jamesz

Donate to Radiohead

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As I’m sure you’ve heard by now, Radiohead have decided to give away their new album online in exchange for a voluntary donation. When one buys the album you choose how much you want to pay for it, with no lower or upper limit on how much you can pay. the idea of paying for something that you can get for free is one that’s puzzled economists for some time. The classic experiment in the field is the Dictator game. In this game one person has an endowment of money and they choose how to split it between them and another person. Despite having no pressure to do so, many people give money to the other person in the experiment. There have been a truckload of different experimental designs employed to investigate this phenomenon.

The key difficulty is that people have the opportunity to donate money to strangers in everyday life but few tend to. Why is it that they then give money away when faced with this experiment? Most explanations focus on the contrived nature of the situation: with a researcher standing there observing your donation one worries about being thought of as selfish if one keeps all the money. Indeed, a large scale anonymous experiment with no researcher present showed very little evidence of altruistic donations.

So what’s my pick for the Radiohead sales? Well, the donation is unobserved and anonymous so the evidence suggests that casual listeners are unlikely to pay for it. However, publicising how much you donated for the album could be a credible signal of your dedication to the band. I’d expect fans of the band to give fairly generously and make their donation known to others. I see also that to get the album you have to enter your credit card details, however much you intend to pay. This seems like a good way of reducing the marginal transaction costs of giving: if you have to enter your details anyway then it’s easy to give a couple of dollars at the same time.

Matt Nolan

New Zealanders like having more money

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An ‘enlightening’ survey by the Business Council for Sustainable Development finds that 75% of New Zealanders would like a tax cut.

The people that said they didn’t want a tax cut were probably thinking about the issue that was raised in the next question in the survey, which asked if people would want tax cuts that meant spending on health, education, and welfare fell. To this over half of the people said no.

Ok, so the Business Council took this as evidence that people think tax cuts are affordable. The chain of logic that I think they are using is: People want tax cuts. They wouldn’t want tax cuts that cut down services. So they think the government can afford tax cuts without cutting services. However, I’m not sure that this survey was the cleanest way of asking that question. After all, many people won’t think of the opportunity cost of the tax cut, just the fact that they would be able to buy more. As a result, even though I accept that the survey showed (to some degree) the premises, I’m not sure the conclusion necessarily follows.

I think the cleanest way to ask if people believed the government could afford tax cuts would be to ask: Can the government afford tax cuts?

Overall, I think that asking people if they want tax cuts is nearly as silly as asking people if they want a $20 note. If you don’t give them an idea of the opportunity cost you are simply offering them money for nothing, which most utility maximising agents would accept (unless they can use it as a signal, or if refusing the money gives them more utility than the best thing they can spend the money on, which means they are implicitly consuming a good with the money anyway 😉 )

Update: Stuff digs into more detail and finds that the participants were asked whether tax cuts were affordable, and a massive 72% said they were. Now that I know they actually had answers to the question that they said they had the answers for, I feel a lot more comfortable with their result 😉

Matt Nolan

Fortnight in numbers

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  1. June Quarterly GDP growth of 0.7% (seasonally adjusted)
  2. August Non-residential consents up 1.3% (seasonally adjusted) on July
  3. August Residential consents up 0.8% (seasonally adjuste) on July
  4. $945m trade deficit in August
  5. August Credit card data down 0.3% on July

I don’t usually say anything about the data, but ….

That GDP number, I wouldn’t have picked it. I was saying that the RBNZ was on crack saying that we would have 2.9% GDP growth in the year to March 2008. However, after that it looks like they knew what they were talking about, and I was the one on crack.

I’ve got to admit, if you question the experts (the RBNZ), you’re often going to be wrong. What can I say, I prefer Microeconomics anyway 😉

jamesz

Economist vs economist

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Economists are often misrepresented and misconstrued as being crazy, right-wing, free-market ideologues. However, economists themselves aren’t above painting each other in to a corner. This article about peoples’ views of economists quotes Joseph Stiglitz on Milton Friedman:

[his] belief in the perfection of market economies, on models that assumed perfect information, perfect competition, perfect risk markets… [was] never based on solid empirical and theoretical foundations.

This view is apparently held by many prominent economists. Dani Rodrik puts their views succinctly when he says

The First Fundamental Theorem of Welfare Economics is proof, in view of its long list of prerequisites, that market outcome can be improved by well-designed interventions.

Unfortunately, this interpretation is inaccurate: the First Theorem give sufficient, but not necessary, conditions for market efficiency. As Alex Tabarrok explains,

…the fact that the theorem’s conditions are not satisfied does not prove that market outcomes can be improved, even by “well-designed” interventions… We know from Vernon Smith’s work, for example, that markets can be competitive with only a handful of traders; nor do the traders have to be perfectly rational. In fact, markets can be very efficient with zero-intelligence traders.

The free-marketeers may not always be correct but it does the debate no good to misrepresent their arguments. Doing so only foments antipathy and creates rivalries which inhibit the quality of the discussion.

dant03

Protection rackets, cartels, and compulsory industry bodies

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So, the Real Estate Industry of New Zealand has censured a member for advertising it’s services by citing the general level of service in the industry, which it claims has customers paying “too much” for not good enough service. Sounds like a competitive claim to me.

But not to the Real Estate Institute of New Zealand (REINZ). REINZ was set up under the auspices of the Real Estate Institute of New Zealand Act 1976, and all licensed real estate agents are required to belong to it and abide by its rules.

The REINZ is one of a class of industry bodies that has been given government recognition. In many other industries, there is no government recognition/compulsion, yet the motivation for setting up the bodies is largely the same. These industries usually have some kind of bar to entry, but it is not one that is strictly prohibitive – for instance a professional qualification may be needed (eg estate agents license, admittance to the bar to practise law). Ostensibly, the bodies regulate the behaviour of members, who ordinary people cannot fully understand or regulate themselves because of the informational difficulties (cannot tell them apart, do not understand things like lawyer-client privelige or are in a compromised position (you are at the mercy of your lawyer in the middle of a trial) etc). It is argued that it is more efficient for the body to regulate, as it is cheaper than legislation, more adaptive to community needs etc.

Sometimes, the industry bodies are formed by members to prevent government regulation – leading members set the bodies up and claim to be preventing poor conduct on behalf of the industry, to stop the government doing so, presumably because they believe that the rules will be less onerous if they write them themselves.

Where this happens and a kind of defacto-power is given to these bodies (or actual power in the case of the REINZ), problems emerge. Often hurdles to competition and industry entry are set up under the semblance of increasing standards – higher qualifications required, minimum practise times, a majority of members need to approve their power to practise. In the end, without actual and real government oversight it is almost innevitable that these bodies move to become quasi-cartels that aim to protect their members under the guise of protecting the helpless consumer. So it is that the REINZ has censured a member for seemingly only competing.

Which brings us to the question of what good it is having them. If without government oversight these bodies invariably abuse their position, why have them and not simply have the government set the rules? I personally find this compelling as an alternative to compulsory industry governed bodies. However voluntary bodies should not necessarily be treated the same, particularly where those who are non-members can be recognised by the public and accordingly treated with due care. If these ‘rebels’ prove reliable enough, there is no reason why they can’t establish their own reputation for protecting consumers etc, and set up their own bodies with their own rules in competition with the established one. If sufficient information is out there for competition to emerge, the two watch dogs will compete on keeping their members in line. The key here is that there is an ability to compete rather than a defacto cartel. On the other hand, cartels running themselves clothed as consumer interested altruistic organisations are no good, and have no place in the New Zealand economy.

Matt Nolan

What a cow wants, what the economy needs

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It seems that some fine researchers in Waikato are trying to discover sets of preferences among cows. Good. I’m sure that individual cows do have a set of preferences over outcomes. However, the researchers better be careful that they don’t try to compare the value of different cows preferences, or take one cows (or a small subset of cows) set of preferences and assume that it holds over all cattle. These are mistakes that economists have made throughout time.

Economists are experts at positive judgements. Distilling the ‘facts’ and providing a framework with which to place issues of scarcity. If you want a normative judgement, such as what is the welfare function for cows, or how do we weight the importance of different cows feelings, then you have to find an expert in the field. In the case of cows, I think the appropriate expert would be a farmer. After all, who knows the nuances of a set of cows better than the farmer who raises them!

If only finding the appropriate experts was as obvious for questions about the national economy. Economists often settle for policy analysts or even themselves to provide the normative judgements around policy decisions. However, do economists and policy analysts get up at 4am most mornings to go visit the national economy? Do they spend precious time alone with the national economy, so they can really get to know it? Can policy analysts and economists identify the subtle nuisances that exist between the different individuals in the national economy?

Ultimately, if an economist wants to add apply normative judgements after setting up a given issue in the frame of scarcity, they must make sure they go out into the open air, and discover how their precious economic agents (people) are feeling. Only then can they attempt to claim that they know what the economy needs.