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So if you are traveling on Qantas in February, when you open your in-flight magazine, you may come across this. Look to the text, not the picture.

Also, while this has been changed on-line, there is a typo in the magazine — Skype was of course acquired by eBay, not Google. Ironically, I wrote this piece rather quickly on a flight and that one got away from me. [Thanks to an alert reader in our IT department that picked it up].

Tim Harford, the author of The Undercover Economist, will be speaking at Melbourne Business School on Thursday 28th February at 1:15pm. If you would like to attend, registration details are here.

Tim is probably the best, popular economics writer around at the moment with a regular Financial Times column and, of course, several books. I reviewed The Undercover Economist on this blog. I have, in my possession, his new book, The Logic of Life and his talk will be about that book. He promises to include: “Lots of exciting stories about attempted murders, speed dates, faked nuclear strikes, companies spying on their workers, etc.” If you are in Melbourne this is not to be missed.

I learned that the Royal Economic Society has a Young Economist award. Judging from last year’s winner, they appear to have a different definition of ‘young’ than the Economic Society of Australia.

In the Freakonomics blog today, two decision problems, each with non-rational answers. First, this one on waiting for the bus. Second, this one on scalping Hannah Montana tickets.

[HT: Orson Scott Card] Take a look at this Dutch department store website. Hang on for a few seconds and you will see what I mean.

Today is Lego’s 50th Birthday. Words can’t express my thanks to what they have brought the world. Google are similarly respectful today:

More interesting Lego facts at Gizmodo such as the world Lego per capita ratio is 62; our household is on the super-rich side of that distribution.

The 2008 Financial Times MBA rankings are out (considered the most comprehensive in the world). Melbourne Business School is up a few places to 75. But more significantly (as it is based on what we are doing now rather than three years ago) is our research performance — now ranked at 49 in the world. The ranking is based on publications in a relatively short list of journals across different management fields. That puts us on a par with business schools at Oxford, RSM Erasmus University and Purdue University. Only LBS, INSEAD and Cambridge outrank us in Europe, and only HKUST in Asia-Pacific. We now outrank Darden (University of Virginia), McDonough (Georgetown University), Weatherhead (Case Western Reserve), Simon (University of Rocester) in the USA, Imperial College London, Manchester Business School and Warwick Business School in the UK and the Australian Graduate School of Management.

It wasn’t too many years ago that we were in the 90s in the research dimension but now it is our stand out feature. This had a lot to do with a change in the way we hired and fired faculty made over 6 years ago. We moved to a US-style system that required faculty votes on appointments and promotions. We also rejigged teaching loads. Not surprisingly, that naturally focused everyone on research and, in particular, research in top tier publications (two or three in each field). So now half our faculty have top tier publications and a third have one coming out next year. Just to get an idea, for economics, the American Economic Review, Journal of Political Economy and Econometrica are the ones counted in the FT (but I can also go for RAND and Management Science in strategy). So incentives and opportunities do work in academia.

Some recent posts over at Game Theorist: I review the Pleo and then try my hand at cartooning here and here (why? Don’t ask). Finally, something on apologising.

These days I don’t venture too much into macroeconomics. I pretty much thought we had reached a nice consensus around the modern incarnation of Keynes and that it was pretty dull stuff after that. But apparently not. This opinion piece by Steven Landsburg in, of all places, The Washington Post, demonstrates clearly that macroeconomics is not widely understood and that basic errors are possible. Landsburg, in an amazingly trite piece of economic theorising decides that supply equals demand all of the time and so there is no room for fiscal stimulus to forestall a recession.

The idea, we’re told, is to stave off an all-out recession by stimulating both investment (through tax cuts for businesses) and consumption (through tax rebates to individuals). But hold it right there.

Investment and consumption are natural rivals.

Investment means converting resources into machines and factories; consumption means converting those same resources into TV sets and motorboats. In anything but the very short run, more of one means less of the other.

Ah, say the package’s more honest proponents, that’s exactly what we care about — the very short run. And in the very short run, we can have more of everything if only we put more people to work.

Fine, but what makes you think that this package will put anyone to work? The idea behind the stimulus deal is to give people tax cuts so they’ll feel richer and spend more. But government can’t make people richer on average; all it can do is shuffle wealth around. To pay Peter, you must tax Paul (or at least promise to tax Paul in the future, when your debts come due). Peter spends more, but Paul spends less.

Now maybe you can time things so Peter goes on a spending spree today but Paul doesn’t tighten his belt until next month. (Then again, maybe you can’t: Paul’s no fool, and he’s likely to start cutting back as soon as he sees higher taxes on the horizon.) But even if you manage to pull this trick off, sooner or later you must tax Paul. So today’s fiscal stimulus comes at the expense of tomorrow’s fiscal drag.

So let me translate: give people tax cuts and that money comes out of something else. Aggregate demand does not change so the economy has not been stimulated. The problem with this thinking is that it was precisely that point that Keynes refuted in 1936. Says ‘Law’ — that supply creates its own demand — does not hold and an economy can go into a slump with an equilibrium short-fall in demand.

Brad DeLong collects the best of why Landsburg is wrong (basically, when there are liquidity constraints, Ricardian equivalence doesn’t hold). But I want to add another: Landsburg starts off with some conflict between consumption and investment. However, he is thinking of dollars. If there is a macroeconomic issue here, the real problem is that there is a conflict between household desire to smooth income and firm’s desire to smooth investment (so as to avoid costly adjustment costs). In a closed economy, these two goals must conflict. If households try to smooth income, this will cause investment and savings spikes and, consequent, adjustment costs to be incurred. But if firms don’t budge as they try to minimise adjustment costs, consumption will become volatile. It takes a general equilibrium model to sort out what happens.

So what happens when someone offers a temporary tax cut? According to Landsburg, this would crowd out investment. According to consumption smoothing, nothing would happen as a good share of this would be saved. Fortunately, Warwick McKibbin and Peter Wilcoxin (who first had the insight about the conflict between consumption and investment smoothing, here) have worked out the answer:

In this case, households will want to save most of the extra income. In fact, under the partial equilibrium version of the permanent income hypothesis they would save all but a small fraction about equal in magnitude to their time preference rate. In general equilibrium, however, a sharp increase in saving would push down the rate of return. Moreover, the downward pressure on rates of return is even stronger when adjustment costs are present: firms have trouble investing the burst of savings without a large fraction of it being consumed by adjustment costs. The result is that the increased savings mostly drives up the stock market value of firms and drives down the rate of return. Little of it ends up as productive investment.

But the potential inefficiency of this is probably overstated. The economy is likely to be composed of sectors with lots of adjustment costs and those without as much, any resulting investment stimulus will be concentrated on the ‘low’ adjustment cost sector. So we will have a growth in income without too much inefficiency as a result of volatility. What McKibbin-Wilcoxen are demonstrating is that even with the behavioural models of modern microeconomics, fiscal policy can impact on the economy. Hence, we can go beyond Keynes and still be Keynesian.

In reality, liquidity constraints probably play a role too. This suggests that blanket temporary tax cuts are not the way to go. But targeted ones may work better. For instance, tax cuts directed at the poorer end of the income stream will cause less of a jump in saving and flow more directly into consumption.

A couple of interesting tidbits from around the web that tell us what it was like in the distant past — you know, a decade ago:

• What happened to generic domain names like milk.com? Answer: not much.
• A gallery of first versions of websites. They look like those old computers and mobile phones. Except for this one that is. It is much the same. How long has it been since anyone ‘felt lucky’?

And of a more contemporary nature: Google moves to prevent domain name ‘tasting’ where entrepreneurs scammers pick up websites, see how much ad revenue they generate and dump the bad ones back for a full refund. When I think that all of the ‘comments spam’ is generated by people trying to raise their Google page rank, I wonder if Google shouldn’t be doing even more.

Who says web ads can’t get your attention? Here is one I saw on the Channel Ten website.

When you click on it, you can see it is clearly intended for Australians? It is some SMS trivia game with all costs in $A. Does someone (maybe Ten) know more than we do about the iPhone’s Australian availability?

… in popular writing that is. Fresh from Slate‘s take just a few days ago, Tim Harford explains the prize system. He focusses on the idea that prizes need not be for ‘big ticket’ innovations like vaccines and maritime clocks.

Prizes need not have such lofty ambitions. They can simply be a way of turning a solution into a commodity. One company, Innocentive, provides an exchange where “seekers’’ can offer cash to “solvers’’. Both sides are anonymous, which is one of the selling points of innovation prizes: they reward neither connections nor seniority, but solutions alone. Innocentive’s problems read a little like the small ads on the world’s least romantic lonely-hearts website. “A technology is desired that produces a pleasant scent upon stretching of an elastomer film’’ ($50,000). “Surface chemistry for optical biosensor with high binding capacity and specificity is required’’ ($60,000).

I have an opinion piece in The Age today about what our market turmoil means for our superannuation system [over the fold].

Read more

A good article in Slate today about innovation prizes and ways of enabling markets for innovation. It isn’t new stuff and I have written about it before but it is nicely exposited; even if it doesn’t mention the main contributor of the idea itself, Harvard’s Michael Kremer. These are ideas whose time has hopefully come. Maybe they will be looked at seriously in Australia by the new innovation review.

Dilbert is now available as a widget for everything. Click here to get yours.

The government has announced today a much needed review of innovation programs to try and sort out and coordinate them. The review panel headed by Terry Cutler is pretty high powered and includes some solid economic representation.

The review of Australia’s national innovation system will be conducted by an expert panel chaired by Terry Cutler. Dr Cutler is a director of the CSIRO and Chair of the Advisory Board for the Centre for Excellence for Creative Industries.

The panel will include former Adelaide University vice-chancellor, Mary O’Kane, who will be charged with the specific task of reviewing the Co-operative Research Centres Program.

Other members of the review panel are: Megan Clark (Vice President Technology, BHP Billiton); Glyn Davis (Vice Chancellor, University of Melbourne); Steve Dowrick (School of Economics, Australian National University); Nicholas Gruen (CEO, Lateral Economics); Narelle Kennedy (Chief Executive, Australian Business Foundation); Catherine Livingstone (former Chair of CSIRO and Director, Macquarie Bank and Telstra); and Jim Peacock (ex-officio, the Commonwealth Chief Scientist).

This will be one to watch.

[HT: 26econ] I just sunk another load of money on some Apple computers. According to this video, that was a bad idea. I would have been better off shipping them in from overseas. And the latest Apple products are all made in China. I know because I tracked my new computer from there. It is really hard to explain persistent high prices. I have heard of no convincing explanation.

In their latest New York Times column, Stephen Dubner and Steve Levitt explore economic policies that completely backfire. They show examples where the behaviour of someone (say, land-owners) is regulated for the goal of protecting or assisting something else (say, rare birds) and the policy ends up, at greater cost, causing precisely the opposite of the intended effect. The sociologist, Robert Merton, first came up with the law of unintended consequences but economists have certainly embraced the whole concept as a work of caution.

But there are different types of unintended consequences. The NYT piece outlines a particular strong failure — the complete reversal of intended consequences. This is the sort of failure that leads one to suspect that the whole policy initiative was the work of a bird-hating evil genius. Sadly, it is all non-conspiratorial, done by well-meaning folk. It is a bit more like Curb Your Enthusiasm. The make from great classroom examples of economics at work.

But there are weaker forms. For instance, compulsory seat belt laws were found to make worse drivers. They were not so worse as to cause higher overall injuries from accidents even if there were more accidents. But they did cause more innocent by-standers to be harmed. In this case, the unintended consequence is harm to a third party. However, the main goal of the legislation was up-held: people in cars with accidents were safer. So this type of problem is an unintended cost.

Another weaker form came from a raft of policies analysed by Milton Friedman. He saw those policies as harming the groups intended to help but through some different mechanism; like giving with one hand and taking with the other. A good example of this was free or subsidised higher education. That was intended to help the poor get affordable education but invariably help the middle class and above get that. The reason for this was that high cost was only one reason the poorer members of society were not going through to higher education. So while the policies helped some, if you tracked through the tax implications, you would find that the poor were as a group worse off as a result of these policies.

All of this is not a message to just give up but to be cautious and to think carefully before launching into things. That is a boring message but the unintended consequence of not heeding it is to provide far more interesting classroom examples.

You know, when she strays into economics, Catherine Deveny is annoying and completely wrong. What she is doing watching television and writing about it, I don’t know. In her latest installment, she attempts and fails to ‘get’ Battlestar Galactica. It pretty much proves my point about her.

In more news, this ridiculous piece The Age lifted from the Guardian on Facebook. Apparent bottom-line: it is bad because people like it.

And another legitimate question: why do I read the newspaper?

I have always had a working hypothesis that sports really only work when no one person or team becomes dominant. For instance, I think cricket is suffering currently because of the dominance of Australia.

Well, Berkeley PhD student, Jennifer Brown, actually takes a look at this with regard to golf and the impact of Tiger Woods (abstract over the fold; the paper is here). Basically, when you know someone is going to win, there is no point trying hard because nothing will likely change that. So everyone slacks off. Turns out that in tournaments where Tiger Woods is going to show up, golf scores rise amongst his closest competitors. They are in the tent getting sponsorship deals rather than learning the lay of the course. [Update: Joel Waldfogel writes about this paper]

Read more

So Apple this week disrupted the movie rental business by offering rentals from every major studio on its US iTunes Store. Accompanying that news came the usual news that they wont be offered in Australia.

Apple has bad news for Australian movie lovers, however. ”The video rental service will not be introduced in Australia,” Apple Australia spokesman John Marx said. This stance will come as no surprise to long-suffering local Apple users.

Now, we are used to this. Accepting that just because some innovation has occurred elsewhere, we can’t have it here. But why on earth should we accept it this time?

Let’s be clear. First, broadband is available and what is more we have a government that is going to upgrade the country (one of the explicit purposes of which is to enable fast video downloads). Second, the movies themselves aren’t like, banned, from Australia. They are usual releases that we have no trouble being available in video stores or on Foxtel. So we are no different from the US that way. Put simply, there appears to be no reason, economically, why the service should not be available here. The fact that it isn’t and won’t be should ring alarm bells not ‘shrugged shoulders.’

In this era of governments concerned about strange practices in petrol and groceries, how about turning attention to industries that distribute copyrighted material? Copyright is a government granted monopoly. However, that should not mean that the monopoly is used in ways that persistently harm consumers. When one country has a service for convenient distribution of such material that another country is supposed to accept, we have to ask why? Is it because the studios don’t want to do it? Or is it because some other interested party who might suffer competitively is something to do with it? I don’t know because I don’t know what sort of contractual arrangements exist and whether they may restrict competition. But I do know that the dichotomy between practices here and with our free trade partners, the US, gives me pause to wonder what is going on here?

Let’s face it, there is as much, if not more, reason for the ACCC to be charged with investigating distribution of copyright material than there is for petrol or grocery pricing. If only because the last thing the government would want would be for it to spend $5 billion on new broadband infrastructure and find that the services that exist elsewhere are not emerging in Australia. This week’s iTunes movie rental saga is just a symptom of something surely more worrying.

News today that Time Warner are thinking of imposing download limits on broadband service. They are just experimenting though to see if it works. They could look to Australia for all the data they need on how much customers love download limits!

Orson Scott Card has written about the writer’s strike. He makes several points.

First, apparently, writers are treated like crap.

Writers have long suffered from the constant irritation of directors who did not write the script being given the proprietary credit: “A film by …” Unless the director also gets the sole writing credit, this statement is always a lie — but the studios seem to believe the French nonsense that the director is the author of the film. The proof that this is never true is a list of all the very bad films made by “great” directors who thought they could make up for the deficiencies in a bad script.

Of course, as Card acknowledges, the strike isn’t about that. But you can’t dismiss the emotion.

Second, the issue is whether getting paid upfront for a script is enough rather than having the returns come later through DVD and internet sales.

Writers get a lot of money per script. But before you dismiss us as a bunch of overpaid babies, please remember that we never know where the next check is coming from. Sell a script for $300,000 — and the film might never get made. You might not sell another script for ten years. Suddenly that wasn’t quite as much money as it sounded like at first.

OK, what this means is that there is risk. Being paid upfront compensates for two risks. First, that you might not sell many scripts. Second, that there might not be future returns. On the former, the writer bears the risk (and the studio pays a premium). On the latter, the studio bears the risk. Interestingly, it is the same two parties here which confounds economists’ usual notions of intrinsic risk aversion coefficients. So there is something more going on here than simple risk sharing.

Third, there is an issue of copyright. The writer signs that over to the studio. Card doesn’t like that:

I think this situation is immoral — though I’ve signed those contracts because there’s no other choice. It’s especially galling because the studios are now fighting to make copyright perpetual, so they can keep making money from long-dead writers’ work — while paying nothing for the privilege.

He argues that if copyright is required to foster creativity, how does assigning it to a studio do that? Well, copyright is a valuable thing. You get it by creating something. But there are many different ways of cashing out on that creation. If the studios have a path to doing that that exceeds what a writer can otherwise do, then who is to say that isn’t fostering writer creativity in the first place. Of course, the studios may have some degree of power in getting the dividends from that. But we have to ask where that power comes from.

Without explaining why, Card then argues that it is the law that needs changing.

Studios create nothing. They just decide which scripts to make and pay for them. This is all well and good in a capitalist society — but the copyright law is not a corporate welfare plan, it’s a device to encourage creativity. The studios don’t have any creativity — the writers do. So the law should be shaped to encourage writers, not the studios that steal from them.

Society benefits from having copyright laws that make it profitable to create literary works like books and scripts; but society also benefits when those copyrights are only temporary. At some point, they should all enter the public domain so anyone can duplicate them — that encourages literature to remain alive long after it was created.

He points back to 1978 changes that allowed copyright to outlive writers. But he claims that this benefited studios more as writers were cut out from the start anyway.

Card wants the long copyright not to extend to situations where that copyright is transferred to a corporation.

If a literary work’s copyright belongs to the human being who created it, then the copyright should last for the writer’s lifetime plus ten years — twenty if he has minor children at the time of his death.

But if the copyright is owned by a corporation or company, then the copyright should last fifteen years. Period. Done. After that, anybody can duplicate the copyrighted work without paying anything.

Well, I have to point out here that all this does is weaken the power of copyright. That might be desirable if, as Card seems to argue, the extra bit of copyright doesn’t foster much additional creativity.

However, he goes a little further. Card argues that this will reduce incentives for studios to cut the writer out early. Let’s face it, if writer copyright-ownership means longer lived property rights, the studios have an incentive to leave it in writer’s hands. But, to make a difference, we would have to restrict contracting possibilities here, such as long-lived licenses. Thus, the writer and studio would be compelled to renegotiate rights periodically.

However, all this does is shift risk back from the studio to the writer on future returns. If the movie is a dud, there is no future license. If it is a success, there is. But the writer’s contribution to that success was surely in play prior to the studio getting involved. If so, why extend the risk?

One thing this change would do is remove rationales for strikes on the basis of what sort of things writers can earn returns on. But other than that all this does little to change matters.

So let me return to the issue of risk bearing. The question is: do studios want writers to bear more risk in terms of DVD and Internet success? They might if writers can do something to impact on that and so some risk apportioned to them would get them focused. I can imagine a world where this is the case. What is harder to imagine is why either side really cares so much as to have a strike? The only reason can be about “who gets how much” rather than “who gets what.”

One of the things people had hoped Apple would do is produce an iBook. This device would do to books what they had already done to music. However, this quote from the New York Times is not going to help that cause:

Today he had a wide range of observations on the industry, including the Amazon Kindle book reader, which he said would go nowhere largely because Americans have stopped reading.

“It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore,” he said. “Forty percent of the people in the U.S. read one book or less last year. The whole conception is flawed at the top because people don’t read anymore.”

Of course, it is an odd criteria with regards to products. One could equally say that x percent of Americans haven’t used OSX or an iPod. It really depends on who is reading and let’s face it an iBook that could deal with the textbook issue alone would surely be a winner. Then again, Jobs also said a few years back that Apple wasn’t interested in phones.

In The Australian, our new innovation minister, Kim Carr, looks at the “voice of science.” It is an interesting read.

We need to reinvigorate the concept of the public intellectual. We need to ensure that public communication is as important as professional discourse.

He sees scientists and I think more broadly academics as having a duty to engage in public debate. I couldn’t agree more.

And in other news, economist Bruce Chapman deals with the export of economic policy ideas.

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