EclectEcon

Thanks to Jeff and Kim at Carman's Photo in Goderich

Back in May of this year, during the purging and down-sizing we were going through as we prepared to move from Clinton to London, Ontario, we came across 2700 slides that I had taken between 1957 and 1979. We hadn't looked at them since then, but we didn't want to throw them away. So I took them to Carman's, a camera shop in nearby Goderich, and asked them to digitize the slides to DVDs for me. It wasn't going to be cheap, and we expected it to take some time, but we were okay with that.

A few weeks ago, we spoke with them about how things were going, and they assured us they were nearly finished.

Then the tornado hit Goderich, destroying nearly every building on the square around the courthouse, including Carman's. 

We figured, "Well, that's that. We hadn't looked at the slides for years, and it's too bad we won't be able to see them ever again." I expected to call them, maybe in a few weeks just to find out for sure.

Lo and behold, yesterday we received a call from them, telling us that during one of the periods they were allowed access to the area, they were able to salvage all our slides and the DVDs they had made from them. The shop was pretty much destroyed, and they had set up a table at the local arena to return photos and processing jobs to people who had left things with them. 

We feel very lucky that our memories were spared by the tornado, and we're very grateful to Jeff and Kim for getting in there when they could to save them before any damage from the later wind and rain could ruin them. I'm sure their other customers are thankful, too.

Planning, the Profit Motive, and Disaster Relief

We learned from hurricanes Andrew, Katrina, Ike, et al., that the most effective planners for hurricane relief were those responding to the profit motive --- firms like Walmart and Home Depot for example. Based on their data analysis, they planned in advance to have supplies on hand before the hurricanes struck, to make sure they could reopen quickly after the hurricanes, and to have supplies on hand quickly after the storms passed.

We're seeing it again as Irene approaches the US East Coast. From NPR, no less [h/t Cafe Hayek]:

Forecasters don't expect Hurricane Irene to make landfall until Saturday. But for nearly a week now, big-box retailers like Walmart and Home Depot have been getting ready.

They've deployed hundreds of trucks carrying everything from plywood to Pop-Tarts to stores in the storm's path. It's all possible because these retailers have turned hurricane preparation into a science — one that government emergency agencies have begun to embrace.

At Home Depot's Hurricane Command Center in Atlanta, for example, about 100 associates have been trying to anticipate how Irene will affect its East Coast stores from the Carolinas to New York.

At times like this, the Command Center looks much like NASA Mission Control during a shuttle launch, says Russ Householder, the company's emergency-response captain....

[D]istrict managers have been focusing on stocking a short list of items, Householder says, including generators, chain saws, water and tarps.

Householder says those supplies are flowing to stores because of a process that began months ago, at the beginning of hurricane season.

"We take storm product, both pre- and post-strike product, we stage those in containers and we have them in our distribution centers, really ready for a driver to pull up and pick up and take them to our stores," he says.

Don Boudreaux at Cafe Hayek adds, 

... when you and your neighbors are homeless, hungry, and thirsty following a natural disaster, would you prefer to rely upon the devotion to public service that allegedly motivates FEMA workers, or to rely upon the devotion to their own self-interests that undoubtedly motivates executives, workers, and suppliers of private companies such as Wal-Mart and Home Depot?

After watching the comparative successes of market forces vs. bureaucrats, despite the imperfections of the market, I'd rather trust it.

One of the Best Criticisms of Standard, NeoClassical Economics

Russ Roberts at Cafe Hayek is generally regarded as a staunch neoclassical economist. And yet, read this, a portion of what he has written about Steve Jobs:

His success illustrates the sterility of the mainstream approach in economics to corporate strategy and the theory of the firm. The theory of the firm in neoclassical theory focuses on how much the firm should produce and optimal capacity. Game theory looks at strategic issues arising under various payoffs. Neither approach captures the nature of innovation, the trial and error risk-taking of the visionary entrepreneur or the power of creative destruction to enrich our lives.

I love teaching the sterile theory of the firm. I love explaining MR=MC, the irrelevance of sunk costs, etc. I love teaching the prisoners' dilemma. But Roberts is right. These are comparatively sterile concepts relative to risk-taking and entrepreneurship. 

For more on "creative destruction", see here. An excerpt:

In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies and laborers that enjoyed some degree of monopoly power derived from previous technological, organizational, regulatory, and economic paradigms. 

The Earthquake (as we felt it in London, Ontario)

We were sitting in the livingroom of our apartment condo, watching a baseball game between the Cleveland Indians and the Seattle Mariners, when Ms. Eclectic suddenly said, with some concern in her voice,

The building is shaking!

To tell the truth, because of some recent ailments and because I was unable to hop out of the recliner quickly, I didn't feel the shaking at first. And as I stood up, I couldn't tell whether there was some shaking or it was just me. Then I looked at the hanging lights over our dining room table, and they were swaying back and forth a few inches each way.

It flashed through my mind that there might be a fault with the building or maybe the nearby trains or construction were causing the shaking. I confess to feeling some concern at that point. 

Within less than ten seconds, though, we noticed the sportscasters in Cleveland were commenting that their booth was shaking. So we realized it was most likely an earthquake. Then I went on Facebook (which seems to disseminate news much more quickly than the major media) and sure as shootin' learned from Eric and Ted that Washington, DC had been affected by an earthquake. 

It was very minor here, not unlike one I felt in London maybe 30 years ago. But it sure was widespread.

40 worst cars ever built?

What is with these young writers who have no concept of what a truly bad or truly unsuccessful car was? Time magazine had an article about bad cars a few years ago, and now the Vancouvre Sun website has one [h/t Jack]. Here are some comments I made about the Time article. They apply to this one, too.

• Other candidates from that [early] era which surely deserved more consideration were the Stanley Steamer, which despite its speed and its adherents, simply was never as good as an internal-combustion-engine car, and the Baker Electric -- you think modern cars have battery-life problems? ...
• But the 1950s really did usher in a lot of bad autos that I can remember, for example, the Henry J:
  • To save body stamping costs, early Henry Js did not have rear trunk lids; owners had to access the trunk by folding down the rear seat. Another cost saving measure was to offer the car only as a two-door sedan with fixed rear windows. Also lacking in the basic version wereglovebox, armrests, passenger side inside sun visor and flow-through ventilation.
• I remember that in our town, Henry Js also had a reputation for being made with thin metal that rusted and dented easily and quickly.
• Another candidate might be the Isetta, a weak-powered, chain-driven car that might be able to reach 50mph downhill. It had a single bench seat, and that was it. I remember riding with two other big guys on a 90-mile round trip in one of those. That experience helped me understand why the car might have been okay in some European settings but was a loser in North America.
• And one of the most serious omissions from the list is the early Hyundais. They had so many problems (Lada-like), it was a miracle the company survived.

 

People Respond to Incentives: Divorce and Real Estate Speculation in China

Whenever people are rewarded for being single, there is an incentive for at least some of them to remain single or even fake divorces. The latest evidence comes from China, where couples fake a divorce so that each of them can legally buy more homes, in hopes of cashing in on China's real estate bubble that is being fueled, in part, by the growing wealth in China [h/t Jack].

[G]overnment initiatives to curb a housing bubble are behind the trend. China has raised the down payment for second mortgages, and about 40 Chinese cities have begun to limit apartment purchases to two per family, or one for non-locals. The government has also asked commercial banks to stop offering loans to third-home buyers.

To get around the restrictions, Chinese couples are flocking to so-called fake-certificate companies, which sell phony divorce papers for 300 yuan, or about $45. Getting “divorced” allows couples to register properties under separate names.

Of course the total transaction costs are higher than just $45 [US]. There are also the emotional costs of even faking a divorce. These can arise from the fakery of it all and/or from the uncertainty it might create about the longevity of the marriage. And I'm sure there are others, too.

But the point is: when incentives are provided, people respond to those incentives. An equally important point is that human ingenuity finds creative ways around gubmnt regulations, something we must keep in mind when trying to interfere with market forces.

 

Fractional Reserve Banking and Goldsmiths: a recapitulation?

Many introductory economics texts and lectures surmise that fractional reserve banking began with goldsmiths and the like who kept gold on deposit for people but lent some of it out, knowing/expecting that not all of the gold would ever be redeemed at once. This story, whether apocryphal or not, forms the basis of our explanations for how fractional reserve banking works. Banks have reserves, but because depositors do not all redeem their deposits at once, these reserves can support multiples of deposits. What percentage of deposits should the banks keep on hand (or on deposit with a central bank) is often a policy choice affecting the perceived soundness of the banks as well as the overall size of the money supply (for more, see this; note that in Canada there is no required reserve ratio for the chartered banks.).

It seems that today's gold dealers, like the goldsmiths of old, are redeploying a fractional reserve strategy [h/t TomL]:

JP Morgan is employing the traditional Wall Street/banking business model of fractional gold ownership. This is not new, as Morgan Stanley was successfully prosecuted for this same scheme several years ago when the firm was exposed for selling physical silver to high net worth clients - and "safekeeping" it for a fee.  The scheme was exposed when a few of them demanded delivery and Morgan Stanley was unable to deliver the actual silver on a timely basis.

... Here's how it works. JP Morgan sells Comex gold to hedge funds, who then opt to safekeep it at JP Morgan's Comex depository for a 15 basis point fee. It makes the purchase very simple, the "storage" inexpensive and enables the hedge fund to seemingly have possession of physical gold. But in reality all the hedge fund gains is a "security interest" - or paper documentation - in the gold rather than the actual gold. Here's why:  how many of those hedge funds will actually ever ask for delivery of the gold into a private depository or go visit the vault to make sure that the gold it purchased is physically sitting in a separate, allocated bin?  JP Morgan is "banking" on the fact that none of them will. This enables JP Morgan to make an electronic ledger entry and create an account statement showing the market value of the gold purchased, but it never has to actually produce the physical bars and deliver them. This dynamic permits JP Morgan to sell gold that the bank is never held accountable for. This is exactly the scheme Morgan Stanley used with their silver fraud on a much smaller scale, that GLD and SLV use and that the Comex and the LBMA bullion banks use for their futures/forwards business. 

I had two reactions when I read this piece.

1. Selling gold that doesn't exist should have dramatically increased the perceived supply of gold on the market and thus kept the price from rising even faster than it has; and
2. I have no idea how widespread this phenomenon is, but even if it is legal (and well-covered in various prospecti), it could well lead to yet another bubble/crash if there is a run on these gold dealers, a run in which people expect to receive their gold.  TomL suggested to me that some of the dealers have reserve ratios of as low as 1%, which could lead to "interesting" developments if/when redemption is sought.

At the same time, it appears to me from what little I've read on this topic, that the gold dealers have worded the current prospecti in such a way that they might be exempt from redemption demands. [addendum: for example see this]. But if that's the case, why are people paying them anything for "storage" of gold that possibly doesn't exist?

At the very least, I sure hope folks buying into these certificates and instruments are doing a thorough due diligence!

Friedrich Hayek Demonstrates the Official Gesture for my students

As regular readers of EclectEcon know, I have established an "official gesture" for students to use when they see me. In the photo below [h/t JB], Friedrich von Hayek demonstrates the gesture, telling the students, "If you want to learn economics, take a course from Palmer."

Update: It seems the image doesn't show up with some browsers, so here it is in a different format.

China to US: "If you aren't nice, we won't be your friend any more."

China warns the US gubmnt to shape up or else. Or else what? [From WaPo, h/t Jack]

“China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets,” Xinhua said. 

The US is now in a position of being a recalcitrant teenager who sullenly sits through lectures from its parents but doesn't change its behaviour, knowing full well that the parents will do nothing to punish them if they don't change their behaviour.

What's China gonna do? Sell US t-bills and buy what? There aren't enough t-bills in existence from stable economies. In fact, compared with many Euro economies, US t-bills are looking pretty darned marketable.

So for the next five years, China (and others) may buy minisculely more Canadian or Australian or maybe even Japanese t-bills, but the demand for US t-bills is going to remain quite high (barring major fiscal fiascos). As a result, the US can continue its policy of debt-ceiling creep, and China will have little option.

For more on the US dollar as a reserve currency, see this. Look carefully at the graph there (reproduced below) and provide a better answer to what currency might serve as an international reserve currency. And note carefully that the Canuck buck doesn't even make the list.

 Update: For more along the lines of what I've said, see this in Bloomberg:

Asian states are likely to retain their U.S. Treasury holdings for now and European governments have expressed confidence in the world’s largest economy after Standard & Poor’s cut the U.S.’s sovereign credit rating to AA+.

South Korea affirmed confidence in Treasuries after an emergency meeting of officials yesterday to prepare for any financial market fallout. Russia said the one-step cut “can be ignored,” and France questioned S&P’s reasoning. China’s official Xinhua news service said in a commentary that the U.S. must cure its “addiction” to borrowing.

For all the angst, policy makers across Asia are lured to Treasuries as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness. 

As some of my former students asked in email and FaceBook, this response implies that the interest elasticity of demand for US t-bills is mighty low in this range.

 

What If Monopoly Money Were "Real" Money?

An economist (whom some people believe is patterned on EclectEcon) minces no words in explaining the problems that would result [from Saturday Morning Breakfast Cereal cartoons, h/t Nathan, Lars]:

One of the Many Reasons I tend to be Pro-Israel

From this site:

 I can personally testify that in May, 1948, Ben-Gurion's public appeal to the Arabs of Haifa and Jaffa was widely spread and broadcast live and repeated over and again in the streets of these two towns, calling upon the Arabs to accept his outstretched hand in peace, and not to leave their homes and possessions as they were being urged by the Arab Higher Command.

I was in Haifa on 16th May, 1948 and I watched the Arabs as they calmly and joyfully lined up to be taken aboard the British warships to be transported to Egypt and Lebanon. There was no panic as they fully expected to return in a few days to take over all the Jewish property from the massacred Jews, as they were promised by their leaders. They were not "refugees". They considered themselves to be no more than "temporary evacuees" just for a few days, and it was a joyful holiday break for them.

My reading of various sources says that there were indeed a few places where Arabs were driven from their homes by victorious Israelis in the 1948, but those instances were very few and far between. For the most part, though, Israeli Arabs voluntarily left their homes at the urging of the Jordan, Syria, and Egyptian leaders who expected to drive the Jews into the sea. To the extent this history is correct, it seems to me the former Israeli Arabs have a bitter complaint against the former Arab leaders, much more so than against the Israel of today.

Diminishing Marginal Utility Example, via Nero Wolfe's Assistant, Archie Goodwin

On page one of Black Orchids, by Rex Stout, Archie Goodwin says, 

"I do not deny that flowers are pretty, but a million flowers are not million times prettier than one flower. Oysters are good to eat, but who wants to eat a carload?"

Most economists I know would take the above quote as a great example of diminishing marginal utility: another flower or another oyster might add to my overall sense of satisfaction, but it won't add as much as the first few did. In fact, I'll probably use it as an example myself when teaching intro microeconomics this fall at The University of Regina.

But when I'm at the campus pub (The Owl), I'll be raising the following issue with colleagues:

I'll accept the basic notion of diminishing marginal utility, and I'll agree with Archie Goodwin up to a point. But at some point, adding more and more flowers becomes stupendous.

I certainly prefer looking at a massive field of flowers to looking at 100 or 101 flowers. I would agree that an additional flower in either case wouldn't add much to my overall sense of satisfaction. But somewhere along the line, having an (or some) additional flower(s) converts the bunch of flowers to a larger field, which greatly increases my overall satisfaction. 

Does this mean that at some point, as additional flowers are added, I experience a massive increase in marginal utility? or, more likely, does adding more flowers convert the product from "flowers" to "fields of flowers"? 

This last possibility is perhaps better seen when you consider collecting things, say quarters from each of the US states. If I have twenty of these, then finding the 21st would add some to my total satisfaction. But if I have 49 and find the 50th, then I would have the complete set, which would likely add greatly to my overall satisfaction. 

To put it differently, I wouldn't pay anything at all to look at one flower, but I would likely, at times, be willing to pay something to look at a field of a million flowers, and in that sense, I might even take issue with Archie Goodwin.

So while we often teach diminishing marginal utility as a law, there are times when getting one more X converts the bunch of Xs into a set, thus increasing overall satisfaction considerably. But I'm not sure that necessarily violates the "law" of diminishing marginal utility. 

 

iPad2: a Great "Wow" Factor, but not really all that great for me

Through a series of odd  events, both Ms. Eclectic and I have ended up owning iPad2s. It may be just my own idiosyncratic interests and preferences, but I remain underwhelmed. Ms. Eclectic is less underwhelmed than I am, but she, too, is not overly enthusiastic about her iPad.

The iPad has some nice things:

• The bigger screen than an iPhone is nice for reading things. Books and PDFs are generally easier to read (but see below). 
• Gmail and Facebook are easier to use on an iPad than on an iPhone. I use them via Safari, which I prefer using as opposed to the Gmail and Facebook apps for the iPad.
• Typing on an iPad is much easier than on an iPhone. At the same time, though, I have experimented with using bluetooth keyboards designed for use with an iPad2, but many of them have keys in the wrong place, which makes using them very frustrating. If you think you might want an external bluetooth keyboard, make sure you check them out for quite a few different uses first.
• The fingertip expansion or contraction and rotation are just plain fun. They really add to the "wow" factor of an iPad2.
• Instant on makes the iPad a great coffee-table tool. Any time you're watching tv or talking or whatever, if a question arises, you just pick up the iPad and google it. As Ms. Eclectic says, "it's much easier to look [stuff] up on the iPad than it is on a computer." 
• It is light and convenient. Once you put it into a case of some sort, the iPad really isn't a whole lot lighter than a Mac Air or a Toshiba Portege. Nevertheless, it seems light and convenient, even when compared with the lighter notebooks. Also it runs much cooler than my Toshiba Portege.
• The battery life is great! Even when reading with a bright screen, it looks to me as if the iPad battery will last well over six-seven hours; some people report battery lives of up to ten hours.

So why is it "not really all that great for me"? As I've said, it might be me, but....

• The iPad isn't a computer and it isn't an iPhone. That means that now I have one more thing to carry around if I want to have it with me.
• It is too big to fit into any pocket easily. I had intended to consider the Samsung, HP, and even Blackberry tablets before getting an iPad2 because they are smaller would fit into a sportcoat or blazer pocket. But after reading the reviews of Blackberry's Playbook, I knew I wouldn't consider that option. I never had a chance to consider the Samsung or HP tablets. [addendum: my daughter visited on the weekend with her Samsung Galaxy tablet. It is exactly the right size for me in that it fits easily into a jacket pocket or into the side pocket of cargo pants. If I were making the decision now, I'd certainly give the Samsung tablet very serious consideration.]
• The lack of a USB port, the lack of an SD slot for loading photos and files, and the inability to load or unload files easily any other way is a royal pain. This is also a problem with the iPhone, but then I don't think of the iPhone as a potential substitute for my laptop.
• If I want to use a computer, a laptop is much easier to use than an iPad.
• If I want to use a cell phone, an iPhone is much easier to use than an iPad.
• Reading books is often much easier on an iPhone because the iPhone is always with me and is much easier to carry around. I always have my books and podcasts and blog downloads with me on my iPhone, but that isn't the case with the iPad because I simply do not carry it with me wherever I go. Ms. Eclectic and I don't share this view. She has always enjoyed reading novels on her iPhone, but she absolutely loves the iPad for reading novels.

As I've said, the iPad2 has a nice "Wow" factor, but I'm less impressed with it as a tool than many others are. I know many people in business love iPads or other tablets (I suspect that's because when the iPad is flat on a conference table, they can check e-mail or surf the web without the screen being viewable by (m)any others; this suspicion received support when a university admin sent me e-mail while I knew the person was in a seminar).

My assessment, after using one for a few weeks, is fairly consistent with my expectations. I'm underwhelmed.

But having said that, I'm not giving it away. I'm sure part of the explanation is "the endowment effect." But I think part of the explanation also is that it is fun and convenient to use in some places or situations.