Wednesday, 9 April 2014

Economists as Dentists: A Correction

Here's a quote you hear a lot about Economists:
If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!

It's from Keynes,  John Maynard Keynes,Economic Possibilities for our Grandchildren (1930).  But its often misquoted. 

Keynes pointed out that with the power of compound interest, by 2030 the UK would be eight times better off.   He therefore predicted the end of scacity and the need to only work 15 hours per week.  With no scarcity, economic problems would vanish.  That would mean that Economics would become a specialised subject, only in fields were scarcity persisted.  That is the context in which he used the dentists description, for he described them as specialists.  And indeed, economics has become more specialised, not because scarcity has vanished but in the same way the discoveries in medicine have divided labour and made the subject specialised. So the full quote is this:
"It [the economic problem of scarcity] should be a matter for specialists-like dentistry. If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!"


Friday, 4 April 2014

The Man in the White Suit: Built- in obsolescence

Russ Roberts is brilliant as usual.

Yet another very popular argument made by non-economists that economists don't believe.

When I started teaching in the 1980s, students were more prone to believe in the idea of what was called planned obsolescence--the idea that companies designed their products to wear out quickly so that they could sell more of each item. You would hear it about lightbulbs, women's stocking, and cars. For example, people would say that manufacturers of stocking know how to make stockings that don't run--that get holes in them--but they don't sell them because they couldn't sell as many pairs. The planned obsolescence argument is enshrined in at least two movies--The Man in the White Suit and Tucker--movies about employees who are harassed or ignored by their employers because they make a product that lasts "too long" or is simply too good a product and will thereby reduce sales.

So why is this wrong?


The planned obsolescence argument is flawed for two reasons. The first is that even a monopolist can potentially make more profit selling products that last longer as long as people prefer longer-lasting products. The planned obsolescence argument ignores the price you can charge for a longer-lasting product. If you could make a lightbulb that never wore out or stockings that never ran, you could charge a higher price for two reasons--there's more value because it lasts longer and you save the customer the hassle of getting up on the ladder or finding the bulbs or shopping more often for bulbs. So you can charge not just double for a lightbulb that lasts twice as long but more than double because of the added convenience. So it comes down to the cost of innovating (and manufacturing). Time preference and interest rates can also play a role in the decision. But the basic argument that companies want shorter-lasting products in order to sell more is simply wrong because it ignores the price they can charge.

That's a monopolist. Under competition--meaning more than one firm trying to survive and thrive satisfying some want of customers--firms look for ways to get ahead. There are many ways--lower prices, better product, better service providing the product or selling it. Firms generally compete on all of these dimensions. If you foolishly try to sell more product by making it less durable, your competitors will eat your lunch. So the one word answer is competition. Competition encourages innovation. And if you stand still in an innovative competitive world you'll disappear. Explaining that fully does take a few paragraphs. And in the real world of lightbulbs, there is more going on--regulations, for example.

Thursday, 3 April 2014

Why we use standard deviations

http://www.separatinghyperplanes.com/2014/04/why-do-statisticians-use-standard.html

A great intuitive guide 

Monday, 17 March 2014

The problem in requiring banks to have more equity: Charles Goodhart has the answer

My friend Matt makes a very good point taken up here by Charles Goodhart in his review of Adamti anad Hellwig's book, in Economica, 2014, V81, pp. 390.

Here's the background:






So here's the problem. Suppose banks hold £2 of equity on assets of £100, a 2% ratio.  Suppose they are required to hold 20% of equity.  Easy!  Just reduce lending to  £40!  Goodhart again:


















The suggested answer: