The Determined Big Thinker

This has been a bad week for the challengers of 'conventional wisdom.' First, Jane Jacobs and now news that John Kenneth Galbraith has passed away at the age of 97. (The grand obituary was published today by the New York Times).

In many respects, JK Galbraith was the writer who got me into economics when I was in high school in much the same way as demand and supply didn't. He had a turn of phrase that inspired and communicated. His breadth of coverage, captivated all and challenged the way I looked at the world. It taught me to be wary to 'easy routes' and simplistic arguments; a value I carry with me to this day.

It was years later that I learned that far from being the centre of economics, the top of the list for a Nobel prize, Galbraith, while prominent, was not considered at the forefront of economic contributions. What is more, it is precisely those things that made him so appealing to me initially, that also pushed him to the fringe in academic economics.

People often like to talk about the market centric nature of the economics profession and to suggest that Galbraith didn't have a great impact there because he thought more about institutions than markets.

In fact, nothing could be further from the truth. His first major work on American Capitalism pointed out that the US economy didn't really look like a market economy at all with its large corporations and large unions so that a broader approach than market economics was needed to understand it. And by and large economists have heeded that call over the past 50 years.

Similarly, Galbraith's account of the stock market crash of 1929 remains a solidly neoclassical account of a market failure with arguments that still underpin our notions of booms and crashes to day. More importantly, his small but very provocative work, The Nature of Mass Poverty (1979), stands out as an early contribution of formal, equilibrium thinking to a field -- economic development -- that had been devoid of such things prior to that.

It is worth outlining that contribution a little more. In that book, the ideas of which were generated when he was US Ambassador to India, Galbraith argued that mass poverty was a bad equilibrium where surely better ones also existed. He suggested that the reason for this was that those in poorer countries faced an actual lower return to investment (particularly in human capital) than those in richer countries, precisely because the job opportunities for higher skill workers were not available. And why weren't they available? Because firms were not investing to utilise them as there were few high skill workers about.

This looked like bad news for poorer countries -- trapped in a vicious cycle. But it also offered hope. Policy interventions could break the chicken and egg problem that caused all of this and generate rapid growth. And what was number one on the list of such interventions: what we would term today as globalisation. Not just freer trade in goods and capital but most critically people. What better incentive for those in poorer countries to invest in education than the ability to tap into the high returns to education in richer ones. Immigration was the key to ending world poverty, wrote Galbraith. You can't get much more market-oriented than that.

It is Robert Solow, reviewing one of Galbraith's books, that best captured the divide between Galbraith and many other economics. Solow saw economists as "determined little thinkers." They spend time on marginal issues (literally) rather than being able to forecast the impact of radical change. The basic idea is economic theory is well equipped to handle some situations -- the dry stuff that most economists spend their time on -- but not for larger issues. Those require more than just economic theory to be dealt with an economists, Solow argued, do more good by staying away from them. Galbraith did not do this. His purpose was large and all encompassing. Galbraith was a determined big thinker. His books wrote of theories of everything but for that very reason did not yield straightforward solutions. Thus, no consensus could ever emerge around Galbraith. Economists didn't have the tools to work our whether he was right or wrong, even if he was provocative. I'll miss him.


Just a taste ...

"Economics is extremely useful as a form of employment for economists."

"If all else fails, immortality can always be assured by spectacular error."

"You will find that the State is the kind of organization which, though it does big things badly, does small things badly, too."

“Faced with the choice between changing one's mind and proving there is no need to do so, almost everyone gets busy on the proof.”

"The only function of economic forecasting is to make astrology look respectable.”

"Modesty is a vastly overrated virtue."

"Under capitalism, man exploits man. Under communism, it's just the opposite."

"Wealth is not without its advantages, and the case to the contrary, although it has often been made, has never proved widely persuasive."

Cloogle

Over the past week or so, I have been steadily going through the daily challenges on The Da Vinci Code Quest (brought to us by Google). I can recommend it thoroughly. It takes less than a minute but is a nice distraction.

The idea is to solve puzzles, reveal clues and use Google to solve the clues. Suffice it to say, there are alot of clues you can solve this way. This is going to make Dan Brown's next novel quiet a challenge: to find clues that a simple or more complex Google search couldn't solve. If not, there is going to be alot of Robert Langdon googled the two associated words on his mobile phone and headed straight for the Palazzo di Venezia in Rome!

Of course, this suggests an interesting novel twist. Whomever the villan is, such as the modern equivalent of the Knights Templar or CERN, will deliberately manipulate Google's page rank to have the wrong answers come up prominently on Google throwing Langdon off the sent. Now that idea is worth a 4 page chapter in a thriller! [Does anyone know if Dan Brown is reading this? Did I just become a Plot Troll?]

Profile of a troll

The FT (Wednesday, 25th April) had a profile of Nathan Myhrvold, a former Microsoft exec, who set up a company Intellectual Ventures, essentially for patent trolling. Here is one article and one video on what he is doing.

Following up from my earlier post defending patent trolls, there is a sense in which Myhrvold sees himself as providing liquidity in markets for ideas; especially as he employs people to generate patentable ideas.

But he also buying up patents of failed start-ups too. This situation can only be favourable to innovation: start-ups who can earn a little money even if they fail are more likely to attract investment funds in the first place. And the more patent trolls there are, the more that avenue for profits can work out in the innovator's favour.

Good popcorn and low ticket prices?

A few weekends ago, while I was writing an exam for my students, I got to thinking about popcorn and movies. Part of this thinking was inspired by this piece by Edward Jay Epstein that the entire movie theatre business was driven by popcorn and soft drink sales. That is, theatres competed not to be able to make money from movie tickets but from other sales. This appeared to make some sense given the high margins on those products and their persistence in the face of competition. [Something that was the subject of one of my earliest posts on this blog].

The theory goes like this. Consumers don't think about buying popcorn or not until they are at the movie theatre. That means two immediate things: (i) movie ticket prices will be all they look at when deciding where to go and (ii) that they can be subject to monopoly pricing for popcorn when they finally get there. But it also means that movie ticket prices will be discounted somewhat because the theatres expect to earn some money from other stuff.

But then, this has another implication. Movie theatres will earn much more from add-on sales (like popcorn, etc.) if they are much more tempting when people get to the theatre. So the theatres that provide great food options will earn more money from that and will have a bigger incentive to get people through the door. In competition with other theatres that means that their ticket price will be slightly lower. But do we see this? Do we see movie theatre with the lowest ticket prices having the best confectionary options? My causal observation suggests that this isn't happening. But if that is the case, how can Epstein be right in saying add-on sales drive the movie theatre business?

The price remains the same

Tyler Cowen today asks: why are all iTunes songs the same price? This is a good question because it is clearly the case that some songs are more popular than others and indeed have differential quality (see this CNN story today). All indications are that the real reason is as basic as: Apple wants simplicity so it can sell more iPods even if the music companies would like to be able to say more about pricing levels.

Of course, we should remember that while Apple practices this policy within countries, it does not between them (so much so that you could construct a currency index based on the differentials). But this is more support for the simplicity story than against it.

But when it comes down to it, if a one price fits all model is profit maximising, it implies that, from Apple's perspective at least, the price elasticity of demand for each song is the same at current demand levels. [Of course, I am assuming here that Apple is paying the same royalty per song for each song]. And Apple from time to time have free song downloads so maybe they have assessed that this is not too far off. One day, my empirical colleagues might be able to sort that out.

Ads on iTunes

Reports today that Apple is considering putting advertisements in iTunes. This is not as new as it seems as ads already appear embedded within Podcasts. But the ability to truely target viewers and know precisely who is watching what is a tempting prize for advertisers.

Of course, the real opportunity here would be for Apple to provide consumers with more options. I have earlier written that to provide books with and without ads, at different prices, might make sense for publishers. The same is true of podcasters and even those 'publishing' music. Provide users with the option to download a podcast for free with ads or pay for one without them. That allows you to match consumer preferences or dis-satisfaction over ads with additional sources of revenue to cover the largely fixed costs associated with providing content.

She loved her cities

News today that Jane Jacobs, the author of The Death and Life of Great American Cities and Cities and the Wealth of Nations, has passed away.

In an earlier academic life, she inspired myself and two of my classmates (Raphael Bostic and Scott Stern) to work on understanding what drove urban growth. The idea that cities had a life of their own and both a resistance to management and a fragility to their life should management go too far.

Her work saw details that economists would never worry about. For instance, she begins her primary work with an appreciation of the sidewalk as the lifeblood of neighbourhood communities and goes on to extoll the virtues of aged buildings and rail against the incursion of the car. It was as if she lived in a city; which of course she always did.

Standing room only

We have it for buses, trains and ferries, why not airplanes? According to reports today, Airbus has been advocating the use of standing passengers to increase passenger numbers on planes. Hey, we all know that with the way seats have gone there isn't much comfort there anyway and for airlines it saves the cost of carrying around all those heavy seats.

Here is the relevant bit:

Airbus has been quietly pitching the standing-room-only option to Asian carriers, though none has agreed to it yet. Passengers in the standing section would be propped against a padded backboard, held in place with a harness, according to seating experts who have seen a proposal.

Well that is one way to drive business class sales. It is also unclear whether there would be any real loss in safety. And for families, well my kids want to wander around the plane anyway. I am happy not to pay for a seat there.

Of course, the big move here is to take more account of the third dimension of space. On long-haul flights, the preferred way to be put is not seat, certainly not standing, by flat and horizontal. It always occurred to me (and given my lack of sleep on planes I have spend some time thinking about this) that by laying everyone down we could have everyone lying down in three rows vertically as well as horizontally. The idea would be a bit like those Japanese capsule hotels. So the move to consider standing seems to me to be a move in the right direction.

But another question occurred to me while reading today's accounts: why do people sit on the space shuttle? After all, if there was ever a time that sitting didn't matter and being strapped in standing was a good idea, isn't it for Earth orbit space travel? If we are lifting payloads at $x'000 per kilogram, let's save on those seats. Let's face it, they are gravity-specific furnishings.

[Thanks to Scott Stern for pointing this news out].

(Un)Happy Meals?

Today brought moves for a code of conduct for the 'junk food industry' to limit the advertising content in junk food ads to children. One of the suggestions is that McDonalds would not be allowed to put toys in Happy Meals.

When it comes down to it, the whole move against advertising towards children is a red herring at best and at worst a distraction and excuse for governments not to hit at real problems.

• First, it is highly unlikely that junk food ads were causing the problem. It is the junk food itself that is surely the issue. Let's face it, no one really believes that advertisements really work otherwise they would advertise carrots to children this way and it would 'solve the problem.'
• Second, Happy Meals are not about the food but about the toys. The good thing about the food is that it is in small quantities. In my day, when we went to McDonalds we would eat adult meals. Anything that stops that is surely a good thing. McDonalds is likely making all their money on selling the toys in these meals.
• Third, indeed, if we are worried about children eating McDonalds then the biggest threat -- ironically -- are the salads and sandwitches McDonalds now offers. These make it easier to sell Happy Meals. Why? Previously, a constraint on going to McDonalds was that increasingly health conscious adults would be resistant because they would have nothing to eat. Now, that is not the case. Remove that constraint and more children get McDonalds. Of course, I don't want to suggest banning healthy food at McDonalds only to suggest that playing around with these things is complicated.
• Finally, if we get politicians thinking that dealing with advertising is good health policy we won't get good health policy. Moves to control the actual content of food rather than the content of food messages is surely the way to go. Thus, moves to ban soft drinks in school tuckshops is a much better candidate for health policy focus.

On a parting note, let's not forget the critical role junk food plays in children discipline and incentives. Everytime an ad is shown, children value junk food more and therefore react more when they receive it as a reward. Happy Meals do have carrots after all.

No HECS for Biotechs

In today's Age, I respond to Mike Vitalie's suggestion that there be a HECS scheme for biotechnology firms in Victoria. I argue that while the intentions may be good, it may be 'solving the wrong problem' when it comes to VC funding.

You can read the Age article here. It basically expands on my blog from last week on the same issue.

Chickens and collective boycotts

On Friday, the Australian Competition Tribunal handed down its decision on the application by the Victorian Farmers Federation (VFF) to authorise collective boycotts by chicken growers in Victoria when negotiating with chicken processors. The ACCC had earlier allowed the VFF this right but the Tribunal overturned that authorisation. So growers will not be able to collectively boycott. You can read the decision here.

I acted for the chicken meat processors in this litigation; although any views I express here are my own. Not surprisingly, however, I think that the Tribunal decision is a good one and that there were likely to be manifest detriments from allowing chicken growers to collectively boycott (i.e., strike) during negotiations with processors; even if the terms of a strike -- in terms of notification etc -- were constrained. Put simply, current negotiations didn't seem to me to be so dsyfunctional that investment in the industry was being harmed. However, collective boycotts may have had many uncertain consequences, including "gaming" behaviour recognised by the Tribunal, that would have been detrimental. This is in addition to the likely price rises (at least in the wholesale market) that would have occurred.

As noted by the Tribunal, the case was a little unusual:

As the hearing progressed a paradox emerged. In a negotiating context, a party threatening a boycott (whether or not lawful) will talk up the baneful effect of a boycott on the other party. Conversely, the other party will put on a brave front and minimize its potential effect. Yet, in the present case, the positions were reversed. The VFF contended that Processors would be able to make arrangements for alternative supplies and carry on pretty much as usual. Processors, on the other hand, predicted the most dire consequences. For the VFF, this is something of a diminishing return. The more readily ameliorated a boycott, the less effective the threat thereof to a point where the question arises whether there is much point in its authorisation at all.

The 'Twilight Zone' feeling of this is easier to understand if one remembers that for there to be net benefits to the public from a collective boycott it must not be too effective in yielding anti-competitive consequences or other costs. That means it can't be too effective at all.

My assessment was that there were real concerns that the collective boycott would be effective. In so doing, I used approaches from game theory -- that the Tribunal ended up adopting -- to analyse whether a collective boycott or at least the threat of one was likely to be effective. In so doing, it was critical to assess whether the boycott would be credible. The Tribunal put this nicely:

... two conditions must hold in order for a collective boycott to represent a credible threat that would enable Growers to have their demands met. First, the benefit Growers potentially could gain from a given demand in contract negotiations (such as higher growing fees, sharing of certain costs with the Processor etc) exceeds the costs to them of a collective boycott of a given duration. Second, the cost to Processors of acceding to the Growers demands must be less than the cost to them of a collective boycott of the given duration threatened by the Growers. It follows from this that combinations of demands by Growers and threats of collective boycotts of particular durations that met these requirements would be likely to generate a credible threat that would lead Processors to accede to the demands made by Growers.

Ultimately, the Tribunal assessed that there were circumstances under which collective boycotts may be highly effective and this was an important fact in driving their ultimate decision.

What is significant is that this is one of the first times I can remember that an Australian court has embraced game theory as a framework for analysing a competition issue and in particular the likelihood of a particular outcome. In regard to other antitrust cases, I had lamented lost opportunities to do this (see an account of the High Court's Rural Press decision here). This latest decision is a true step forward in economic analysis in our legal system.

Launching the iPod: Who would have thought it?

Youtube has just posted Steve Job's introduction to the very first iPod; almost 5 years ago now. When you watch it, the first thing that hits you is the small room this was done in and all the empty seats. Hardly the introduction you would expect from what became a killer appliance in the music industry.

The initial iPod was only for Mac (Windows would have to wait another year), ultraportable with firewire and with a 10 hour battery life. Apart from a neat design and great performance, there was nothing to suggest here that this would be more than another gadget with another name -- iMac, iBook, iPod, iEverything. Indeed, it was not until the opening of the iTunes Music Store (two years later) that anything special looked like coming from this. Just goes to show: who can predict?

Another interesting bit in the video is a comparison of alternative devices. Here is the table put up:

A CD player costs $75 and has 15 songs equating to $5 per song.
A Flash player costs $150 and has 15 songs equating to $15 per song.
A MP3 CD costs $150 and has 150 songs equating to $1 per song.
A hard drive costs $300 and has 1000 songs equating to $0.30 per song.

Notice the problem here? It assumes that once you put a CD in a CD player you can't change it. I hope that wasn't on the business plan. Hardly a good description of consumer decision-making.

Of lemons and rejections

Tim Harford has a little piece in the FT today on George Akerlof and his insights regarding markets for used cars.

Apart from explaining Akerlof's nobel prize winning contributions he also describes his difficulties in getting his work published ...

used cars were just the beginning for Akerlof. His neat little paper was turned down by two top journals because they couldn't see past the trivia of his example. He recalls that a third, the Journal of Political Economy, had a better reason for rejecting him: the paper couldn't be true, because if it was true then economics would be turned on its head.

The Journal of Political Economy was half right. Akerlof did turn economics on its head - and eventually received the Nobel Prize for doing so - not by documenting the travails of used-car buyers and sellers, but by showing how corrosive a little bit of inside information can be to all sorts of markets. Insurance, including health insurance, is one possible casualty.

Akerlof's problems in getting published were not isolated. George Shepherd and I wrote an account of the problems that faced many economists who would eventually win the Nobel prize [see "How Have the Mighty Fallen," Journal of Economic Perspectives, 1994]. George published a book of letters that we received from many famous economists. I also recounted how we came to write that paper in my edited volume, Publishing Economics (Edward Elgar, 2000). Finally, here is another account of another Nobel prize winner -- Robert Lucas.

Driving hard bargains

From Nature, so you know its a contribution to knowledge, a story about research at the University of Leuven who have examined the behaviour of men playing the ultimatum game.

This game is a simple one where one person makes a take-it-or-leave-it offer to another over how to split an amount of money. Either the other person accepts the deal or they do not. In the latter case, no one gets any money. Game theory predicts that the offeror will ask for (almost) all the money and the offeree will accept this because it is better to get something rather than nothing.

In experiments, this outcome does not occur and usually offerors offer something fairer (40 or 50 percent) and offerees reject things that are unfair. The new research looks at the behaviour of men playing this game factoring in their testosterone levels. It turns out that the higher the testosterone the more likely offerors will make high demands and the more likely offerees will only accept fair offers. Thus, pit two high testosterone individuals together and a deal isn't likely.

But then the researchers did something else. They showed the subjects pictures of bikini-clad women. This didn't affect the low testosterone subjects' behaviour but did soften the stance of high testosterone ones. The suggestion is that advertisements depicting women with little clothing will get some men to pay higher prices. This is a longer bow to draw. Indeed, there is a sense that we already knew this. My consumer behaviour colleague, Brian Gibbs, demonstrated that ads with such pictures were much more effective (on men and on women) than those without them.

Blogs of blogs

Ian Holsman has set up a 'blog of blogs' on economic issues. It is a good way to consolidate your blog monitoring on a single site. My interests are a little broader and so I often use Bloglines.

Upcoming Conference: Media Ownership Reforms and Mergers

On Friday, 19th May, the Centre for Business and Public Policy here at Melbourne Business School will be holding a half day conference on "Media Ownership Reforms: The 3 C's -- Convergence, Competition and Consolidation."

The line-up is a terrific one including Graeme Samuel (Chair, ACCC), Kim Williams (CEO, Foxtel) and Professor Simon Anderson (University of Virginia). If you are interested in attending, click here for all the details.

Google this!

It was inevitable really. AAPT is contemplating suing Telstra over its 'sponsoring' of its own link when someone searches for AAPT. Of course, if you try googling 'aapt' now all you get as a sponsored link is AAPT. Nonetheless, apparently until recently you would get Telstra there too.

This is not an uncommon practice:

• Google 'nab' and you get American Express
• Google 'Melbourne Business School' and you get the AGSM
• Google 'RACV' and you get AAMI (among others)
  
• Google 'HBA' and you get Australian Unity (among others)
• Google 'harvey world travel' and you get STA Travel (among others)

Now I am not sure on the law on all of this but there is a sense in which it is not altogether a bad thing. Try and search for a firm and you may get its competitors. In fact, it is surprising we don't see more. For instance, google 'qantas' and all there is an Appliance Repair Service which has nothing to do with travel. One wonders why.

Anyhow all of these sponsored links are allocated by auction anyway. To get priority you need to bid more and also have a decent 'click through rate.' So they will only stay there if they are working. So go ahead, and click on that AGSM link.

But will 10 red paperclips get you 10 houses?

I am going to celebrate my 100th post by blogging about another blog: oneredpaperclip.blogspot.com. It is a specialist blog by Kyle MacDonald who has been trying for the last 10 months to covert his possession, one red paper clip, into a house. He is getting closer and this week sealed a trade that got him a year's rent on a place in Phoenix. That is also getting him a ton of media attention.

His sequence of trades to date has been:

• Paper clip for a fish-shaped pen
• Fish-shaped pen for a clay doorknob with a funny face on it
• Clay doorknob for a camping stove
• Stove for a generator
• Generator for an "instant party"
• Instant party for a snowmobile
• Snowmobile for an all-expenses-paid trip to Yahk, British Columbia
• Yahk trip for a panel van
• Van for a recording contract
• Recording contract for the year of free rent in Phoenix

Suffice it to say, he lots of options for each trade.

Now Kyle might read his goal. The publicity doesn't hurt at all and the ad revenue on his site may assist too. But should we conclude that 1 red paper clip can really have an exchange value of 1 house?

I am going to keep an open mind here. The economic test is simple: if 10 red paper clips could be traded for 10 houses then I am pretty confident we have set a market-price here. If not, then other factors (and there are tons of them) are likely at work. Let's wait and see.

Confusion as a screening device

In Slate, Tim Harford recounts his difficulties in choosing a mobile phone plan. Faced with a confusing set of options, he finally rings his current provider and they tell him what the best plan for him is. His thought: they put too many options in their catalog so as to screen customers based on whether they have time to call them for the 'right' choice or not.

The question is whether this argument makes sense. One issue is whether calling-in is the option that costs the most in time. Harford's implicit idea is that those who do not have the time will randomly choose a plan and end up paying too much. Those who do, will call-in and pay less. In that way, the phone company screens for those who have "money to burn."

This theory, however, depends on several things. First, that those who do not call-in indeed have money to burn. It seems to me that if you wanted to exploit this, you would want to provide a simple but high price option that can be purchased easily rather than an array of choices that are hard to sort out. Second, even if this were the case, it would have to be actually harder to call-in rather than choose a plan from a catalog. The reverse could easily be the case. Finally, those who were frugal would have to understand and trust the calling-in option.

On this latter point, my own experience with choosing gas and electricity plans stands in sharp contrast. In preparing for a presentation at an ACCC conference last year, I decided to see how much competition amongst energy retailers had got us. I rang up all the main incumbents (including my own provider) and tried to compare the plans. The task was incredibly difficult. Some plans were based on monthly consumption, others bi-monthly. Some had the prices stated ex. GST and others including GST. And there was more. I put it into a spreadsheet and what did I find? They were all exactly the same! Hours of work for nothing. They were all the same and at their regulated cap.

In the end, I rang my current provider and threatened to switch to an alternative. They offered me what amounted to a 2% discount for the next year -- a saving of $22 in total. Not much reward for the effort of working out what to do. Moreover, that 2% was disappear next year as it was really just the X in the CPI-X regulated pricing formula.

I saved people at the conference the time of searching but also identified a real source of screening: those willing to call-in were those who had demonstrated a willingness to switch. These are exactly the people you want to give a discount to.

All this doesn't explain the mobile phone confusopoly where the prices are different. Thinking more about that is something I'll leave for a future blog.

HECS for Biotechs

In today's Age, Mike Vitalie argues for a HECS scheme for biotechs ...

A "HECS for Biotechs" program, that is loans for fledgling companies, to be repaid if and when a company's earnings reach a certain level - should be implemented. More should be done to encourage overseas biotechs to establish operations in Australia. In biotechnology as in education, our neighbours are steadily becoming our competitors - Singapore used the occasion of BIO to announce $US8 billion ($A11 billion) in biotechnology funding over the next five years, and Malaysia announced it was creating a biotech hub. The Australian tax system is not friendly to overseas companies or executives. Global biotechs certainly need to be in the Asia Pacific region, but they do not need to be in Australia, and for the most part they aren't.

The scheme would be the equivalent of a loan provided by the government. It would only be repaid if the biotechnology was successful.

Of course, that is pretty much what venture capitalists do now except that they do this by taking equity in the biotech start-up. For there to be a government provided substitute for this, it would have to be that venture capital is suffering from some sort of market failure. Certainly, as Vitalie points out, less VC funding goes to Australian biotechs than those in other countries but that does not mean there is a market failure in terms of capital market constraints.

The constraint could be on the demand for capital side. Not enough funding is going to Australian biotechs because their potential to earn profits may be lower than elsewhere. Indeed, this appears to be the constraint on start-ups even in the US. A few years ago, Scott Stern (Kellogg) and I studied whether the demand or supply side of the capital market constrained start-up funding. By comparing privately funded start-ups with those seeded by government we could distill this. Our conclusion: that it was the demand-side that constrained funding. The implication: it is better to improve the prospects for start-ups to appropriate more of the returns from their intellectual property than to provide them with more capital per se.

All this means that biotechs in Australia likely don't need a HECS-type scheme. Instead, they need assistance in accessing commercialisation resources and overseas networks. This suggests that core infrastructure might be a better way to spend Victorian government dollars.

[By the way, Scott Stern was lurking around and presenting at the Chicago biotech gathering this week. I heard he made off with a boomerang from the Australian exhibits.]

Iran and the Lessons from History

There is lots of talk on the upcoming likely attack by the US on Iran. My favourite assessment thusfar comes from Stephen Colbert of The Colbert Report:

Many say, those who ignore history are doomed to repeat it. I say, those who ignore history are in for a Big Surprise! And doesn't everybody love a surprise?

The 'Et.al.' Effect

In academic economics, the convention in papers with many authors is to order them alphabetically. This is in contrast to other academic disciplines that have their own norms including ordering based on relative contribution.

It was always somewhat surprising that economists might choose to 'hide the individual contribution' by adopting a convention that meant that name-order should bear no signal. In the 'cuteness over substance' phase of my academic career, I wrote a paper on this topic. The paper (with Maxim Engers, Simon Grant and Stephen King) was published in the Journal of Political Economy. We demonstrated how this might be the natural result of bargaining amongst co-authors. Put simply, to deviate from an alphabetical ordering norm would cost the author with a surname earlier in the alphabet alot more than would be the gain to the other author. Hence, this would only occur rarely; reinforcing the norm. [Oh, and yes our 4 authored paper was ordered alphabetically but only after vigorous bargaining].

The only effect we thought this would have would be to reduce paper quality -- after all, without a signal of individual contribution, free riding would ensue. Now it turns out that there is something more sinister at work: your surname matters for real academic success in economics.

In a paper that will appear in the Journal of Economic Perspectives soon, Liran Einav and Leeat Yariv look at the actual effect of a surname's first letter on academic performance in economics. They find that those with surnames earlier in the alphabet are more likely to have tenure at a Top 10 economics department and win awards such as the Nobel prize. There is real alphabetic discrimination in economics and it is not accounted for differences in nationalities, age and other trends in academic co-authorship. If you look at psychology, for instance, none of this happens and surnames have no effect on success.

How can this be? After all, an alphabetical norm was supposed to send no signal and not be meaningful as it appears to be. Einav et.al. suggest several possible channels for this effect. The first is that in citing multi-authored work, others use the first named author plus 'et.al' to save on space. Maybe the 'et.al.' obscures all. Similarly, citation measures such as the Social Sciences Citation Index used to similarly only report first authors. This may distort the number of attributed citations for others and harm their chances of promotion or awards. Of course, what is strange is that the surname effect only appears for Top 10 departments. Go to others and surnames do not matter.

Another possibility is that this effect influences participation decisions for multi-authored projects. It is suggested that a disadvantaged surname holder will opt out of those projects but this, in turn, would disadvantage them academically as those projects may be more successful. This, however, isn't borne out at surname is not a predictor of such participation.

So if surname matters and it matters more 'higher up' in the profession, what is causing it? In the tradition of Larry Summers, I suppose that we can't rule out that the causation runs the other way. Maybe those with surnames earlier alphabetically are better economists. As with all discrimination, it is hard to imagine how that could be.

Of course, it could be a selection effect. Good students with names later in the alphabet here that they will be ordered last. They make choices between economics and psychology and go for the latter. Of course, this would suggest that a reverse discrimination effect should occur elsewhere but it may not show up because the other options are diffuse.

This could explain why the surname effect is not showing up as we move down the academic rankings. It could be there but it could be offset by the reverse discrimination as those denied tenure at top departments move their way down.

Something more is at work here. This seems to me to be a real puzzle that will do a nice job in diverting academic economic research towards the cute.

It is time for 'The Undercover Economist'

The discovery of Neptune was pathbreaking in astronomy. It was the first planet to be discovered in theory before it was actually found. As Tom Standage recounts in The Neptune File, John Couch Adams and Urbain Le Verrier took unusual anomalies in the orbit of Uranus and concluded that these were caused by a planet. They then went on to predict the planet's location. Telescopes were trained on the location and the rest is history.

The idea that theory can be so practical is something held dear by most economists. In his latest book, Tim Harford (a regular columnist for the FT and Slate), likens himself to an undercover detective, seeing things in others' behaviour that other people cannot. Hence, the title The Undercover Economist: Exposing Why the Rich are Rich and the Poor are Poor -- and Why you can Never buy a Descent Used Car!

This book shows nicely how economists view the world. How they sort the forest for the trees and how they find the relevant trees in the forest. For instance, Harford describes where the money paid to a successful Starbucks really goes. Not to the coffee growers, not to the coffee machine makers and not to Starbucks. Instead, it goes to the owners of the scarce resource: the property the Starbucks sits on. There is your Neptune.

This book has teaches me little but it has taught me how to teach. For the brief period of time I between when I read this book before my students will inevitably get their hands on it, I have been able to describe economic concepts more precisely and more usefully. And for that brief period of time I could appropriate the credit. However, that is not the scarce resource. People like Tim Harford are. They can turn the complex into the simple, the unconvincing into the convincing and put it all in the printed page -- a much more efficient way of getting market reach than through lectures.

For anyone interested in economics -- even on the margin -- this is a terrific read. It will change they way you look at the world.

Download TV goes Free

Last time on "the evolution of television" ...

• iTunes put TV shows on (ad-free) for US$1.99 per episode; now dropping to less than a dollar if you purchase a whole season
• Google launched its Video Store with episodes of Survivor and The Amazing Race among many others available for variable prices and watching options
• CBS launched a direct TV on demand service similar to iTunes.
• Telstra Bigpond offers download episodes relying on consumer ignorance to keep them on computers.
• NBC offers episodes on the web before they are broadcast for free.
• A blog post anticipates that download TV will have ads.

In today's installment ...

• ABC (in the US) will put free download television on its website but with advertisements. Moreover, the technology is such that those ads will not be easily skipped. Given this and the fact that ABC will have a much clearer ratings picture (not to mention the ability to record demographic information alongside this) will mean a much tigher relationship for advertisers between their dollars and their eyeballs.

And in future installments ...

• DVDs with Ads: you may have noticed that you cannot skip over some announcements at the start of DVDs. There is nothing to stop this including paid ads or even the same idea within a DVD. This means that you might find yourself getting your television in the mail until broadband becomes good enough to download HD quality.
• Australian TV networks lose their battle against multi-channelling as others around the world do it anyway!

Patent grant lags and ideas markets

David Hsu (Wharton), Scott Stern (Kellogg) and I have a new paper out this week on "The Impact of Uncertain Intellectual Property Rights on Markets for Ideas: Evidence from Patent Grant Delays." The paper assembles an interesting data set that allows us to relate the timing of patents being granted (as opposed to being filed) to the timing of licensing agreements (that is, transactions in markets for ideas).

We uncover two interesting facts: (1) that about 50 percent of licensing agreements are signed prior to a patent being granted and (2) that there is a 'spike' in licensing agreements around the time a patent is actually granted.

These two facts are interesting because efficiency would normally require licensing to occurs as early as possible. After all, if an innovation is available, better to put it to use sooner rather than later. The fact that many agreements occur after a patent is grant suggests that there are some frictions in ideas markets. The fact that agreements appear to occur soon after patents are granted suggests that patent grants alleviate those frictions.

By the way, our chief candidate for the latter effect is how having a patent (with much uncertainty regarding its scope of protection resolved) can improve the bargaining position of licensors and hence, their perceived return to searching for the best licensee or their incentives to cooperate with the licensee on transferring tacit knowledge down the track. For more on that, however, you can read the paper.

Mankiw on the blog

I followed Greg Mankiw into textbook writing by adapting (with Stephen King and Robin Stonecash) his Principles of Economics book for the Asia-Pacific Region. [It is now in its 3rd edition from Thomson].

It seems like Greg has followed me (by a month) into blogging. Probably not causal this time but nonetheless a great resource for economics students.

Auctioning patents

A few days ago, Ocean Tomo held a well-publicised auction of 68 blocks of patents. Many sales were transacted with prices ranging from a few thousand to over $1 million (that one for compressing movies on television). Such things have generated concerns over patent trolling (see my previous posts on that).

In actuality, they represent a good way for smaller innovators to commercialise their innovations without the whole issue of entering product markets themselves or searching for established players who would be interested. That is, they contribute to the smooth functioning of markets for ideas. This is something that Scott Stern (Kellogg) and I have been advocating for years.

The trolls may still be out there but an auction hardly ensures that they get greater benefits. After all, they need to compete against other trolls for those patents with the returns flowing back to individual innovators. The basic idea is that these auctioned patents are sold prior to any further development and not after it. Hard to imagine how that in-of-itself can be a bad thing.

Hiding referees

This article in the Chronicle of Higher Education is about the ways in which authors can find out who reviewed their paper for academic journals prompted me to wonder about why referees do not 'sign' their reviews. Why is there anonymity?

We know why sometimes journals make reviewers blind to an author's identity -- to remove reputation and affiliation from the accept/reject decision. But what good does making authors blind to a reviewer's identity do. After all, everywhere else in academia we value attribution.

The key issue is whether anonymity improves the 'honesty' of the review. The two type of errors that could occur (Type I and Type II) are that poor articles may receive favourable reviews while good articles might receive unfavourable reviews.

Why would a reviewer of a bad article, give it a favourable review? With anonymity, there is no reason to distort the truth while without it, a reviewer may be concerned about other effects. Of course, that effect could be embarrasment, so reviewers would be more cautious about 'getting it wrong.' But the other effect could be fear of retaliation. There may be a concern that reviewers who make unfavourable reports may receive retaliation from authors (or their colleagues). How might this retaliation come? When the author becomes reviewer, then there may be in an issue in getting published or securing jobs, etc. Thus, anonymity involves a trade-off: it removes a fear of retaliation for a cost of 'shirking' and not as thorough a review.

Do similar things explain why a reviewer of a good article, would give it a bad review? Again, fear of embarassment is an issue. I wrote a paper years ago (Journal of Economic Perspectives, 1994) about the classic articles in economics that had been initially rejected. There were lots of them and I wondered if, had reviewers been non-anonymous, would this have occured. (Actually economics is somewhat of an outlier in terms of the sheer volume of rejections compared with other sciences).

But surely fear of retaliation is less of an issue? Maybe, the reverse is not. You could give a favourable review to 'pay it forward' for favourable reviews in the future. Thus, a club or cartel might form and too many good papers would be accepted.

In each case, with transparency, the potential for distortion arising from punishments and gifts is traded-off from short-run costs associated with embarassment in giving 'off the mark' reviews. This suggests to me that, if it is becoming harder to retain anonymity as the Chronicle argues, then the potential for embarassment needs to rise. In particular, editors will need to get more and more reviewers for a given paper. And let me tell you, as an editor, this is not without cost.

But the current issue is that transparency may be limited to authors and reviewers and not to anyone external. This would be a real problem -- little chance of external embarassment -- but lots of opportunities for cartelisation.

The second best 'ice' movie this month

Movie Reviews (Ice Age 2: The Meltdown and March of the Penguins)

We saw Ice Age 2 yesterday and I have to say that it was the second best ice-themed movie I have seen this month (behind March of the Penguins). Let me substantiate this bold claim but first letting you know something about my criteria in seeing these G-rated movies: just because they were made for kids doesn't mean they should only be for kids. If I have to go along, I am expecting to enjoy it too.

That means that I am looking for something a little more sophisticated in plot than 'chicken sees sky falling and then war of the worlds ensues just as he was being doubted by society.' Ice Age 2 was strongly anticipated on this front. Ice Age had produced a remarkably complex plot that exposed prejudice, revenge and forgiveness. Just to recap that movie involved the plot 'sabre tooth tiger attacks humans as revenge for a prior attack, human mother saves baby by placing it in a boat [yes, it was derivative of Moses], baby picked up by mammoth whose family was also attacked by humans, who overcomes desire for revenge (thanks to a friendly sloth), converts another tiger away from group think and ends up fending off tigers to return child safely to humans, who show self-restraint in not killing the mammoth.' Very similar to the Jungle Book but with a few extra dimensions of selflessness and alot more ice.

As the ice melted for Ice Age 2, so apparently did the need to get everyone's motives down pat. The mammoth, Manny, is now concerned about being the last of his kind and is faced with a single potential mate, Ellie, who was raised by possums and thinks she is a possum. [Now there is some irony here as the mammoth is taken in by others just as the baby in the first Ice Age but is not smart enough to know what she is as opposed to the dinosaur in Dinosaur who knew he was not a lemur!]. Other than that it is not clear what the deal is with everyone else. The sloth, Sid, and their tiger friend try to overcome fears but the main enemies -- some previously frozen reptile things -- are somewhat one dimensional. They can't even talk for goodness sake!

Actually, there is a secondary plot line -- just as in Ice Age -- with a little rodent, Scat, trying to get himself an acorn. He will do anything for it and in the process causes mayhem (but ultimate redemption) for others. His struggle (reminiscent of the penguins that I will get to in a second) is wonderful, painful but also inconsistent with the plot of the first movie where he was frozen for 20,000 years. Nonetheless, I was happy to seem him back, even if there was no attempt to explain that.

In the end, there is little below the surface in Ice Age 2. The good news is that it is easily watchable and there is no sense at all of 'when will this be over' making it above average for the genre. [No Vogon poetry-type torture here].

Contrast this with March of the Penguins, a documentary about emperor penguins in Antartica and what they have to do through. It is 'set' today but the same story could have taken place during the ice age, so I feel that the movies are 'apples to apples' comparable.

Now you definitely get the 'when will this be over' feeling watching the March. But it is not for yourself, but for the penguins. In a vast irony of evolution, penguins appear to have become perfectly adapted to their Antartic environment but in a way that leaves their quality of life below that of pond scum. I don't want too give much away but you haven't seen suffering until you have seen what the penguins do as part of their normal life. Yes, there was suffering in Schindler's List and Meet the Parents but it was relatively short and hardly normal. The penguins do this year in, year out, generation in, generation out.

This movie is entertaining for the whole family but also gives you something in return: a new perspective on how hard life can be. Whenever things are getting you down, you will be able to think of the penguins and thank goodness you are not one of them.

In another irony, there is the subtext of global warming and what it might be doing to the penguins' environment and way of life. When it comes down to it, it is difficult to walk away from that with environmental fervour. After this movie, the emperor penguins are not going to be the poster child for that cause.

Make ATM fees transparent

Today's news reports of the fees individuals pay when they utilise ATM machines. It turns out that you can be charged for cancelled transactions as well as normal ones.

This is all part of a bigger issue. When it comes down to it, ATMs are one place where you are forced to consider paying for a service while not being certain about the price. And there is no reason why this should be the case. Anyone using an ATM -- whether it is your bank or not -- should be able to put their card in the ATM and find out what it will cost them to do various types of transactions. If they don't like the price, they should be able to cancel and move on.

This would have several benefits. First, consumers would know what they are paying for and may actually be more likely to use ATMs; especially those of other banks. Second, the transparency will increase price competition on ATM fees.

If there ever was a payment system issue for the RBA and ACCC to worry about, it is surely this.

Media competition and media bias

There is a nice summary in Slate of a new paper by Matthew Gentzkow and Jesse M. Shapiro. They argue that a media outlet's concern for its reputation tempers potential bias. Their core argument is that competition in the media will generate a diversity of opinions and reduce overall bias. This is all related to an earlier post of mine on cross media ownership; again focusing on competition as being important rather than cross media ownership per se.

But is it really a Mac?

News today that Apple will be providing what hackers have already been able to do: to run Windows XP on an Intel-based Mac.

While techies may like the challenge of getting computers to do new things, I think we really need to deal here with a more important existential issue: is an Apple-manufactured computer running Windows really a Mac?

To put this in context, some years ago I was a devoted Mac user at work. My last Mac had an Intel Pentium chip inside it that I could switch to and boot with the flick of a function key. The idea for me would be that I could have the best of both worlds.

However, it proved not to be. Switching between them was onerous and in the end it convinced me that most of the applications that I used for work were Windows-based. I left the Mac behind.

At home, however, this is all a different story. A Mac sits prominently in the kitchen area and is never used for word processing, power point or spreadsheets. It is all web surfing, movie editing, our stereo and of course blogging.

My point is that if it had Windows XP, it would be of less value for those things. It is the software that maketh the Mac.

Completing the circle

For less than a year, Download Television (through iTunes, Google Video Store and other places) has emerged alongside traditional Broadcast Television. In effect, the lag between the pay per view programming and the free to air equivalent has fallen from 6 months (through DVD sales) to 6 or so hours. Now, the lag will turn 'negative.' This summer, NBC will offer new episodes of The Office on the web first. Presumably, they will then be broadcast on the regular season.

What this means is that television programs will have a 'versioning' structure similar to movies that start with pay per view before going to free to air broadcast. This is not surprising as high priced versions are usually offered prior to low priced ones -- with the key differentiator being delayed. The surprising thing is how long this has taken to happen with regard to television programming.

Mandatory academic blogging

In today's Age, James McConvill (La Trobe) argues that all law academics should be blogging. The idea is that this will make their work more accessible quickly. Moreover, he argues that:

So government funding is being pumped into a system that is based on an interpretive community of academics competing for the article with the largest number of footnotes and most sophisticated use of prose.

Why not reallocate that funding towards law academics reaching out to the world through effective blogging? Blogs can be easily found through a simple Google search (unlike many Australian law reviews, which are still only available in hard copy via the library, and American law reviews, many of which are accessible only viaWestlaw or Lexis), making them a handy source of research for students,practitioners and other academics.

Of course, why stop with law academics, why not anyone in the social sciences including economics?

Let me put this succintly: I couldn't agree with this less. There are real problems associated with blogging. First, it takes time. Second, not that many people read them. Third, academic journal articles are peer reviewed and that leads to a significant improvement in quality. A blog entry has no similar check. Finally, if its accessibility we want, then governments should make the libraries and authored work more accessible. For instance, versions of papers should be posted online so they can be indexed by Google Scholar.

It would be a mistake to blindly mandate or otherwise incentivise blogging; an activity without peer checking. Not even in teaching are academics really afforded that luxury.

The market for monarchy

In an interesting article in Slate, Tim Harford speculates as to why lobbyist pay so little for their so-called control of government. We wonders what people would pay for government if it were truely up for sale in a monarchy.

This all reminded me of an idea I had years ago when Australia was considering becoming a Republic. By Republic, the idea on the table as that we would replace our current non-elected Head of State -- The Queen of England -- with a local non-elected Head of State -- who knows who that would be except that they would be an Australian citizen.

I wondered that we might be thinking about this the wrong way. After all, the Head of State in either case would have no real power but a little bit of residual control (that is, if something was not constitutionally specified then they would intervene) and lots of prestige. In this case, why should we care if the Head of State is Australian or not.

Instead, we should recognise that whoever got the position would have lots of private benefits associated with it. So the problem was that we were giving it away rather than selling it. It would be better to think about auctioning the position off to the highest bidder -- regardless of which country they are a citizen of. Moreover, if they were foreign, we would have the additional benefit from a sale in providing export dollars (the current account deficit was still a big issue back then).

Seemed like a clear win-win. I wonder why nobody invited me to the Constitutional Congress?

April fools spotting

I can't resist some good April Fool's Day prank spotting. As usual Google got into the act with Google Romance (following up from last year's Google Gulp and this job ad from 2004).

According to The Economist you will soon be able to buy dragons. Of course, for an economist, nothing will beat their post of a decade or more ago on the growing concern over 'number inflation.'

For a complete list of this year's work, see Wikipedia.

On the technology front, the iPod ironing dock takes the cake.



Click here for the full story.

First Aplia Blog

My first blog on Aplia's Economic News Blog is up. It reflects some of my discussion earlier this week on innovation incentives for pharmaceutical drug makers.