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.
December 22, 2017
QotD: Economic lessons from Christmas toy shortages
September 10, 2017
QotD: Peak oil
Witness, brothers and sisters, witness. The oil, it’s going to run out. Peak production of the world’s oilfields has either passed or is about to pass; from here on out it’s rising oil prices forever. Now we wave our hands and pronounce that the energy-guzzling capitalist West (and especially Amerikka) is so addicted to cheap oil that its decadent empire will collapse, collapse I tell you. Barely concealed gloating follows.
There are so many mutually-reinforcing idiocies here that it’s hard to know where to start. As I was thinking of writing about this, one of my commenters pointed out that above $32 per barrel it becomes economical to build Fischer-Tropf plants and make your oil out of coal. This is old tech; the Germans did it during WWI. At slightly higher price points, MHD generators to burn garbage start to look good.
These are instances of a more general phenomenon: markets adapt to price shifts! To wreck an economy with oil-price rises, they’d have to spike so fast and so far that you somehow couldn’t run the cement trucks to build the Fischer-Tropf plants. Not gonna happen.
In fact, the long-term trend will be that the amount of oil invested per constant-dollar value of goods produced in the U.S. economy drops faster than the price of oil rises. This is a safe prediction not because manufacturers have all bought into Green ideology but because they want to make money. This means that they have a market incentive to use their inputs (including oil) a efficiently as possible, and to substitute less expensive inputs for more expensive ones. It’s called capitalism, and it works.
(And, by the way, the cheapest input of all is information. Buckminster Fuller pointed out forty years ago that as technologies mature, the products tend to get smaller and lighter and less energy-intensive and smarter. Your cellphone today weighs less than it used to, and costs less oil to produces than it used to, because its design is smarter. Information has replaced mass. This trend will continue and accelerate.)
The peak-oil collapse scenario is not credible for five minutes to anybody who understands market economics. But the sort of people who believe it are blinded by their own prejudices; fundamentally they think market economics is an invention of the Devil. They need to believe in the collapse, because they need to believe that the wickedness of Americans and capitalists and Republicans will be punished.
Eric S. Raymond, “Peak Oil — A Wish-Fulfillment Fantasy for Secular Idiots”, Armed and Dangerous, 2005-11-13.
September 1, 2017
The complex dance of supply, demand, scarcity, and price
Tim Worstall explains why laws against “price gouging” are denials of economic fact and actually work against getting urgently needed items to the people who require them:
Those little diagrams at the start of the Econ 101 class (supply, demand, price) are not optional extras to our universe, they are instead accurate descriptions of how we humans interact with it. If and when demand rises then price rises, this in turn encouraging an expansion of supply. Thus why we desire to have price flexibility in the face of either changes in supply or demand.
Consider Houston right now in the wake of Hurricane Harvey. It seems a good bet that the tapwater supply is disrupted — flooding has a tendency to do that. We would therefore assume the demand for bottled water has risen – the sensible who normally hydrate from that wondrous invention, the municipal water supply, will not be able to do so, thus increasing the demand for the bottled stuff. Equally, on the other side, there’s going to be a certain difficulty with supply at present — roads 5 feet underwater don’t exactly help trucking.
We thus desire to do two things simultaneously. We want to restrain demand to only the really important things and we want to incentivize greater supply.
Which is exactly what a price rise does for us.
With water at (just to make up a price) $99 a case, people are only going to buy it for drinking water, perhaps only in sippy cups. Which is excellent — we want whatever limited supply of potable water (we’ve really plenty of non-potable around, that’s the basic problem) there is in place to be used for that most valuable use, being potable. We’ve achieved one of our goals therefore, by allocating that scarce resource to its most valuable use: keeping people alive.
We also want to increase supply, though, and being able to sell in Houston for $99 something bought for $9.99 in Beaumont (again, just to invent an example) might well get a few boats carrying loads in – although quite possibly not from Beaumont. Thus, by allowing prices to rise, we’ve at least potentially increased supply.
Our price system, operating without constraint, is thus achieving the two things we desire, a curtailing of demand through rationing to only truly important uses, and a rise in supply.
“But,” goes the cry, “this isn’t fair!”
Indeed it isn’t, and ain’t that a shame, fairness not being a notable feature of this universe we’re struggling to inhabit. All we can do is the best we can. Which is, again, why I insist that there should be variable prices, why there should be no laws against price-gouging. Because this really is a disaster, there really are significant shortages in Houston right now, we really do want to solve them. Which means that we should be using all of the tools at our disposal.
August 27, 2017
August 24, 2017
Words & Numbers: Child Labor Was Wiped Out by Markets, Not Government
Published on 23 Aug 2017
In 1938 the US government passed the Fair Labor Standards Act mandating a forty hour work week, establishing a minimum wage, and prohibiting child labor. Because of legislation like this, government is often credited for making the American work environment safer and more fair. Yet, as Antony Davies and James Harrigan demonstrate with historical data, market forces were already making things easier on the American worker long before the FLSA.
Learn More:
https://fee.org/articles/child_labor_was_wiped_out_by_markets_not_government
https://youtu.be/0zq-2cKENOchttps://fee.org/articles/child_labor_was_wiped_out_by_markets_not_government
Data:
http://www2.census.gov/prod2/statcomp/documents/CT1970p1-05.pdf
See page 170 for average weekly work hours.
See page 134 for child labor rates.
August 17, 2017
Words & Numbers: The Illusion of School Choice
Published on 16 Aug 2017
In private schools, as in private enterprise in general, poor performance drives funding away by driving paying customers away. Yet in public schools, poor performance is used as an excuse for increased funding. With incentives like these, is it any wonder that public schools are failing our children so badly? Isn’t it time to inject some competition into the system?
Education for all is a worthy wish. So is food for all. But we don’t force poor people to eat state-produced food. Even food stamp recipients get to choose where to shop. Why shouldn’t beneficiaries of public education spending get to choose where to send their kids?
Our hosts James R. Harrigan and Antony Davies want to know…
August 7, 2017
The Idea Equation
Published on 31 May 2016
Alex Tabarrok’s TED talk showed you that ideas can trump nearly every crisis. Now, since ideas are so important, we have to ask: is the future of ideas a bright one?
To answer that, we’ll look at something we call the Idea Equation.
It goes like this: Ideas = Population x Incentives x Ideas/per hour.
This equation is a useful way to lay out the factors affecting idea production. When we understand the factors behind production, then we can better predict how the future will go.
Now, the first factor in the equation, is population.
Population determines how many possible idea creators we can have. The good news is, not only is world population growing, but a larger percentage of that population is becoming part of the researcher pool. For instance, China now has 1 researcher per thousand people. This seems low, until you remember they had about half a researcher per thousand in the year 2000. This means they’ve doubled their researcher pool, in just about 10 years.
So, on the population front, we’re seeing progress.
But how about the incentives that encourage idea creation? What’s the state of those?
That’s factor 2 in the equation, and again, we have good news here.
See, for the most part, countries are now choosing better institutions. On balance, the world now has more dependable legal systems, and more honest governments. Previously closed-off nations are now opening their markets to competition and trade. Aside from that, the world is generally becoming more politically stable, and property rights are strengthening as well.
As a result of these better institutions, there are now more incentives to produce ideas. Not to mention, we’re still continuing to globalize world markets. Remember what the TED talk said? Larger markets incentivize more R&D, and we’re certainly seeing higher activity in this area.
For example, in 1990, only seven nations accounted for 92% of world research spending. Today, those same 7 countries only account for 56%. Countries like China, Korea, and Brazil have already joined the fray, sharing the burden of idea creation, which benefits us all.
That said, we do still have the third part of the Idea Equation. This is where things get hairy.
You see, the factor “ideas/per hour” is the most mysterious one. Yes, it measures the productivity of idea creators, but we’re still unsure how productive the future will be. For one, there’s evidence that idea creation is becoming more expensive in certain fields. But on the other hand, we’re also seeing new technology that makes idea creation easier—things like the Internet, AI, and online education.
As long as we continue to globalize markets, provide better incentives for idea production, and keep developing technology that makes idea creation easier, then there’s no reason to think that the future can’t be bright. The brightness may not be guaranteed, but at least there’s hope, which is what matters.
August 3, 2017
Words & Numbers: Is UBI Better Than Welfare?
Published on 2 Aug 2017
A viewer recently asked us what Words & Numbers thought of Universal Basic Income.
Antony Davies likes the idea of it, provided it’s done well, but doesn’t think it could ever possibly be done well. But what about a theoretical UBI? If we could actually figure out how to implement that well, would that work? And why wouldn’t that work in the real world? This week on Words and Numbers, Antony and James R. Harrigan tackle the issue that’s getting a lot of attention in Silicon Valley.
August 2, 2017
Some troubling early signs from Finland’s UBI experiment
Dan Mitchell says we can’t draw definite conclusions from these early (anecdotal) points, but that it may point toward UBI (universal basic income) not being the panacea it’s been touted to be:
The New York Times published an in-depth preview of Finland’s experiment late last year. Here’s a description of the problem that Finnish policymakers want to solve.Map of Finland (Suomen kartta) by Oona Räisänen. Boundaries, rivers, roads, and railroads are based on a 1996 CIA map, with revisions. (via Wikimedia)
… this city has…thousands of skilled engineers in need of work. Many were laid off by Nokia… While entrepreneurs are eager to put these people to work, the rules of Finland’s generous social safety net effectively discourage this. Jobless people generally cannot earn additional income while collecting unemployment benefits or they risk losing that assistance. For laid-off workers from Nokia, simply collecting a guaranteed unemployment check often presents a better financial proposition than taking a leap with a start-up.
For anyone who has studied the impact of redistribution programs on incentives to work, this hardly comes as a surprise.
Indeed, the story has both data and anecdotes to illustrate how the Finnish welfare state is subsidizing idleness.
In the five years after suffering a job loss, a Finnish family of four that is eligible for housing assistance receives average benefits equal to 73 percent of previous wages, according to data from the Organization for Economic Cooperation and Development. That is nearly triple the level in the United States. … the social safety net … appears to be impeding the reinvigoration of the economy by discouraging unemployed people from working part time. … Mr. Saloranta has his eyes on a former Nokia employee who is masterly at developing prototypes. He only needs him part time. He could pay 2,000 euros a month (about $2,090). Yet this potential hire is bringing home more than that via his unemployment benefits. “It’s more profitable for him to just wait at home for some ideal job,” Mr. Saloranta complains.
So the Finnish government wants to see if a basic income can solve this problem.
… the Finnish government is exploring how to change that calculus, initiating an experiment in a form of social welfare: universal basic income. Early next year, the government plans to randomly select roughly 2,000 unemployed people — from white-collar coders to blue-collar construction workers. It will give them benefits automatically, absent bureaucratic hassle and minus penalties for amassing extra income. The government is eager to see what happens next. Will more people pursue jobs or start businesses? How many will stop working and squander their money on vodka? Will those liberated from the time-sucking entanglements of the unemployment system use their freedom to gain education, setting themselves up for promising new careers? … The answers — to be determined over a two-year trial — could shape social welfare policy far beyond Nordic terrain.
The results from this experiment will help answer some big questions.
… basic income confronts fundamental disagreements about human reality. If people are released from fears that — absent work — they risk finding themselves sleeping outdoors, will they devolve into freeloaders? “Some people think basic income will solve every problem under the sun, and some people think it’s from the hand of Satan and will destroy our work ethic,” says Olli Kangas, who oversees research at Kela, a Finnish government agency that administers many social welfare programs. “I’m hoping we can create some knowledge on this issue.” … Finland’s concerns are pragmatic. The government has no interest in freeing wage earners to write poetry. It is eager to generate more jobs.
As I noted above, this New York Times report was from late last year. It was a preview of Finland’s experiment.
[…]
Maybe I’m reading between the lines, but it sounds like they are worried that the results ultimately will show that a basic income discourages labor supply.
Which reinforces my concerns about the entire concept.
Yes, the current system is bad for both poor people and taxpayers. But why would anyone think that we’ll get better results if we give generous handouts to everyone?
- We already know that unemployment benefits discourage people from working.
- We already know that food stamps discourage people from working.
- We already know that Obamacare discourages people from working.
- We already know that disability payments discourage people from working.
So if we replace all those handouts with one big universal handout, is there any reason to expect that somehow people will be more likely to find jobs and contribute to the economy?
Again, we need to wait another year or two before we have comprehensive data from Finland. But I’m skeptical that we’ll get a favorable outcome.
August 1, 2017
Ontario adopts voluntary self-surveillance app from CARROT Insights
I often joke about how inexpensive it appears to be to “influence” politicians, but it’s only fair to point out that the voters those easily influenced politicians represent are even more easy to influence:
Ontario announced earlier this month that it will become the fourth Canadian government to fund a behavioral modification application that rewards users for making “good choices” in regards to health, finance, and the environment. The Carrot Rewards smartphone app, which will receive $1.5 million from the Ontario government, credits users’ accounts with points toward the reward program of their choice in exchange for reaching step goals, taking quizzes and surveys, and engaging in government-approved messages.
The app, funded by the Canadian federal government and developed by Toronto-based company CARROT Insights in 2015, is sponsored by a number of companies offering reward points for their services as an incentive to “learn” how to improve wellness and budget finances. According to CARROT Insights, “All offers are designed by sources you can trust like the BC Ministry of Health, Newfoundland and Labrador Government, the Heart and Stroke Foundation, the Canadian Diabetes Association, and YMCA.” Users can choose to receive rewards for companies including SCENE, Aeroplan, Petro-Canada, or More Rewards, a loyalty program that partners with other businesses.
It’ll be interesting if they share the uptake of this new smartphone app … just how many of us are willing to let the government track just about all of our actions in exchange for “rewards”.
In order to use the app, users are giving Carrot Insights and the federal government permission to “access and collect information from your mobile device, including but not limited to, geo-location data, accelerometer/gyroscope data, your mobile device’s camera, microphone, contacts, calendar and Bluetooth connectivity in order to operate additional functionalities of the Services.”
Founder and CEO of CARROT Insights Andreas Souvaliotis launched the app in 2015 “with a focus on health but the company and its partner governments quickly realized it was effective at modifying behavior in other areas as well,” according to CTV News.
July 31, 2017
Patents, Prizes, and Subsidies
Published on 17 May 2016
Growth on the cutting edge is all about the creation of new ideas.
So, we want institutions that incentivize such creation. How do we do this? The answer is somewhat tricky.
The first goal for good ideas is for them to spread as freely as possible. The further the reach, the greater the gains. The problem is, if just anyone can use ideas, then why would we ever pay for them? And without the right incentives, why would innovators create new ideas at all?
Imagine yourself as the creator of a new drug. Typically, it costs about a billion dollars to do this, not counting the time and effort needed to get the drug FDA-approved.
Now, if there were no protections in place, then theoretically, once the formula’s known, everyone could just copy the make-up of your new drug. See, the thing about pharmaceuticals is, once the formula’s known, production is relatively cheap. Given that, let’s assume imitations start flooding the market.
Predictably, the price of your new drug will plummet.
Once prices hit rock-bottom, you’ll have no way to recoup the $1 billion you spent on R&D.
Given that kind of result, we reckon you probably won’t want to develop more good ideas.
The US founding fathers anticipated this problem. Knowing that innovators needed incentives to have good ideas, the founders wrote a protection mechanism into the Constitution.
They gave Congress the ability to grant exclusive rights to inventors — rights to use and sell their inventions, for a limited period of time. This exclusive right, is what we call a patent. Patents grant inventors a temporary monopoly over the use and sale of their intellectual property.
Now, as nice as this is, patents are a thorny subject.
For one, how long should patents last? Also, how much innovation is considered enough to merit a patent grant? Not to mention, are patents the only way to reward good ideas?
The answer is no.
There are two more incentive options here: prizes, and subsidies.
Let’s start with subsidies. University and research subsidies are particularly effective in the basic sciences. Since innovations in this space are rather abstract, subsidies incentivize research without requiring the applications of the research to be explicitly named. The problem is, when we’re incentivizing just research, then researchers might pick directions that are interesting, but not particularly useful.
This is why the third incentive option — prizes — exists.
Prizes reward the output of solving a certain problem. Another plus, is that prizes leave solutions unspecified. They provide a problem to work on, but give quite a lot of leeway as to how the problem is solved.
Now, knowing the complexity inherent in patents, you might think that prizes and subsidies are good enough alternatives. But none of these incentives for ideas, are inherently better than any of the others. Patents, prizes, and subsidies all involve their own tradeoffs and questions.
For example, who decides what gets subsidized? Who decides which goals merit a prize?
It’s hard to determine what mix of institutions, will best incentivize the production of good ideas. Patents, prizes, and subsidies all navigate these conflicting goals, in their own way.
And yes, all this talk of incentives and conflicting goals and tradeoffs might be like walking a tightrope. But, it’s a tightrope we can’t opt out of. Certainly not if we want the economy to keep growing.
In our next release, you’ll watch a TED talk from a certain economist that elaborates further on ideas. And then, we’ll wrap up this course segment with the Idea Equation. Stay tuned!
July 19, 2017
QotD: Prices in a post-scarcity economy
The most important piece of information that the price system provides is “How much do I want this, given that other people want it too?” That’s the question that millions of people are answering, when they decide to use less tin, or pay more for tin and use less of something else. Computers are not good at answering this question.
How would a computer even get the information to make a good guess, in the absence of a price system? Please do not say surveys. You know what did really well on surveys? New Coke. Also, Donald Trump, who is not going to be president. We are, in fact, back to some version of the incentive problem, which is that when the stakes are low, people don’t put too much thought into their answers.
In many cases, people are interested in getting rid of prices precisely because they don’t like the signal that it is sending — that the best possible medical care is a scarce good that few people are going to get, or that other people do not value your labor very much. People are trying to override that information with a better program.
But even if we decide that the planners know best, we still have to contend with the resistance that will arise to their plan. Just as Communism’s critics need to remember that money is not the only reason people strive, post-capitalists need to remember that they will be dealing with people — cantankerous, willful and capable of all manner of subversions if the plan is not paying sufficient attention to their needs.
It’s possible that we’ll see versions of a “post-scarcity” economy in things like music and writing, since these are basically versions of activities that people have been doing for free for thousands of years. But when it comes to unpleasant labor like slaughtering animals, mining ore and scrubbing floors, even an advanced society needs to figure out exactly how badly it wants those things done. And so far, nothing beats prices for eliciting that information.
Megan McArdle, “Yes, Computers Have Improved. No, Communism Hasn’t”, Bloomberg View, 2015-09-02.
July 14, 2017
The Peltzman Effect
The odd situation where increasing the safety of an activity by adding protective gear is offset by greater risk-taking by the participants:
In the 1960s, the Federal Government — in its infinite wisdom — thought that cars were too unsafe for the general public. In response, it passed automobile safety legislation, requiring that seat belts, padded dashboards, and other safety measures be put in every automobile.
Although well-intended, auto accidents actually increased after the legislation was passed and enforced. Why? As [Professor of Economics Steven E.] Lansburg explains, “the threat of being killed in an accident is a powerful incentive to drive carefully.”
In other words, the high price (certain death from an accident) of an activity (reckless driving) reduced the likelihood of that activity. The safety features reduced the price of reckless driving by making cars safer. For example, seatbelts reduced the likelihood of a driver being hurt if he drove recklessly and got into an accident. Because of this, drivers were more likely to drive recklessly.
The benefit of the policy was that it reduced the number of deaths per accident. The cost of the policy was that it increased the number of accidents, thus canceling the benefit. Or at least, that is the conclusion of University of Chicago’s Sam Peltzman, who found the two effects canceled each other.
His work has led to a theory called “The Peltzman Effect,” also known as risk compensation. Risk compensation says that safety requirements incentivize people to increase risky behavior in response to the lower price of that behavior.
Risk compensation can be applied to almost every behavior involving risk where a choice must be made. Economics tells us that individuals make choices at the margin. This means that the incentive in question may lead the individual to do a little more or a little less of something.
[…]
The fact that incentives reduce or increase behavior is an economic law: Landsburg posits that “the literature of economics contains tens of thousands of empirical studies verifying this proposition and not one that convincingly refutes it.” Incentives change the effectiveness of government policy and shape day-to-day life.
June 28, 2017
Concert-goers rejoice, for the government is here to help you!
Of course, if you have any experience of the utility of “government help”, you shouldn’t get your hopes up too high, as Chris Selley explains:
The results of an online public consultation were clear, said Naqvi. “One: the current system clearly is not working for fans; and two: Ontarians expect the government to take action.” We should have expected nothing less: ticket rage is a real thing among concertgoers in particular — a mind-boggling 35,000 people completed the online consultation — and besides, the survey didn’t include an option to suggest the government do nothing.
Among other things, Naqvi said, it will be illegal to resell tickets for more than 150 per cent of face value, and it will be illegal to use bots. Soon, he promised, “everyone (will have) a fair shot at getting the tickets they want.” Ontario, he said, will become “a world leader in ticket sales regulation.”
You’re supposed to think that’s both plausible and desirable. You should instead be very, very skeptical. So long as U2, the Tragically Hip and other artists insist on pricing their tickets vastly below what people are willing to pay for them, there will be an enormous incentive to circumvent whatever laws are in place to prevent third parties from reaping those foregone profits. A 150-per-cent cap would reduce the incentive, as Naqvi says — but only if the entire scalping community decided to respect it.
It won’t. It doesn’t. Scalping is illegal in Arkansas. Tickets for the University of Arkansas Razorbacks’ Nov. 24 game against Missouri are going on Stubhub for well over twice face value. Scalping is illegal in Quebec. Stubhub will put you in the third row for Bob Dylan’s show at the Montreal Jazz Festival next month for US$275; face value is $137.50 Canadian. The experiment works in every scalping-restrictive North American jurisdiction I tried. Heck, scalping used to be illegal in Ontario. That sure didn’t deter the gentlemen who prowled around outside Maple Leaf Gardens and SkyDome.
Many Stubhub users aren’t even in Ontario — that’s even more true for the people with the bots. Is the Attorney General really going to prosecute people for the crime of selling tickets at prices people are perfectly willing to pay? People in other countries? That would get awfully old in an awful hurry.
As he points out in the article, this is yet another instance of the Ontario government pandering to the demands of economic illiterates (recent examples include slapping on new rent controls in the middle of a housing crunch and significant increases in the minimum wage as new workforce entrants are already finding it tough to get hired). It’s as though the government is reading the economic textbook upside down … bringing in exactly the wrong “solutions” to every problem they see.
