Tag Archives: markets

Dec 24 2010
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cognition, Economics, Intelligence, law, philosophy

Thoughts on the ontology of Prohibition and origin stories

I was thinking about the notion of Prohibition lately, and realized there was a valuable insight to be garnered from the telling of the Original Prohibition story, or at least the way I see it.

What I refer to as the Original Prohibition, of course, was Adam & Eve’s experiment* with the mind-altering “fruit of the tree of the knowledge of good & evil”. And here is the crux of the story. It is a story about free will, and about how divine and human will interact, and the consequences of your choices.

I have the suspicion that many people (on both the right and the left) receive this narrative and think that the lesson from the story was that God’s Prohibition was not strong enough. It was not strong enough because it did not work to prevent our prototypical human ancestors from making a choice that brought misery and the profane to human existence. If Adam & Eve could have been prevented from eating that fruit, perhaps, the human race would not be in this ambiguous, pitiable state of earthly existence. The divine would be the sole content of human experience, and who wouldn’t want that?

But having the freedom to choose involves the awkward notion of living with the consequences of your actions. Not the false, legal, human-created consequences (at least in consensual actions where there is no victim), but the consequences of living with the knowledge, and the impact of your free will.

I have the sense that people who support prohibitions on consensual, non-tortuous activity really have the mindset that if we can just engineer society to this end or that end that we can prevent all bad outcomes, all miserable outcomes. But this is the worst kind of foolishness. Society is best served by criminalizing tortuous behavior, not non-tortuous behavior. To criminalize non-tortuous behavior is to subsume the notion of free will and human choice beneath the spectre of a glorious and impossible future.

The end result of criminalizing consensual, non-tortuous behavior, is that you create markets and industries that are dependent on the existence of the law and the need for its enforcement and not the real demand for goods and services by individuals. Ultimately, you can criminalize the entire canon of human activity through some extension of the law. The phrase “slippery slope” is appropriate here.

This is the ugly machine of fascism. It is the request to abrogate your rights and your choices for the ever-greater pursuit of security. But it is an ontological abyss. From a vantage point above, one can see the Gulag below, the (in)evitable promise of the Soviet Dream.

*One might replace the Judeo-Christian origin story with any of the many other different origin stories of similar structure and plot for the purposes of this argument.

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Aug 06 2010
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Economics

This is really, really smart

Stephan Kraus:

Deutsche Börse’s electronic trading system Xetra features volatility interruptions as safeguards against potential flash crashes. Volatility interruptions are automatically initiated if the potential execution price of an order lies outside a pre-defined price range around a given reference price. Once a volatility interruption has been initiated, continuous trading is interrupted and a change in trading form to auction is triggered. Market participants are informed of this market situation and may react to it by either adding, modifying or deleting orders and quotes. Continuous trading resumes after a certain minimum duration of the auction. In case of larger price deviations, the auction is extended until the volatility interruption is terminated manually. Given the described circuit breaker mechanism, a scenario similar to May 6 in the US is impossible to happen on Xetra. This is particularly true since the calculation of the DAX is based on Xetra data only, thereby effectively taking into account trading interruptions on Xetra while other platforms may continue to trade.

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Jun 29 2010
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Economics

When does Apple get together with Detroit?

Or more directly, when will auto manufacturers build vehicles with cameras embedded in them? We already have the Iphone, or the Flip camera; why hasn’t anyone thought to put these in vehicles?

This simple mashup could have profound implications for Americans dealing with law enforcement. With an embedded camera setup, citizens now can operate on equal footing with law enforcement and have a far easier time proving claims of law enforcement misconduct. Other security needs are also met with the use of embedded cameras; it raises the costs of property crime, as criminals are now faced with the reality that without being able to destroy the video data they are leaving behind powerful incriminating evidence.

The technology for this is already in the market and it is modular, which means that auto manufacturers don’t even need to think about this. There are plenty of firms that make aftermarket addons for automobiles; you could develop a device as an addon suitable for even the most ancient of vehicles.

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Jun 10 2010
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wine

The economics of Caymus

Caymus, the well-known producer of California cabernet sauvignon, has for years enforced its retail pricing through strict allocations of its wine (which over the lat 15 years has been in extremely high demand). Retailers and distributors are generally free to sell the wine at any price they choose, but could not advertise pricing lower than $70 for the regular Napa bottling or $150 for the Special Selection bottling. Both are certainly excellent wines, but Caymus’s insistence on holding a certain retail pricepoint has in some ways degraded the brand name that they built over the last two decades.

Here’s the story. In 2007 and early 2008, high end wines began to see a softening in demand, and in the latter half of 2008 that softening of demand turned into a free-fall. Most Californian producers who made wines priced over $50 saw their sales plummet as consumers stopped buying wine as status symbols and turned to more pertinent questions of “is this wine good?” and “is this wine a good value for me?”

High prices for cult-status Californian wines also often reflect extremely high prices of land (I remember hearing that Opus One bought an acre of land in the To Kalon vineyard for $250,000), high prices for state-of-the-art-winemaking facilities, and high prices for top winemaking talent (check out what Helen Turley charges, for instance…). In short, a lot of high-end production, while good, was represented by pricing that often had little or nothing to do with the actual quality of the wine, and many Californian producers ended up producing wines that were rather homogenous in style and geared to the tastes of wealthy people who treated wine more like a lifestyle than an agricultural product (as they do in France).

Caymus very quickly realized that their pricing strategy wouldn’t work, and began cutting deals with distributors and retailers, while trying to maintain the hard line about not advertising retail prices that were under certain pricepoints. But this was difficult, and for a while Caymus had some success getting internet retailers to remove price listings of the Special Selection (I’ve seen internet retailers list the Special Selection for as low as $85 online, a huge drop from 2005-2007, when it frequently retailed for $180). In enforcing their pricing, Caymus was often very aggressive with small retailers, who were often hit hardest by the slumping market. Retailers who had stocked up on Caymus often had large inventories of wine that represented a significant financial investment, but couldn’t discount that product to the market to maintain cash flow.

But it was impossible to maintain the hard line with everyone; in the recession, distributors and retailers started looking for better deals. Anecdotally, I have heard the large retailers on the East and West coast were cut in first on deals from Caymus and other cult-producers, and were able to retain some level of solvency on their Caymus inventory due to higher profit margins and their ability to access long-standing ‘handshake’ relationships with wealthy buyers who they could verbally communicate huge discounts to.

My own experience in this process has soured me on Caymus, who has conducted their pricing strategy and branding in a way that damaged their relationships with many small retailers and especially those who don’t have access to large markets. Their pricing scheme isn’t flexible to their relationships with many of the retailers who have worked with them for years, and has resulted in a veritable glut of expensive cabernet sauvignon in the market. The Wine Merchant in St. Louis, for example, recently started advertising the regular Napa bottling for $59, and other internet retailers are going as low as $55, which represents a $10 margin over cost (at least as of 2009).

The opinions here are my own and is not intended to represent the opinions of anyone else in the wine industry, though you’ll probably find many industry people who are willing to agree with me off the record.

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Jun 09 2010
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Economics, law, politics

Economic development, markets, and a Missouri governor I’ll identify as “Jay Nixon”

Thomas Duda at the Show-Me Daily writes:

While reading the Springfield Business Journal, I ran across a mention of the governor’s recently formed Executive Advisory Board, which will produce “a five-year plan for economic growth.” The governor’s press release states:

The final outcome of the planning process will be six to 10 strategic objectives to transform Missouri’s economy for the 21st century. The objectives will pinpoint existing and future industries that will drive growth. Along with each strategic objective, the plan will include specific tactical steps necessary to accomplish the goal. The strategic objectives and tactics will focus on the next five years.

Although I find the Executive Advisory Board’s mandate ludicrous — that state government should chart and shape the course of something as complex as our collective future economic development, I do find it encouraging that a committee member quoted in the Springfield Business Journal stated:

“We spend lots of money on economic development every year. The question is, ‘Are we strategically aligned to do it in the most effective way?’”

Obviously, the panel will not consider the possibility that the state of Missouri leave the business of economic development entirely, but I am somewhat hopeful that Executive Advisory Board just might conclude that the termination of some market-distorting policies would set Missouri on a course toward a freer and more prosperous future.

Say there are several companies in cutting edge industry X that are trying to make location decisions. The key criteria for a potential location is whether or not the legal architecture for that business to operate exists or not. Do you think it is appropriate for a governmental commission to try to predict what kind of legal architecture is necessary to sustain economic growth? Consider the much debated but unarguably important scholarship of Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny (LLSV 1998) whose data-driven approach to analyzing the relationship between legal development and economic growth has been influential in persuading governments to support markets, not replace them (LLS 2008).

Consider, too, that this is not just a commission that can be characterized in a strict government/free market dichotomy. The press release notes that the commission will be directed by top business leaders; this is more appropriately characterized as a place where the public and private spheres interact to increase the efficiency of both. I point you to Vincent Ostrom, who notes in an interview with Vernon Smith:

Instead, we should expect to find some combination of market and non-market structures in every society, and we should recognize the complex configuration of institutions behind labels such as “capitalism”. We might usefully think about combinations of private and public economies existing side by side. However, it’s important to stress that not all forms of public enterprise are, or need to be, state-owned and operated. Markets are diverse and complex entities. Markets for different types of goods and services may take on quite different characteristics. Some may work well under the most impersonal conditions. Others may depend upon personal considerations involving high levels of trust among trading partners. In other words, the options are much greater than we imagine, and we can see this is true if we don’t allow our minds to be trapped within narrowly constrained intellectual horizons.

I hazard a guess that Duda does not account for these parameters. Consider Maryland, for instance. The economic development commission there (if there is one) there could make the determination that laws barring video recording of law enforcement provides a poor legal architecture for the existence of citizen journalism or documentary filmmakers, among others. Relaxing these laws would stimulate economic activities by people and firms who previously were priced out of the market by liability costs.

Or alternatively, an economic development commission could find that biotech companies would be happy to relocate to Missouri if they could rely on a legal architecture that protects them from unfair claims of tort. Without that architecture, biotech companies wouldn’t be willing to relocate to Missouri, and we’d lose what might otherwise be an very productive industry to another place.

I don’t want to extend this argument to subsidizing businesses to relocate through tax incentives and other kinds of public financing. But I do think that the notion that Governor Nixon is interested in promoting sensible economic development through the work and advice of private-sector leaders commendable, and I think that there are good arguments as to why.

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May 02 2010
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Economics

On competition in the payday loan market

How competitive is the payday loan market? This is a question that as far as I know is unanswered. You would think that competition would stimulate innovation in the sense that as more payday lenders enter the market you would see firms starting to bundle financial products and offering lower fees or interest rates. Is this the case in Missouri or any other state? I don’t know, but it seems to me that these are all questions worth answering.

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Apr 29 2010
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Economics, Intelligence

Chaos theory and economics

I’m working on a long post on extending the implications of work done by Edward Lorenz (1963) on chaotic outcomes from deterministic systems to economics. For those of you unfamiliar with the subject (and who have an idea of fun that doesn’t include reading academic mathematical papers) Lorenz examines a simple system of 3 deterministic equations that describe convection in the atmosphere. His key insight in this examination is that changes in the parameters generate vastly different systemic behaviors, some of which are chaotic and unpredictable.

The general lesson for meteorologists that Lorenz isolates is that you can’t predict some of these weather systems past some specific time frame (I think a week or so). More generally, Lorenz’s work is foundational in chaos theory, fractal dynamics, and nonlinear systems.

Where I propose to extend this work is in following Benoit Mandelbrot (1963) who finds evidence of chaotic behavior in cotton prices. Mandelbrot was also Eugene Fama’s instructor at the University of Chicago and this work plays a key role in the development of the  efficient market hypothesis. I also am inspired by Stephen Wolfram (2002, A New Kind of Science) who suggests that there are extensive applications for the tools used by nonlinear dynamical studies of cellular automata in modeling economies and interactions. I won’t delve into it here, but Douglas Hofstadter’s seminal text on Godellian incompleteness (1977, Godel, Escher, Bach) is also worth reading for the deep and rich insights into cognition and systems theory.

My interest in this subject was triggered from the notion that institutions are fundamental parameters in describing and understanding economic interactions. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny (LLSV) are foundational in the study of legal origins and economic development but I am hard pressed to think of work outside of that literature that engages institutional interactions, development, and outcomes.

I suggest that properly understand the dynamics of interactions and change are key in understanding the nuances that make political ideologies untenable at the margin (and this is a statement that I want to make in context specifically of the 3 major strains of thought competing for space today: liberalism, conservativism, and libertarianism). There are many places where these ideologies allow for computationally equivalent outcomes but this is poorly understood.

Stay tuned. Oh and here’s the famous Lorenz Butterfly, which is the phase space portrait of the dynamical system that Lorenz (1963) analyzes:

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Oct 12 2009
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Economics, Language

Great Lines in Economics, Vincent Ostrom Edition

It would be more accurate to call them paragraphs, actually, but this interview excerpt from Vincent Ostrom perfectly articulates an argument that I’ve made for a long time: that at the end of the day, a critically important feature of human institutions and interactions is that they are defined by complexity and nuance and that monolithic conceptions based on those interactions or institutions (like “socialism” and “capitalism”) are are intellectually straitjacketing. Worth your while:

Probably the best way to characterize our approach would be to start with one of our most influential themes: the idea that broad concepts such as “markets” and “states”, or “socialism” and “capitalism”, do not take us very far in thinking about patterns of order in human society. For example, when some “market” economists speak of “capitalism”, they fail to distinguish between an open, competitive market economy and a state-dominated mercantile economy. In this, they follow Marx. He argued that “capitalism” has a competitive dynamic that leads to market domination by a few large monopoly or monopoly-like enterprises. But what Marx called “capitalism”, Adam Smith called “mercantilism”. Similarly, many authors who write about “capitalism” fail to recognize the complexity of capitalist economic institutions. They overlook the rich structures of communal and public enterprises in societies with open and highly competitive market economies.

Instead, we should expect to find some combination of market and non-market structures in every society, and we should recognize the complex configuration of institutions behind labels such as “capitalism”. We might usefully think about combinations of private and public economies existing side by side. However, it’s important to stress that not all forms of public enterprise are, or need to be, state-owned and operated. Markets are diverse and complex entities. Markets for different types of goods and services may take on quite different characteristics. Some may work well under the most impersonal conditions. Others may depend upon personal considerations involving high levels of trust among trading partners. In other words, the options are much greater than we imagine, and we can see this is true if we don’t allow our minds to be trapped within narrowly constrained intellectual horizons.

A later edit or post will talk about my experiences coming to this line of thought through the rich world of critical literature.

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Oct 07 2009
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Economics, law

Some Thoughts on Scalia’s Comment About the Supply of Lawyers

Ilya Somin over at the Volokh Conspiracy discusses Justice Scalia’s comments that many of our best and brightest minds end up wasted in the practice of law. Somin notes one serious argument against this claim, specifically that high prices for legal services are indicative of the high demand for those services. I think that there are two things that need to be added: first, as a tangent, that Say’s Law applies here (supply creates its own demand) and second, that the market for legal services is huge and the market clearing price for legal services is often way to high for many consumers. This interview with Jay Moses of the Center for American Progress details some elements of the supply and demand for legal services amongst the poor; this article in McClatchy details, among other things, an 11 million jump in the number of people eligible for free legal services since 2007. And this piece of advocacy from Diller and Savner is rich in detailing the extent of current legal services. Diller and Savner interestingly suggest that subsidizing legal aid for the poor also increases the quality of democratic representation, since it reduces the search and transfer costs of information about that sector of the population, allowing politicians to be more informed about the policy preferences and needs of their constituency. In shorter, more precise language one could say that subsidizing legal services for low-income users has positive informational externalities that increase the quality of democratic government (a public good).

But the second half of Somin’s argument is all too true: we have way too many laws. I recall a statistic (in a Krugman editorial perhaps?) noting that the massive body of federal criminal law implies that over half the population are de facto felons. Certainly the most egregious example is the terminally useless War on Drugs but there are far more insidious examples; there are plenty of excessively broad laws and regulations that felonize trivial things like failing to appropriately label chemicals or animal parts.

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