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Thursday, May 29, 2003


Sorry to be so quiet, but I have exams, and I should be posting again by the end of next week. I am still reading blogs, though, and I have even been giving comments when I have the time. Thanks for your patience.

Monday, May 19, 2003

Behavioural Marketing

Management consultant Jo Owen writes in the Independent on Sunday saying that the customer is not always right, and the implications this has for market research. Take the first of her reasons, that customers often do not know what they want:

We did not know we wanted the internet, frappuccinos, mobile phones or MP3 players until they were offered to us. [Market] Research can inhibit innovation. Try the following questions:

"Do you want to pay £2 for a coffee instead of getting it for 50p elsewhere?"
"Do you want to pay £10 to send your mail instead of 28p?"
"Do you want your airline to cancel its inflight service, reduce seat size and pitch, fly from secondary airports at awkward times, and give you neither a ticket nor a seat reservation?"

These questions would have led to dumb disbelief on the part of the consumer. And in the process Starbucks, FedEx and discount airlines would never have got started. In each case they were taking on entrenched competition that should have known what their customers wanted. But the entrenched competition were asking the wrong questions, getting the wrong answers and missing the growth markets. No manager is ever fired for missing a new market. Instead, whole divisions are fired when senior management belatedly discover that upstart competitors have taken their market from them.

Owen goes on to talk about the faint praise of customer feedback ("we give three out of five for barely adequate service") and how customers try to be rational ("we can justify buying sports cars for the traffic jam"). This is not new, I think. Economists have known about the limits of surveys for years, and generally refer to rely upon observing actual behaviour--revealed preference. Owen is aware of this, and is trying to convince managers, who often feel complacent after seeing simple feedback data, to take the problem seriously. Her recommendations are well worth reading.

Friday, May 16, 2003

Olympic Dreams

The British government announced yesterday that it will "pull out all the stops" to support London's bid to host the 2012 Olympics. Lance Knobel is right to say that there is not much that economics can say about this, despote the considerable research into the economics of major sports franchises and large sporting events. Questions to be asked are whether sports events like the Olympics contribute to long-run growth, or are merely a temporary local stimulus; the signficance of the substitution effects to the public- and private-sector spending on sports, and is there is a "crowing out" effect; the opportunity costs of such spending. Ultimately, though, opinions on the olympics and similar events come down to how people feel about the event in question, and whether they welcome or condemn the disruption they cause.

In London's case you can read the Arup Asssociates cost-benefit analysis [PDF] of a successful olympic bid. "Benefits" are broadly defined, and include unquantified theings such as national prestige and improved cultural development. A major goal is the regeneration of the East End of London. In a press release, Michael Ward, Chief Executive of the London Development Agency, says that a "successful Olympics bid will transform a neglected and run down part of east London and kickstart the regeneration of the wider Thames Gateway, creating thousands of new jobs in the process”. A revealed preference rebuttal is in order here. If the Mayor, the national government and other interested truly valued the regeneration of the East End it would be doing it already, not needing the "catalyst" of an olympic games to do so. It's odd that interventions that some see as desirable need the commitment to an event like the Olympics to move forward. Sir Bob Scott, who ran Manchester's successful Commonwealth games last year says:

If we take the IOC down to Stratford to see the Lower Lee Valley it's not a case of them seeing world-class facilities but hopes and dreams. I can see why London wants the bid. It wants the catalytic effect to speed up the regeneration of the Thames gateway. That is not of great interest to the IOC. It's what you can offer the Olympic movement, not what it offers you.

For an example of what it takes to win, consider what Beijing did to win the 2008 games:

Beijing is preparing for the [February 2001 IOC Evaluation Commission] visit with a vast programme of urban reconstruction involving more than 3,000 streets, demolishing old, illegal and unseemly shops, offices and homes and replacing them with grass, trees, pavements and sculptures. It has designated the three principal roads on which the IOC delegates will travel as guest roads, lined with grass and trees.

£17 million has been allocated to finance London's bid--not nearly enough to take care of the the dirty and graffiti-strewn parts of London where the Games are proposed to be held.

London, though, is favoured to win. Well,. apparently. The olympic bidding news site GamesBids.com breaks down the bookmakers:

London is odds-on favourite to win the 2012 bid, and then two clicks later Paris is the bid to beat. Toronto's non-existant bid is tops in North America here but can't touch New York over there. The early odds for the yet-to-begin 2012 Olympic Bid race provide excellent opportunities for gamblers to literally hedge their bets.

Now that London has thrown its hat into the "rings", U.K. bookmakers are setting the odds and Ladbrokes was quick to get in on the action. Currently, both London and New York are at 3-1 behind Paris at 2-1. Toronto hasn't even tabled a bid but are given 8-1 odds. Then it's Madrid at 10-1, Leipzig and Rio de Janeiro at 14-1, Moscow at 16-1, Sao Paulo at 20-1 and Havana at 200-1.

But you could just as easily place a bet with bookmaker William Hill and you may end up with more favorable odds. London leads at 2.75-1 followed by Paris at 3.5-1 and then Toronto with 5.5-1 (but don't expect Vancouver 2010 supporters to get in on this action).

The rest follow like this - Madrid at 7-1, New York at 9-1, Rio at 11-1, Sao Paulo at 15-1, Moscow at 17-1, Leipzig at 34-1 and Havana at 51-1.

The author correctly questions the basis for these initial odds, especially at such an early stage in the bidding process. GamesBids itself operates a mathematical model called BidIndex, which currently favours Salzburg to win the Winter Olympics in 2010; they have yet to start such an index for the 2012 games. Though bookmakers do adjust the odds over time, a better indicator of probability would probably be a proper decision market like the Iowa Electronic Markets.

As for me, a Trinidadian born in New Jersey who's currently residing in London, how do I feel? I support New York's bid, naturally.

Thursday, May 15, 2003

Banana State

Felix Salmon (via Lance Knobel) reports on the fiscal situation in New York State:

[New York Governor George] Pataki is a man facing record budget deficits but who simply refuses even to consider raising any taxes at all to help pay for government services. His friend Michael Bloomberg wants a commuter tax? Don't even think about it. The legislature wants to raise income taxes on individuals earning more than $100,000 a year? No way, José: that's "job destroying," that is. Rather, Pataki wants to borrow against future revenues which may or may not be coming New York's way from the 1998 tobacco settlement, and use the cash for routine operating expenses. Oh, and he also wants to put video poker machines inside New York's betting stores. Everything he does, on both the taxing and the spending sides of the budget, is fiscally disastrous: if Pataki were in charge of any Latin American country, the IMF would cut him off without a second thought.

The New York state legislature is not any better--in fact, it's worse. Check out also these posts by Jane Galt on New York City's dire straits. Some people in the US have called for the federal government to bail out the states; if behaviour like this is common, though, then perhaps deprivation may teach the right lessons, in the long run.

Tuesday, May 13, 2003


In last Sunday's Observer, William Keegan starts off by saying:

The world economy may well be in serious trouble, and could turn the current debate about the euro in the United Kingdom into a sideshow.

Mr Keegan is a little late; the British euro debate is a sideshow, especially since everyone knows that Britain is not going to join the euro now anyway. The eurozone may be in crisis, and Britain itself faces a housing price bubble and, oddly in these times, the chance of rising inflation. No, uncertainty and credibility appear to be Britain's biggest economic worries at the moment, and both pro and anti-euro folks are pushing for a "commitment technology" (i.e. the referendum) to counter their Gordon Brown time-inconsistency problem. It takes Ed Crooks, the FT's economics editor, to write in the New Statesman (subscribers only) about the answer to all this:

For Blair, a referendum is the only outcome that does not look like some sort of defeat. He has given so many assurances of his enthusiasm for joining that he cannot again allow Brown to kick the decision into touch. Some big inward investors, as a result, have been making decisions in the belief that the government was committed to joining the euro in the foreseeable future. If that belief proves mistaken, they will feel betrayed. In Europe, too, Blair and Brown have traded on the impression that Britain is a euro 'pre-in' rather than an out. A formal decision to stay out would suggest a determination to remain on the margins of the EU.

For Brown, the important thing is to keep Britain out, for the time being at least. As any reputable economist will tell you, the balance of costs and benefits from joining the euro cannot be judged beyond all reasonable doubt. Even supporters of entry admit it will lead to 'greater volatility of output': in other words, the economic cycle will have higher peaks and deeper troughs. For the Chancellor, who promised 'no return to Tory boom and bust', the prospect is alarming.

So the government should send a strong signal to inward investors and the rest of the EU that it is still committed to the euro, while not actually joining. A statement of intent in principle would be too weak: it has done that before. Only an actual referendum will do.

Saturday, May 10, 2003

Story Ideas

The Economist this week published this story on a new economics course at Harvard, and the possibilities it holds for economics and its pedagody. Matthew Yglesias, in the comments of this post of Brad Delong's, points out that the proposed course has been rejected by both the course committee and the department. Oy.

What's happened to the fact-checking at the Economist?

Bush Trading

President Bush has just called for a US-Middle East Free Trade Agreement to be created within the next decade. Good grief. Other countries are still waiting on their agreement, and then there's the subject of the Doha round of trade negotiations. I have not been that worried about Bush's economic policy in general, but his trade policy is abominable. Dan Gelfand, talking about the proposed US-Australia agreement, says it up:

Up until now, the Bush administration hasn't exactly worshipped at the altar of free trade. It has instead favored the political gains from the protectionism, as with the economically unjustifiable steel tariffs. Only now, when it seems politically expedient, has an expansion of free trade been promised. Its track record of living up to trade promises, as with Chile, aren't exactly cause for optimism.

In his testimony to congress last month, Columbia trade economist Jagdish Bhagwati said:

With over 200 such bilaterals in place, and growing by the week as Asia follows in our footsteps now, we can confidently expect that they will grow to well over 400 by the end of the year. The great economists who warned us against preferences during the 1930s when competitive tariff-raising was creating fragmented markets worldwide would have been horrified to see that, in the name of free trade, we are now re-enacting such fragmented markets on a parallel scale, and feeling virtuous about it.

In a Tech Central Station article last month, Arnold Kling called for unilateral free trade with all countries. That, I think, is too much to hope for. If the US really wants to stick it to France, though, it could fight at the WTO for and end to agricultural subsidies and supports and for reform of the EU's Common Agricultural Policy. It would be indirect, though it would benefit everyone, including the French.

Friday, May 09, 2003

While I was out . . .

[this post has been edited--DCS]

While writing my macroeconomics assignment over the long weekend I missed out on the Jane Galt-started brouhaha on economics as a science. It was really about positivism, as Stephen Karlson correctly notes. Not wanting to restart that (not that I can; I don't get that much traffic) focus on this comment of Galt's:

Economics is the least scientific where it has the most trouble finding testable data, which is to say macroeconomic policy, which is why there's so much truth-shading by politics-minded economists in areas like tax policy; assertions are often arguable, but rarely falsifiable.

Galt's partly right about this. Economic data only goes back for a century and a half in the most advanced countries, and most of the time this is too small a sample on which to make reasonable estimates. Most econometric models of the busines cycle, say, use just over 20 years of data, the definition of which may have changed over time. Forming a model based on this small sample would you to conclude that the future would be exactly like the last 20 years. Not a good basis to work from.

The reason way I say this in partly right has less to do with data and more to do with the nature of macroeconomics itself. Among other things I've been doing while I should be studying, I've been reading "Modern Economics and its Critics, 1", by the Cambridge professor Sir Partha Dasgupta. He has this to say about macro:

Many of my non-economist friends think macroeconomics is economics, and are surprised when I tell them it is not so. Macroeconomics is among the most problematic of fields within economics, because it is very, very hard. Lord only knows why you should expect to be able to get things "right" if you have to describe an entire economy in terms of nine or ten variables.27 But then, Lord only knows why you should expect to say very much of practical moment if you were to work with models comprising thousands of commodities and millions of households. So macroeconomic reasoning is essential.

The "frontier" fields in economics today are mostly in micro--behavioural economics, auction theory, institutional economics, the economics of crime--to name four. It took years of persistence, but have finally began to take notice of the innovative measures proposed by microeconomists, like tradeable emissions permits and spectrum auctions. In contrast, since the New Classical-Monetarist-New Keynesian debate ended in empirical (though not theoretical) failure for all sides, macroeconomics (well, the macroeconomics of stabilisation) has lost a lot of its daring. Macoeconomists hav huge difficulties even explaining the world as it is, and while econometrics has come far, it still is no subsitute for a real economy. Since the early 1980s few policymakers are willing, like Margaret Thatcher in Britain or Roger Douglas in New Zealand, to risk pain or financial-market repudiation by instituting even a moderately unconventional macroeconomic policy; in macroeconomics, as in economics as a whole, a live "experiment" is the mostly the only one there is.

While Robert J. Samuelson writes that "unfamiliar problems may require unfamiliar responses" and Edward Hugh looks for an "unconventional toolbox" to combat deflation, there is little sign of it today, especially in the places that really need it. "Truth-shading", as Galt says, has some to do with this. More likely, though, is a simple status quo bias among macroeconomic policymakers--in uncertain times (which is, to say, most of the time) they, and the people that follow what they do, stick with the devil they know.

Wednesday, May 07, 2003

Editor's Note

As I wrote last week, posting for the next 3-4 weeks will be occasional, while I study for exams. Apologies to all of my readers.

Tuesday, May 06, 2003


On Sunday on my way to Birkbeck I walked past the London Review Bookshop, though it was shut at the time. It's small, and I don't see what the fuss is all about. The literary types who've it basically called up their journalist friends and got some free advertising. I wonder at this bookshop for snobs--people who prouldy say "we have no 3 for 2 offers". What's wrong with discounting?

Lance Knobel says the issue is that most bookshops don't have the "right" books. What are the right books? I impression is that people have heterogenous preferences, and that such a concept is different for everyone. I, for one, will continue to love Borders. It's open late (except Sunday, thanks to the working time directive) serves coffee and has friendly enough staff. And for me, at least, it has the right books, and it can get them if it didn't.

Friday, May 02, 2003

Reversal of Fortune

First Kenneth Rogoff, and now The Economist (subscribers only), as it explains why capital controls may be justified in developing countries:

Why is trade in capital different from trade in goods? For two main reasons. First, international markets in capital are prone to error, whereas international markets in goods are not. Second, the punishment for big financial mistakes can be draconian, and tends to hurt innocent bystanders as much as borrowers and lenders. Recent decades, and the 1990s most of all, drove these points home with terrible clarity. Great tides of foreign capital surged into East Asia and Latin America, and then abruptly reversed. At a moment's notice, hitherto-successful economies were plunged deep into recession.

Thursday, May 01, 2003

The Marraige Market

This just goes to show that I should read the Volokh Conspiracy more often. Eugene quotes an email from Jon Klick, a fellow at the George Mason University School of Law:

Regarding your discussion of polygamy, there are some interesting economic issues involved here. A good place to start is Gary Anderson and Robert Tollison (1998). "Celestial marriage and earthly rents: Interests and the prohibition of polygamy." Journal of Economic Behavior and Organization, 37(2): 169-181.

The basic argument is that, as long as existing wives have direct or indirect veto power over new wives, polygamy is generally welfare increasing for women, but welfare decreasing for men in the aggregate (basically, polygamy leaves a shortage of female marriage partners). Anderson and Tollison argue that men used their greater voting power to induce the government to crack down on polygamy among the Mormons.

Interestingly, if there's reason to believe that members of one of the sexes are more likely to enter into legalized homosexual marriages (empirical question, I guess), then there would be a similar disruption in the partner markets, if sexual orientation has any plasticity on the margin (another empirical question, I suppose; Posner discusses some of the evidence for "opportunistic homosexuality" in his Sex and Reason book). It seems to me that there are significant political economy forces (similar to that described by Anderson and Tollison) which push against any such disruptions.

I know the marraige partner market is highly competitive, and this just serves to illustrate the power of regulation. I wonder, though, given that a significant number of these transactions take place in the black economy, if such regulation is counterproductive.

That time of Year

I have an assignment due next Tuesday, and exams in just over four weeks. Posting will be light this weekend, and occasional thereafter.

Steel Barriers

In response to a question from Stephen Karlson, while the biennial World Steelband Music Festival is open to all countries, the annual Panorama competition is closed to steelbands outside of Trinidad and Tobago. (All carnival competitions save for the International Soca Monarch are closed to non-Trinbagonians, and most Trinis, unfortunately, think it should stay that way, at least until someone else liberalises first.) That does not mean that a overseas steelband has not performed at Panorama in the past, but the restriction on Panorama has been in place for as long as I can remember.