August 2005 Archives

Oil

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With Katrina bearing down on the gulf coast, some commentators have noted that this could possibly have economic consequences. A large percentage of the domestic oil production comes from this area, 25% is the number I saw today. The overnight oil futures are a few cents short of $70 after trading as high as $70.75. Where as most of the rise in oil prices were the result of increasing demand, this storm could possibly cause a supply shock. This could finally cause some negative economic consequences that people have been predicting but have yet to come to fruition. Our prayers are with those still in New Orleans and other communities in Katrina's path.

In other news, the headline from this MarketWatch seams downright pressimistic. Although, the article itself isn't as glum. It seems that attendees of the Fed's confab iin Jackson Hole aren't in agreement as what the future holds for the economy. The greatest threat it seems to me is rising interest rates. Oil, as mentioned above, doesn't seem to be causing problems yet.

Above Invoice?

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M. Anthony Carr is porting tips from car sales to real estate, but he seems to have visited too many Honda dealerships:

You must switch from selling the product to selling the deal.

We see this strategy in plenty of other sales. The auto industry is famous for it -- 0 percent financing, $500 above invoice, employee discount price. None of these strategies has anything to do with the product. They all entice potential buyers with the deal.
I don't know about you, but to me $500 above invoice doesn't sound like a deal. I'd push for $500 -- or more -- below invoice, if possible.

Below-invoice pricing is pretty common, according to automotive.com:

In fact, over the years, between 25 percent and 45 percent of customers have gotten bids below factory invoice price.
However, Mr. Carr's recommended home selling strategies feel like winners -- including giving cash up front:
The buyers are borrowing $250,000 -- a quarter of a million dollars -- and dropping the price by $10,000 reduces their principal and interest payment from $1,498 to $1,438. Is that move enough to get them excited?

Let's turn that around and offer $7,500 -- 3 percent of the loan amount -- at a full-price contract and see what it does for the buyers. They could use it for closing costs. It could be a lot of money in their pockets. They could use it to make payments over the next several months. It represents more than five months' worth of payments at $1,498 a month.

This homebuyer behavior is entirely sensible and rational, simply because, the $7500 upfront is a low-total-cost loan that gives them cash when they can use it, with marginally small payments for the next 30 years. A homebuyer could take out an additional personal loan to get the cash, but the extra time and cost of discovering and executing a second transaction (one with a higher, possibly non-tax-deductible interest payment) means it's worthwhile just to merge the two transactions.

In other words, don't feel bad about buying a car above invoice; if you're savvy, the dealer is funneling cash or extras to you upfront, and not just taking you for a ride.

UPDATE: See also Mr. Carr's retelling of the story of one of the first recorded cases of eminent domain -- from 874 BC:

The earliest one I can recall was 874 BC when Samaritan King Ahab took a vineyard next to his palace. He wanted the vineyard of Naboth the Jezreelite (I Kings 21). But Naboth wouldn't sell it to the king because the land had been in the family for so long. Naboth, being the spoiled man he was, got depressed, wouldn't eat his supper and went to bed to pout.

Enter Jezebel. Ahab's wife, Jezebel, told Ahab not to worry, she would deliver the vineyard -- "Do you now govern Israel? Arise, and eat bread, and let your heart be cheerful; I will give you the vineyard of Naboth the Jezreelite." (21:7)

She commenced to plot a false accusation of blasphemy against Naboth, leading to his execution by stoning. The land was left for taking -- which Ahab took. And thus, one of the first recorded incidents of eminent domain.

And the takings were certainly not for "public use".

BBC Radio has been running a series on specific numbers, called (plainspoken folk that they are) Five Numbers. In general, the programs programmes are quite good, so a listen through all of them is encouraged.

But more specifically for this audience, I'd suggest the final programme in the second series (titled, wittingly, Another Five Numbers) which is on not a number specifically, but rather Game Theory in general, and as applied to various economic issues:


Not long ago auctions seemed to be the preserve of either the mega-rich, bidding for Van Goghs at some plush auction house, or the shady car-dealer, paying cash-no-questions-asked for vehicles of dubious provenance. However, the advent of the Internet and David Dickinson has changed this. Auction web-sites allow the average punter to buy and sell pretty much anything, whilst an army of Bargain Hunt devotees can now happily tell their Delft from their Dresden.

But this auctioneering is just the tip of the iceberg. In 2000, the UK government received a windfall of around £23 billion from its auction of third generation (3G) mobile phone licences. This astronomical sum wasn't the result of corporate bidders "losing their heads", but a careful strategy designed to maximise proceeds for the Treasury.

Click here to open up the .RAM file.


K. Brancato adds: This reminds me of this google search I performed last week, which yielded this ad:

militaryaircraft.jpg

Unfortunately, nobody was auctioning off a pre-owned F-5 that I was in the market for.

Long-Term Hybrid Use

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The uncertainty arising from a lack of long-term use data has scared away many potential hybrid car drivers. But we do have one data point -- a taxi-cab driver in Vancouver who put 200,000 miles on his 2001 Prius:

Having had the opportunity to talk with Alain Lee, product training consultant for the Prius division at Toyota Canada, he stated the life expectance of the batteries would be a minimum of 15 years in normal use with the nickel metal hydride battery. This is based on 20,000 kms or 12,000 miles per/year.This claim is based on the information gathered from my 2001 Prius, which went back to Japan to be disassembled for technical information after 25 months use as a taxi, in exchange I received a 2003 Prius.
I'd say that was a very good deal for both sides.:

Notes on Oil Supply

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While there is some chatter going on around other blogs about oil supply issues, I wanted to make mention of something I think is important to the debate.

The definition of oil supplies often carries (and too often does so implicitly) the descriptor "economically recoverable". That is, the amount of oil that can be drawn from the ground using today's technology and todays cost-structure for doing so and reap a price that companies are willing to sell it for. By its nature, this means the amount of oil is in constant flux. An alternative description is the amount of "oil-in-place", i.e. the amount of the stuff that is extant, no matter how hard it might be to extract. (Including the stuff just found in this guy's back yard.) Of course, this number itself moves since the geological assessment benefits from ever-improving measurement methods.

To get an idea how much this number has increased, here's a chart from an EIA presentation that shows some early measurements (1942) at 600 Billion barrels of oil as ultimately recoverable, all the way up to just under 4 Trillion barrels in a 2000 USGS survey.

In the same presentation, the amount of oil-in-place is estimated at around 6 Trillion barrels. Estimates of the amount of oil to be recovered, then, depend heavily on the technological ability to make extra barrels recoverable. And, of course, as the price of a barrel of oil rises, the more economically reasonable it is to go after those additional barrels.

Currently, the EIA is using an estimate of about 1.3 Trillion barrels of "proved" oil reserves. The remarkable thing about this is that, in just 1980 that number was approximately 644 Billion (NOTE: XLS file). Clearly it would be wrong to consider any single number the exact amount of oil that is truly left in the world.

This has large impacts on anyone trying to truly predict where "the peak" might come in oil production. Yet another picture from the EIA; this time it's projected "peaks" in the production curve. As can be seen, the date of the peak is highly sensitive the changes in the projected level of production growth. There is a 46-year difference between 1% and 3% growth. It is also important to mention a couple of other items on this graph. 1) Note the sharp decline in the demand following the oil shocks of the 1970s. 2) Recent projections of growth extrapolate a trend that includes a period of time when oil was US$10 a barrel, meaning that industries like auto makers were responding by caring less about conservation. In both cases, the extremes of prices resulted in marked shifts in market actions (people wanted, and got, more efficient cars in the early 80s, then wanted, and got, gas-guzzlers in the 90s). I don't think there is any reason to suspect this time will be any different.

In a note to this slide, the EIA puts things quite nicely:

The peak year would be delayed by discovery of a larger recoverable conventional resource base than is currently estimated, or it could occur earlier with accelerated production rates. It may also vary as global oil demand varies. For example, if demand for oil weakens for economic reasons or because substitutes for conventional oil gain market share, the conventional oil production growth rate may decline and result in a later peak.

I think it would be quite reasonable to see a sustained growth in the price of oil, and thus gasoline and other fuel products, as the best way to curb demand. As the price climbs, oil companies will become more active in searching for new reserves as well as researching new technologies to make more of known reserves, meanwhile the demand for the oil will fall, and alternatives become more appealing. The reaction, I would suggest, is a pushing off of the coming peak in production. If that's so, then any attempt to restrain the rising price through some sort of governmental intervention (stepping in to respond to the people who cry "there oughta be a law" and those who simultaneosly complain both about high gas prices and the polluting nature of fossil fuels) could result in, all else equal, bringing the impending peak closer and closer to fruition.

Encounters with small business

My recent experience with a small businessman delighted me so much that I thought I'd mention it here. This is done for no better reason than to constantly remind myself and others of the sheer magnificence of seeing the market system in action.

Though I hesitate to bring up personal items, I am getting married soon. I mention this because, as is the case for just about anyone in this situation, I now spend a great deal of time party-planning, including serving as a sounding board to my lovely bride-to-be as she moves through innumerable tiny decisions. One of these is the method by which table numbers should be displayed on the tables at the reception. As it happens, Martha Stewart's Wedding magazines recently featured one of "her" typical do-it-yourself solutions using a specific type of wire that met the approval of my fiance. I was thus asked to help procure a certain amount of the stuff. She's not the only one whose fancy was struck, it turns out.

Radio Daze, of Victor, New York has been inundated with calls from future brides concerning the cloth-covered wire that was highlighted in a recent issue of the magazine. This company, specializing in products and parts for vintage radio and electronics, is now a current rage with junior Marthas looking for a bit of a personal touch. The orders have increased to the point that the product is now simply known as "wedding wire". This provides a solid chuckle for the self-described "old fogeys" that usually frequent the store.

I spoke with a man at the store, and talked for a good while about the influx of business. He's taking it well in stride, and just has to laugh a bit. One of the women he works with attempted to make some of the featured table-number holders, and proclaimed "these brides have a lot more patience than I did. There must be a learning curve for this sort of thing."

The store was, in fact, "warned" that they would be included in the upcoming magazine. They apparently had no idea the scope of what was to come, however. The extra attention is neither unwanted nor a hassle. I just wonder if, whoever first started Radio Daze likely out of a long interest in the world of antique radio, could have ever considered that such a peripheral product (well, less peripheral for those seeking to keep their speakers working, I suppose) would gather so much national attention.

Mostly, though, it's the sheer volume of exactly this sort of thing going on everyday that astounds me even more. The most important point: Radio Daze was an absolute delight to talk and do business with and I hope their good fortune continues.

Bob's post about the desire for 4 in 10 Mexicans to emigrate to the US reminds me of a conversation I had recently with a close friend.

While noting with joy how her cousin could pay $75 a day (wasn't it $50 not too long ago?) for semi-skilled Mexican day laborers to fix her home in Long Island, she insisted that the federal government "should do something to help the Mexican economy so people wouldn't want to come here".

Well, this was a new one, to me at least.

Poll

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I saw over on Kudlow's blog this story on a Pew poll which found that four out of every ten adults in Mexico would migrate to the U.S. This is unsurprising since 1 in 10 Mexicans already lives in this country. Recent reports from across the border makes it sound like drugs gangs have the run of the place.

The immigration issue has once again come front and center with Bush's plan for a guest worker plan. People such as Congressman Tom Tancredo and blogger/columnist Michelle Malkin have been talking about this issue for a while. While Bush denies it, his plan seems to offer a defacto amnesty. This has already lead to an increase in illegal immigration as this Washington Post article suggests.

So, it would appear that a guest worker program may cause a tidal wave of immigrants from Mexico if the poll is correct and anecdotal evidence is right. I say we take them. I am one of those on the right that supports easy immigration policies. Of course, there are potential economic consequences of allowing a large number of unskilled workers in the country. Namely, they won't have health insurance and will stretch an already overburdened public health care system and, also, they could drive down wages on the low end. However, as the article points out, even the educated want to move to here.

This leads to a larger question of whether we can absorb 30 million immigrants from another culture. Pat Buchanan would say we can't and that Latinos have already had negative consequences on our culture. I strongly disagree with him on this point and wonder why he thinks American culture is so weak. That is, why after absorbing many immigrants before that it will be Latinos which doom us? Victor Davis Hanson has made some interesting points in some of his columns and what he says is similar to my experiences(his comments on the guest worker program is here). There are negatives as he points out, but also a ton of positves. The proliferation of taquerias being just one. Also, the fact that many latinos grow up to be patriotic Americans who serve dispraportionally on the front lines in the armed services.

As Kudlow says "Looks like we're doing something right", but more importantly an easy immigration policy is consistent with freedom and free markets.

Informative, and scary

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I can't help myself, really. The point almost makes itself, but I figured I'd make it explicitly.

Read this entire post over at Tall, Dark, & Mysterious.

An excerpt simply cannot do it justice.

Now, imagine these people are running your health care system. Imagine them doing it for a country with several times the population of Canada.

And remember it the next time someone cites Canada as an example of the wonders of universal health care.

Overheard at Islip Airport

Due to unspecified security concerns, last night's 8:30 from ISP to BWI departed at 11:30 or so, but I had already rescheduled for the first flght out this morning when I was passing through a pack of baggage handlers smoking outside. One sang a very short ditty:

Nuttin' but DE-lays, baby

makin' OT like CRA-zy

Though the extreme delay was not the fault of this man or of his colleagues, one can see a perverse incentive arising. Still, I'm not a manager, but I'd say than an overtime structure that rewards everyday personnel with a bonus for working slowly is neither labor-friendly nor shareholder-wealth maximizing.

This got me thinking, "Could airport ground crews collude with one another to slow down air traffic, giving each other routine OT?" These aren't sumo wrestlers, but why not?

Garry Kelley, call your office.

Violence in The Maldives

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bfhead2.jpg
Paul sends an urgent email; violence is growing in Male, the capitol of the Maldives, on the anniversary of last year's pro-democracy rally. The main opposition leader, the pro-democratic Mohamed Nasheed, was arrested during a peaceful protest. Others had to be dragged away:

Mohamed Nasheed, who heads the Maldivian Democratic Party and is a vocal opponent of President Maumoon Abdul Gayoom, was leading a 600-strong rally when he and four colleagues were encircled by riot police and whisked away.

"It was a peaceful protest until some undesirable elements joined ... and they started to get a bit unruly," acting government spokesman Mohamed Shareef said by telephone from the island cluster's capital of Male. "We had to take Nasheed away for his own safety.

The usual place to go read for more is Minivan News, which is reporting widespread civil unrest across the entire Maldives. However, Paul fears that the internet will soon be cut. In the past -- just last week, in fact -- the government has referred to the opposition as "extremists":
The objective of this handful of political extremists is clear: They want to destabilize the economy at a time when national efforts have been geared to attaining full recovery after the tsunami, and to stir up violence and hatred on the streets, instead of participating in the democratic process.
Of course, it's kind of hard to participate in the democratic process without multiparty elections. And did I mention that physical copies of the Universal Declaration of Human Rights are banned in the Maldives?

The photos here tell the entire story. I am unable to connect with the government's Voice of Maldives feed.

Here's a backgrounder on the Maldives. Check back here for updates throughout the day.

The Maldivan Democratic Party appears to have more, but in the Divehi language, not in English.

UPDATE: Paul sends in another email:

The whole thing is pretty grim: police mercilessly beating children, pregnant women, without any mercy. People have been dragged out of mosques.

The government has no regard at all to the constitution... it gives the right for people for free assembly...

I don't understand these so called ministers and others prostituting (that may even be an insult to prostitutes) for such a murderous regime. Maybe I have learned from a different book than theirs, that there is such a thing as human rights.

Like in Saddam's Iraq when the government turns on its own people, who is there to help?

Sadly there has been little or no international press coverage. Meanwhile the government run media put outs this charade of false news.

The prayers of this atheist are with you, Paul. MSM, where are you?

Phantoms in the Mind

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phantommind.jpg

A visit to the hospital often brings up interesting things. A colleague I met at the hospital mentioned about a strange case of a woman who gave birth recently, refusing to take care of her new born.

The birth was normal and the woman took care of the baby initially. After about a week, the woman refused to give milk to the child and got angry when she sees the child. She complained that the child had come into this world after cutting her stomach. The doctor diagnosed her with a rare neurological disease. ( If any one of you had come across a similar disorder and know its technical name please let us know)

The relationship between mind and body has always fascinated me especially after reading the V. S. Ramachandran�s popular introduction to neuroscience, Phantoms in the Brain. The above case illustrates a physical change in the body triggering a reaction which affects the person mentally. In other cases like pseudocyesis or false pregnancy (it is said it affected Mary Tudor, a queen of England, who was falsely pregnant twice, with one episode lasting thirteen months) it is the other way. One explanation given by Ramachandran of false pregnancy is that it could be cultural; many women felt extreme social pressure to have a baby during the olden times and the disease is rarely seen today.

Ramachandran (first scientist to have done a successful amputation of a phantom limb) and Oliver Saks have been great popularisers of neuroscience. What I like about Ramachandran�s style of writing is that he always try to tell the big picture and adds humour as well. He also warns budding scientists not to ignore every anomaly they see and learn to differentiate between a trivial anomaly and a genuine anomaly:

[A]s a rule of thumb, if an odd, inconsistent observation has been lying around for ages and has not been empirically confirmed despite honest attempts, then it is probably a trivial one. (I regard telepathy and repeated Elvis sightings as belonging to this category.) On the other hand , if the observation in question has resisted several attempts at disproof and is regarded as an oddity solely because it resists explanation in terms of our current conceptual scheme, then you are probably looking at a genuine anomaly. (p.223, Phantoms in the Brain)

Ramachandran points out elsewhere that for sciences that are still in its infancy (like neuroscience and psychology) demonstration-style experiments play an especially important role. He notes for example, �in recent decades all medical students were taught that ulcers were caused by stress, which leads to excessive acid production that erodes the mucosal lining of the stomach and duodenum, producing the characteristic craters or wounds we call ulcers. And for decades doctors treated it with antacids, histamine receptor blockers, vagotomy (cutting the acid-secreting nerve that innervates the stomach) or even gastrectomy (removal of part of the stomach). But then a young resident physician in Australia, Dr. Bill Marshall, looked at a stained section of a human ulcer under a microscope and noticed that it was teeming with Helicobacter pylori- a common bacterium that is found in a certain proportion of healthy individuals. Since he regularly saw these bacteria in ulcers, he started wondering whether perhaps they actually caused ulcers.�

Bill did mention it to his professors and they were adamant that it was conventional wisdom that ulcers were caused by stress and what he was seeing was probably a secondary infection. Anyway Marshall did not stop there. He carried out an epidemiological study which showed a strong correlation between the distribution of Helicobacter species in patients and the incidence of duodenal ulcers. Even this did not convince his superiors. Finally Marshall swallowed a culture of bacteria, did an endoscopy on himself and demonstrated that his gastrointestinal tract was full of ulcers! He went on to do a proper clinical trail and showed that ulcer patients who were treated with a combination of antibiotics, bismuth and metronidazole recovered at a much higher rate- and had fewer relapses- than did a control group given acid-blocking agents alone.

As Ramachandran mentions:

[A] single medical student or resident whose mind is open to new ideas and who works without sophisticated equipment can revolutionize the practice of medicine. It is in this spirit that we should all undertake our work, because one never knows what nature is hiding�Every scientist knows that the best research emerges from a dialectic between speculation and healthy skepticism.�

For Discussion: Should economists give more emphasis to �demonstration-style experiments� in doing economics like teaching capuchin monkeys to use money (and also to use money for sex) and approaches pioneered by Vernon Smith.

Links: There are several good neuroscience and cognitive psychology blogs like Mind Hacks, Brain Waves, Brain World, Cognitive Daily, Neurodudes and Neuroeconomics.

Here are lectures of Ramachandran which was made to his latest book The Emerging Mind. Even OECD has publications on the brain. Neuroeconomics is fast becoming an important area of economics.

Intellectual Trespassing

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bowandarrow.jpgRecently there has been some controversy brewing across the blogosphere about Jared Diamond�s book Guns, Germs and Steel.

Many expert generalists and synthesizers (Diamond is physiologist specializing in membrane physiology of the intestine, an ornithologist the first westerner to observe the mating rituals of the golden-fronted bowerbird and wrote a book called Why is Sex Fun, and a historian all rolled into one) run into trouble with specialists who often fails to see the big picture. Of course there are legitimate criticisms of his views in Guns, Germs and Steel and his most recent book Collapse.

Even Bill Gates praises Guns, Germs and Steel:

It's the first explanation of history I've seen that gets at the key question of why Europeans and Asians, came to control most of the world, rather than Africans, Native Americans or other people.

Diamond's primary thesis is that there's no inherent superiority among any racial or ethnic groups, and that the often-tragic failure of other races to resist expansion by other peoples was largely a matter of bad luck.

What I�m amazed is how he manages to churn out these massive tomes when he doesn�t even use a computer (Bill Gates doesn�t explain this):

I do not have a computer. I do not know how to turn on a computer.

Further he explains his approach when questioned about his approach to generalist thinking:

Q: Is there a process that you go through, a way you organize your thinking, to be able to synthesize from such a broad array of fields?

A: A couple things. One is that I found that the more things you�re interested in and the more you learn, the richer the framework into which you can fit any new thing. So synthesis, if you do it at all, gets professionally easier with time. It�s no surprise that older people can do better at synthesis, because they�ve been learning their entire lives. It�s the opposite of, say, reasoning skills in mathematics. Synthesis increases with age as you learn more.

I�ll show you upstairs one of the chapters that I�m working on for my next book. It�s about the history of Viking Greenland. When I started reading about Greenland, one of the first things I wondered was: Where did their iron come from? Another thing I wondered was: Could grain grow there? So knowing about other things, there were just more questions I could ask about Viking Greenland.

As for how I actually go about working with some new area, you�ll see the piles of books and papers upstairs � I do lots of reading, I talk to people, I find out who has written
stuff in an area, and then I call them up and I ask them to recommend more things, which I then read and I come back to them with questions. Then, if possible, I go visit the sites.
I�m hoping to go visit Greenland this summer. I read the stuff, I take notes on it, I organize, I type up the notes, my secretary transcribes my dictation, and then I organize notes into topic headings, and the topic headings then get organized into different sections of the chapter.

Book Recommendation: Intellectual Trespassing As A Way of Life

Here are two good lectures from Jared Diamond; The Broadest Pattern of Human History and Ecological Collapses of Pre-industrial Societies.

Radioeconomics PodCast

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James Reese gets me to make off-the-cuff remarks about my dissertation, T&B, ALP, and RAND in his most recent podcast at Radioeconomics. I haven't listened to it, and I won't, so please tell me whether or not I sound like an economist or a fool -- or both.

Thought of the Day

justdoit.jpgToday�s thought of the day is from the excellent Indian blog of Turbanhead. Even Coca Cola is not happy with the photographer and is threatening to slap a defamation suit for Rs. 2 Million and demanding an �unconditional apology�.

Turbanhead has a lot of humorous posts like this one, Fashion Terrorists, and lot of clips of Bollywood movies.

Talking about Bollywood, here are eight things you ought to know about Bollywood. I have earlier commented about the overdose of Indian patriotism in some of the Bollywood movies. It seems the tax system also encourages it;

States use taxes to protect local language cinemas, and the Indian government waives taxes on films that are deemed to be especially patriotic (recently, films like Lakshya and LOC: Kargil were 'tax-free'. So the next time you see some uber-patriotic war film and wonder how Bollywood got so patriotic all of a sudden, keep in mind that there's a profit-margin in there....)

The success rate for Bollywood films is 15-20 percent. The vast majority of films are 'flops'. The industry survives because there is always some rich sap ready to invest in another film.�

Borders Doesn't Want to Sell Me Books

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Sometimes I feel bad for the small bookstore owner, noting their courageous competition against superstores like Borders, discount warehouses, and Wal-Mart. But it's clear to me that independent booksellers almost always beat the big boys in service, and that service must never be compromised.

Case in point: Last night I searched online and found that the Borders store nearest to my workplace carried in stock a Thomas the Tank Engine book I wanted for my son. Then I saw this:

reserveforpickup.gif

In theory, Borders will find the book to verify that it is still in stock, reserve it for you, and email you back within 2 business hours. Sounds like a time-saver, so I did it.

And an hour after opening, the store indeed sent an email with this disappointing message:

Thank you for your online reservation request. We're sorry to say that the remaining stock of the item you requested has been purchased since our last online availability update. You may want to check online to see if there are other items that will meet your needs. Your local store will also be happy to special order the item, if you wish.
Blah, blah, blah...

To make a long story short, I checked online again, and the book was still in stock. So I went to the store, and within 30 seconds I found the book I had reserved, exactly where it should be in the Children's book section. Surprise, surprise.

Did Borders employees even bother to check the shelves? I'm not surprised. My previous encounters with Borders elsewhere were also sub-par.

Given the near universal acknowledgement of the relative health benefits of human breast milk over formula, I find opposition to the sale of breast milk to hospitals offensive and repugnant:

A US firm is looking to commercialise breast milk by selling it to hospitals for the treatment of sick babies.

Prolacta Bioscience, a small company just outside Los Angeles, also wants to carry out research to develop breast milk-based therapies....

But the Human Milk Banking Association of North America questioned the "buying and selling" of human milk.

It said introducing the profit motive might pressure women and medical institutions to provide milk to a bank regardless of the needs of their own babies.

Well, I'm not certain the "breast milk as remarkable cure" angle will fly, but that's the marketing... not the science.

Donated breast milk comes from healthy women who pump out more than they use, whether they are weaning their own children, or otherwise. Is it possible a woman will starve her baby to sell her breast milk? Sure, it's possible, but that's not a meaningful, operational standard.

More importantly, I gather that any hospital that uses donated breast milk has nurses, doctors, and other staff who are earning money by feeding and caring for the sick infants. As Alex Tabarrok and others have noted in other contexts, why is it that the donors the only ones not allowed to make money off the deal?

Let's go further with this. Why limit breast milk to sick babies? Why not make human breast milk available to anybody willing to pay the price? Many women currently choose not to breastfeed or cannot breastfeed, and they substitute formula. Other women return to work shortly after giving birth, and choose to pump and store breast milk during the day. Why shouldn't they have the opportunity to purchase what they might consider a healthier and/or easier alternative?

-----

The Markets in Everthing label is stolen from MR, of course.

UPDATE: A little history:

The practice of women sharing breast milk is nothing really new. It's been going on for centuries -- dating back to the era of wet nurses. What is new is a phenomenon in which women, often perfect strangers, exchange breast milk through the Internet, in mommy chatrooms, and even through mainstream sites like Craig's List and eBay.
Now, you need a prescription to buy breast milk from a bank (at $3.25 an oz.)!

In 2003, one Canadian family spent C$700 a week on breast milk. They claim that donors are sometimes paid in the US, unlike Canada, so regulated milk is easier to come by, but I cannot verify this. But "black market" unregulated, untested, risky breast milk is always available:

When supply can't meet demand, a black market emerges. Websites and chat rooms freely exchange tips on buying and selling breast milk.

"When you get milk informally... the donor isn't screened and so it comes down to how well the family knows that donor. And obviously, if it's a complete stranger, then you know absolutely nothing about them. You may be placing your child at some risk," Jones says.

Here's one forum on which many women wanted to know how they could go about entering the market on the supplier side. The motives of several are clear -- they want money so than can stay home longer:

I am among the many women looking to sell my breast milk. As another women said on the board, I am bearly making enough money and would love a way to make extra money so I can stay at home longer with my baby. I agree with that all the way. Maybe in the future when I am a little better off I will look into donating because it is for a wonderful cause but for now I am looking to sell.
Posters ignored warnings that selling breastmilk is illegal in many states, and that the board was not to be used for marketing purposes.

In addition, one woman in Salt Lake advertised in a newspaper classified section, only to get too many prank calls. The asking price: $1 an oz.

Of course, some women are genetically predisposed to having large amounts of breast milk. One such Norwiegan woman sold hers and bought a car:

�I�m making some money on this as they pay 135 krone per liter,� Lie said to TV 2. �I�ve gotten my driver�s license and bought a car, everything paid by breast milk.�

With the liter price of NOK 135 (USD 19.56), Lie got an income of more than NOK 65,000 (USD 9430) on her breast milk. She has an 11 month old son.

$20 a liter is $20/28.34 = $0.75 an oz, which seems like a bargain. Price dispersion is very large, and I never really thought that we must include production of breast milk in our GDP calculations:
One dollar per liter was the value assigned to milk in the Hatloy & Olshaug article from JHL, in which it was estimated that counting human milk production in Mali would raise the the GDP by 5%.

Well, let's play this game for the US. Breastfeeding women require about 500 calories more a day, but the price of caloric intake is much less than the output value of milk. Let's say the 500 calories cost $5, and a baby drinks 32 oz a day at a risk-adjusted black-market price of $2 an oz. A breastfeeding woman produces about $60 a day in net economic value, excluding the opportunity cost of her time. There
are an average of 35% x 4 million = 1.4 million women breastfeeding daily in the US. (This is from an extremely crude linear extrapolation: given 4 million annual births, 70% breastfed at 0 months, 35% breastfed at 6 months, and 0% breastfed at 12 months, the probability of any 0-1 year old being breast fed is 35%). Multiply 1.4 million times 365 times $60 and you find that American women produce, on net, about $30 billion annually in breast milk.


An Email from the Michael Jordan of Economics

| 4 Comments

I received the following email from Dr. Gary Becker with regard to the post I had on him sometime back, The Secret of Gary Becker.

I DO REMEMBER THE LETTER FROM FRIEDMAN. IT WAS INITIALLY VERY UPSETTING, BUT I REALIZED HE WAS ABSOLUTELY CORRECT. I BELEIVE I WROTE ABOUT THAT EPISODE IN MY ARTICLE ON FRIEDMAN AS A TEACHER.

I FELT I HAD GOOD IDEAS IN THIS EARLY VERSION OF MY THESIS ON DISCRIMINATION, BUT I HAD MADE LITTLE EFFORT TO CONVEY THE IDEAS TO OTHERS. BY TRYING TO DO THAT, ONE USUALLY DISCOVERS WHAT YOU UNDERSTAND WELL AND WHAT YOU DO NOT. IT WAS A GREAT LESSON FOR ME THAT I HAVE TRIED TO INCORPORATE IN MY WRITING.

ON YOUR GENERAL POINT, I WAS VERY FORTUNATE THAT I HAD A FEW GREAT TEACHERS-WITH FRIEDMAN CLEARLY THE BEST.

-GARY S. BECKER

There is an interview (warning; a large file 9 MB) with Becker and Posner at Radio Economics blog. Mostly its about blogging but they also comment on issues like who will replace Alan Greenspan. I think the approach they are using at Becker and Posner with one person taking the lead on writing a post about an agreed topic and the other commenting is a useful model for a group blog. Posner also comments about his latest column in The New York Times: "Bad News". Daniel Drezner has links to blogosphere�s reaction to the Posner article. I was curious why the Anti Becker Posner Blog was not mentioned in their interview.

If anybody comes across the web link for the Becker article on Friedman as a Teacher, please let us know.

I will pose the question first, then give you the background below.

Question: How do countries decide to go to war? What role do economics play in choosing to pursue military action?

Please share your thoughts! I know we have intelligent readers and I would love to know what you have surmised on this issue.

I have begun reading Conflict After the Cold War: Arguments on Causes of War and Peace by Richard K. Betts (an assigned class reading). Richard Betts is a long time fixture of U.S. foreign relations and is now a professor at Columbia. In his book, Betts proposes to collect the great prose regarding war and peace in an effort to search for global stability. So far, I have been quite disappointed. Betts is a realist, and as such he has begun his book with an obvious bent toward his fellow theorists and through the first 200 pages he ignores liberal ideals and economic theory almost entirely. The next section is titled "Economics: Interests and Interdependence" so there may be hope yet.

Two of the early featured authors are John Mearsheimer and Geoffery Blainey; both are realists, and therefore focus on the balance of power dynamic between nations. Mearsheimer completely ignores the economics, and therefore the decision science, of war, going so far as to reject it when he wrote, "... the main assumption underpinning [liberal economics] is wrong. States are not primarily motivated by the desire to achieve prosperity (Betts 26)." The bulk or Mearsheimer's argument is that a state of bipolarity, with two major powers of equal military might, is the most stable global power configuration.

Blainey is more open minded, after reading his article, I see room for integrating economic theory. Blainey's primary argument lies in that war is the last resort of failed diplomacy. In other terms, Blainey examines the diplomatic process as a barter transaction and he sees war as the final action when double coincidence of wants does not occur. Much as in a barter transaction between a pedestrian and a mugger might go.


Mugger: Give me your wallet and your watch!

Pedestrian: My wallet and my watch are quite valuable. What do you offer in barter for my property?

Mugger: I hate mugging economists, I've got to stop prowling George Mason University! I offer you your life in exchange for your property.

Pedestrian: Your terms are not reasonable. I think that I have more might than you do, I choose the tools of war to settle this transaction.

Mugger: Damn, you called my bluff. I'm just a political science major using this street corner as a political science lab, since we cannot otherwise test our hypotheses in real life. Thank you for your participation.


The more subtle aspect of Blainey's argument is that in order for war to occur, both parties must disagree about the military strength of the other party and believe the costs of war will be less than the payoff for winning. As you can see, the mugger and the pedestrian disagree, but they do not both want war.

Blainey does not however come right out and recognize our economic tools in this article. He merely leaves room for insertion of cost & benefit analysis, game theory and economic value. Most other authors in this book have so far dismissed economics as well. Franco Fornari writes, "...economic, political, ideological factors are specifically generators of conflicts but are not specific factors of war." In other words, countries might disagree over economics, but they don't go to war because of economics.

Primarily, these author's either assume economics is only the study transactions involving money, or they reject the idea of competition for resources in general and just assume that power hungry nations always choose war if they have enough power to do so.

As a student of economics, I am convinced that these authors are missing the boat. I realize my bias is present in assuming that economics can help to explain, well, basically everything, but certainly war.

I will be happy to share more thoughts on war as this class will continue for a few more weeks.

If you are interested in more on this topic, you may read the whole paper: The Value of Reality (PDF).

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