Wednesday, October 16, 2019

How Odysseus Started The Industrial Revolution

Factory work may have been a commitment device to get everyone to work hard. Odysseus tying himself to the mast was also a commitment device. Dean Karlan, Yale economics professor explains how commitment devices work:

"This idea of forcing one’s own future behavior dates back in our culture at least to Odysseus, who had his crew tie him to the ship’s mast so he wouldn’t be tempted by the sirens; and Cortes, who burned his ships to show his army that there would be no going back.

Economists call this method of pushing your future self into some behavior a “commitment device.” [Related: a Freakonomics podcast on the topic is called "Save Me From Myself."] From my WSJ op-ed:
Most of us don’t have crews and soldiers at our disposal, but many people still find ways to influence their future selves. Some compulsive shoppers will freeze their credit cards in blocks of ice to make sure they can’t get at them too readily when tempted. Some who are particularly prone to the siren song of their pillows in the morning place their alarm clock far from their bed, on the other side of the room, forcing their future self out of bed to shut it off. When MIT graduate student Guri Nanda developed an alarm clock, Clocky, that rolls off a night stand and hides when it goes off, the market beat a path to her door."
 See What Can We Learn From Congress and African Farmers About Losing Weight?

Something like this came up recently in the New York Times, in reference to factory work and the Industrial Revolution. See Looking at Productivity as a State of Mind. From the NY Times, 9-27. By SENDHIL MULLAINATHAN, a professor of economics at Harvard. Excerpts:
"Greg Clark, a professor of economics at the University of California, Davis, has gone so far as to argue that the Industrial Revolution was in part a self-control revolution. Many economists, beginning with Adam Smith, have argued that factories — an important innovation of the Industrial Revolution — blossomed because they allowed workers to specialize and be more productive.

Professor Clark argues that work rules truly differentiated the factory. People working at home could start and finish when they wanted, a very appealing sort of flexibility, but it had a major drawback, he said. People ended up doing less work that way.

Factories imposed discipline. They enforced strict work hours. There were rules for when you could go home and for when you had to show up at the beginning of your shift. If you arrived late you could be locked out for the day. For workers being paid piece rates, this certainly got them up and at work on time. You can even see something similar with the assembly line. Those operations dictate a certain pace of work. Like a running partner, an assembly line enforces a certain speed.

As Professor Clark provocatively puts it: “Workers effectively hired capitalists to make them work harder. They lacked the self-control to achieve higher earnings on their own.”

The data entry workers in our study, centuries later, might have agreed with that statement. In fact, 73 percent of them did agree to this statement: “It would be good if there were rules against being absent because it would help me come to work more often.”"
The workers, like Odyssues, tied themselves to the mast to resist the temptation of slacking. This made it possible for factories to generate the large output of the Industrial Revolution.

Thursday, October 10, 2019

Using Reggae to Fight Inflation

See ‘Keep de Rates dem Low’—Jamaica Sets Inflation Fight to Reggae Beat: Central bank calls on music stars to record upbeat songs explaining inflation targeting, monetary policy and consistent GDP growth by Robbie Whelan. If you go to the article, you can watch one of the music videos. Excerpt:
"KINGSTON, Jamaica—Call it Reggaenomics.

As a drumbeat eases the listener into a familiar reggae rhythm, the high tenor of Jamaican pop star Tarrus Riley cuts through the groove.

All the high prices that mean me harm  
They can go back where they came from
No inflation monster
Shall prosper!

Mr. Riley looks into the camera and explains in Jamaican patois: “High inflation is a wicked ting, and we must banish it like slavery….Low, stable and predictable inflation is to the economy like what the bass line is to reggae music.”

The Bank of Jamaica has launched what may be the grooviest public-education campaign ever undertaken by a central bank.

Over the past year, the bank called on local pop stars to record upbeat songs in reggae and dancehall styles and to produce YouTube music videos explaining such buzz-killing concepts as inflation targeting, monetary policy and consistent GDP growth.

One video features a woman tooling around the capital in a sports car while a singer sings about how inflation targeting can help boost the economy.

Keep de rates dem low, stable and intact
So de consumers can buy more good wit dem cash!
 
Next up for the central bank: a single and music video inspired by dancehall star Sean Paul’s 2005 hit “Temperature,” featuring what the bank hopes will become a viral craze called the Inflation Dance.

The campaign is the brainchild of Tony Morrison, a former hotel talent booker and television reporter who now serves as the central bank’s head of communications. He says he has wanted for years to marry reggae and monetary policy, and finally got the go ahead from the administration of Andrew Holness, elected prime minister in 2016.

“We wanted to have some songs about changes to our foreign-exchange reserves policy a few years ago, but in the end decided it was too complicated,” Mr. Morrison says. “Things like inflation targeting, however, are the type of things that everyone should know about, and the best way to reach the people of Jamaica is through reggae.”"

"Behind Jamaica’s playful strategy is a serious goal: to build public support for a government policy designed to bring economic stability to a country that has long been a financial basket case."
"Central banks around the world are straining to capture the public’s imagination with rap videos, festivals and cod-themed bank notes."

Wednesday, October 02, 2019

Do We Have A Zombie Economy?

See When Dead Companies Don’t Die: The policies created to pull the world out of recession are still in place, but now they are strangling the global economy by Ruchir Sharma in The NY Times. He is author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World” and is the chief global strategist at Morgan Stanley Investment Management.

This ties in to some recent posts I did on the recovery and Joseph Schumpeter (links below). Excerpts:

"Since the end of the recession, the economy has grown at about 2 percent a year in the United States and 3 percent worldwide — both nearly a point below the average for postwar recoveries.

What explains the longest, weakest recovery on record? I blame the unintended consequences of huge government rescue programs, which have continued since the recession ended."
"Once the crisis hit, however, governments erected barriers to protect domestic companies. Central banks aggressively printed money to restore high growth. Instead, growth came back in a sluggish new form, as easy money propped up inefficient companies and gave big companies favorable access to cheap credit, encouraging them to grow even bigger."
"Central bankers had hoped that low interest rates would spur investment, increasing productivity and boosting growth. But a recent paper from the National Bureau of Economic Research shows that low rates gave big companies an incentive and means to grow bigger. As their power grows, workers’ share of national income has been shrinking, fueling inequality — and anger.
Four airlines and three rental car companies account for more than 80 percent of the American travel markets."
"Start-ups represent a declining share of all companies in Britain, Italy, Spain, Sweden, the United States and many other industrialized economies. The United States is generating start-ups — and shutting down established companies — at the slowest rates since at least the 1970s."
"Zombies now account for 12 percent of the companies listed on stock exchanges in advanced economies and 16 percent in the United States, up from 2 percent in the 1980s. Companies are surviving in the “zombie state” for longer, depleting the productivity of healthy companies by competing with them for capital, materials and labor."
"The problem, however, is that government stimulus programs were conceived as a way to revive economies in recession, not to keep growth alive indefinitely. A world without recessions may sound like progress, but recessions can be like forest fires, purging the economy of dead brush so that new shoots can grow. Lately, the cycle of regeneration has been suspended, as governments douse the first flicker of a coming recession with buckets of easy money and new spending. Now experiments in permanent stimulus are sapping the process of creative destruction [see link below about Joseph Schumpeter] at the heart of any capitalist system and breeding oversize zombies faster than start-ups.
To assume that central banks can hold the next recession at bay indefinitely represents a dangerous complacency. Corporate debt levels continue to rise; government debts and deficits continue to rise. If there is a sudden break in confidence, the damage will be that much greater and governments may find themselves too broke to stem it."
Related posts:

Thursday, September 26, 2019

How the U.S. justifies & enforces sanctions on countries like Iran and how other countries try to get around the sanctions

See The Dollar Underpins American Power. Rivals Are Building Workarounds. Iran sanctions spur Europe and India to devise systems to trade with Tehran without using the U.S. currency by Justin Scheck and Bradley Hope of The WSJ. Excerpts:


"In congressional testimony in March, Treasury Department undersecretary Sigal Mandelker said that “those who engage in activities that run afoul of U.S. sanctions risk severe consequences, including losing access to the U.S. financial system and the ability to do business with the United States.”"

The dollar’s status dates back to the end of World War II, when the U.S. economy was the world’s most robust and dollars were plentiful. The currency’s liquidity, and the efficient U.S. banking system anchored by the Federal Reserve, mean trading in dollars is much less expensive and more convenient than using other currencies, says Craig Pirrong, a University of Houston professor who studies payment systems.

Here’s how it works: A Canadian lumber company sells boards to a French buyer. The buyer’s bank in France and the seller’s bank in Canada settle the payment, in dollars, via “correspondent banks” that have accounts at the Fed. The money is transferred seamlessly between the banks’ Fed accounts because their status as correspondent banks means they are seen as safe counterparties.

The use of these accounts, the U.S. says, means every transaction technically touches U.S. soil, giving it legal jurisdiction. Because using most other currencies is relatively inconvenient and expensive, many countries and companies will do whatever the U.S. requires to maintain access to dollars."

"It is needed because U.S. sanctions bar dollar transactions with Iranian banks, even on deals for unsanctioned goods. Once operational, Instex’s [Europe's workaround] members could expand it to cover any trade with Iran."

"The system aims to bypass the dollar by using the same mechanism underlying the age-old hawala money-transfer system popular in the Middle East and Asia, under which people pay cash in one office and a recipient draws the equivalent funds at a distant locale without money actually moving.

This is how the Instex system would handle the sale of medicine by a German company to an Iranian buyer: The German exporter wouldn’t get paid by the buyer, but by another European company that is separately importing goods from Iran. Similarly, in Iran, the buyer of the medicine would pay the exporter of the other goods. No dollars at all would be involved, which means the U.S. would have no jurisdiction."

"In 2013, less than 7% of trade between China and Russia was in yuan and rubles, the bank ING Groep reported last year. In 2017, it was more than 18%."

"Even if such alternative systems catch on, the dollar is likely to dominate international trade for years to come. In 2016, the most recent year for which data are available, the dollar was involved in 88% of the daily trades in the $5 trillion-per-day foreign-currency market"

"The euro is handicapped by political uncertainty in Europe, and the yuan by Chinese restrictions on currency flows and unease about that nation’s economy. Further bolstering the dollar’s standing is its role as the world’s main reserve currency, held by central banks globally. That creates a strong incentive to keep the currency stable and liquid.

“The rest of the world can’t do without the U.S. dollar,” says Daniel Drezner, a Tufts University professor who used to advise the U.S. Treasury."

Thursday, September 19, 2019

Why honey prices have climbed about 25% since 2013

See You’ll Need a Lot More Money to Buy That Jar of Honey: Beekeepers are in a sweet spot as consumer trends shift away from cane sugar and high-fructose corn syrup by Lucy Craymer of The WSJ. Excerpts, with my comments in brackets:

"Honey prices are starting to sting.

Global honey prices are at their highest levels in years, due to a new wave of consumer demand for natural sweeteners [demand increases because tastes or preferences increased with the opposite happening for sugar] and declining bee populations that are hampering mass production [supply decreases]."

"In addition, it is being used more as an ingredient in shampoos, moisturizers and other personal-care products that companies market as naturally made [another increase in demand due to tastes]."

"Retail honey prices world-wide recently averaged $4.69 a pound, according to market research firm Euromonitor International. Prices have climbed about 25% since 2013, while the cost of sugar has fallen around 30% over the same time frame."

"U.S. retail prices averaged $7.66 a pound in May, up 9% from a year earlier"

"Those prices have risen by about two-thirds in the last decade"

"Americans consumed 596 million pounds of honey in 2017, or an average of nearly two pounds per person—up 65% since 2009 [if demand shifts right, we expect both price and quantity to increase]."

"It has been touted by celebrities—including tennis starNovak Djokovic—for its health benefits and numerous scientific studies have shown it can help heal wounds, ulcers and burns [maybe this is part of the reason tastes increased]."

"Global honey production has been relatively stable over the past five years [but if supply shifted left that could cancel out the demand increase and leave quantity the same]."

"In the U.S., honey production peaked in 2014 and has fallen 15% since then [if supply shifted more to the left than demand shifted to the right, total Q falls-maybe the increased American quantity means less for consumers elsewhere]."

Thursday, September 12, 2019

Why Doing Good Makes It Easier to Be Bad

By Abbas Panjwani. He is a journalist at Full Fact, the UK’s leading fact-checking charity. He has previously written for the Sunday Times.

Adam Smith's "invisible hand" suggests that if you follow your own self interest, you will promote the interests of society. I have had some posts on this issue of being selfish vs. being altruistic and if they can actually be separated before. So those links are at the end.

But this article says that if you work in a "socially responsible company" it makes you think that it is okay to do something immoral, that somehow you have earned that right.

Excerpt:


"Oscar Wilde, the famed Irish essayist and playwright, had a gift, among other things, for counterintuitive aphorisms. In “The Soul of Man Under Socialism,” an 1891 article, he wrote, “Charity creates a multitude of sins.”

So perhaps Wilde wouldn’t have been surprised to hear of a series of recent scandals in the U.K.: The all-male charity, the President’s Club, which raised money for causes including children’s hospitals through high-valued auctions, was forced to close after the Financial Times uncovered sexual assault and misogyny at its annual dinner; executives of Oxfam, a poverty eradication charity, visited prostitutes while delivering aid in earthquake-stricken Haiti, and were allowed to slink off to other charities, rather than being castigated for their actions; and ex-Save the Children executives Brendan Cox and Justin Forsyth stepped down from their roles at other charities, after allegations of sexual harassment and bullying toward junior female colleagues resurfaced.

You might wonder how people who seem so good by occupation could be so bad in private. The theory of moral licensing could help explain why: When humans are good, it says, we give ourselves license to be bad.

In a recent paper, economists at the University of Chicago reported that working for a socially responsible company motivated employees to act immorally. In one experiment, people were hired to transcribe images of short German texts and paid 10 percent upfront, with the remaining payment being delivered if they completed the transcriptions, or if they declared the documents too illegible to transcribe. When they were told that, for every job completed or marked illegible, 5 percent of their wages would be donated to Unicef’s educational programs, the instances of cheating rose by 25 percent, compared to where no charitable donation was offered. Cheating manifested in both workers not completing jobs (taking the 10 percent upfront fee and running) and also workers saying that documents were too illegible to transcribe (and so receiving the full fee).

“The share of cheaters [was] highest when we frame corporate social responsibility as a prosocial act on behalf of workers,” the researchers, John A. List and Fatemeh Momeni, found. When the workers felt a greater sense that their own actions would lead to charitable donations, like Robin Hood, they in turn felt enough license to steal, essentially, from their employer to give to charity. “The ‘doing good’ nature of [corporate social responsibility] induces workers to misbehave on another dimension that hurts the firm,” List and Fatemeh concluded."

Related posts:

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index
 

Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ

Thursday, September 05, 2019

How Technology Has Changed The Distribution Of Income Among Musicians

See Music Superstars Are the New One Percenters: Huge stars like Beyoncé and Taylor Swift are dominating the concert-tour business like never before, as music’s top 1% takes home an increasingly large share of the pie by Neil Shah of The WSJ. Excerpts:

"A small number of superstars like Beyoncé and Taylor Swift is gobbling up an increasingly outsize share of concert-tour revenues, as music’s biggest acts dominate the business like never before.

Sixty percent of all concert-ticket revenue world-wide went to the top 1% of performers ranked by revenue in 2017, according to an analysis by Alan Krueger, a Princeton University economist. That’s more than double the 26% that the top acts took home in 1982.

Just 5% of artists took home nearly the entire pie: 85% of all live-music revenue, up from 62% about three decades earlier, according to Mr. Krueger’s research. “The middle has dropped out of music, as more consumers gravitate to a smaller number of superstars,” he writes in a new book, “Rockonomics,” set to come out in June. (Mr. Krueger died in March.)"

"Performers’ royalties—for acts big and small—are generally much smaller on streaming than on records, CDs or download sales, so artists have to turn to concert revenue for more of their income. And it’s only the superstars who have the ability to charge significantly more for tickets than their predecessors did a generation ago. That leaves non-superstar performers competing for a shrinking share of the concert pie.

The average ticket price in the U.S. jumped from $12 in 1981 to $69 in 2017, far outstripping inflation and driven by superstars, Mr. Krueger’s research indicates. Three tours alone—Ed Sheeran, Taylor Swift, and Beyoncé with Jay-Z—hauled in around $1 billion in concert-ticket revenue in 2018, up from the $600 million that 2008’s three highest-grossing tours brought in, according to Billboard Boxscore. Beyoncé and Jay-Z charged $117 a ticket on average, according to Pollstar, the concert publication. Taylor Swift? $119. (Ed Sheeran, by contrast, charged a relatively more modest $89.)

Meanwhile, at the bottom of the industry, the lowest 2,500 acts ranked by revenue grossed an average of about $2,500 in 2017 from concert tickets, out of the 10,808 touring acts that year that Mr. Krueger studied. There were 109 acts in the top 1%."

"Performers today generally generate about three-fourths of their income from concert tours, compared with around 30% in the 1980s and 1990s. While many artists have tried to increase ticket prices to compensate for smaller recorded-music revenues, the biggest stars have the most leverage.

Concerts generated a record-setting $10.4 billion in revenue last year"

"While the share of concert tickets sold by superstars has stayed relatively constant, “the actual ticket prices themselves have risen quite dramatically compared to everyone else,”"

"streaming-music services and social-media marketing have helped small acts, making it easier for emerging artists to find fans. But for performers in the middle market, particularly in genres like rock—which isn’t as popular on streaming as hip-hop—the reduced earnings from recordings and increased need to tour can be tough."

"Music venues often take a cut of 20% or higher of the merchandise, he says. By the end of a tour, merchandise sales can determine whether it was financially successful or not."

"The concert circuit is so jammed with artists competing for tour dollars that there’s even been a shortage of tour buses."