Quote of the day: Band aid vs Core solutions

I agree with this quote 100%:

There is often a discussion about the great divides in economics – Neoclassical vs. Keynesian, Freshwater vs. Saltwater, Left-Wing vs. Right Wing, Top-Down vs. Bottom-Up, Elites vs. Populists, etc. Another one should be between economists who feel the way to counter the distortions caused by 34 different government policies is to created a 35th policy and those who believe in countering root causes and would like to avoid Rube Goldberg-type policy structures. I said ‘should be’, because there are so few of the latter kind of economists out there. We could hold our meetings in a phone booth.

In defence of the scalper

Events in high demand that have limited capacity sell out. See for example the Wellington Sevens or Toast Martinborough, which sold out in three minutes and thirteen minutes respectively. These events sell out as demand far outstrips supply at the price that the seller sets. In other words, many of those purchasing the tickets would be willing to pay much more than they actually do pay in order to attend said event.

High demand events such as these are the capitalist world’s version of queuing for basic food items in a communist shit-hole. When buyers are unable to adequately express their willingness to pay, due to blunt ‘one-for-all’ pricing and an inability of the seller to price discriminate, shortage ensues.

Enter the scalper. Scalpers are typically demonised by the media in New Zealand. However, scalpers simply allow buyers to reveal their true willingness to pay. When a scalper auctions off a ticket on Trademe, buyers are able to pay exactly what they value their attendance at said event at. What ensues is the efficient allocation of resources – scarce resources are allocated to those that value them highest – an admirable economic goal. Contrast this with the lottery that is the current ‘log-in and hope’ method of ticket allocation. Rather than be vilified, scalpers should be commended for their actions that facilitate the clearing of the market!

Indeed, a commentator at the NBR goes further, calling scalpers “unsung entrepreneurs”. I tend to agree with this sentiment.

Disclaimer: I have both scalped and been scalped. Both experiences were highly pleasurable and I encourage you all to try them.

Baumol’s cost disease: An issue of government productivity

Often I have heard people bring up “Baumol’s cost disease” as a reason for why labour productivity and wages can be unrelated.

Effectively, the argument is that if labour productivity rises in one sector it increases the demand for labour which in turn drives up wages in other sectors, even though productivity in other sectors is unchanged.

Now this is all well and good, but I’m not sure that this takes away the relationship between productivity and wages. Let us assume that there are an infinite number of sectors, but conveniently there are only two sectors competing for the same labour pool. Furthermore, one of these sectors experiences an exogenous increase in labour productivity and the “other sector” doesn’t.

Effectively, the increase in the cost of labour for the “other sector” will reduce the supply of that good driving up the relative price of the other good. There will be a reduction in the quantity produced and an increase in the relative price, which should imply that there will be an increase in marginal (and probably average) productivity of labour in the other sector.

What this concept DOES tell us is that maybe we shouldn’t be so tough on government for its poor productivity performance (as lamented here and here). Why? Labour productivity in the government sector hasn’t experienced any technological change, the services they provide haven’t become relatively easier to produce.

As a result, with the rest of the economy experiencing an increase in labour productivity wages have been driven up, forcing the government to also drive up wages.

Of course, this also implies that the relative size of the government should have shrunk (which it hasn’t) and that the increase in the price of government labour should have been smaller (which it wasn’t). But it does explain part of the public sector wage inflation that we have seen in recent years.

In defence of the New Zealand wholesale electricity market

Recently the New Zealand electricity sector has been taking a bit of a hammering. According to a Commerce Commission sanctioned report, consumers have been overcharged by $4.3b over a six year period (how’s that for a headline!). More specifically, the report concluded each of the four big generators – Meridian, Contact, Genesis and Mighty River – has been exercising the power the market’s design gives them to command unjustifiably high prices, at least during years when inflows to the hydro lakes are low as they were in 2001, 2003 and 2006.

New Zealand has two markets in electricity – the wholesale market and the retail market. The wholesale market is where generators sell their production to retailers (often the seller and purchaser are one and the same). These prices vary significantly depending on the conditions of that particular period (for example, how dry Southern Lakes are or whether a generation unit is out service). That’s why, as a consumer. it’s clever to be informed with details like Business Energy costs.

The second market is the retail market, where retailers sell electricity to consumers. Prices here are typically very stable, with consumers seldom exposed to the vast variation that takes place period-on-period in the wholesale market.

In the long-run, the prices in the wholesale market feed through to the retail market. In other words, if a generator/retailer found themselves short of generation and thus had to buy excess generation on the wholesale spot market at relatively high rates, they would eventually pass through these additional costs to their consumers in the retail market.

The report is essentially saying that generator/retailers were able to use their dominance in the wholesale market to push up prices during periods of constrained supply, which consumers then ultimately had to pay for in the retail market.

The report also says that pricing in the wholesale electricity market is, in the absence of dry periods, typically competitive. A very important point made in the report is that no market is ‘textbook’ perfectly competitive and this is certainly the case in electricity, given its unique characteristics (in particular the need for supply to continuously meet demand).

Indeed, I would say that the wholesale electricity market is working almost exactly as intended. Pricing is commonly competitive except at times of tight supply, when generators are able to reap higher rewards that incentivise continued investment in generation (which is extremely expensive) so that ever-growing demand can be met into the future. And the Commerce Commission determined that the generators’ actions were a “lawful and rational exploitation of the opportunities the market gave them”. I doubt you’d be able to make nearly as impressive a headline out of that though…

More definitions of economics

I just asked this new Wolfram Alpha search engine “what is economics”.  It told me:

Economics:  The branch of social science that deals with the production and distribution and consumption of goods and services and their management

This differs from the Robbins definition of economic science:

Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses

And it differs from the broadest possible definition that we discussed earlier:

The study of how humans/societies allocate scarce resources.

Given no mention of “human behaviour” or incentives this definition is wider than the Robbins definition.

Is the Wolfram definition any different to our broadest definition?  Well if certain elements are defined correctly I would say they are equivalent.  As a result, it doesn’t tell us what economists do, or what the dominant school of economic thought is.  Wolfram is simply giving us a definition of the broadest scope of what “economics” can be (and has been) seen as – as long as we define the “outputs” (goods and services) as widely as humanly possible.

So, given that the Robbins definition is the one that more fully captures the essence of what economists currently do (with our obsession with methodological individualism) I tried typing “what is economic science” in.  But it told me:

Wolfram Alpha isn’t sure what to do with your input

The assault on homo-economicus

Interesting article proclaiming the end of “homo-economicus” (ht Economist’s View).  This is an issue I care about a lot – so one day I’ll attempt to discuss the article in some detail.  Today however, I’m just linking to the article and waiting to see what interesting comments you guys have about it 😉

It also reminds me of this awesome comic from XKCD:


Source XKCD