Marginal Revolution

"Free Markets Foster Competition"

Tyler Cowen — 2010-09-02T09:52:00-04:00

That's a chapter title from Jonathan Franzen's new book Freedom. If you think you are going to like this book, you almost certainly will; it delivers on its promise. The problem is, I never thought I was going to like this book.

This passage is one of many that made me cringe:

"And while you're here hon, can you help me with my taxes? They're due tomorrow and my nails are wet."

Is there any surer way to long for Victor Hugo and "men as they ought to be"?

I almost stopped reading it at about p.100. I was not afraid it would get worse, rather I was afraid it would get better and I would start liking it and finish it.

Which is precisely what is happening.

The Small Schools Myth

Alex Tabarrok — 2010-09-02T07:30:00-04:00

Did Bill Gates waste a billion dollars because he failed to understand the formula for the standard deviation of the mean? Howard Wainer makes the case in the entertaining Picturing the Uncertain World (first chapter with the Gates story free here). The Gates Foundation certainly spent a lot of money, along with many others, pushing for smaller schools and a lot of the push came because people jumped to the wrong conclusion when they discovered that the smallest schools were consistently among the best performing schools.

The chart at left, for example, shows by size the percentage of schools in North Carolina which were ever ranked in the top 25 of schools for performance. Notice that nearly 30% of the smallest decile (10%) of schools were in the top 25 at some point during 1997-2000 but only 1.2% of the schools in the largest decile ever made the top 25.

Seeing this data many people concluded that small schools were better and so they began to push to build smaller schools and break up larger schools. Can you see the problem?

The problem is that because small school don't have a lot of students, scores are much more variable. If for random reasons a few geniuses happen to enroll one year in a small school scores jump up and if a few extra dullards enroll the next year scores fall.

Thus, for purely random reasons we would expect small schools to be among the best performing schools in any givenyear. Of course we would also expect small schools to be among the worst performing schools in any given year! And in fact, once we look at all the data this is exactly what we see. The figure below shows changes in fourth grade math scores against school size. Note that small schools have more variable scores but there is no evidence at all that scores on average decrease with school size.

States like North Carolina which reward schools for big performance gains without correcting for size end up rewarding small schools for random reasons. Worst yet, the focus on small schools may actually be counter-productive because large schools do have important advantages such as being able to offer more advanced classes and better facilities.

All of this was laid out in 2002 in a wonderful paper I teach my students every year, Thomas Kane and Douglas Staiger's The Promise and Pitfalls of Using Imprecise School Accountability Measures.

In recent years Bill Gates and the Gates Foundation have acknowledged that their earlier emphasis on small schools was misplaced. Perhaps not coincidentally the Foundation recently hired Thomas Kane to be deputy director of its education programs.

Ignoring variance and how it relates to group size is a simple but common error. As Wainer notes, building on a discussion in Gelman and Nolan, counties with low cancer rates tend to be rural counties in the south, mid-west and west. Is it the clean country air or some other factor peculiar to rural counties which accounts for this fact? Probably not. The countries with the highest cancer rates also tend to be rural counties in the south, mid-west and west! Once again, small size and random variation appear to be the main culprit.

Why so much BS in the corporate world?

Tyler Cowen — 2010-09-02T05:58:00-04:00

Chris, a loyal MR reader, asks:

Why does the corporate world use language so inefficiently? Why turn a simple thing like "talking to a client about their needs" into a five-step process (distinguished, no doubt, by an acronym)? Do companies think that they create net value when they brand a common thing like human conversation as a one-of-a-kind, complex process – even after the costs of being opaque, jargonistic, and long-winded are taken into account?

I assume that a large proportion of people become cynical at the sound of corporate-speak. Is it reasonable to expect that language in the business world will become more transparent and down-to-earth in the future? Or do you expect that corporate-speak will continue to serve the (perceived) need to brand the commonplace or to affect a marketable expertise – clarity, concision, and common sense be damned?

My speculation: People disagree in corporations, often virulently, or they would disagree if enough real debates were allowed to reach the surface. The use of broad generalities, in rhetoric, masks such potential disagreements and helps maintain corporate order and authority. Since it is hard to oppose fluffy generalities in any very specific way, a common strategy is to stack everyone's opinion or points into an incoherent whole. Disagreement is then less likely to become a focal point within the corporation and warring coalitions are less likely to form.

Many morale-improving corporate practices are precisely what people perceive as somewhat demoralizing, such as fluffy rhetoric, forced socializing, and a somewhat egalitarian bonus structure. Rule of thumb: when you see the demoralizing, start with the premise that it is being done for morale.

Real "straight talk" very often is not compatible with authority, as it breeds conflict. Do political leaders give us much real straight talk? Do CEOs in their public addresses?

When direct financial incentives can work well, such as in sales (bonuses) or in some parts of finance, there is much more straight talk. Disagreement and candor can flourish, because the $$ keep the workers on a common track.

My lunch group has a high level of trust and we are at little risk of a morale breakdown and thus we speak very directly with each other with a minimum of fluff or BS.

Are cruise ships saving the theatre industry?

Tyler Cowen — 2010-09-01T22:19:52-04:00

Cruise entertainment doesn't have the best of reputations, but I took my maiden voyage earlier this year and it was a real eye-opener. I was there to review shows on board the Celebrity Eclipse, and both the productions and facilities were extremely impressive. The theatre itself was actually of a far higher standard than many of the West End's crumbling playhouses – more comfy seats, better sightlines, excellent acoustics and high-end equipment.

Celebrity spends up to $1m per show for three 60-minute productions on every ship in its line. Each vessel has a 1,150-seat theatre, employs a cast of 18, plus nearly 40 musicians, a stage crew of six and various other technical crew across the music lounges on the ship.

And cruising is a huge growth area in the entertainment business. Looking across some of the other lines – P&O has its own on-board theatre company with more than 100 entertainers, Royal Caribbean is staging cruise versions of Hairspray and Chicago, and elsewhere there are licensed versions of Andrew Lloyd Webber musicals or other popular shows such as Saturday Night Fever.

But no Chekhov. The full story is here.

How much did interest rates matter for the housing boom?

Tyler Cowen — 2010-09-01T14:58:00-04:00

Both theory and data suggest that lower real rates cannot account for more than one-fifth of the boom in house prices.

That's from Edward Glaeser, Joshua Gottlieb, and Joseph Gyourko; here is more. Here is some of the theory:

If people expect to move in the future, low interest rates today will not lead them to bid up prices so much now because they realise they might have to sell later at a lower price when rates are higher. The option to prepay also weakens the link between current interest rates and house prices for the same reason. Rates also should have little or no impact on prices in elastically supplied markets as shown in Glaeser et al. (2008).

Finally, if people are credit-constrained, lower rates today need not lead to higher prices. After all, if the marginal buyer cannot take advantage of those lower rates, they should not affect the buyer’s valuation of a home. Taken together, we show that these factors can reduce the predicted impact of interest rates on home prices by about two-thirds, bringing it down to 6 or 8 from previous conclusions of around 20.

Venezuelan markets in everything

Tyler Cowen — 2010-09-01T12:30:00-04:00

A Venezuelan politician is offering breast implants as a prize in a raffle to raise funds for his parliamentary election campaign.

"Some people raffle TVs and we decided to offer this. It's an interesting prize and there's a lot of interest," Gustavo Rojas, an opposition candidate for a National Assembly position, told Reuters while campaigning in Caracas.

Here is his defense of the policy:

"The raffle is a financing mechanism, nothing else. It's the doctor who will do the operation, not me," he said.

The link to the story is here and for the pointer I thank MikeRosenwald and also Daniel Lippman.

Assorted links

Tyler Cowen — 2010-09-01T11:44:00-04:00

1. In defense of factory employment.

2. Bill Dickens defends education against the signaling model.

3. In defense of links.

What I've been reading

Tyler Cowen — 2010-09-01T06:18:53-04:00

1. The Private Lives of Trees, by Alejandro Zambra. He has snuck up on us and suddenly he is one of Latin America's best writers. As an extra bonus, you can read this in a single sitting, and still wish to read it again.

2. Burmese Lessons: A True Love Story, by Karen Connelly. Insights into dissidents, why Burmese intellectuals love books so much, and the author's sex life. She doesn't wish to call the country Myanmar. I liked it, although it would be easy to mock in a hostile review.

3. Book of Days, personal essays, by Emily Fox Gordon. She is a self-described "faculty wife" (I know her husband, the philosopher George Sher, a bit) and she has been seeing therapists most of her adult life. This is a more multi-faceted book than it may sound, and it is good for thinking through what a workable marriage actually consists of.

4. The Death of French Culture, by Donald Morrison and Antonie Compagnon. Maybe there is nothing new here, but it is useful to have a statement of French culture-bashing in one coherent place. Antonie responds, by confessing a sense of desperation.

5. Understanding The Book of Mormon: A Reader's Guide, by Grant Hardy. I only skimmed/browsed this book, but I learned a great deal from even that limited treatment. It's a serious, substantive treatment, historical and literary rather than religious. For instance, I had never even known before who "Mormon" was. This book is getting very good reviews and deservedly so.

Is being interesting more important than being happy?

Tyler Cowen — 2010-09-01T05:18:00-04:00

Vimspot asks:

2 things I'd love you to elaborate on (though perhaps you left them as cliff hangers for a reason):
1. You once said being interesting and responsible are more important values than happiness. Could you elaborate on why you think that? http://www.marginalrevolution.com/marginalrevolution/2009/12/gretchen-rubins-the-happiness-project.html

It's more interesting if you get only one of the two queries, even if it makes you less happy.

There's also the value of being interested.

"Happiness" to me sounds boring, as if the person has a limited imagination when it comes to wants and an inability to be frustrated by the difficulty of creating new peak experiences.

"Responsible" is the right thing to do and it usually carries with it some sense of fulfillment.

"Interesting" helps other people expand the horizon of their wants, since you show them some new goodies on the table.

Viewed as a signaling problem, "happiness" fails when it comes to credibly demonstrating the possession of some extreme quality or another. The busier people are, and the higher wages are, the more important it should be to signal extreme qualities to command the attention of interesting others.

What does the word "important" mean anyway? It presupposes the value judgment in question.

Penelope Trunk has interesting posts on this topic:

People with interesting lives do not get offended that they cannot be happy. Happy people are offended that they cannot have interesting lives.

A simple parable of price stickiness and international externalities

Tyler Cowen — 2010-08-31T15:24:06-04:00

Olivier Blanchard and Nobuhiro Kiyotaki published a famous "Keynesian" paper in 1987 and it remains a well-cited piece in macroeconomics. One central result is that prices and wages can get stuck too high, above market-clearing. Market participants who produce more and lower prices and wages confer a strong large and positive externality on other individuals (or regions) in the market. Of course in the absence of such adjustments, activist monetary policy is recommended, but the point about externalities remains.

Yet often, today, we are told that the individuals (or regions) which produce (i.e., export) more are imposing negative externalities on other individuals or regions.

Of course the Blanchard and Kiyotaki model had its limitations. It did not, for instance, incorporate open economy considerations. It could be that the star producers impose an unfavorably high exchange rate on the broader region and hurt the ability of the broader region to export to the larger world economy.

When the open economy considerations are relatively strong, that coincides with...the conditions under which a coordinated fiscal policy will prove counterproductive, for reasons shown by the Mundell-Fleming model. In other words, if you think the strong Eurozone countries are hurting the Eurozone weakies, you also should be skeptical about coordinated European fiscal policy. This paper surveys some key issues.

In many open economy versions of the B-K model, or variants, looser monetary policy simply exports the problems of the region to other parts of the world. So why advocate such policies, especially if you are an outsider? Maybe the EU determines its own economic destiny (fine by me) but then we're back to German production and prosperity helping Spain rather than hurting it, for the reasons given by B-K.

In this well-regarded model, the international spillover effects from the monetary expansion can be either positive or negative. But it takes work to get those effects into the positive category.

Here is a survey of some literature which extends the sticky price model to open economy and policy coordination settings.

It is commonly suggested that German exports damage (or help) Spain without considering the broader implications of that proposition.

Overall, the results may depend on whether wage rigidity is real or nominal in each currency, the degree of capital mobility, the currency of invoicing in which sticky prices are set, and how much market participants look forward and consider stocks in addition to flows. This paper surveys some issues. There are many permutations, to the point where they are perhaps no longer very useful.

I wish to emphasize the broader point that not all combinations of views here are mutually consistent.

Sentences to ponder

Tyler Cowen — 2010-08-31T12:19:00-04:00

Despite all the alarmist rhetoric, the bond vigilantes have been perfectly happy with the JGB market, presumably because Japan offered something much rarer than mere fiscal rectitude, namely deflation.

Here is more.

Assorted links

Tyler Cowen — 2010-08-31T11:26:00-04:00

1. In defense of reading James Joyce.

2. Luxury retailing booms while discount houses suffer.

3. Cooking for 80,000.

4. The early history of publishing.

5. Small town pros (very interesting, and it's about sports).

6. The culture that is Japan.

7. New Guardian science blogs.

Why isn't this on Robin Hanson's blog?

Tyler Cowen — 2010-08-31T08:40:20-04:00

Older people like reading negative news stories about their younger counterparts because it boosts their own self-esteem, according to a new study.

Or on Bryan Caplan's blog, for that matter? Here is more and I thank Daniel Lippmann for the pointer. The underlying data, by the way, are taken from Germany.

Will the Chilean miners still be paid their wages?

Tyler Cowen — 2010-08-31T07:26:24-04:00

The union is making its demands right now (Sp.) and the final outcome is not clear. The union is demanding that the government accept responsibility for paying the miners, as apparently they no longer consider the company a reliable creditor. They then want the government to try to recover the funds from the company. So far the government is strongly resisting this suggestion. Another account of the dispute is here.

Update: So far it seems that corporate payment of wages will continue through August but after that is uncertain.

Markets in everything

Tyler Cowen — 2010-08-31T07:23:33-04:00

Music lovers can now be immortalised when they die by having their ashes baked into vinyl records to leave behind for loved ones.

A UK company called And Vinyly is offering people the chance to press their ashes in a vinyl recording of their own voice, their favourite tunes or their last will and testament. Minimalist audiophiles might want to go for the simple option of having no tunes or voiceover, and simply pressing the ashes into the vinyl to result in pops and crackles.

The full link is here and I thank VaughanBell and also Allison Kasic for the pointer. Occasionally I've wondered whether my funeral ought not to consist of playing a recording of Brahms's Ein Deutsches Requiem (loudly) and then asking everyone to leave. This innovation puts a new slant on that idea.