Monthly Archives: January 2008

I have a feature in this weekend’s FT:

In 1737, John Harrison, a self-taught clockmaker from Yorkshire, stunned London’s scientific establishment by presenting an idiosyncratic solution to the most important and notorious technological problem of the 18th century. He was hoping to win a then-fabulous prize of £20,000 (about £5m today) for anyone who could devise a way for a ship’s navigator to determine its longitude and therefore its position at sea. Harrison’s approach was to build a clock that would keep Greenwich time faithfully; by comparing local time (measured using the position of the sun) with the time in London, the navigator would know how far east or west the ship had sailed. The theory was sound, but given the rolling of ships and changing temperature and humidity, the leading scientists of the day – including Sir Isaac Newton – reckoned that a sufficiently accurate clock would be impossible to build. Harrison proved otherwise.
The longitude prize, sponsored by the British government, was not unique. Prizes were also offered in France for a functional water turbine, and for a method of preserving food for Napoleon’s armies. The latter prize quickly inspired the tin can, more of a blessing than food snobs might acknowledge.
But such prizes then fell out of fashion. For commercial innovations, we now rely on patents to encourage and protect innovators. Basic research is funded not by prizes but by grants.
And yet two centuries after tinned fish hit the market, the way we look for solutions has come full circle. Governments, private foundations and even corporations are rediscovering the value of offering prizes for good ideas. Rather than paying for scientific and engineering effort as they have done for the past 200 years, idea-hungry patrons are returning to the 18th century, and paying for results.

The whole thing is here.

Steve Landsburg explains:

Basically, Huckabee’s plan is to eliminate the income tax and replace it with a national sales tax. To a first approximation, that’s not such a radical change. As long as you spend what you earn, a sales tax feels just like an income tax…In the long run, most people, or at least most families, do spend what they earn. (Why earn it if you’re not going to spend it?) …a 20 percent income tax and a 20 percent sales tax are equally painful.
Except for one thing: With an income tax, you pay up front. Earn a dollar in 2008, and you’ll pay 20 cents tax in 2008. (Actually, you’ll pay more, of course; I’m assuming a 20 percent tax rate for the sake of illustration.) With a sales tax, that 20 cents sits in your bank account earning interest until the day you spend your earnings. Let me say that again: Your pretax earnings sit around collecting interest until the day you withdraw and spend them. Where have we heard that before? It’s exactly what happens when you invest in a traditional IRA!

Landsburg’s piece is a model of clarity but explicitly leaves out some important caveats. Here’s Tom Redburn in the New York Times:

Whatever the rate, critics say, a steep federal retail tax, piled on top of existing state sales taxes, would encourage widespread illegal tax evasion, black market transactions and other forms of cheating, creating a cycle that would require even higher tax rates.
“The main weakness of the FairTax is its comprehensiveness,” said Dale W. Jorgenson, an economist at Harvard who opposes the plan but whose research into problems with the current system is sometimes cited by supporters. “It tries to roll everything into one tax, which simply can’t carry all that weight.”

Pay your money, take your choice.

Michael Munger has written the most lucid essay you’re likely read for a while on the theory of the firm:

Then one day, in one firm, one manager, perhaps on a whim, outsources the computer services or janitorial services or the legal advice. Not to India or Ireland but simply to another company across town or across country. The boss signs a contract, after taking bids from several companies that provide similar services.  These companies are forced by the scolding winds of market competition to provide excellent service at low cost. By looking at the different prices in the bids offered in this competition, the boss learns something. He learns how much the service costs to provide. And he learns how much money he saves by laying off the employees who used to provide the service in-house.
It’s hard to fire employees, particularly since most employees are smart enough to work hard enough to get acceptable performance reviews. The boss also has a hard time motivating the in-house staff, because watching each employee is expensive and tiresome. But it’s easy to fire contracted employees, because you just sign a new contract with a competitor. Why not let the market system do your motivation work? Let’s suppose that our outsourcing boss sees the company’s profits rise dramatically, and the stock price goes up 18% in six months. Life is good, for the boss.
So, one day the boss has this crazy thought. He asks himself a question that has never occurred to him before: Why have any employees at all? Why have a building? Why not just sit home, wearing his jammies and bunny slippers, sipping a nice cup of tea, and outsource everything? He can write contracts to buy parts, he can pay workers to assemble the parts, and he can use shipping companies to box and transport the product.

You can tell that this parable is not going to end happily ever after. As Munger argues, there’s a balancing act: too little outsourcing and a firm becomes a socialist state, denied incentives or price signals; too much and the problem of coordinating all the contracts becomes impossible.
It’s worth thinking about how changing technology may alter this balancing act. The answer is not obvious. Some outsourcing decisions are made much easier to coordinate thanks to the internet and all the rest. At the same time, inter-firm communications also improve. And if the world is full of firms making more complex, intangible products, that may favour more implicit contracts and therefore larger firms. I simply don’t know the answer and I’m not sure anyone else does either.
(HT: Free exchange.)

Marginal Revolution is hosting a book forum on "The Logic of Life". The last such forum – on Greg Clark’s "Farewell to Alms" – was superb. I have high hopes for this one. The first expert reviewer is Bryan Caplan of George Mason University. Comments are closed in order to realise economies of scale – if you’d like to join in the discussion, Marginal Revolution is the place.

Hm. We’ll see. Comment from my colleagues, and guests (including George Soros, who seems to hold this opinion) is here.

I wrote recently about Justin Wolfers and his work on information flows around the Googleplex. He’s an expert on prediction markets, too. But his joint work with Betsey Stevenson about the economics of marriage is particularly important stuff. I relied on it for The Logic of Life (see the extracts here) and now you can get the details from the horse’s mouth at Freaknomics and Cato. Edited highlight:

So what drives modern marriage? We believe that the answer lies in a shift from the family as a forum for shared production to shared consumption. In case the language of economic lacks romance, let’s be clearer: modern marriage is about love and companionship. Most things in life are simply better shared with another. … The key today is consumption complementarities — activities that are not only enjoyable, but are more enjoyable when shared with a spouse. We call this new model of sharing our lives “hedonic marriage.”

I have to talk to him about the technical terms, but this is good work and accessible to non-economists. The Cato Unbound debate contains many other perspectives, too. I am not sure whether it matters, but Stevenson and Wolfers have for many years been together in a hedonic non-marriage". Grist to the mill, I think.

In the comments, "Lee" asks:

  1. Why the US edition of The Logic of Life is published first;
  2. Why the covers and subtitles are different;
  3. Is there a significant difference between the two books?

Fair enough, and a few emails suggest other people are wondering the same thing. The answers are not mysterious:

  1. The US edition is first because somebody had to be first (I cannot promote the book in two places at once). The US is first, probably because they were first to publish "Undercover Economist", which in turn was because the US publisher bought it first. Last time the gap was five months; this time it is just three weeks.
  2. Why the different covers and subtitles? Different publishers come to different conclusions about what will sell in different markets. Are they right? We’ll never know, I suspect.
  3. No, there is barely any difference between the two editions, but do feel free to collect the set.

You can compare the two covers here.

Okay, I admit it. Adam Smith did visit a pin factory. David Warsh has the details; I reviewed his excellent book here. Thanks to Gavin Kennedy for pointing out the error, for which I am sorry.

Ray Fisman explores the question in Slate:

A few years ago, Bill Cosby set off a firestorm with a speech excoriating his fellow African-Americans for, among other things, buying $500 sneakers instead of educational toys for their children…But notably absent from the Cosby affair have been the underlying economic facts. Do blacks actually spend more on consumerist indulgences than whites? And if so, what, exactly, makes black Americans more vulnerable to the allure of these luxury goods?

The truth, says Fisman, is yes, but that the effect is a statistical artefact. Many people, black and white, conspicuously consume in an attempt to win status. But what if (as is true) African-American households tend to be poorer than white households? And what if (as is likely) African-American households tend to compare themselves to other African-American households?
In that case, a poor white household will tend to be surrounded by richer households and will opt out of the status game, while a poor African-American household will tend to be surrounded by similarly poor households, meaning that the status game is worth playing.
That’s the intuition behind the argument, which comes from:

Economists Kerwin Charles, Erik Hurst, and Nikolai Roussanov have taken up this rather sensitive question in a recent unpublished study, "Conspicuous Consumption and Race.

Kerwin Charles is one of the most interesting economists around at the moment, and features in The Logic of Life. Here’s an article I wrote about Dr Charles’s work on marriage markets; here’s one about car-pooling and social capital.

I am delighted that the London School of Economics is hosting my public lecture on "The Logic of Life", with the excellent Hamish McRae in the chair.. All are welcome, the details are here.

Date: Wednesday 6 February 2008
Time:
6:30-8pm
Venue: Old Theatre, Old Building
Speaker: Tim Harford
Chair: Hamish McRae

From teenage sex to the scourge of racism, Tim Harford explains why economics can provide the answers other disciplines cannot reach.

Tim Harford is the author of The Undercover Economist, is a member of the Financial Times editorial board and writes a regular column for the FT magazine.

This event is free and open to all with no ticket required. Entry is on a first come, first served basis. If you are planning to attend this event and would like details on how to get here and what time to arrive, please refer to Coming to an event at LSE

 

The Undercover Economist: a guide

Publishing schedule: Excerpts from "The Undercover Economist" and "Dear Economist", Tim's weekly columns for the FT Magazine, are published on this blog on Saturday mornings.
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