Will the EU break apart?

Martin Feldstein (paper) suggests that Greece and some of the other PIIGS (Portugal, Italy, Ireland, Greece and Spain) may be better off leaving the Euro:

If Greece were not part of the Eurozone, its exchange rate with the rest of the world would adjust over time to prevent this type of large and growing trade deficit. More specifically, the need to finance that trade deficit would cause the value of the Greek currency to decline, making Greek exports more attractive to foreign buyers and encouraging Greek consumers to substitute Greek goods and services for imports. The rising cost of imports would also reduce real personal incomes in Greece, leading to less consumer spending and freeing up Greek output to be exported to foreign buyers.  

Milton Friedman on public housing

Note the consequentialist ethic, when he fields a question from a young man in the audience.

What is rational behavior?

The NY Times has a good book review of Daniel Kahneman's Thinking Fast and Slow. Kahneman, a psychologist, won the Nobel Prize in Economics for documenting departures from rationality. Students will recognize his work in sections from our textbook from Chapters 3 (Psychological Biases in Decision Making) and in Chapter 12 (Psychological Pricing).

What interested me in the review was the bigger idea that these departures from rationality--documented in psychology labs using student subjects--may actually be rational in the bigger sense:

Even if we could rid ourselves of the biases and illusions identified in this book — and Kahneman, citing his own lack of progress in overcoming them, doubts that we can — it is by no means clear that this would make our lives go better. And that raises a fundamental question: What is the point of rationality? We are, after all, Darwinian survivors. Our everyday reasoning abilities have evolved to cope efficiently with a complex and dynamic environment. They are thus likely to be adaptive in this environment, even if they can be tripped up in the psychologist’s somewhat artificial experiments. Where do the norms of rationality come from, if they are not an idealization of the way humans actually reason in their ordinary lives? As a species, we can no more be pervasively biased in our judgments than we can be pervasively ungrammatical in our use of language — or so critics of research like Kahneman and Tversky’s contend.

Prediction comes true, NBA owners win

The owners came away with most of what they wanted.

David Stern and the owners came into these NBA labor talks saying they lost more than $300 million last season and $400 million the year before that. By getting the players to agree to what is in practice a 50/50 split of basketball related income (although the deal allows the players to get to 51 percent if revenue increases enough) the owners got the players to essentially accept a 12 percent salary cut that will cover those losses.

We predicted this outcome in an earlier post.

Remember, the alternatives to agreement determine the terms of agreement.

XKCD Money Poster

This is a wonderful visualization the price, cost, or value of many things. I will order the poster for my office ASAP. For a larger, more glorious view, click through at XKCD.

Data Driven Decision Making

According to the Atlantic, it is happening more and more:

According to Google economist Hal Varian, his company is running on the order of 100-200 experiments on any given day, as they test new products and services, new algorithms and alternative designs. An iterative review process aggregates findings and frequently leads to further rounds of more targeted experimentation.

Why monopolization cases are so difficult: AMD vs. Intel

Monopolization law (called "abuse of dominance" in Europe) is controversial (see the post below) and difficult, because there are no clear cut answers. The laws are brief, outlawing "monopolization" and "abuse" without defining exactly what they are. Typically rivals are injured, and can sue for damages, but the court has to decide if consumers (or the competitive process" is harmed as well. This typically involves weighing the evidence to determine whether it most favors the anti-competitive theory of the plaintiff, or the pro-competitive rationale of the defendant.

A variety of tests have been devised to help distinguish between the pro- and anti-competitive theories:

• Effects-Balancing 
• Profit-Sacrifice 
• No-economic-sense 
• Equally Efficient Competitor 
• Disproportionality 
• Complementary Market Monopolization

To illustrate how this process works, we use the recent case of Intel's loyalty payments to large customers (sympathetic view, skeptical view) in exchange for buying most of their chips from Intel instead of rival AMD.

AMD claimed that the loyalty payments made it prohibitively expensive for them to compete for large computer manufacturers who would lose large loyalty payments if they switched to AMD. This had the effect of reducing demand for AMD chips, which drove them up their average cost curve, and made it more costly for them to compete, which could harm the competitive process by driving AMD out of some markets.

However, the loyalty payments reduced price for the larger manufacturers which benefited their customers. The lower prices could be modeled as either a form of price discrimination or a discount justified by the lower cost of serving larger customers. They also could be justified as as eliminating the double mark-up problem, but plaintiffs argued that there were less anti-competitive ways of aligning the incentives of chip and computer manufacturers.

Intel eventually settled the case by paying AMD $1.25 Billion, and then faced investigations from US, Asian, and European antitrust agencies.

What if the Episcopal Church were subject to antitrust law?

Ever since Adam Smith, economists have recognized the role that competition between religious sects plays in aligning the incentives of the clergy with the goals of a congregation: if a church does not deliver what its customers want, the customers can vote with their feet, and find a church that does.

There are, in general, two ways to to respond to this kind of competition: (i) by offering customers more of what they want or (ii) by harming competitors. The former is good for consumers while the latter is not, and the antitrust laws try to distinguish between these cases with what is called the "no business sense" test. If an action by a firm with market power harms competitors in a way that doesn't make any business sense but for its anticompetitive effect, then it may face prosecution.

I was reminded of this principle when I saw (WSJ link) the leader of the Episcopal church respond to congregations that want to affiliate with a rival Anglican sect, by saying that she'd rather have these properties become Baptist churches or even saloons than continue as sanctuaries for fellow Anglicans.

When the Church of the Good Shepherd in Binghamton, N.Y., left the Episcopal Church ..., the congregation offered to pay for the building in which it worshiped. In return the Episcopal Church sued to seize the building, then sold it for a fraction of the price to someone who turned it into a mosque.

I include this under the heading of "Managing vertical relationships" because the buildings are an "upstream" input into the production of Church services. The Episcopal Church is trying to raise the cost of rivals for accessing this input.

The success of the strategy depends on how much rival costs go up without access to these particular land parcels. Using this criterion, the chances of success seem small.

UPDATE: In response to the very good comments to the post, here is a brief commentary on the "no economic sense" test taken from the short-lived Section 2 Report (since renounced) that described how the Department of Justice would enforce this part of the antitrust laws.

The Department finds the no-economic-sense test useful, among other things, as a counseling device to focus businesspeople on the reasons for undertaking potentially exclusionary conduct. At the same time, the Department does not believe that a trivial benefit should protect conduct that is significantly harmful to consumers and the competitive process. Therefore, the Department does not believe that this test should serve as the general standard under section 2.

So even though it may have been the intent of the Episcopal church to monopolize, its ability to do so is unlikely.

The real meaning of Thanksgiving

John Stossel gives us another lesson that you won't learn in high school:

When the Pilgrims first settled the Plymouth Colony, they organized their farm economy along communal lines. The goal was to share everything equally, work and produce.

They nearly all starved.

Why? When people can get the same return with a small amount of effort as with a large amount, most people will make little effort. Plymouth settlers faked illness rather than working the common property. Some even stole, despite their Puritan convictions. Total production was too meager to support the population, and famine resulted. Some ate rats, dogs, horses and cats. This went on for two years.

"So as it well appeared that famine must still ensue the next year also, if not some way prevented," wrote Gov. William Bradford in his diary. The colonists, he said, "began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length after much debate of things, [I] (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. ... And so assigned to every family a parcel of land."

The people of Plymouth moved from socialism to private farming. The results were dramatic.
"This had very good success," Bradford wrote, "for it made all hands very industrious, so as much more corn was planted than otherwise would have been. ... By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many. ... "

Peter Klein has some commentary, as does the revisionist NY Times:

Don't say the govt never did anything for you

See the cool graphs at FRED