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kottke.org posts about economics

Congress considers font readability

Both houses of Congress have recently passed credit card legislation which will cut down on credit card companies abusing their customers. The NY Times has a guide to what the new legislation could mean for consumers. The bill that passed the House contains some interesting provisions on how card companies can use type.

The House throws in what ought to be called “The Fine Print Rule.” Card companies must print their account applications and disclosures in 12-point type or greater. A supervisory board will also probably declare certain hard-on-the-eyes fonts off limits. The Senate is silent on typeface but imposes many other communication requirements.

From the bill itself:

SEC. 14. Readability requirement.

Section 122 of the Truth in Lending Act (U.S.C. 1632) is amended by adding at the end the following new subsection:

“(d) Minimum type-size and font requirement for credit card applications and disclosures. -All written information, provisions, and terms in or on any application, solicitation, contract, or agreement for any credit card account under an open end consumer credit plan, and all written information included in or on any disclosure required under this chapter with respect to any such account, shall appear-

“(1) in not less than 12-point type; and

“(2) in any font other than a font which the Board has designated, in regulations under this section, as a font that inhibits readability.”.

I haven’t seen a credit card application or bill in years (we’re paperless)…what unreadable fonts are these companies using? Do they set their terms and conditions sections in 6-pt Zapf Dingbats a la David Carson?


Economics reporter gets caught in mortgage bubble

Edmund Andrews, an economics reporter for the New York Times, confesses that he got caught up in “catastrophic binge on overpriced real estate” and signed a “reckless mortgage” for more money than he and his new wife could afford.

What about my alimony and child-support obligations? No need to mention them. What would happen when they saw the automatic withholdings in my paycheck? No need to show them. If I wanted to buy a house, Bob figured, it was my job to decide whether I could afford it. His job was to make it happen.

“I am here to enable dreams,” he explained to me long afterward. Bob’s view was that if I’d been unemployed for seven years and didn’t have a dime to my name but I wanted a house, he wouldn’t question my prudence. “Who am I to tell you that you shouldn’t do what you want to do? I am here to sell money and to help you do what you want to do. At the end of the day, it’s your signature on the mortgage - not mine.”

Andrews and his family aren’t all that bad off, but my mouth got all cottony while reading this as I extrapolated from his story to the millions of people who made similar deals under much more dire circumstances. A chilling first person tip-of-the-iceberg tale. (via the laboritorium, which calls the piece “an instant classic of economic crisis journalism”)

Update: According to a nice bit of reporting by Megan McArdle, Andrews failed to mention that his second wife has declared bankruptcy twice, once while married to Andrews.

Moreover, pesky bad luck isn’t really the picture painted by either filing. Rather, Ms. Barreiro seems to have spent most of the last two decades living right up to the edge of her income, and beyond, and then massively defaulting. If you structure your finances so that absolutely everything has to go right, it’s hard to blame the mortgage company when you don’t quite make it.

Andrews has been admirably open about many of the poor decisions and the wishful thinking that led him deep into debt. Nonetheless, he has laid much of the blame onto irresponsible bankers and mortgage brokers. The missing bankruptcies substantially undermine this basic narrative arc of Andrews’ story. Particularly in his book, the bankers are the villains, America’s current troubles are the inevitable denouement of their maniacal greed, and the Andrews household stands in for an American public led, by their own greed and longing and hopeful trust, into the money pit.

Seen through this lens, it’s not so much that Andrews was done in by a overly large mortgage…it was that he married a financial anchor.

Update: Andrews responds to McArdle’s claims:

These bankruptcies did occur, but they had nothing to do with our mortgage woes. They were both tied to old debts from before we were married or bought a house. They had nothing to do with my ability to get a mortgage; nor did they have anything to do with our subsequent financial problems.

And McArdle responds to his response. (This is getting complicated!)

Andrews seems to now be arguing that the Chapter 7 filings are not relevant because they didn’t affect his ability to get a mortgage. But of course the article and the book is not just about himβ€”rightly, because unless your marriage is pretty dysfunctional, it’s a financial partnership. The two bankruptcies seem to reveal that one partner has demonstrated a historic inability to live within their means. So though the bankruptcies don’t tell us anything about their ability to get a mortgage on their house, they may tell us quite a bit about their willingness to take on a mortgage. This decision is at least as important as the bank’s. I’m sure banks would have given me all kinds of stupid mortgage loans in 2004, but I didn’t avail myself of the opportunity.

(thx, pamela)


The economics of the new Yankee Stadium

Ticket prices at the new Yankee Stadium are so high that if a New Yorker wants to watch a Mariners/Yankees game from the best seats, it would be a lot cheaper to fly to Seattle, stay in a nice hotel, eat fancy dinners, and see two games.

Option 1: Two tickets to Tuesday night, June 30, Mariners at Yanks, cost for just the tickets, $5,000.

Option 2: Two round-trip airline tickets to Seattle, Friday, Aug. 14, return Sunday the 16th, rental car for three days, two-night double occupancy stay in four-star hotel, two top tickets to both the Saturday and Sunday Yanks-Mariners games, two best-restaurant-in-town dinners for two. Total cost, $2,800. Plus-frequent flyer miles.

(thx, david)


New Yorker Summit: finance

The big themes of the day so far are confidence and experts: should we and do we have confidence in the experts? Malcolm Gladwell kicked off the morning with a talk about overconfidence. He talked about the three types of failure possible in a situation like the financial crisis:

1. Institutional failure. The regulators and regulations were not sufficient.

2. Cognitive failure. The bankers weren’t smart enough and got in over their heads.

3. Psychological failure. The bankers were overconfident and failed to recognize the direness of their situation.

Gladwell argued that the financial crisis was caused largely by overconfidence, which has two key effects. One is that people become miscalibrated. They think that the predictions that they are making are actually a lot better than they are. Secondly, there’s an illusion of control problem in which people think they have control over things that are impossible to control. Fixing the situation will be hard because overconfidence is a useful trait to possess and experts are hard to purge from systems (they’re the experts!).

[Experts talking about how experts are wrong! My brain is seizing up.]

Next up were Nassim Taleb and Robert Shiller. Shiller believes that confidence drives the economy and that macroeconomics is flawed because there’s no humanity in it. Taleb was very quotable and the most full of doom of all the panelists so far. He doesn’t like economists. Like wants them gone from the world, or to at least marginalize their effects so that their opinions and decisions don’t affect the lives of normal people. In talking about why this crisis is different than similar situations in the past, he argued that globalization, the Internet, and the efficiency of global financial markets has created an environment where very large and very quick collective movements of money are possible in a way that wasn’t before. Taleb had the last word: “people who crashed the plane, you don’t give them a new plane”.

The panel moderated by Suroweicki was a little odd. Two out of the three panelists kept repeating in reference to the solution to the very complex financial crisis: “this isn’t that complicated”. There has also been a undercurrent to the discussion so far that the goal of any solution to the financial crisis is to get the economy back to where it was. I’m with Taleb on this one: where we were wasn’t very good, why do we want to go back.


Raising prices and gaining readers

Feeling undervalued, some magazines are raising their prices and gaining both readership and revenue.

The Economist is leading the charge on expensive subscriptions, and its success is one reason publishers are rethinking their approaches. It is a news magazine with an extraordinarily high cover price β€” raised to $6.99 late last year β€” and subscription price, about $100 a year on average.

Even though The Economist is relatively expensive, its circulation has increased sharply in the last four years. Subscriptions are up 60 percent since 2004, and newsstand sales have risen 50 percent, according to the audit bureau.

I’m always amazed that something as great as The New Yorker can be had for a buck an issue when people routinely pay $4 for burnt coffee, $10 for crappy movies, and $12 for -tini drinks.


Create Your Own Economy

I don’t think he’s talked about it on his site yet, but Tyler Cowen has a new book coming out called Create Your Own Economy: The Path to Prosperity in a Disordered World.

As economist Tyler Cowen boldly shows in Create Your Own Economy, the way we think now is changing more rapidly than it has in a very long time. Not since the Industrial Revolution has a man-made creation — in this case, the World Wide Web — so greatly influenced the way our minds work and our human potential. Cowen argues brilliantly that we are breaking down cultural information into ever-smaller tidbits, ordering and reordering them in our minds (and our computers) to meet our own specific needs.

Create Your Own Economy explains why the coming world of Web 3.0 is good for us; why social networking sites such as Facebook are so necessary; what’s so great about “Tweeting” and texting; how education will get better; and why politics, literature, and philosophy will become richer. This is a revolutionary guide to life in the new world.

I never properly reviewed Cowen’s last book (sorry!), but I found it as enlightening and entertaining as Marginal Revolution is. (via david archer)


A world without Black Swans

Nassim Nicholas Taleb lists ten principles for a Black Swan-proof world. Most points relate directly to the current economic situation in the US.

No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

It was difficult to choose just one of Taleb’s points to excerpt; they’re all worth considering. BTW, a Black Swan is an event that is rare, has a large impact, and is deemed predictable after the fact. I might have to push Taleb’s book of the same name to the top of my reading list.


Mo’ money, mo’ socioeconomic issues

New Scientist has collected a bunch of studies related to the pychological impact of money on people.

Almost all of us, for example, are “loss averse” β€” it hurts more to lose Β£50 than it feels good to win Β£50. We also value money in relative rather than absolute terms β€” we consider Β£10 irrelevant when buying a house but not when paying for a meal. Similarly, finding Β£100 will give many people more pleasure than having a heating bill cut from Β£950 to Β£835, even though this gains them more in real terms.


Michael Lewis telling fish tales?

Jonas Moody, who has lived on Iceland for the past seven years, takes Michael Lewis to task for some inaccuracies and other odd things in his Vanity Fair piece about the country’s economic crisis.

5. “Icelanders are among the most inbred human beings on earth β€” geneticists often use them for research.”

Now this is insulting. Icelanders’ DNA shows their roots to be a healthy mix between Nordic Y chromosomes and X chromosomes from the British Isles. The reason genetic-research company deCODE uses Icelandic genes for its research is not because the codes are so homogeneous, but because the population has kept excellent genealogical records dating back thousands of years.

I sort of shrugged my shoulders at this stuff when I read the piece and forged ahead for the financial meat and potatoes, but it doesn’t read so well when collected all in one place like this. Was the piece supposed to be a farce? If not, it doesn’t reflect well on Lewis or his editors at VF. (thx, micah)


Up in a down market

Mother Jones magazine has a list of ten people who have profited from the current financial crisis.

[John] Paulson is a hedge fund manager who has been ridiculously successful betting against banks and other entities that had exposure to the subprime crisis: In 2007, his funds were up $15 billion. In 2008, he didn’t do as well: His main fund rose 38 percent in a year when the S&P 500 fell almost 40 percent. His 2007 earnings were in the neighborhood of $3.7 billion. According to Forbes, while 656 billionaires lost money last year, Paulson was one of the 44 who added to their fortunes.

This is the peculiar thing about financial markets: if you know something bad is going to happen (you know, like the global collapse of the financial markets), you can either sound the alarm and save a lot of people a lot of grief or you can make a billion dollars.


How the Crash Will Reshape America

Right or wrong, How the Crash Will Reshape America, Richard Florida’s analysis of how different areas of the United States are going to be affected by the current financial crisis, is full of fascinating bits.

The University of Chicago economist and Nobel laureate Robert Lucas declared that the spillovers in knowledge that result from talent-clustering are the main cause of economic growth. Well-educated professionals and creative workers who live together in dense ecosystems, interacting directly, generate ideas and turn them into products and services faster than talented people in other places can. There is no evidence that globalization or the Internet has changed that. Indeed, as globalization has increased the financial return on innovation by widening the consumer market, the pull of innovative places, already dense with highly talented workers, has only grown stronger, creating a snowball effect. Talent-rich ecosystems are not easy to replicate, and to realize their full economic value, talented and ambitious people increasingly need to live within them.

And:

But another crucial aspect of the crisis has been largely overlooked, and it might ultimately prove more important. Because America’s tendency to overconsume and under-save has been intimately intertwined with our postwar spatial fix β€” that is, with housing and suburbanization β€” the shape of the economy has been badly distorted, from where people live, to where investment flows, to what’s produced. Unless we make fundamental policy changes to eliminate these distortions, the economy is likely to face worsening handicaps in the years ahead.

Others have written about it elsewhere, but the few paragraphs Florida devotes to Detroit are stunning. (thx, peter)


The Trough of No Value

The Trough of No Value is the period in the lifetime of most objects between when they are new (and therefore valuable) and when they are old, rare, and collectable (and therefore valuable).

Who wanted to keep old lunchboxes around? They weren’t useful any more. They weren’t worth anything. And, since they were almost all used for their intended purpose, many were damaged or worn by use (I vaguely remember owning one that was rusty and had a dent). People naturally threw them away. The “trough of no value” for lunchboxes was long and harsh. That’s why they’re not so common today as you might guess β€” because not that many made it through the trough.

My unsharpened NeXT pencil is still very much stuck in the trough, but I have endless patience. I hope to sell it for 75 cents someday. (thx, danny)


Also, don’t drive angry!

kottke.org contributer Cliff Kuang asks: what can we learn from the classic Bill Murray flick Groundhog Day? A: Lessons physic, lessons Buddhist, and lessons economic.

The first time Phil Conners lives out Groundhog Day, he knows nothing about how events will unfold, and acts accordingly β€” self centered, short sighted and rash. But by the time Conners lives out his last Groundhog Day, he has perfect knowledge of how everyone around him will behave. He acts accordingly β€” maximizing his happiness and the happiness of those around him. The metaphor gets pretty loose, but in this interpretation, Phil’s last day is analogous to classical economics, where people act with perfect knowledge and rationality.


Things that go up in a down economy

Marginal Revolution has been posting an ongoing series of posts on countercyclical assets: things are doing well even though the economy as a whole is struggling. The latest example is that shoe repair shops are doing a booming business. One Florida cobbler’s repair volume is up 50%.

Some other examples are increasing activity on Second Life, cocoa futures, unusual pets, gold coins and wine, evangelical churches, tasers, high end prostitutes, beer, and household safes. Sounds like a hell of a party.

My own countercyclical hunch is that Internet use will rise dramatically over the year because a) it has become something that people need (even more than TV…you’ll see people scaling back on cable before they send back their cable modem) and b) spending more time using it doesn’t cost extra. Plus, unemployment = lots of time to spend online screwing around “updating your resume”.


America’s quiet ports

The current inactivity at Port of Long Beach is indicative of larger problems in the highly coupled global economy. Americans are buying fewer goods, including those made abroad, so no new goods are coming in to the port and those that have already arrived are sitting on the docks, including 165+ acres of Toyota cars. Because Americans are not buying foreign goods, China has slowed production. Slowed production means that they don’t need cardboard boxes for packaging. Since we ship our used paper to China for recycling into cardboard boxes, hundreds of tons of paper are sitting on the docks, unshipped. The strengthening of the dollar abroad means that American made goods aren’t selling and the ships hauling them are unable to leave the port. Nothing is selling anywhere so everything sits in the now-constipated port.


Gradual nationalization of healthcare

From the New Yorker last week, Atul Gawande on how the US should nationalize healthcare. His answer: nationalize slowly, use what’s already in place, and don’t rebuild the whole system from scratch.

Every industrialized nation in the world except the United States has a national system that guarantees affordable health care for all its citizens. Nearly all have been popular and successful. But each has taken a drastically different form, and the reason has rarely been ideology. Rather, each country has built on its own history, however imperfect, unusual, and untidy.

As usual, Gawande makes a lot of sense. Whatever the solution, we should be doing all we can to avoid something like this from ever happening again:

“When I heard that I was losing my insurance, I was scared,” Darling told the Times. Her husband had been laid off from his job, too. “I remember that the bill for my son’s delivery in 2005 was about $9,000, and I knew I would never be able to pay that by myself.” So she prevailed on her midwife to induce labor while she still had insurance coverage. During labor, Darling began bleeding profusely, and needed a Cesarean section. Mother and baby pulled through. But the insurer denied Darling’s claim for coverage. The couple ended up owing more than seventeen thousand dollars.


Facebook’s valuation and the network effect

My inbox is divided about the valuation of Facebook calculated using Burger King Whopper Sacrifice promotion (unfriend 10 people to get a Whopper). The majority say that even if you prevented people from refriending those they unfriended for a Whopper, a value of 12 cents for each friend link is too high and that most links are worth much less than that. That is, Facebook is awash in junk friendships of little value.

A smaller contingent is arguing that Burger King would have to pay much more to break some friendships and that Facebook’s valuation is therefore higher than the straight calculation indicates. For instance, getting Johnny Shoegazer to unfriend that girl he likes might take a considerable sum of money. I agree that Facebook is worth more than $1.8 billion in Whoppers but not because some individual links are more valuable than others…it’s about groups and networks of links. You might be able to get someone to part with 10 “junk” friends for $2.40 but could you pay them $22 more to essentially shut down their Facebook account for good? I don’t think so. It’s going to cost much more than that…and for some intense users of the site, the “buyout” amount might be surprisingly high. (I’d probably accept $24 to close my Facebook account. But I pay nothing to use Twitter and ~$25 a year for Flickr and it might take several hundred or even thousands of dollars to entice me to permanently close either of those accounts…I get so much value from them.)

The reason for this seems like it might have something to do with Metcalfe’s Law:

Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n^2). […] Metcalfe’s law characterizes many of the network effects of communication technologies and networks such as the Internet, social networking, and the World Wide Web. It is related to the fact that the number of unique connections in a network of a number of nodes (n) can be expressed mathematically as the triangular number n(n - 1)/2, which is proportional to n^2 asymptotically.

Or for our economic purposes, the network effect:

In economics and business, a network effect (also called network externality) is the effect that one user of a good or service has on the value of that product to other users. The classic example is the telephone. The more people own telephones, the more valuable the telephone is to each owner. This creates a positive externality because a user may purchase their phone without intending to create value for other users, but does so in any case.

As Facebook accumulates users and friendship links, the service becomes more and more valuable for each user. In Whoppernomics terms, Facebook may well be worth the $15 billion that the Microsoft deal suggested, but there are obviously problems for Facebook in thinking about their value in this way. How do they extract that value from their users? Getting a user to accept a $500 buyout for their Facebook account is different than Facebook asking that user to pay $500 to keep using their account even though the monetary value of the account is the same in either case. What Facebook is betting on is that each user will put up with hundreds of dollars worth of distractions (in the form of advertising and promotions) from their primary goal on the site (i.e. connecting with friends). Also, as Friendster and MySpace and every other social networking site has learned, membership in these services is not exclusive and users may eventually find more value in some other network with (temporarily) less distraction.

Again, assuming that we’re not taking this too seriously.


Facebook’s valuation (in Whoppers)

Burger King recently introduced a Facebook app called Whopper Sacrifice that allows users to delete ten of their friends in exchange for a Whopper sandwich. Watch the app in action.

What BK has unwittingly done here is provide a way to determine the valuation of Facebook. Let’s assume that the majority of Facebook’s value comes from the connections between their users. From Facebook’s statistics page, we learn that the site has 150 million users and the average user has 100 friends. Each friendship is requires the assent of both friends so really each user can, on average, only end half of their friendships. The price of a Whopper is approximately $2.40. That means that each user’s friendships is worth around 5 Whoppers, or $12. Do the math and:

$12/user X 150M users = $1.8 billion valuation for Facebook

That’s considerably less than the $15 billion valuation assigned to Facebook when Microsoft invested in the company in October 2007 and the lower valuations being tossed about in recent months.

P.S. Other assumptions for the sake of argument: every user is eligible for the Whopper promotion (it’s actually only valid in the US), you can sell all of your friends for multiple burgers (actually limit one per customer), and the “average user has 100 friends” means that Facebook users average 100 friends apiece (no idea what the reality is…if they’re using the median instead of the mean then that number could be higher or lower). Oh, and it’s also assumed that no one should take this too seriously.

Update: I’m getting some email saying that Facebook friendships require the assent of both parties. Is that the way it works for the BK thing? If I am friends with Mary and I unfriend her through the Whopper Sacrifice app, is she then unable to unfriend me to help get her burger? If so, then the $3.6 billion valuation drops to $1.8 billion because each unfriending event takes care of 2 friend connections, not just one. Anyone? Note: we are already taking this too seriously!

Update: Ok, it looks like unfriending on Facebook takes out two friendship connections, not just one. So that drops each user’s share to $12 and the valuation to $1.8 billion. D. Final answer, Regis. (thx, everyone)


The Last Traffic Jam

From The Last Traffic Jam in The Atlantic.

Unless we exercise foresight and devise growth-limits policies for the auto industry, events will thrust us into a crisis that will lead to a substantial erosion of our domestic oil supply as well as the independence it provides us with, and a level of petroleum imports that could cost as much as $20 to $30 billion per year. (This in turn would produce a staggering balance-of-payments problem for the United States, and give the Middle Eastern suppliers a dangerous leverage over our transportation system as well.) Moreover, we would still be depleting our remaining oil reserves at an unacceptable rate, and scrambling for petroleum substitutes, with enormous potential damage to the environment.

And:

In short, common sense dictates that we begin a transition to policies designed to avoid an energy impasse that could cripple out transportation system and imperil our economy. We must set growth limits that will allow the automobile and oil industries to maintain economic stability while conserving our resources and preserving our environment. Of course, such a reorientation will require statesmanship as well as public pressure. It will not happen unless corporate self-interest yields to a responsible outlook that serves the broader interests of the nation as a whole. Above all, this shift requires a thorough redirection of the aims of these two industries.

Believe it or not, those words appeared in the magazine in 1972. These views would have seemed out-of-date and old fashioned just a year or two ago but now all those chickens are coming home to roost.


Spam’s fortunes rise and fall

The amount of spam email decreased by more than 66% last week after a single company was knocked offline by their ISP after the Washington Post dug into their activities. But sales of Spam, the midwestern delicacy, are up, up, up because of the crappy economy.

Through war and recession, Americans have turned to the glistening canned product from Hormel as a way to save money while still putting something that resembles meat on the table. Now, in a sign of the times, it is happening again, and Hormel is cranking out as much Spam as its workers can produce.

In a factory that abuts Interstate 90, two shifts of workers have been making Spam seven days a week since July, and they have been told that the relentless work schedule will continue indefinitely.

People are also buying fewer socks and more frozen pot pies. And Spam can be added to the list of unlikely economic indicators, joining sushi, Big Macs, cigarettes, and others.

Update: Oh, and lipstick.

An indicator based on the theory that a consumer turns to less expensive indulgences, such as lipstick, when she (or he) feels less than confident about the future. Therefore, lipstick sales tend to increase during times of economic uncertainty or a recession.

(thx, dann)


Gladwell on early- and late-blooming geniuses

Now that he has a book coming out on the subject of genius and high achievement, the New Yorker finally lets Malcolm Gladwell write about David Galenson’s work on age and innovation. (A previous effort was Gladwell’s first article to be rejected by The New Yorker.) For an overview of Galenson’s work, check out my post from August.

The most interesting bit of Gladwell’s piece is his discussion of the economics of the two different types of artist. The conceptual artist’s talent is noticed and rewarded immediately. But conceptual innovators need more help to reach their full potential.

Sharie was Ben’s wife. But she was also-to borrow a term from long ago-his patron. That word has a condescending edge to it today, because we think it far more appropriate for artists (and everyone else for that matter) to be supported by the marketplace. But the marketplace works only for people like Jonathan Safran Foer, whose art emerges, fully realized, at the beginning of their career, or Picasso, whose talent was so blindingly obvious that an art dealer offered him a hundred-and-fifty-franc-a-month stipend the minute he got to Paris, at age twenty. If you are the type of creative mind that starts without a plan, and has to experiment and learn by doing, you need someone to see you through the long and difficult time it takes for your art to reach its true level.

Gladwell discusses the article in a podcast and will be answering reader questions about it later in the week.


Cans of mackerel are prison currency

In the US federal prison system, cans of mackerel have replaced outlawed cigarettes as the de facto form of currency.

“It’s the coin of the realm,” says Mark Bailey, who paid Mr. Levine in fish. Mr. Bailey was serving a two-year tax-fraud sentence in connection with a chain of strip clubs he owned. Mr. Levine was serving a nine-year term for drug dealing. Mr. Levine says he used his macks to get his beard trimmed, his clothes pressed and his shoes shined by other prisoners. “A haircut is two macks,” he says, as an expected tip for inmates who work in the prison barber shop.

See also the economics of POW camps.


The economics of fruit picking

A British fruit company gave three economists the chance to increase the company’s fruit harvest by tinkering with pay schemes of the pickers.

The owner had been paying a piece rate β€” a rate per kilogram of fruit β€” but also needed to ensure that whether pickers spent the day on a bountiful field or a sparse one, their wages didn’t fall below the legal hourly minimum. Farmer Smith tried to adjust the piece rate each day so that it was always adequate but never generous: The more the work force picked, the lower the piece rate. But his workers were outwitting him by keeping an eye on each other, making sure nobody picked too quickly, and thus collectively slowing down and cranking up the piece rate.

Over the course of three summers, three different approaches raised the total harvest by 50% the first year, another 20% the second year, and by another 20% the third year.


The McDonald’s theory of war

The Russian/Georgian conflict has proven the McDonald’s theory of war wrong. The theory stated that no two countries with McDonald’s restaurants would ever go to war with each other. (via mr)

Update: Depending on what you consider a war, the theory has been proven incorrect before. (thx, lots of folks who sent this in)


Relatively rich

Social scientist Dalton Conley on how rich people are now working longer hours than poor people in America.

This is a stunning moment in economic history: At one time we worked hard so that someday we (or our children) wouldn’t have to. Today, the more we earn, the more we work, since the opportunity cost of not working is all the greater (and since the higher we go, the more relatively deprived we feel).

In other words, when we get a raise, instead of using that hard-won money to buy “the good life,” we feel even more pressure to work since the shadow costs of not working are all the greater.

The increasing income inequality in the US is partially to blame, says Conley. Those in the middle and upper middle classes are working harder and longer, trying to keep up with the Joneses who are growing more wealthy at an even faster pace. Conley’s got a book coming out in January on the same topic called Elsewhere, USA. (via ah)


Old Masters and Young Geniuses

This short NY Times profile of economist David Galenson reminded me that I never shared Old Masters and Young Geniuses with you. The book was recommended to me by Malcolm Gladwell — which means that many of you can now form your opinion of it without even reading it — through a talk that he gave a couple of years ago. Gladwell also wrote an article for the New Yorker about Galenson’s work but it was rejected:

When Mr. Gladwell submitted an article about Mr. Galenson’s ideas to The New Yorker, he suffered his first rejection from the magazine. “You buy this Galenson stuff?” Mr. Gladwell recalled his editor saying to him. “What are you, crazy?”

But never mind all that, Old Masters and Young Geniuses is one of the most interesting books I’ve read in the past few years. I haven’t studied enough art history to know if Galenson’s thesis is correct, but the book presents an interesting framework for thinking about innovation and how to best harness your own creativity.

The main idea is this. Instead of people being super creative when they’re young and getting less so with age (i.e. the conventional wisdom), Galenson says that artists fall into two general categories:

1) The conceptual innovators who peak creatively early in life. They have firm ideas about what they want to accomplish and then do so, with certainty. Pablo Picasso is the archetype here; others include T.S. Eliot, F. Scott Fitzgerald, and Orson Wells. Picasso said, “I don’t seek, I find.”

2) The experimental innovators who peak later in life. They create through the painstaking process of doing, making incremental improvements to their art until they’re capable of real masterpiece. Cezanne is Galenson’s main example of an experimental innovator; others include Frank Lloyd Wright, Mark Twain, and Jackson Pollock. Cezanne remarked, “I seek in painting.”

Galenson demonstrates these differences through analysis of how often artists’ works are reproduced in textbooks, auction prices, and museum shows. The pattern is clear, although the method is less than precise in some cases and Galenson has since backed off his thesis somewhat. But the compelling part of the book is what the artists themselves say about how they work. The text is littered with quotes from painters, poets, writers, sculptors, and movie directors about how they perceived their own work and the work of their peers and predecessors. Their thoughts provide ways for contemporary creators to think about how their creativity manifests itself.

The transcript of Gladwell’s talk is a good introduction to there ideas. Galenson’s next book, And Now for Something Completely Different, appears to be available online in its entirety in a preliminary form. Much more information is available on his web site.


POW camp economics

How a rough system of barter developed into a more complex system of trade in WWII POW camps. This is fascinating stuff.

We reached a transit camp in Italy about a fortnight after capture and received 1/4 of a Red Cross food parcel each a week later. At once exchanges, already established, multiplied in volume. Starting with simple direct barter, such as a non-smoker giving a smoker friend his cigarette issue in exchange for a chocolate ration, more complex exchanges soon became an accepted custom. Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes; the market was not yet perfect. Within a week or two, as the volume of trade grew, rough scales of exchange values came into existence. Sikhs, who had at first exchanged tinned beef for practically any other foodstuff, began to insist on jam and margarine. It was realized that a tin of jam was worth 1/2 lb. of margarine plus something else; that a cigarette issue was worth several chocolates issues, and a tin of diced carrots was worth practically nothing.

The cigarette soon became the coin of the realm and at camps with stable populations, there were shops operated by the senior British officer with cigarettes as the currency people used to buy and sell goods to/from the store.

One trader in food and cigarettes, operating in a period of dearth, enjoyed a high reputation. His capital, carefully saved, was originally about 50 cigarettes, with which he bought rations on issue days and held them until the price rose just before the next issue. He also picked up a little by arbitrage; several times a day he visited every Exchange or Mart notice board and took advantage of every discrepancy between prices of goods offered and wanted. His knowledge of prices, markets and names of those who had received cigarette parcels was phenomenal. By these means he kept himself smoking steadily - his profits - while his capital remained intact.

The article also discusses deflation, the shifting availability of currency, credit, price movements, futures markets, paper currency, and price fixing. (via migurski)


Rising oil price consequences

A list of fifty things being blamed on rising oil prices. Among them: pizza deliviery prices, weakened demand for wine, “gas rage”, and more foot patrol for police officers.


Internet’s impact on media

The internet and other technologies have had differing impacts on the music and publishing businesses.

One of my friends proposed a theory I find compelling: Our cultural consumption exists on a spectrum from “individual” to “collective”. Technology has shifted the balance for both books and music. Digital distrbitution and the iPod have made music consumption much more individualistic, while the internet and global branding have made book consumption increasingly collective.

(via short schrift)


Fast food not fattening

New paper: fast food doesn’t make you fat.

When eating out, people reported consuming about 35 percent more calories on average than when they ate at home. But importantly, respondents reduced their caloric intake at home on days they ate out (that’s not to say that people were watching their weight, since respondents who reported consuming more at home also tended to eat more when going out). Overall, eating out increased daily caloric intake by only 24 calories. The results for urban and suburban consumers were similar.

(via marginal revolution)