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Showing posts from November, 2009

The economics zeitgeist, 29 November 2009

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This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.

The words moving up and down the chart are listed here. Key words this week: Dubai, gold and percent (for some reason).

I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier…

What's the difference between short-term and long-term?

[Fairly long post: scroll to the bottom for a one-paragraph summary]

I've been interested in this debate for many years. It takes several different forms, but the simplest statement is: stockmarket investors are too focused on short-term returns at the expense of the long-term investment that builds real economic capital.

I first heard this argument deployed against "asset strippers" such as Hanson, a UK conglomerate prominent in the 1980s. Since then it's been used to describe stockmarket traders, company shareholders in general, financial institutions of all kinds, and US and UK companies who supposedly focus greedily on quarterly earnings, unlike the more virtuous French, German and Japanese firms who are willing to take the long view.

The first problem with the argument is this: long-term returns are just a string of several short-term returns in a row. For example, £1,000 invested over 20 years to return £5,000 is equivalent to an annual return of 8.3%. But at any…

Tories: Are you sure you understand that word "elected"?

There's a cute article in the Evening Standard today about the Conservative plans to bring in US-style elected police chiefs.

Whatever the merits of the idea, there's a very odd statement from shadow home secretary Chris Grayling.
"We envisage the Mayor of London being the elected police commissioner."Now this could mean that they expect the current Mayor of London (Boris Johnson) to also run for the post of police commissioner, and just happen to win. But it doesn't mean that.

It might even mean that they expect the Mayor of London to be the temporary holder of the police commissioner role until an election can be held - though it would be a very strange way to say it. But it doesn't mean that, either.

What it means is that the Mayor of London has at some point in the past been elected; and that he will become police commissioner by virtue of his position.

I don't really think that is what anyone thinks they meant by "elected police commissioner"…

The economics zeitgeist, 22 November 2009

Image
This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.
The words moving up and down the chart are listed here.
I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

[For some reason, Dean Baker's blog this week crashed my code, so I've taken it out of the feed temporarily. Proposals as to why this might be are very welcome.]

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you…

Holding out for a hero - Microsoft?

Media owners are salivating over the idea that Microsoft is going to save them in a hugely expensive attempt to compete with Google. "Microsoft makes move to cut out Google" in the FT: "Microsoft are doing exactly the right thing and asking exactly the right questions," Richard Titus, chief executive of Associated Northcliffe Digital.
"Any competition to Google is a good thing," one UK publisher said.
Tom Curley, chief executive of the Associated Press, said last month that Microsoft was willing to accept “principles” such as favouring AP stories in search results over others that regurgitate its news, or helping it track its content. “We are only going to work with those who use our principles,” he added. “We stand at an enviable moment where Microsoft and Google have decided to go to war,” he said. You can smell the desperation of people whose business model has been overthrown - not by any underhand behaviour or cheating from Google, but by a world where i…

Practical applications of behavioural economics

I'm starting a series on how to use the principles of behavioural economics in the real world of business.
It will be structured around a series of individual cognitive biases, and for each bias I will outline: Examples and stories to demonstrate how it worksThe cognitive theory of why it worksA toolkit showing how to implement it in practiceFirst up, this weekend, will be anchoring. Come back tomorrow to see some examples of this from our clients and other companies.
And if you'd like to be featured in this series - and in a forthcoming book on the same subject - please email me to share your stories of cognitive bias or behavioural economics in the business world. If you are writing about a specific business, please mention whether you're happy for their name to be used in this blog and/or in the book.

Does QE cause deflation?

In the leader column of City AM today, Allister Heath argues that quantitative easing should be stopped because it will lead to inflation. Set aside for a moment the fact that this is the whole point of it. Is he right that it will actually succeed in causing inflation?
Scott Sumner (consistent with mainstream monetary theory) points out that an increase in the money supply is only inflationary if it is expected to be permanent.
And is QE a permanent increase? Not necessarily. On the contrary: QE in isolation makes the money supply smaller.
Under QE, the Bank of England has issued £200 billion of new currency and used it to buy bonds (mostly gilts) in the private market. (The Federal Reserve has done something similar, with a higher proportion of corporate and mortgage-backed bonds.)
So there's now £200 billion more sterling than there used to be - it's fair to say the money supply is bigger. What will happen next year - or in five years time, or thirty years when all the bonds ha…

The economics zeitgeist, 15 November 2009

Image
This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.
The words moving up and down the chart are listed here.
I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Can we build a theory of expectations?

If Scott Sumner and Paul Krugman agree on something, it must be true. I think most of us would accept that as an axiom of economic sociology.
Accordingly (see here and here), we can take as read the idea that expectations of inflation and aggregate demand strongly influence actual inflation and aggregate demand.
There's nothing really controversial about this: the idea of multiple equilibria is well established. If people expect deflation and recession, they will try to save more, spend little and invest less - and deflation and recession will result. If people expect inflation or growth, they will spend more quickly and invest in the hope of protecting their assets and capturing a share of that growth; and as a result, the expectation will be fulfilled.
Or as it's caricatured by a self-help motto you've probably seen: if you think you can, or if you think you can't, you're right.
Presumably we want to have more growth rather than less, and (mild) inflation rather than…

Psychology of sticky prices

Do we implicitly extrapolate, unconsciously, from how we make a single trade to how we behave in markets generally?
We have a basic need to fix the price of a transaction for long enough for the trade to complete. If I agree to buy this beer from you for £3.40, and by the time it's finished pouring, the price might be £3.75 (or indeed £2.90) neither of us is likely to buy or sell much beer. For a transaction of this kind to work, the terms should be known in advance to both parties and remain the same for the duration of the trade.
And with our minds' amazing capacity to extrapolate, it's not such a big leap from there to the expectation that prices will remain stable over a slightly longer period of time (an hour, a day, a month, a year?)
Whatever learning mechanism creates this stability of expectations over the duration of a single transaction can surely be fooled into expecting the same thing for a bit longer.
This is reinforced by the tentative and exploratory nature of p…

Amazon's behavioural pricing

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I'm studying behavioural pricing as part of my response to the forthcoming OFT market study, and Amazon has an interesting history of this.
Whether or not they still offer personalised prices to different customers for the same product (probably not, as they were shot down for it last time), their pricing strategy is still fascinating. Take a look at this screenshot:

Because I have a ton of books in my 'Saved for later' list, I get a message like this nearly every time I visit the Amazon checkout. Often the same book moves up or down by £1 or 50p several times over the course of a few weeks.
The only plausible explanations for this are that Amazon either: has an incredibly sophisticated demand management process and knows exactly when people will pay more or less for a bookor, is testing different prices to measure the overall demand curve (or my personal one, which is even more interesting).Either way, it's fascinating to watch one of the most sophisticated behavioural ma…

The economics zeitgeist, 8 November 2009

Image
This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.
The words moving up and down the chart are listed here.
I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

An unanticipated surge of lending?

I've had this article in draft for about three weeks. Paul Krugman's latest item seemed an opportune moment to finish it.
Intriguing article by Sheng and Pomerleano in the Economists' Forum about zero interest rate policy. I don't think I agree with what they are saying (insofar as I can even tell what they're saying) but it stimulates a few thoughts along Scott Sumnerish lines.
One bit (from Kevin Warsh, quoted approvingly by the authors) jumped out at me: A complication is the large volume of banking system reserves created by the non-traditional policy responses. There is a risk, of much debated magnitude, that the unusually high level of reserves, along with substantial liquid assets of the banking system, could fuel an unanticipated, excessive surge in lending. Now surely a surge in lending is exactly what we want? Isn't all this monetary activism meant to increase the effective money supply (or counter a fall in velocity) therefore sustaining nominal GDP? Aft…

How can rising productivity mean more staff?

This BBC article asserts that... Productivity, as measured by output per hour of work, rose at an annual rate of 9.5% between July and September.
The data suggests that firms, which have cut jobs in the downturn, are now increasing their output, which may in turn lead to them needing more staff. This is truly a paradox. Greater productivity normally means firms need fewer staff - until, eventually, rising income increases aggregate demand, and then the laid-off people are employed in other sectors.
The article seems to be another example of the equilibrium fallacy*, where a reversion to equilibrium is mistaken for a first-order effect.
That is, firms cut staff because they had insufficient demand for their products - naturally, getting rid of the least productive staff. The remaining workers are more productive on average, and the reduction in output is less than the reduction in staff. This doesn't imply at all that either demand or output is increasing. If productivity had increased

No, really?

A good friend sent me a link to this unintentionally hilarious article about pricing on the iPhone App Store.
I burst out laughing at the writer's tone of utter outrage. App developers are charging the price the market will bear, and it is lower than his moral intuition tells him it should be?
The list of "complaints" in this article is hilarious: People used to sell apps for $50/year on Windows. When they moved to the iPhone, the optimal strategy was to sell it for $10/year. Therefore they sell it for $10/year. NO, REALLY?"Not all of the people investing time and money in their products are reaping the returns they expected." NO, REALLY?Someone had to price his app not on the basis of how much work he put in, but on the basis of what people would pay for it. NO, REALLY?The top ten apps list (which is based on the number of items sold, like every other top ten list in the world) is dominated by cheap applications and not by expensive ones. NO, REALLY?As there are …

The economics zeitgeist, 1 November 2009

Image
This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.
The words moving up and down the chart are listed here.
I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Lisbon treaty ratified

Vaclav Klaus has become the final European leader to sign the Lisbon treaty into law, enabling it to take effect across all 27 countries.
This is good news from a purely practical point of view - it streamlines decision making and enables the EU to work more effectively with a growing number of member states.
From a symbolic point of view things are more controversial. It is a declaration that the European institutions intend to move forward rather than fading into irrelevance, and there are a number of important symbols which will reinforce this in the public view. In ten years it is possible to foresee a European president coordinating and powerfully representing European interests in the world. Possibly even the beginning of a European economic or fiscal presence. And most importantly, a more powerful, legitimate and meaningful democratic process in Brussels and Strasbourg.
Most people would regard most of these things - in isolation - as positive moves. But they will inevitably take …

Superfreakonomics - wrong by a factor of nine

So tomorrow is the big day: the result of the Superfreakonomics counting contest!
My logarithmically scaled maximal-gap estimate, as you'll recall, was 88,782. This number was my carefully calibrated guess for the number of Google results shown for "Superfreakonomics".
At first I was worried that my number might be too high. But in fact I was stunningly inaccurate in the other direction. The current figure, one day before the authors will calculate the final result, is 737,000. It has been increasing at tens of thousands per day and will likely creep up a bit more before the search is carried out at 6am Eastern time tomorrow.
Two scenarios are possible:
Either, one of the other contestants has gamed the Google search in order to bring the results up to their guess - probably not worth it, as such skills are highly marketable in the search engine manipulation, I mean optimisation, industry. Then again, I've wasted a couple of hours writing about it by now so we can't …