bulbs for replanting that are shipped all over Europe. It’s actually become so important that other flowers, grown outside Europe, are still marketed through Holland as that’s where all the skill and infrastructure is.

October 4, 2012

Why EU politicians love the idea of a Financial Transaction Tax

Filed under: Economics, Europe — Tags: , , , — Nicholas @ 10:31

Tim Worstall explains why politicians love the notion of an FTT, and why all the benefits claimed for imposing an FTT are not going to happen:

Large numbers of people have convinced themselves that a Financial Transactions Tax (FTT) would be a really very good idea indeed. It would make the banks pay for the problems they’ve caused, it would lower speculation and thus lower volatility, it would raise a lovely large amount of money that can be spent on good causes and anyway, there are a number of FTTs around and they’ve not caused any problems, have they?

Politically this is of course quite wonderful. Lots of money to pay for things and it’s the banks that have to cough up? We’ll get tens, no hundreds of billions and none of us will really have to pay any of it? Let’s tax the other guy usually does gain public support after all.

The thing is, all of the stated joys of this tax are in fact untrue. I’m rather involved in this as I prepared evidence for the House of Lords on the point (evidence which I’m glad to say heavily influenced their final report). Other submissions also pointed to posts on this very blog here at Forbes in support of various points. Finally, this formed the basis of my one and only peer reviewed paper to date. You might say that I’m more involved in this story than I am in most.

The thing is, those four things which campaigners for the FTT say are the good things about it all turn out to be untrue. Firstly and most obviously, banks are companies and companies never pay tax. It’s always some combination of customers, workers and shareholders who do: for only a real human being can bear the burden of a tax. As to speculation, more speculation lowers price volatility so reducing speculation will increase volatility, not reduce it. An FTT would crimp economic growth and thus would reduce total tax revenue, not increase it and finally, we do indeed have several FTTs currently and also know that they crimp economic growth and thus reduce total tax revenue.

All of these things have been explained by all of the serious people (plus me, who you can regard as serious or not as you wish) who have looked at the question. And yet governments continue to sign up for what they keep being told is a seriously bad idea. They’ve even been told this in terms simple enough for a politician to understand.

July 2, 2012

What value do speculators offer?

Filed under: Economics, Liberty, Media — Tags: , , , , — Nicholas @ 10:17

In most newspapers, you don’t need to wait long to read some journalist beating up on evil speculators for the “damage” they do and the claimed “uselessness” of their activities. Tim Worstall points out that speculators are actually essential to smooth operation of free markets:

What is it that the speculator in food manages to achieve? They move prices through time. At the moment, there’s a drought, and so we think there will be less corn available for consumption next year, so its price goes up.

What would we like to happen? Should prices stay stable? We would all carry on using the amount of corn that we originally thought we’d get. And we’d run out — there may even be a famine. People tend to die in famines.

So what we’d actually like to happen is for people to prepare by consuming a bit less corn this year.

Some of this should come from substitution: farmers will feed wheat to animals not corn. Consumers might move from grits to weetabix for breakfast. Perhaps the fools putting corn into cars will move over to sugar cane to make ethanol from.

We would also like a supply effect: those who are currently growing corn might add a bit more fertiliser, take more care in harvesting, make sure less gets spoiled or lost in transport.

Rising prices causes both of those pretty neatly. Put up the price and people will use less, while suppliers will make more. And what is it that the speculators on the futures markets have done in response to this report of drought? They have raised prices.

February 11, 2011

How “those evil speculators” actually provide a very useful public service

Filed under: Economics, History, Liberty, Politics — Tags: , , , — Nicholas @ 07:59

Tim Worstall has a very good summary of Adam Smith’s explanation of the very useful public service provided by speculators:

Back to food: this is exactly the argument that Adam Smith put forward to explain the activities of a wheat merchant (Wealth of Nations, Book IV, Chapter V, start at para 40, here, for a decent dose of 18th century prose). When wheat is plentiful (although he calls it corn — the English did not call maize corn until some time later), say after a harvest, the merchant buys it up and stores it. He then waits until prices have risen before he sells it. If his expected shortage in the future doesn’t arrive then he’s shit out of luck and loses money. If it does, then the happy populace now have wheat to eat. For, and here’s the crucial point: what our merchant, our speculator, has done is move prices through time.

If we all ate wheat like it was that bounteous time just after harvest all the time then we would run out of wheat entirely before the next harvest. Prices would, at that point, become really rather high. However, by buying in the time of plenty, he’s raised prices in that time of plenty: thus making everyone consume a little less in that Harvest Festival gluttony. He’s also lowered prices in the Hungry Time (in medieval times, the six weeks before the harvest was indeed known as this, it was the worst time of year for food supplies) because he has at least some grain available rather than none.

So we’ve reduced price volatility, stretched the available supply over more time, possibly even stopped some starvation, by someone being enough of a bastard to speculate on food prices.

Now note, this is physical speculation, actual purchase, taking delivery and storage.

Derivatives speculation, using futures and options, has less effect on prices. It gives us information about what people think prices might be in the future, for sure, but it will only affect today’s prices if high future prices lead to that actual physical storage and hoarding. Which could happen, to be sure, but won’t necessarily.

All of this leads us to what people like M Sarkozy are trying to say and what the WDM are screaming about. The latter, in their report linked above, come right out and say that as more people are playing with food derivatives, this is what has been pushing up food prices. This is nonsensical, in the absence of any physical hoarding. For a start, WDM seems not to realise than a futures market is zero sum: for any profit made by someone then someone else must have made an equal and opposite loss. For everyone going long (betting on a price rise) someone else must have made an equal and opposite bet going short (betting that prices will fall). That’s just how these markets are. It really doesn’t matter to spot (current) prices whether three people are betting £50 or 30,000 are betting $50bn: there will be an equal and opposite number of people long as there are short, by definition.

So it absolutely cannot be that “more people speculating increases food prices”.

WDM’s second point is that more speculation means more volatility in prices: something that almost all economists would regard with a very jaundiced eye. For the general assumption is that futures act upon prices as does Smith’s wheat merchant: they reduce price volatility. Fortunately, the WDM, in its own report, provide us with an example of this. In the 2006/8 price rises, it notes that there’s a deep and liquid speculative market for wheat and corn (maize), while there’s only a very thin one for rice. And yet it was rice that was vastly more volatile in price in this period: despite the fact that it was wheat and maize which people were turning into ethanol for cars (the true cause of the price rises) rather than rice.

The price of a good is also a signal of availability: the more scarce the item is, the higher the price will go. The higher the price goes, the greater the incentive to either limit the use of the item or to search for substitute goods. This is a key feature of free markets: without the price change signalling, consumers cannot accurately guage whether to increase or decrease their use of a particular good. This is why the worst possible reaction to a sudden price increase is price controls: remember the first oil crisis in the 1970s? Price controls meant that people could still buy gasoline at the “old” price . . . until there wasn’t enough to go around. Controlling the price creates artificial shortages and fails to rationally indicate to consumers to conserve or limit their consumption.

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