Wednesday, May 31, 2006

Insults: where are the new ideas?

So the Opposition Health spokesperson, Julia Gillard, got thrown out of Parliament today for calling the Health Minister, Tony Abbott, a "snivelling grub." Yesterday, Mr Abbott was not thrown out for saying the exact same insult. Commentators have called it a double standard.

Well sure, it is a double standard. But let me go out on a limb here and suggest that maybe it isn't a bad thing if the speaker throws out politicians for recycled insults. Yes, I know that Gillard was just being ironic. And that plays well in a sitcom. But what I really want to see is more innovation by our politicians in insults. It is critical for the entertainment function that is central to our democracy. In fact, that was what the Labor Party of old was really known for. Take Paul Keating for example:
  • "He has more hide than a team of elephants." (Keating on Howard)
  • "You boxhead you wouldn't know. You are flat out counting past ten." (Keating on Tuckey)
  • "(His performance) is like being flogged with a warm lettuce." (Keating on Hewson)
  • "The Opposition crowd could not raffle a chook in a pub" (Keating on everyone)
  • On each other ..
Whitlam: "That was a good speech. You should go back comrade, and get yourself an honours degree."
Keating: "What for ? Then I'd be like you."

But if all else fails we can just remember the late great Douglas Adams ...

"It gives me a headache just to try to think down to your level." (Marvin the Paranoid Android)

Let's face it, the Labor Party isn't going to get re-elected unless we see some real new ideas playing on their traditional strengths.

A small percent of a big number

I have taken a little time to get around to this, but a couple of weeks ago the Productivity Commission released a report into waste management. The blaze of publicity centered around their conclusion that only 1 percent of all plastic bags used in Australia find their way into streams and such, potentially choking wildlife to death. The PC reached the conclusion that perhaps a blanket ban on plastic bags would be over-kill. This is the kind of conclusion that economists normally latch onto -- you know, policies should have a proper weighing of costs and benefits. See Harry Clarke for an example and The Age for a write-up.

Now I was curious about this one because all of the reports reported the 1 percent (a small number) and concluded that plastic bags were a small problem. But 1 percent isn't a number at all, but a ratio. So what is the number?

Well buried deep in the PC report is the total number of bags consumed by Australians per day: 8 million. So that means that 80,000 bags a day are going into streams and such. That translates to 3 million per year. Now that seems to me like a big number. In 2005, this number was 34 percent less than 2002 because of the campaigns against plastic bags; that is 1 million less. (According to other sites, the total might actually be many times higher perhaps of the order of 60 million).

The issue with regard to the 1 percent, therefore, is that it doesn't tell us whether plastic bags are a problem or not. The magnitude will tell us more about the cost. But it does tell us that policies designed to reduce overall plastic bag usage might be hitting at the wrong end of the problem. Instead, we likely need to spend money limiting the amount of plastic bags that enter into streams. That would directly hit upon the cost.

[Of course, it could all be because of a few offenders and not general practices. In this case, we need even better targetted policies. See this New Yorker article by Malcolm Gladwell for more].

Tuesday, May 30, 2006

Starting out elsewhere

New research on the career paths of academic economists tells us pursuing careers in Australia something very important: consider starting your career elsewhere. Stanford's Paul Oyer has studied the career paths of economists conditioning on the status of their initial job placement. Now of course initial job is an indicator of quality but it also is driven by other factors; principally, the state of the academic labour market. When there is high demand for faculty, an individual will likely get a higher placed job as compared to situations were there is low demand. Come out in a boom year and you have a 40-60% greater chance of ending up in a Top 50 department later in your career or getting a Top 5 publication in your first decade.

There have been a few write-ups about this paper recently (see, for example, Joel Waldfogel in Slate; Greg Mankiw; and Mark Thoma). All have the advice work hard early or you're stuffed. That is nice but you could also have advised people to change their surname to an earlier name in the alphabet because we do not really know why the market for academics appears to be operating based on random factors and not more efficiently sorting.

Now the argument being made of course is that after the fact there is efficient sorting and that initial placement actually affects academic productivity. In that case there is a cautionary tale for those starting out. As I sit here well outside the top 50 (at 106 according to the measure Oyer used) I figure I might be able to offer a different perspective.

If I were to guess, the main distinguishing factor is the research environment. As you move from the Top 50, the time available for research diminishes greatly. Teaching loads are higher and in smaller departments so are administrative loads. In my initial job at the University of New South Wales (ranked 135) the teaching loads at the time (I was there from 1994 to 1996) were extreme. In the semester before I left I was teaching between 12 and 18 hours a week (mostly lectures) across 5 different subjects. I taught in 8 different courses ranging across macroeconomics, microeconomics from 1st year undergraduate to PhD. Not surprisingly, it was rather difficult to get things done. Hopefully, things have improved since then for junior faculty. (At the time, senior faculty had lower teaching loads).

The reasons why I moved to Melbourne should be obvious but it is a very different environment here. In both the Business School (where I am) and the Economics Department teaching loads for research active faculty are very low; especially compared with simlarly ranked institutions. And it wasn't until I came here that I was able to hit top tier journals. The experience of my colleague Catherine de Fontenay who made a similar move also attests to this.

So my advice to those starting out is to value your time appropriately and make sure you have guarantees regarding your teaching load. My strong guess is that is the critical variable driving Oyer's findings.

[PS. Oyer relies on the ranking provided by for his study. It is based on the quality of publications of a department's top 15 authors. is a great resource for those choosing PhD programs and was established by University of Melbourne economics PhD student Christian Roessler. Someone to watch out for on the market soon.]

[PPS. You might wonder why I went to UNSW first. Well, I had a Fulbright Scholarship that required me to come back to Australia. I did and have been very happy overall with that (especially for my personal life!). Of course, Oyer's study suggests that you might think twice about taking one of these scholarships.]

[PPPS. All of this only enhances the rationale for free immigration amongst academics].

Monday, May 29, 2006

Optimal supermarket queuing

Economists think alot about queues whenever they are standing in them. For example, Steve Levitt became preoccupied with Disneyland queues earlier this month.

Today, my co-author, Andrew Leigh recounts his supermarket experience. He ponders the difficult issue of what line to stand in and concludes that it may be best to make your assessment, go to the nearest queue and stick to it. Queue picking is a hard issue. It is a little like an auction. You are observing check-out's bids for your patronage. The shorter queue reflects supply and demand. It may be short because checking out is efficient or it may be short because others have worked out that it is hopelessly inefficient. What is the truth also depends upon the ratio of queues to queuers.

This means that a static assessment of your options is not enough to make a long term judgment. You need to observe the dynamics of the situation before you can judge and you may want to update and change queues. The problem is that involves a switching cost as you have made a sunk investment in a particular queue and would be forced to go back to the start by re-optimising.

What you need to make this all much better is one of the following:

  • Real markets: you should be able to pay to get a better place in the queue. See this article in Slate.
  • Reverse queuing: Steven Landsburg in Slate suggested that we might change the convention and have arrivals to queues go to the front rather than the back. His issue is that everytime someone joins a queue that imposes costs on those who come later. That won't happen if people can join the front of the queue. In the context of supermarkets it would be those at the back of the queue jumping around to see if they should join a longer queue; assessing the speed of the checkout and so forth.
  • The one queue hypothesis: queuing theory tells us that having many check out queues is hopelessly sub-optimal. Better to have a single queue leading to multiple check outs as they become available. Average waiting times are much much less.
  • Crying children: the best way to improve your own waiting time is to have a crying child. If your child is not crying, do something to make them cry. I can tell you that it works a treat. No one wants to stand in a long queue with a crying child and you can move to the front so minimise that pain.

In Hansard ...

Earlier this month I testified before the Australian Parliament on the impact of the Reserve Bank's credit card reforms. For those of you who can't get enough of this, the transcript is now in Hansard. Click here to download the day. I start at about page 20 and blather on for about 8 pages.

Updated Web Page

It has been about 6 years since I have done this but I have redesigned by academic home page. Click here to see the result. The idea is to make it a more 'living document' than I had previously with more about 'what's new' than 'what's old.'

Sunday, May 28, 2006

Game Theorist: Toilet Training and Incentives: Child No.2 (Part I)

There is a new post today on GameTheorist (my original blog I started in 2003; I mentioned it in an earlier post).

I decided to revitalise that blog in order collect together some of my longer posts on parenting issues. I have visions of a book -- did someone say Parentonomics? So GameTheorist contains some cross posts from this blog and I intend to continue to do that. I have more ideas to write about but they take a little longer and so the posts will be at irregular intervals.

Saturday, May 27, 2006

Opening Up Immigration

Lots of talk today on the web about an open letter proposal from Matthew Yglesias. He writes:
I'll believe that this is all about altruism when I see an open letter from economists demanding that we scrap the complicated H1B visa system and instead allow unrestricted immigration of foreign college professors.
Brad de Long and Greg Mankiw are happy to sign even if it might depress their own wages.

Here in Australia we have similar restrictions that create hurdles for hiring academics. Even getting a visa for a visit can be a struggle. So I will, of course, lend my support for a similar initiative here.

But let's be clear about one thing: I cannot claim that this will be purely altruistic. If all countries adopt free migration for academics, there is every chance that my wages could rise rather than fall. Remember competition has two edges. I may face more competition from overseas academics for jobs in Australia but at the same time I will have more options competing for me. What happens to my pay as a result of this is unknown.

Page 3 News

Our paper on "The Millennium Bub" appears to have made the news today (page 3 of The Age no less, "Y2K proved a turn-on"). Obviously, the article focused on the conceptions result but did quote liberally and accurately from the paper.

The Low Productivity Genius Factory

When I picked up The Genius Factory by David Plotz, I was expecting something a little different. The book was subtitled: Unravelling the Mysteries of the Nobel Prize Sperm Bank; speaking of the (in)famous experiment run by Robert Graham (the shatter-proof eyeglasses magnate) who supposedly recruited Nobel prize winners to 'improve' the world's human gene pool. Now whatever you think about the ethics of such an endeavour (and there is lots to think about there), it is very natural to be curious about what happened to those children. 20 or so years on, David Plotz -- a journalist at Slate -- set out to find out.

Here is what I was expecting: lots of kids, basically above average in IQ, and some out of this world amazing. Those latter ones burdened by expectations from pushy mothers. I should point out that I had no reason to expect this and had put no thought into my expectations. But that is what I thought would make a good story.

Here is what happened: very few kids, no real Nobel prize donors, lots of angst and in the end more an insight into sperm banks than the Nobel sperm bank. Nonetheless, I am happy to report, it was a compelling saga nonetheless.

At the outset, you may have wondered: why would Nobel prize winners donate to a sperm bank like this? I don't think that I am giving too much away about the book as a whole when I tell you that it turns out that they didn't. Three did apparently -- including William Shockley (no stranger to eugenics). The remainder were other high achievers (well for the most part) including one Olympian. So right there, this moves away from a story about a big genetic experiment.

There is a story still here about Graham and his plans; it is just that they didn't work out the way he intended. There is also a story about the controversy generated. Finally, there is a story about the mothers who utilised the bank but in many ways that turns out to be easy to understand. Moreover, when it comes down to it, today's sperm banks are modelled on similar principles: they make more money by supplying attractive sperm.

David Plotz turns this into a story about an industry. There are apparently 1 million children of anonymous sperm donors out there and there is considerable debate about the anonymity. Plotz, on a mission of journalistic exploration, is able to match donors and children on two occasions and recount what happens. It is those tales that are the meat of this book and make it well worth the read.

Ultimately, the Genius Factory itself had low productivity -- both for reasons of being ill-conceived but also because it wasn't implemented according to its original designs. The industry it lead, however, has moved the productivity of such factories to another level.

Thursday, May 25, 2006

The Y2K Bub

Much was foretold about the problems that might have befallen us on the day of the Millennium (1st January, 2000). Little happened, of course, that was detected by the human eye. But it appears the statistics have uncovered a little something; perhaps a hint of optimism. Perhaps a way to remember the ages of your children. Perhaps a good time. Who can tell?

Andrew Leigh and I have made a habit this year of looking at Australian data on births and deaths by day. There is lots of interesting stuff and I am sure we will tell more about them in due course. Among the less interesting but quite fascinating facts uncovered was that -- all other explanations of how many births and deaths there are on a day aside -- the 1st January, 2000 was a bigger than usual day for both births and deaths. The deaths bump wasn't statistically significant but the births one was. We estimated that births jumped by between 5 and 12 percent in the first week or so of the millennium as compared with the previous week.

Why might this have been so? Novelty value most likely. A fresh start for parents with some discretion over birth timing (through planned ceasrians or inducements). Or perhaps an easy way to remember ages. My son is turning 6 this year and all I have to remember is that it is 2006 to work that out.

Of course, curiousity can get the better of us. If we look 9 months ahead to September 2000, there was another bump in births; perhaps 3 to 4 percent. This was statistically significant too; enough to suggest that the 1st January was a bigger party night for some that year than it usually is.

Anyhow, you can read the paper in all its technical glory here. It is an empirical one; hence, the catchy (corny?) title, "The Millennium Bub." (See my earlier post about catchy titles).

Counting letters

Apparently, in a recent speech, Hillary Clinton said that "young people today think work is a four-letter word." I am not sure but was she implying that young people in generations past used to think work was something other than a four-letter word? If so, all those Spelling Bees in the US are paying off.

Catchy titles

Nothing pleases me more than having a clever title for an academic paper. Some that myself, co-authors or others have suggested for my papers include "First Author Conditions," "Licensing the Gale of Creative Destruction," "Inside the Black Box: A Look at the Container," and, of course, "Knowledge of Growth and the Growth of Knowledge."

[From Marginal Revolution] Hugo Mialon (Emory) has studied citation rates on academic papers in economics and has found, among other things, that catchy titles tend to increase citation rates for empirical papers but lower them for theoretical ones. Suffice it to say, most of my papers are theoretical, so this is bad news for me. I had better stick to titles like "Regulating Private Infrastructure Investment: Optimal Pricing for Access to Essential Facilities."

Wednesday, May 24, 2006

Picture in picture

[Via Boing Boing] This is as cool as it gets. Click here to see an 'infinite' photomosaic.

Obscene exec pay is not a prize

I normally like Tim Harford's analysis and conclusions about the frustrations of everyday life. However, this article in Forbes comes up short. Harford looks at the high level of executive pay and provokes us by suggesting that the pay is not for the exec's benefit but for the benefit of their underlings:
The ugly truth is that your boss is probably overpaid--and it's for your benefit, not his. Why? It might be because he isn't being paid for the work he does but, rather, to inspire you. In other words, we work our socks off in underpaying jobs in the hope that one day we'll win the rat race and become overpaid fat cats ourselves. Economists call this "tournament theory."

This an appealing theory for companies that have a policy of promotion from within. However, it does not apply to top level execs where many appointees are from outside companies.

Let's dissect the tournament argument. A company wants to motivate employees to outperform one another. They offer promotions with 'excessive' rewards. The rewards are greater than the person's immediate value to the company. However, seen as an incentive device they might make sense. So one could imagine that a company might commit to overpaying so as to save money motivating a mass of others; giving each a chance at a bigger prize.

But this all depends on the reward going to one of the contestants. If a CEO is an outside appointee that doesn't happen. In this case, the company is commiting to reward employees outside their own company. But they do not get the benefit from that (the higher productivity is elsehwere) so it does not make sense. [Of course, CEOs may be colluding but that is another matter].

Now you might argue that if there is a chance that an insider gets the job, then high exec pay expands the range of competition and may encourage more competition internally. But it also expands the field. So there is a trade-off. Competition can motivate but too many competitors can be de-motivating. Moreover, the CEO tournament doesn't run too often. So every time you actually appoint an outsider you are killing competition for awhile.

Paying people to watch ads

In an earlier post, I noted that the television-ad game is a funny one. In order to get viewers to watch ads they don't like, broadcasters intersperse them with television programs they do like.

Today, CBS have announced a new way to get people to watch ads. They are going to provide clues within ads that give viewers the chance to win prizes. This isn't such a new idea. Individual ads have often contained incentives to watch them. What is new is that it is being done at a broadcast level. Specifically, it is directly aimed at giving people an incentive not to skip ads using digital video recorders. [In this respect, it is similar to the Ayres-Nalebuff saving-lottery scheme].

Ultimately, the ideal would be to separate out the ad market from the television one and have people pay to watch television and to be paid to watch ads. Clearly, the latter is a market that is difficult to achieve as it is hard to monitor compliance. But, as a matter of principle, it is what one would want. Paid download television is a step in the right direction there giving people a paid opt-out option for ads.

A post I can't ignore

Scott Adams on The Dilbert Blog today has a provocative post (to me at least) entitled "How to Think Like an Economist." He says, very accurately:

The most important skill you learn in business and economics classes is how to compare things. The average person can be forgiven for lacking those skills. It’s not a natural capability. Like most things, it helps to be trained.

Economists do think alot about how to compare things although that is a task that is required only if certain questions are asked. .

His question today was "should the United States send $3 billion per year to Israel?" Adams then criticises previous comments on his post that named only the possible benefits of giving aid to Israel. He argued that to answer this question you need to compare those benefits to other possible uses for $3 billion.

This is right, but his criticism on his readers is unfair. His original question was "why do we give foreign aid to Israel?" To see why this is unfair, you need to know that economists make a distinction between normative questions (why should we do that) and positive questions (why do we do what we do). To answer normative questions requires being able to compare the activity in question to other alternatives. Sometimes that helps us understand a related positive question but not always.

For the Israel question, the distinction is important. Consider some of the good answers given by Adams' readers:

- Aid was part of the U.S. promise at the Camp David peace accords to get agreements between Israel and Egypt. Egypt gets about the same amount of U.S. aid as Israel. (How long did the U.S. agree to continue funding? Forever?)

- In exchange for U.S. aid, Israel is required to buy stuff from the U.S. (mostly military), thus lining the pockets of the military industrial complex.

- U.S. politicians don’t want to lose Jewish votes.

- Many Christians in the U.S. believe that the nation-state of Israel must be restored and the Temple Mount rebuilt prior to the return of Christ and the following "Tribulation." Thus, support for Israel as a nation-state is viewed as supporting God in history's culmination.
Only the last of these questions is one that requires comparing alternatives as to whether this is a good way to spend money in order to understand why the funds are spent. The first three do not. They are answers to the positive question without the same normative elements.

Answer three is political for which proper analysis is whether this is the best way for politicians to win elections. So there is a private comparison for politicians there. The first and second answers are that the funds are not funds but a payment for services (I guess three is like that to). In this case, the question is whether the services were worth paying for or not at the time agreements were made.

In the end, Scott Adams needs to be clearer when he asks a question like this so as to distinguish the positive from the normative.

Tuesday, May 23, 2006

What could have been

Comedy wise that is; click here. George W. Bush would have been doing this on SNL.


This is just a test post from my new Blackberry toy. They say I'll be addicted to it. But wasn't I addicted to email already?

You don't need no education

News today that apparently Einstein wasn't that great at maths. He was very good at thinking up broad ideas but not so good on the details of proofs. Even so he was able to derive E = mc^2 although only a few months after his main paper on special relativity.

This follows on from the well known tale that Einstein didn't speak properly until 8 or 9.

Just goes to show what you can get away with.

Monday, May 22, 2006

Neutral Networkity

An interesting debate has emerged in the United States regarding the concept of "network neutrality." This is the idea that Internet networks should not discriminate based on content. The debate involves lots of rhetoric and a lack of clarity on the economics of the situation. A regular reader provoked me into thinking about this issue and there is nothing like to demand to generate supply. And so supply I shall.

Basically, network neutrality, if adopted, would constrain internet backbone providers and ISPs from engaging in discriminatory practices with respect to websites. They would have to treat all web requests as equal in terms of traffic priority. Specifically, they would be prevented from charging web content providers (such as Google or CNN) for more favourable treatment on the network (e.g., faster downloads). The proponents argue that this will keep the Internet fair and allow equal access for content providers. Its critics say that it will reduce opportunities to earn greater returns on network investment and to reduce prices to Internet users. On that score, it is about as traditional a competition policy debate as you get.

To begin thinking about this, I note that the main push against network neutrality, not surprisingly, is from those who would be constrained by it -- the AT&T's, Verizons and the like -- Internet infrastructure providers. According to the Washington Post, AT&T Chair Ed Whitacre said that content providers were getting a free-ride: "They don't have any fiber out there. They don't have any wires. . . . They use my lines for free -- and that's bull," he said. "For a Google or a Yahoo or a Vonage or anybody to expect to use these pipes for free is nuts!''

Seems reasonable until you think about it for two nanoseconds. First, the content providers do actually pay for use. They reside on an infrastructure provider's network and pay for data transmitted. Moreover, that infrastructure provider is paid by its own users (those requesting content) and also by other infrastructure providers through interconnection (although, by choice, those payments between them are often set at zero -- a practice called peering). Second, the content providers, by investing in content, generate demand from users who are the infrastructure provider's customers. So they are paying, in the sense, that their efforts provide a reason for others to pay for the use of the pipes. You can't look at one side without considering the other. So the notion of free riding is ridiculous. Even more so when you think that when Google or Yahoo make improvements that generates more traffic, it is the AT&T's of the world that reap in the extra dollars from users.

Perhaps it would be more instructive to consider the infrastructure provider's incentives to invest in higher speed Internet connections. Their argument there is that content providers benefit from this as it improves the quality of their products to users and hence they can make more money either directly from that (users paying for movie downloads and the like) or indirectly (from advertising). So the infrastructure providers want to be able to capture some of those additional returns by charging the content providers for the improved performance. And that means being able to have differential speeds for content providers depending upon whether they have paid or not -- a violation of network neutrality.

The proponents of network neutrality get concerned at this point. They worry that there will be two classes of content providers -- those who pay for high speed and those who do not. Absent any other reason to prefer one over the other, users will go to the high speed sites. Smaller content providers won't stand a chance, they argue, and the free flow of ideas and innovation will be harmed. (See Tim Wu in Slate for an outline of this argument).

While they are correct about the effect of such non-neutrality, the proponents of network neutrality don't really hit on the key point: that users who choose a high speed content provider over another do not internalise the costs they are causing by this. This is the core problem of network non-neutrality: it is not neutral for the providers but too neutral for the users. That is, there is 'neutral networkity.'

The alternative to network non-neutrality as a means of funding high speed connections is non-neutral networkity. In this situation, users pay for a high speed connection (as suggested by Adam Penenberg in Slate). Then, regardless of which content provider they turn to, speed won't be the issue. People will only get a high speed Google if they have paid for it. It will not depend on whether Google has paid for it or not. Now Google may want them to have a high speed connection but they are going to have to give users a broad reason for paying for it. The advantage of this, however, is that there will be no disadvantage to content providers -- small or large. Moreover, infrastructure providers will be able to get a return on investments in network improvements so long as users are willing to pay for them.

What this suggests is that when it comes to high speed connections, the choice between network neutrality and non-neutrality is a choice between these:

  • (Network neutrality): having the users decide the speed of their connection, with access to all content on equal terms, or
  • (Neutral networkity): having the content providers decide the speed of their connnection, with access to all users at equal speeds.

There will be have and have-nots either way. The question is what that is defined over -- content or speed. For proponents of network neutrality, the dividing line is to be over speed.

For me, framing things this way, really neutralises the debate (if you'll pardon the pun as I know you won't). It is hard to know what the best dividing line is although I have some sympathies with having people pay for speed and internalise costs they impose. This is why when credit card reforms were being debated, I advocated getting rid of prohibitions on surcharges for credit card customers. In the absence of these, users had too much neutrality with respect to their choice of payment instrument. Put a surcharge in and they are forced to think about the consequences of their actions.

But even this is a little simplistic. I suggest putting costs with the users because it is they who request Internet traffic. But there are probably more elaborate models than requiring the user to make a choice between getting all their traffic at high speed or none. In reality, they will want high speed for some services but may be willing to wait for others. Ironically, movie or music downloads are an excellent example of the latter while streaming video would be an example of the former. So what you would want would be for users to nominate which web sites they want at high speed and which they do not want and pay for it according -- just like peak-load pricing for energy or dare I say it, congestion pricing for roads.

The problem with network neutrality and neutral networkity is that we are forced to choose. The ideal would be a site-by-site option. In the absence of that, we would need a situation where ISPs were sufficiently diverse so that consumers might be able to choose options that approximated this. It is unclear that there is sufficient competition between infrastructure providers to generate that. Thus, policy-makers will face a difficult trade-off but will ultimately have to make a choice on the issue.

In the end, what is of greater concern is the potential for exclusivity or exclusionary deals. Without network neutrality, the concern is that an AT&T would sign on a Blockbuster or iTunes or someone exclusively and so to get high speed access to them, a user would have to be an AT&T subscriber. This may generate market power and reduce competition between infrastructure providers. Network neutrality blocks this possibility but not the idea that a Blockbuster may pay AT&T some kickback based on the number of high speed subscribers it has. Thus, a backdoor form of exclusionary conduct could still arise.

Similarly, in Australia, Telstra's BigPond -- an ISP with the greatest share of the market -- has a number of content deals; e.g., with the AFL. This enables it to allow its users to access those sites without counting the usage in their monthly download allowance. It can do the same for its proprietary music and movie download services. Providers of other similar services are, therefore, at a disadvantage with respect to BigPond customers. Other ISPs need not be at a disadvantage though if they can also effectively set a lower price to users who access those services. However, to the extent that these are owned by Telstra, they have an advantage there.

For this reason, the debate should not be over network neutrality per se but the use of exclusive deals offered through particular content providers and integration of content and infrastructure providers. It is there that some real problems could arise.

Sunday, May 21, 2006

The penny drops

Sometimes we can be a little slow. A few weeks back I wrote about's wrinkly pricing. This is where it gives users of its A9 search engine a 1.57% discount on its products when they conduct a certain number of searches. say that the 1.57 is approximately pi/2; that is, pi as in 3.14 etc. Apart from noting that that was a non-round number I thought that they were just being mathematically cute in the way Google often is.

Well, the penny has finally dropped for me at least. The discount is a reward for searches that itself make Amazon more money through advertising (perhaps of its own products). So the discount or rebate is a share of the value or 'pie' created from this type of activity. It would 'split the pie' as they say in negotiations. Hence, pi/2. It was not mathematically cute but economically cute. La di da.

Saturday, May 20, 2006

Piracy cost claims versus World Wealth

In a provocative post, Donny's Blog calculates that if the RIAA got its way and was able to extract $150,000 per infringement, in one month it would accumulate more money than the annual GDP of France. In the end, some $11,441 billion. This seems a tad more than the $300 million per year the RIAA estimates it is losing because of downloads. To recover that, only 2000 prosecutions would need to be successful.

I enjoy these types of calculations, but it would be remiss of me not to point out the obvious: the fines for those prosecuted are much more than the cost imposed by them on the music industry. This is consistent with the economics of crime and penalties that tells us that to deter an activity when you can't catch everyone you need to set penalties high enough that people who gamble on not getting caught won't do it.

But this calculation does enable us to assess what the probability of being caught might be. Let's suppose that the RIAA targets 2,000 successful prosecutions per year. Using the numbers that got us the $11 trillion cost per month, there are possibly 1 billion downloaded songs per year. Thus, your probability of being caught is 2 a million. To back out the deterring penalty we take this and divide it through the cost of downloading a song legally (that is, $1). That gives us $500,000. [I guess if we could adjust for US versus other downloads it may be less].

So according to this, the RIAA's penalties are too low and not too high as the blog was suggesting. Perhaps that is why downloading still occurs.

And the code is ... [Spoiler alert]

Last post I described the mystery in The Da Vinci Code movie that wasn't in the book. Namely, how did they get all that great presentation material in lectures. It really was wonderful and I couldn't imagine they could have done it with PowerPoint. I said that I had solved the mystery. Don't read on if you don't want this revealed.

OK, the first clue can be seen in the audience of Robert Langdon's lecture. At least three people are listening to iPods. Then when he is signing books, one of those people is still listening to an iPod in the line while eating something round and red.

Then, in the background of the French Mansion where we get The Last Supper lecture from Ian MACCallum there is a computer in the background that looks much like an iMac but it is blurry.

Finally, Langdon solves the mystery when he searches for a 5 letter word to enter into the codex. And the word is "A P P L E." Ahhh. I knew it! No wonder the evangelists are up in arms!

[Of course, this doesn't explain why everyone in the movie uses Sony phones].

I cracked the Code

Last night, we went to see The Da Vinci Code. It was pretty much exactly like the book. That would normally lead to the conclusion "if you liked the book, you'd like the movie." I'd say it probably is more accurate to say that "if you liked the book, you won't hate the movie." But the problem really is that the best bit about the book was the following tactic: towards the end of relatively short chapters, Professor Langdon would say something like "unless it really isn't a cup?" or "I've got it now." Then you could have to read on to find out what he meant. This you would do about 1000 times until you were at the end of the book. Then you would remark: "boy, that was a real page turner!" It was as hard to leave a half read book of this kind as it would be to leave a half eaten box of Krispy Kreame donuts.

The problem is that if you have read the book, this experience of continual revelation isn't there. The best that you can hope for is that you forgot what clues were revealed and you are surprised again. For me at least that didn't happen often. I wonder what the movie experience would be like if you hadn't ready the book? We will have to force those 3 people to go so we can find out.

What you do get in the movie (and it is not really worth the ticket price for just that) is better graphics. Now I don't mean this in terms of CGI but instead in lecture presentations. Robert Langdon presents a book tour lecture with some superb use of what might have been PowerPoint but seemed to good so you can't know. Then the evil history buff uses some other lecture presentation material to move around people in the Last Supper and show us other things. Now you just don't get that in the book. But the real mystery to me was "how did they do that?" Where can I get my hands on that presentation software? It may really beef up my lectures.

As I watched the movie the clues were revealed. But I'll tell you about that in my next post (don't read it if you don't want the mystery revealed).

Friday, May 19, 2006

Media mergers

Today we held our '3 C's' Conference on media mergers at MBS with Simon Anderson, Graeme Samuel (ACCC) and Kim Williams (CEO Foxtel) speaking. Some highlights ....
  • Simon Anderson spoke to our joint paper on what is different about media mergers? Interestingly, in commentary on it, Stephen King suggested that because of their two-sided nature -- supplying viewers and advertisers -- it is likely that any large merger will require authorisation and could not be analysed solely on competitive grounds.
  • Graeme Samuel demonstrated how in touch he was with latest technological developments in the media especially the issues associated with the use of the Internet to produce alternatives to consumers than traditional media. This, of course, lent itself directly to concerns over control of the Internet echoing my 2000 submission to the Productivity Commission on the same topic.
  • Kim Williams outlined Foxtel's new strategy of getting 'same day' content of television from the US so that Australians don't have to wait between 6 months and foreever to view television. As I wrote recently, that might help slow illegal downloads.

A very interesting day suggesting very interesting times ahead.

Four letter word paper title

Ohio State University's Christopher Fairman swears his way into a legal study of the relationship between taboo (linguistically speaking) and the law. [Click here and you will immediately see what I mean]. He has some interesting ideas about self-censorship but ultimately concludes that the law is a mess when it comes to these things.

Thursday, May 18, 2006

Maybe we can learn from the world

Recently, as part of on-going work into an inquiry into public support for science and innovation in Australia, the Productivity Commission (PC) released a very large (595 page) econometric analysis to uncover the social rate of return for business R&D expenditure in Australia. You can access that report here.

Now most econometric studies of this kind have found that the social rate of return to R&D is very very high (greater than 100 percent). One might have expected that the PC would find similar things. However, they do not. They find it hard to find a significant impact of domestic R&D expenditure on productivity growth although foreign knowledge does have a large impact.

This sort of result can lead to the following conclusion: perhaps we shouldn't support R&D in Australia at all and instead get knowledge from the rest of the world. After all, the economy has travelled well without it for the last 14 or so years. I call this conclusion: the leech policy (yes, clearly it is not a value free term but it is accurate).

However, in my reading of the report, there is an irony to the PC's findings. In contrast to most other studies of the social rate of return of R&D in small countries, the PC focus exclusively on Australia. Hence, their time series sample size is just 35 years. Now when you have a small sample size, the problem is that it is hard to get precise estimates. The PC realise this but instead of getting more data (you know as others have done) they appear to throw their hands up and claim that we just don't know what the impact is.

But here is the irony. The leech policy is that we should learn exclusively from the rest of the world. However, the PC's own econometric analysis explicitly assumes that they do not believe we can learn anything from the rest of the world to inform us as to the likely social rate of return on R&D! That is, they do not use the data and hence, experience of other countries -- controlling for obvious differences but respecting similarities (e.g., the global economic cycle) -- to assist them in understanding what the R&D does in Australia. That knowledge is useful. In other areas of public policy it goes under the term 'benchmarking.' In macroeconometrics, it is about the law of large numbers. When you have a small sample you add to that other data to improve the numbers.

So my message to the PC is, let's learn from the rest of the world when thinking about the likely impact of our own policies. After all, the knowledge is there for the leeching.

Wednesday, May 17, 2006

Quiggin on Advertising

John Quiggin has a nice post on the differences or lack thereof between Galbraith and Becker and Murphy on advertising --- namely, both assume advertising is uniformative but B&M allow for the possibility that consumers might like it.

John Quiggin suggests that because we are 'paid' to watch ads on television -- essentially by the lure of television programs -- that it must be the case that ads are bad and do not provide satisfaction.

While I don't disagree with this conclusion (I think that is likely to be right because people spend money to avoid ads), the economic logic behind is argument is incomplete. To see this, suppose that everyone loved ads but some people liked them more than others. This means that a broadcaster of ads only (with no TV shows) will not attract all viewers. That may reduce their advertising revenues and so it is conceivable that even in this case the broadcaster might offer the inducement of television shows in order to attract more ad-viewers.

Thus, observations that people watch television shows does not prove that they like or hate ads. Now, if there was an explicit monetary payment that would be another matter.

What might be a better proof that people hate ads is where we don't see them: e.g., in books.

[Update: John said that he needed to ponder the welfare implications of a model of broadcast television with advertising. No need. Simon Anderson and Stephen Coate have done all the work in a paper published in the Review of Economic Studies in October 2005.]

Tuesday, May 16, 2006

My small world

Harry Clarke reviews an article published in the latest Journal of Political Economy of the small world of academic economists. It seems that most economists have few co-authors who themselves do not co-author with one another. Thus, links are characterised by a large interconnection of star graph formations.

Naturally, this sort of thing prompts one to look at their own 'networked' situation. I looked at my academic publications (not including textbooks or working papers). To date (since my first publication in 1990) I have 88 published works or which 67% are co-authored. There are 25 distinct co-authors of whom only 3 pairs have co-authored with each other outside of a collaboration with me. Out of interest my main co-authors are Stephen King (29), Philip Williams (7), Scott Stern (6), Catherine de Fontenay (5) with the rest only 1 or 2 papers.

For other economists, 40.9% of papers are co-authored with 1.67 different co-authors. For the top 100 economists, 84.8% are co-authored with an average of 25.31 co-authors. So relative to that group I have less co-authored work for about the same number of co-authors.

Last night I replayed recorded TV

Last night I watched an "Enough Rope" episode I recorded last week on my Foxtel IQ. I missed a bit when I was called upstairs for Ghostbusting duties, so I rewound the program and played it again. It turns out that that act was an illegal violation of new copyright laws in Australia!

There was a sense that when copyright laws in Australia actually ended up making it illegal to record television programs (on a VCR, DVD or DVR) for personal use, it was a harmless omission in history. Copyright laws just not fitting in with real trends that sensible people knew would not make sense.

So when the government finally gets around to reforming the laws -- through deliberative thought -- you would think that the end solution would make some sense. Not so and Australia is becoming a world-wide laughing stock as a result. Here is a link to the Attorney General's press release on the subject. But it is the helpful Q&As that draw the eye:

Does this mean I can record my favourite television or radio programto enjoy later?
Yes. For the first time you will be able to record most television or radio program at home to enjoy at a later time. This will allow you to watch or listen to a program as it was made available to the public at the time of the original broadcast.
How long can I keep the recording?
The recording must be deleted after one use. It will not be possible to use the recording over and over again.
Can I make a collection of copied television and radio programs?
No. You will not be able to burn a collection (or library) of your favourite programs on DVD or CD to keep. (It will be permitted to record a programon DVD or CD but only temporarily until you watch or listen to it for the first time.)
What can I do with recorded program?
You can watch or listen to the recording with your family or friends. It will not be permitted to sell or hire a recording or to play it at school or work or in any kind of public audience.
Can I give a recording I have made to a friend?
No. A recording is for the personal use of the person who made it. You can invite a friend over to watch or listen to your recording but you can't lend or give it to a friend to take home with them.

Did someone say 'ludicrous'? Is it April 1st?

As you can see here, by replaying even bits of television you are breaking the law. If you watch a program and then let your spouse what it later you are breaking the law.

What next? If you tell someone about the program you watched last night are you violating copyright? Or should I say, if you tell two people!

But it all gets worse. You are of course not allowed to share music with friends or family. Make sense? Well, think about that wedding video. Better make sure it doesn't have any songs playing in the background because if you make a copy of it for grandma you are violating copyright law. And don't even think about backing the wedding video up. If that has music on it, backing up is illegal too.

If the goal was to get people to take the law seriously, then this surely has only made matters worse. It invites illegality. Like me, I replayed a recorded show but it is OK I didn't inhale.

[UPDATE: OK I got the evil plan. When you fast forward through commercial breaks, you end up missing the beginning when the program starts and so you skip back. Technically, you have replayed and so that is what this is all about. Even if you have a Tivo or PC with automatic skip back technically you are still replaying. So it is all about viewing the ads!]

At last, superannuation I can understand

As an economist, people often ask me what the changes to the superannuation laws will mean for them. My response is that when I work out what the previous laws meant, I might have a hope of working out what the changes to those laws would mean. Frankly, all I know is that the government forces me to save and wants me to believe I am getting some form of tax advantage by doing so. In my mind, however, it is all a tax since I have no choice to do what I currently do and can't work out what it would mean to actually do more. [Given that I am being forced to do something, it stands to reason that I would not ordinarily want to do more so maybe it is all quite easy].

[From Marginal Revolution], Forbes has a new "Why Not?" article by Ian Ayres and Barry Nalebuff on how to encourage retirement savings. Now this is a scheme I can understand. Here is the relevant bit:

A lottery savings ticket would look just like a lotto ticket, scratch like a lotto ticket, cost a buck and pay out the same prizes. The only difference would be that half the revenue would be earmarked for a personal retirement savings account rather than for education. There would still be about a third for prizes and the remainder for administering the game. Setting up a personal retirement account would be no more difficult than setting up a mutual fund. Players would receive a swipeable card that would automatically credit a portion of each losing ticket to the player's retirement account...

Some 20 million Americans spend at least $1,000 a year on lottery tickets. For these heavy purchasers the new tickets would increase their personal savings by $500 a year. Invested over 40 years, these savings tickets would generate an expected retirement nest egg of $200,000. This is a lot of money for the mostly not very prosperous crowd who buy lottery tickets every week.

It seems to me that this is nothing short of brilliant as it mirrors, but in a more transparent way, what we currently do. We take money and put it into a casino called a mutual fund in the hopes of 'making it big.' The problem is that it takes a PhD in finance to calculate the probabilities on that whereas a lottery is fairly easy. Indeed, all of our consumer protection laws in this area try to bind funds in putting information in lottery-like terms.

In the end, however, you are just putting the money into yet another lottery but in a way that shares risk across individuals.

Ironically, the objection that will prevent this from ever happening is that it would encourage gambling. Yeah, clearly getting people to put their hard earned money directly into the stock market is completely different!

Monday, May 15, 2006

Not even on Frontline

We have been re-watching Frontline on DVD these last few weeks [highly recommended by the way] but not even there could you have seen or imagined anything like this clip on youtube.

The best way to watch it is just to watch it first and then 30 or so seconds in take a look at the description. You will be stunned but not as stunned as the guy being interviewed.

Testifying on credit

No sooner had I returned to Melbourne after testifying at a Parliamentary inquiry on the credit card reforms than a story on the day's events had appeared online. Here is the entry from and a similar one from The Age. It appears my "they appear didn't have much impact" message was noted but others are concerned about bank shareholders losing at the expense of retailer shareholders which, by the way, isn't really clear at all.

The inquiry was an interesting experience. Six MPs on the Committee and those asking questions seemed to have put some thought into it and had read the submissions which was gratifying. Not sure where all this is going to lead but I will continue to monitor the situation.

Sunday, May 14, 2006

The expanding domain of ads (SSRN)

The Social Science Research Network (or SSRN) is one of the main repositories of working papers in the social sciences. I discovered today that it now carries ads.

Here is an example of one of the more popular of my papers hosted on SSRN. You'll notice the Google Adsense links on the right hand side. It contains ads for risk analysis and even photocopying. An interesting mix for a paper on regulated pricing for access to infrastructure.

More amusingly are the number of Melbourne bicycle ads for my paper on "Markets for Ownership" but also an ad for the Macquarie Graduate School of Management linked to my paper on "Operationalizing Value-Based Business Strategy."

I only mention this to complement some of my earlier posts on the expanding domain of ads (especially the idea that books might contain them). After all, if they can be linked to relatively obscure academic papers can there really be any limits to their domain?

The Long Con

I read a great piece by Mitchell Zuckoff in the current issue of The New Yorker where he provides an account about how a psychotherapist got taken in by a Nigerian e-mail scam. You can read the article here. This is not an "it could have happened to you" story. Everyone who has received Nigerian e-mails with promises of shares of ill gotten riches and ignored them would not have gotten into trouble.

However, it shows how much trouble you can get into through both greed and bad luck (in the form of checks being cashed that shouldn't have cleared). It is a gripping tale. The victim in this case became the fraudster and ended up paying dearly for his crimes.

I used to enjoy the narrative of these e-mails. The story behind them and the attempts to give the reader a central role. I also enjoyed the potential returns. The early ones promised a few million but I once received one that promised half a billion dollars. Now that has a really gets you to think.

The message here is that zero (being a probability of any legitimacy) times a very large number is still zero.

Taking the p...

In the "I thought I'd seen it all" category, it is a little hard to see from my mobile phone shot, but here is the urinal from "Middle Brighton Baths" (a restaurant in Melbourne). Yes, it has a plasma television screen built in. At the time, it was showing CNN.

Suffice it to say I couldn't do it. I worship television way too much. But don't despair, many others have taken the opportunity.

Of course, this all may make sense of the new Nintendo "Wii." Hook that up here and it will give a whole new meaning to point and shoot.

Saturday, May 13, 2006

Most expensive Google words

I came across this late but here is a list of the most expensive words on Google. You may not be aware but those links down the right hand side of Google search results are the results of bids in an auction. Advertisers bid for priority on the page and pay by the click (with some adjustments that need not concern us here). The words here are those attracting the highest bids.

Number one relates to asbestos (click here for an example). If you click any of the sponsors (and I don't recommend that you do), you will cost them a packet. Almost all the top words have to do with lawyers (in particular wrongful death) and mortgages. Surprisingly, travel doesn't rate the same way which is where I do most of my sponsored clicking.

This all relates to my earlier post regarding high bidding for keywords by rivals.

But it all demonstrates that all that early Internet hoopla regarding bidding for domain names became pretty much irrelevant after Google, Yahoo and company became the standard way of searching for what you want.

Friday, May 12, 2006

Review of credit card reforms

Today's Age reports the consumer groups have claimed that credit card reforrms have not gone for enough. I have said previously that I don't think they have had much impact.

Next week the House of Representatives Standing Committee on Economics, Finance and Public Administration will be holding hearings on the credit card reforms and their impacts. I'll be testifying first thing Monday morning with my "where is the effect?" message. My submission says just that [click here to view it]. You'll be able to see a transcript here.

Full of Cadbury Dairy Milk

Former Patricks chair Chris Corrigan yesterday suggested that if the ACCC and its mergers team were to form a rock band it would be called "Flim Flam and the Flakes." I guess my long time co-author Stephen King would be one of the flakes.

I wondered what songs they might sing. A few came to mind:
  • "All my friends are getting married"
  • "D.I.V.O.R.C.E."
  • "Love and marriage"

and some special tributes to Chris: "Long train running," "Don't pay the ferryman" and, of course, "I love it when you call me names.

[Update: another source suggested adding "Fox on the Run"]

Thursday, May 11, 2006

Plot Impossible

I saw Mission Impossible III last week. Even if I wanted to give the plot away I couldn't. It wasn't really given to me. [I mean if anyone can tell me what the threat to life, liberty and the pursuit of happiness was this time, I'd like to know]. Suffice it to say I am happy to review it as "not as stupid as Mission Impossible II."

Now I think enough time has passed that I can give the plot of MI:II away so let me explain. In that movie, an Australian biotech company. Let me pause there. I know I should be pleased with the idea that it was plausible that an Australian company was responsible for an "innovation" that drove the plot of a Hollywood Blockbuster but, for reasons I'll explain, there is not a lot of shine there.

Back to the plot: in that movie, an Australian biotech company invents a cure to a major virus that could easily infect and kill the world's population. It patents it but here is the kicker, it has also invented the virus itself. The villan, who owns stock options in the biotech start-up, intends to release the virus, wait a little, then announce and sell the cure for what promises to be a sum near to the entire wealth of the world. They have the patent after all and, therefore, a monopoly.

On the face of it this seems like a great commercialisation strategy. However, the plan really reinforces the problems with commercialisation strategy. They are going to make money here only if the patent stands up. The problem is that when you are extorting the world's governments to buy the cure for the virus, the world's government might just realise: "hey, didn't we grant them this intellectual monopoly in the first place?" You can see the rest. Me thinks they might void the patent (which they can do) rather than pay out trillions to the Australian start-up.

So Tom Cruise really could have just stayed at home. This was hardly an impossible mission this time.

From this perspective, while the movie improves the reputation of Australian start-ups for inventiveness, it undermines them for the next step: commercialisation. If true, as I have suggested before, it also means that the government shouldn't be pouring more money into research capital but instead should think about how to improve commericialisation decisions and strategies.

The regional demand for ideas

Today, Google launched a beta version of Google Trends. You can put in a keyword and if it is popular enough, then you can see how its popularity changes over time, the impact of certain news events and the regional distribution of searches.

I can see already that we are going to enjoy this one. For instance, type "game theory" and it appears that most activity is coming from Bangalore, India. Note that by activity, it is the share of searches in a location devoted to the keyword. So it is not the absolute number of searches. Here are some other interesting ones:
  • "Download television": Sydney, Melbourne, Perth and Brisbane are all in the Top 5 (No.1 is Delhi)
  • "Auctions": Sydney, Adelaide and Auckland are all in the top 5
  • "Survivor": Sydney is in the top 5 but all the rest are Canadian
  • "Battlestar Galactica": Perth and Brisbane are in the top 5
  • "Star Wars": Australia is the top region
  • "Melbourne Business School": Melbourne is number 1 but the next three are all in India before we get to Sydney.
  • "AGSM": now this is interesting the two top cities (by a long long way) are both in Italy (Verona and Padova) followed by Sydney, Melbourne and Canberra.
  • "MBA": all of the top searchers are from India (by a long way).

This has got to be a good instrument for some regression somewhere.

Wednesday, May 10, 2006

The dark side of the JPE

The back page of the latest issue of the Journal of Political Economy (JPE) usually contains descriptions of references to economic ideas from literary sources.

From the back page of the latest issue (April, 2006):

Darth Vader and the Holdup Problem
In The Empire Strikes Back (part of the Star Wars saga), the evil Darth Vader set in motion a plan to lure Luke Skywalker (the hero) into a trap. To do this, Vader made a deal withLando Calrissian to facilitate Han Solo’s (Luke’s friend) capture and torture so that thisplan could be completed. In so doing, Vader agreed to free Solo’s companions, Princess Leia and Chewbacca (the Wookiee). On the basis of this undertaking, Lando betrayed Han and Leia to Vader.

Imperial Officer: Skywalker has just landed, my lord.

Vader: Good. See to it that he finds his way here. Calrissian, take the princess and the Wookiee to my ship.

Lando: You said they’d be left in the city under my supervision.

Vader: I am altering the deal. Pray I don’t alter it any further.

[Lawrence Kasdan and Leigh Brackett, Star Wars, Episode V, The Empire Strikes Back (script adaptation from a story by George Lucas), 1981]
I wonder who suggested this to them ;)

Tuesday, May 09, 2006

This prediction is not even wrong

In Slate, Sean Captain predicts that "your laptop will never replace your TV." His argument is not strictly about laptops but more about the prospects for download television. He argues that broadcast television will dominate because download television cannot deliver the same quality efficiently or more critically in a timely fashion.

Of course, this prediction suffers from the 'current infrastructure' fallacy. It is true that right here, right now, watching streaming television is not possible. However, waiting for downloaded television is but Captain dismisses this:
But the download-and-play model isn't a real solution to the Internet/HDTV intersection problem. The more time-sensitive a program is—sports, the news—the less sense downloading makes. The same goes for massively popular shows: Who wants to wait a day to download American Idol? Plus, why would broadcasters want to support 30 million simultaneous, bandwidth-hogging downloads when they could send out a single broadcast signal instead?

Well, let's dismiss one argument: there are television programs people are willing to wait for or there wouldn't be Tivo. Moreover, it assumes that downloading couldn't begin prior to broadcast. Why can't networks provide a download product that arrives completely on your PC at the same time as broadcast?

Second, it forgets that download television offers a tighter revenue stream -- whether by subscription or by ads (with better viewship information). So there are big incentives to do this even if the costs are higher. Moreover, for DVD releases there may be cheaper distribution this way and this will complement developments in download television.

It is tough to make definitive predictions and I am always sympathetic with ones which suggests that despite the hype the status quo will be maintained. But here Captain focusses on the wrong thing -- viewing from computers -- and doesn't ask the broader question as to whether the model of broadcast television will persist. For that reason, his prediction is not even wrong.

Thank the Lords of Kobol

I know that it is great news that the Tasmanian miners were released but I became aware today of some more terrific news: the SciFi channel is developing a prequel series to Battlestar Galactica called Caprica. It is set 50 years earlier at the time when Cylons are first developed.


I was involved in a short but interesting discussion today about whether the word 'blog' was a good word blog related activities. I argued that its chief virtue was that it could easily by made into verbs and adverbs such as blogging, blogged and blogable.

This lead to another thought: was 'Google' so successful in becoming known because it had the same verbability [yes, I know verb doesn't really have verbability]? That is, 'Google' is not only a noun (for the search engine) but a verb both present (googling), past (googled) and future tense (to google). Notice that this is a feature that Look Smart, Microsoft Search, Yahoo and Britannica do not have. I have never known anyone to yahoo themselves!

In economics, one reason Freakonomics has taken off is that it is now an adjective. Amongst my colleagues we talk often of 'freakonomicsy' ideas to describe ideas that Steve Levitt might pursue.

As a final example, consider Tivo. That product is both a noun (for the machine) and a verb (for what the machine does or has done). That is, it is common to have 'tivoed' a program.

The message here is that when choosing a name consider verbability. Of course, with Nintendo's new 'Wii' console, say whatever you want about that name, it may just have what it takes (depending upon what you are doing of course).

Final exam questions

When I first started this blog, my 'evil' strategy to build readership was to tell my students that my exam questions would be inspired by blog posts. [Here is that earlier post]. I did just that for the mid-term exam.

The final exam was very challenging. [Click here if you are interested in viewing it]. But the multiple choice questions were based on my post about movies and popcorn on which I had two posts in February and in April.

The only question now is whether I will have any readers after exams are over?

The Open Source Textbook

Preston McAfee is a not a stranger to textbook writing. His Competitive Solutions is a nice but low-tech textbook designed to give MBA students a feel for the economics of strategy.

Now he has done something far less marketable: an introductory economics text that is far from shy on the technical. While written assuming no prior economics knowledge, it has the technical (that is, mathematical) sophistication of an intermediate economics textbook. Here is what McAfee writes about it:

The way principles is taught embodies an inefficiency -- generally we motivate the analysis in principles but don't complete it, then perform the analysis in intermediate micro. Why not combine these two in one more thorough course? In this regard, managerial economics in business schools does a much better job (and the books are better, too, but are focused on business applications and not general economics).

"I should also mention that at Chicago, they did not offer what is known as a "principles" course, the watered-down, mind-numbing survey course that most universities offer as a first course in economics. At Chicago, they started right off at the intermediate microeconomics level. So I had the enormous advantage of starting off with challenging, intellectually coherent material and first-rate teachers. I was very fortunate." --From an interview with Paul Romer, Conversations with Economists: Interpreting Macroeconomics, edited by Brian Snowdon and Howard Vane, Edward Elgar, 1999.

Publishers normally hate these types of books. They are hard to format, hard to proof read and let's face it, there are not many introductory economics courses that teach this type of material.

The publishers are right of course, this is unlikely to be commercially strong. But that is not McAfee's goal. He was more interested in dissemination than profits and so he has provided his textbook as a free download. [Click here for it]. In effect, it is an open source project. All McAfee wants is attribution. After that, the rest is up to lecturers and students.

The advantages to this are numerous. First, it is free and so there is a saving right there. It is simply costless to ask students to read all or some of it. Second, it is electronic. That means that an errors or updates are easy to do. There is always a latest version and so lecturers can assign that. Finally, this truely open source. Lecturers will be able to adjust and create their own versions of the book.

But there are costs. It lacks the glitz and attractive formatting of commercial texts although that can be overrated. It also lacks the additional materials but even that is being dealt with by others. There are powerpoint slides available and even a podcast! You can also order, at what appears to be marginal cost, a printed version.

Don't tell my publisher but there is a good part of me that admires this project and wishes I had thought to do something like it for my own MBA textbook (now published by Thomson). Indeed, I did so for almost a decade with my own students but I wanted more dissemination. I don't have the stature of McAfee [his site currently has 80000! hits] so convincing a publisher to get on board was the way to go. Fortunately, it is alot cheaper than other MBA texts (maybe half the price) and so there is some benefit there.

Patent peer reviews

[From Boing Boing] News today that the United States Patent Office will be launching peer review of patents. The idea is that the overloaded work of the USPTO will be assisted by volunteering to vet patent applications. IBM, for one, have agreed to this.

This idea has a precedent: scientific peer reviewing. For the most part that works well and there is some alignment of skills in that 'contribution' is what is being evaluated. However, there should also be a wrinkle of concern given the commercial interests involved. In scientific work, there is no (well little) chance a peer will have invested in a rival's stock. For patents, how will referees be checked for conflict of interest?

A diversity of reviews will be required to provide a proper assessment of prior art. As an editor myself, it is hard enough to get one opinion let alone several. This should be an interesting pilot project.

Monday, May 08, 2006

The technological front in the advertising war

Philips has filed for a patent on a digital video recorder whose remote would be disabled from skipping ads unless the owner paid a fee. Here is the write up. Not surprisingly, Philips aren't seriously thinking of marketing this yet but with changes in digital broadcasting, the option for utilising this type of technology is improving.

The problem with television advertising (and for that matter any media advertising) is that it is fundamentally an unnatural marriage. We lure viewers attention for something they want and slip in something they don't want in the hope that it will accidentally have an impact. The accidents happen sufficiently often that much media is advertiser-funded.

Interestingly, while many people worry about the moral implications of piracy when purchasing media, there are few (well actually no) qualms about skipping ads. Moreover, both the VCR and now the DVR industry is thriving on it. People are willing to pay to ultimately deprive broadcasters of revenues.

When it comes down to it, the economic issue here is that there is a lack of a separate market for advertisers. Advertisers want to buy attention but they can only get it through an indirect means. It would be much better of they could pay for it directly (and yes I know some websites attempted to do this) and leave the media providers with traditional means of selling their goods: you know, by getting people to pay money for them. But early issues with distribution -- namely, that it was hard to charge people for non-encrypted broadcasts -- have left us with the 'free-to-air' model.

All indications are that, absent government intervention, that model may be scaled back. But as I have noted before, one of the problems is that where you have consumer attention for one thing, it is tempted to sell abit of that to another party. So even if we see more paying by consumers, we will still likely see advertising there. Thus, technologies that prevent advertising avoidance will be invented to combate those that assist it. The technological war will only intensify.

[Update: Tivo have moved to put advertisements on their 'Now Showing' page so you can watch them whenever you want. Now if they could mount a camera on the box and see that you are watching them this would have the makings of a 'being paid for watch ads' plan. For now, I wonder if they will reduce their monthly subscription fee because of those ads]

Sunday, May 07, 2006

Australian soccer birthdays

In today's New York Times Freakonomics column, Levitt and Dubner uncover a startling fact:

If you were to examine the birth certificates of every soccer player in next month's World Cup tournament, you would most likely find a noteworthy quirk: elite soccer players are more likely to have been born in the earlier months of the year than in the later months. If you then examined the European national youth teams that feed the World Cup and professional ranks, you would find this quirk to be even more pronounced. On recent English teams, for instance, half of the elite teenage soccer players were born in January, February or March, with the other half spread out over the remaining 9 months. In Germany, 52 elite youth players were born in the first three months of the year, with just 4 players born in the last three.
And what accounts for this. They argue that subtle differences in youth soccer entry:
Since youth sports are organized by age bracket, teams inevitably have a cutoff birth date. In the European youth soccer leagues, the cutoff date is Dec. 31. So when a coach is assessing two players in the same age bracket, one who happened to have been born in January and the other in December, the player born in January is likely to be bigger, stronger, more mature. Guess which player the coach is more likely to pick? He may be mistaking maturity for ability, but he is making his selection nonetheless. And once chosen, those January-born players are the ones who, year after year, receive the training, the deliberate practice and the feedback — to say nothing of the accompanying self-esteem — that will turn them into elites.

Well that is an interesting theory but let's check out the Australian socceroos who likely have a different cut off date for youth entry. If you go to Football Federation Australia, there is a remarkable set of information on the socceroos (both the senior and junior teams). Now I only look at the senior team but here are the results by month (players born): Jan (3), Feb (4), Mar (5), Apr (0), May (4), June (1), July (3), Aug (9), Sept (3), Oct (6), Nov (1), Dec (5). Out of 44 in the squad, 12 (27%) are in Jan-Mar in contrast to the European result of 50%. In Australia, the same were born in the last three months as in the first three. The only distortion seems to arise with few players in Apr-June (5) and the most in Jul-Sept (15).

I haven't been able to find out the cut-off date for youth qualifying in Australia. However, if it follows season, it is a good bet that it is 30th June. In this case, the Australian experience appears to mirror the German one.

But there is another issue at work. Particularly when they are young, soccer players might move country. In particular, there would be lots of opportunities to shift hemispheres. So I wonder whether there is a reinforcement effect for birthdays through migration. That is, you work out that you don't stand a chance having a career in Europe if you are born in Oct-Dec and so move to Australia and South America (and vice versa for Apr-June). This seems to be an easily testable hypothesis. It may help us determine precisely when in their life great soccer players are made.

Well-meaning demand and supply

In Project Syndicate, Peter Singer has an article about 'Fairtrade.' Fairtrade is a service that ensures that the ultimate product suppliers -- e.g., the growers of coffee, cotton and the like -- are paid a fair amount for their produce. It appears that some people object to this as being a poor way of helping the poor and that giving money directly to aid agencies may be better. Singer is right in that economists actually have no real objection to Fairtrade: afterall, it is product with certain characteristics and if there are consumers who are willing to pay more for those characteristics then so be it.

I agree with this line but am worried about consumer protection here. Are consumers really getting the product they think they are paying for? Now the one thing I am less worried about is that this might be a device for price discrimination: that fairtrade coffee prices to consumers are sold at a margin way above the additional compensation to coffee growers. At least the growers are getting additional compensation even if it is not cent-for-cent with the additional price consumers are paying. And the consumers are getting whatever additional satisfaction they are over and above what they paying. That is a win-win, it is just that there are a few more winners than just the growers.

What is more difficult to assess is whether growers are being made better off. I think that they probably are but it is not a given. To see this, suppose that would-be coffee purchasers come to growers and say: "we will pay you more than you are getting from your current evil multinational." Now, no self respecting grower would not take that deal. Indeed, they would all want it. So, how does Fairtrade choose who gets the better pay? If they go to some farms and not others, then there is inequity. If that gets back to consumers, it won't really be seen as fair. What they would have to do is get a little bit from all farms. But in this case, the returns to switching from other farm products to growing coffee will rise. And so there will be more coffee farmers.

That is not a bad thing in of itself, after all, if growing coffee now has more remuneration then farmers are getting more remuneration. So long as Fairtrade keeps the price it is paying the same, you might say that the system is working.

However, when every farmer is getting a share of Fairtrade traffic, they will competing more intensively to sell the remainder of their crop. To whom? 'Evil' multinationals. The increased supply of coffee means that they will pay lower prices for coffee. So, in effect, Fairtrade and their customers end up subsidising evil multinationals and their customers. Whoops!

Unless there are real shortages of coffee growing land and coffee farmers, the end result of Fairtrade is to reduce the costs associated with growing coffee for non-fairtrade trade. The additional margins the growers receive from Fairtrade are ploughed back into even lower prices for coffee sold to others. Indeed, it is conceivable and perhaps likely that no coffee grower will be better off as a result of this.

I must admit that I write all this with a heavy heart because it would be great if the market worked to deliver social demands. However, in this case, it just does not seem likely. Maybe direct aid would be better.

Poking around

Today's FT Magazine has an interesting article by Tim Harford of the world of competitive poker. Game theorists since von Neumann have been interested in the game and with $250m supposedly bet each year more are trying to use game theory and computer science to profit from poker. Of course, the one thing we know is that this is a zero-sum game, so there will be losers. The effort is in trying not to be one.

Saturday, May 06, 2006

Kauffman Foundation: Entrepreneurship Research Portal

The Kauffman Foundation who a few years ago awarded my co-author, Scott Stern, a medal for for excellence in entrepreneurship research, have established a research portal. You can access it here. Lots of good material for those interested in all aspects of entrepreneurship.

Friday, May 05, 2006

Postal insurance

[From Marginal Revolution] Today there is a store the the US Post Office is considering launching a stamp which can use to post a letter at any time in the future. This will hold even if, as is inevitable, stamp prices should rise. What this means is that you could confidently buy the stamps and not have to worry about having to put annoying little adjustments on when the price rises. There would be no reason not to stock up now. Moreover, the stamp would be priced at the same price as current first-class stamps.

How will this change the USPO's pricing behaviour? Before, when they put up postage prices, there would be an 'inframarginal effect' that spread over all postal customers: that is, the price of postage would rise to existing users and so most of them would end up paying more. Now, when the USPO puts up postage prices, there will be a large number of customers who are unaffected. This reduces the profits the USPO will make from putting up prices as they still suffer all of the costs of this as marginal customers turn away. So postage prices will rise more slowly than they have in the past.

Of course, this assumes that the type of customer who buys the fixed price stamp in bulk has the same willingness to pay for stamps as those who do not. This may not be the case. The fixed-price stamp offers two things: (i) more convenience for those who buy stamps in bulk for convenience; and (ii) insurance against future prices rises; also more valued by bulk purchasers. However, those bulk purchasers have alot of mail to send and likely are thinking more about that then 'emergency' letters that have high value but are not sent very often. In this case, the future marginal consumer will have a higher willingness to pay for stamps as compared to today. So things could flip and the USPO may be tempted to increase future stamp prices more rapidly.

While fun to theorise about, I suspect that with the post office under attack from electronic substitutes these days, they are constrained as it is and will want to think of products that simply make life more convenient. That is, they want to give people less reason rather than more to go to the post office.

Thursday, May 04, 2006

The Romer Model

Paul Krugman recently reviewed a new book by David Warsh, Knowledge and the Wealth of Nations. [Here is a link to some extracts from the review].

One bit got my interest ...

Maybe that slight sloppiness reflects Warsh's relative lack of interest in applications of increasing returns other than the one he believes to be most crucial: as an explanation of economic growth. He portrays a famous 1990 paper about increasing returns and growth by Paul Romer of Stanford University as a
sort of pivot around which the whole way economists see the world changed.

Now "Romer 1990" is a terrific paper — I wish I had written it, which is the highest praise one economist can give to another. Yet I don't think it can bear the weight Warsh places on it. Nor is it clear that increasing returns really did transform our understanding of economic growth. In fact, Warsh seems to concede as much. "So there is a new economics of knowledge. What has changed as a result? The answer, it seems to me, is not much."

I think Paul Krugman is living in a different academic world from mine. For me, the Romer model was a watershed. Let's first go to the statistics on influence -- not just academic but wider. If we look at you will find that the Romer's 1990 Journal of Political Economy paper receives 3122 citations. This paper was a follow-up to his 1986 paper that resolved a number of technical issues (with 3621 citations). These would place it at the top of influencial papers in economics in the last 20 years. By contrast, Paul Krugman's most cited 'increasing returns' work (his 1991 book Geography and Trade) received 2312 citations. Still alot but it was a book not a single paper.

What the Romer model did was identify the main issue for public policy with respect to economic growth: that is, that knowledge was a partially-excludable but non-rival good. What this meant is that the market would underprovide this as a matter of course but also provide us with too little innovation in terms of new products. That had been said before. What Romer showed was that this would lead to an additional and on-going distortion to the labour market for knowledge intensive workers. The returns to becoming a scientist or engineer were too low relative to other activities. It is this that would fundamentally limit growth rates both within a country but also across them as skilled workers migrated. This is what general equilibrium modelling was all about.

The Romer model was clear, it was precise and it was useable by others -- both theorists and empirical economists alike. And more importantly, its message was never misunderstood.

Games of honesty

A new post on the Freakonomics blog today describes a music artist, Jane Siberry, who sells on-line tracks by means of an honour system. No one has to pay but she posts statistics regarding what proportion of people have paid and what they paid. Suffice it to say, most pay her recommended price despite the ability to simply receive a 'gift.'

Stephen King tried a similar idea in 2000 selling a book on-line in chapter installments. He bypassed traditional book publishers for his novel, The Plant. Instead, he released the book in installments through his web site (, of course). The cost of each installment was initially $1 each the first three episodes (1) 5,000 words; (2) 6-7,000 words; (3) 10-12,000 words. Installments 4 through 7 or 8 would be much longer-perhaps as long as 25,000 words-and the download price would go up to $2.50.

The deal was this: so long as 75 percent of people who download an installment pay up (on his site or at he will publish the next installment. Note that it is downloads only and he is allowing people to distribute a particular download as widely as they wish. If fewer than 75 percent of those who download any installment pay, no further installment will be published

Here is a piece I wrote about that experiment. I speculated that it might have had a better chance of working had it had the transparency of the kind Siberry has used. The pitch was also put a little differently than Siberry. Rather than gifts, King appealed to guilt:
My friends, we have a chance to become Big Publishing’s worst nightmare. Not only are we going glueless, look Ma, no e-Book! No tiresome encryption! Want to print it and show it to a friend? Go ahead! There's only one catch: all this is on the honor system. Has to be. I’m counting on two things. The first is plain old honesty. “Take what you want and pay for it,” as the old saying goes. The second is that you'll like the story enough to want to read more. If you do want more, you have to pay. Remember: Pay and the story rolls. Steal and the story folds. No stealing from the blind newsboy!

Stephen King's experiment failed but that may be partly an issue of scale and partly an issue of poor design. It has been five years now, I wonder if someone will try it again.