economics

Why Lobster Isn’t Priced Like Chicken

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In 2005, Maine lobster was selling for almost six dollars a pound wholesale. By 2009, it cost just half that, and, in the past couple of summers, huge lobster harvests, believed by some to be a result of global warming, have glutted the market, sending prices tumbling further. This month, lobster off the boat is selling for as low as $2.20 a pound. So why hasn’t the price of lobster come down when you’re buying it at your favorite restaurant?

James Surowiecki explains in The New Yorker that lobster isn’t like a commodity, but rather is more like a luxury good. If it were priced like chicken, people would presumably enjoy it less:

Keeping prices high obviously lets restaurants earn more on each dish. But it may also mean that they get less business. So why aren’t we seeing markdowns? Some of the reasons are straightforward, like the inherent uncertainty of prices from year to year: if a bad harvest next summer sent prices soaring, restaurants might find it hard to sell expensive lobster to customers who’d got used to cheap lobster. But the deeper reason is that, economically speaking, lobster is less like a commodity than like a luxury good, which means that its price involves a host of odd psychological factors.

Lobster hasn’t always been a high-end product. In Colonial New England, it was a low-class food, in part because it was so abundant: servants, as a condition of their employment, insisted on not being fed lobster more than three times a week. In the nineteenth century, it became generally popular, but then, as overharvesting depleted supplies, it got to be associated with the wealthy (who could afford it). In the process, high prices became an important part of lobster’s image. And, as with many luxury goods, expense is closely linked to enjoyment. Studies have shown that people prefer inexpensive wines in blind taste tests, but that they actually get more pleasure from drinking wine they are told is expensive. If lobster were priced like chicken, we might enjoy it less.

Another additional point worth highlighting:

Restaurants also worry about the message that discounting sends. Studies dating back to the nineteen-forties show that when people can’t objectively evaluate a product before they buy it (as is the case with a meal) they often assume a correlation between price and quality. Since most customers don’t know what’s been happening to the wholesale price of lobster, cutting the price could send the wrong signal: people might think your lobster is inferior to that of your competitors. A 1996 study found that restaurants wouldn’t place more orders with wholesalers even if lobster prices fell twenty-five per cent.

Finally, having lobster on the menu is a boon for restaurants because its artificially high price makes other dishes on the menu comparatively more affordable. Cited in Surowiecki’s piece is a fascinating paper by Itamar Simonson and Amos Tversky concerning these context-dependent preferences:

The standard theory of choice-based on value maximization-associates with each option a real value such that, given an offered set, the decision maker chooses the option with the highest value. Despite its simplicity and intuitive appeal, there is a growing body of data that is inconsistent with this theory. In particular, the relative attractiveness of x compared to y often depends on the presence or absence of a third option z, and the “market share” of an option can actually be increased by enlarging the offered set. We review recent empirical findings that are inconsistent with value maximization, and present a context-dependent model that expresses the value of each option as an additive combination of two components: a contingent weighting process that captures the effect of the background context, and a binary comparison process that describes the effect of the local context. The model accounts for observed violations of the standard theory and provides a framework for analyzing context-dependent preferences.

David Graeber on the Phenomenon of Bullshit Jobs

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David Graeber is a professor of Anthropology at the London School of Economics and author of Debt: The First 5,000 Years. In a must-read, thought-provoking post titled “On the Phenomenon of Bullshit Jobs” he explains how the majority of workers these days are stuck in meaningless jobs:

In the year 1930, John Maynard Keynes predicted that, by century’s end, technology would have advanced sufficiently that countries like Great Britain or the United States would have achieved a 15-hour work week. There’s every reason to believe he was right. In technological terms, we are quite capable of this. And yet it didn’t happen. Instead, technology has been marshaled, if anything, to figure out ways to make us all work more. In order to achieve this, jobs have had to be created that are, effectively, pointless. Huge swathes of people, in Europe and North America in particular, spend their entire working lives performing tasks they secretly believe do not really need to be performed. The moral and spiritual damage that comes from this situation is profound. It is a scar across our collective soul. Yet virtually no one talks about it.

So what happened as a result of global automation?

But rather than allowing a massive reduction of working hours to free the world’s population to pursue their own projects, pleasures, visions, and ideas, we have seen the ballooning not even so much of the “service” sector as of the administrative sector, up to and including the creation of whole new industries like financial services or telemarketing, or the unprecedented expansion of sectors like corporate law, academic and health administration, human resources, and public relations. And these numbers do not even reflect on all those people whose job is to provide administrative, technical, or security support for these industries, or for that matter the whole host of ancillary industries (dog-washers, all-night pizza deliverymen) that only exist because everyone else is spending so much of their time working in all the other ones.

So was Keynes wrong? No, argues David Graeber, in this humorous paragraph:

While corporations may engage in ruthless downsizing, the layoffs and speed-ups invariably fall on that class of people who are actually making, moving, fixing and maintaining things; through some strange alchemy no one can quite explain, the number of salaried paper-pushers ultimately seems to expand, and more and more employees find themselves, not unlike Soviet workers actually, working 40 or even 50 hour weeks on paper, but effectively working 15 hours just as Keynes predicted, since the rest of their time is spent organizing or attending motivational seminars, updating their facebook profiles or downloading TV box-sets.

On meeting people with bullshit jobs in real life:

In fact, I’m not sure I’ve ever met a corporate lawyer who didn’t think their job was bullshit. The same goes for almost all the new industries outlined above. There is a whole class of salaried professionals that, should you meet them at parties and admit that you do something that might be considered interesting (an anthropologist, for example), will want to avoid even discussing their line of work entirely.

On the perverse notion that this status quo should endure:

It’s even clearer in the US, where Republicans have had remarkable success mobilizing resentment against school teachers, or auto workers (and not, significantly, against the school administrators or auto industry managers who actually cause the problems) for their supposedly bloated wages and benefits. It’s as if they are being told “but you get to teach children! Or make cars! You get to have real jobs! And on top of that you have the nerve to also expect middle-class pensions and health care?”

A must-read in its entirety. Thought-provoking.

Post-Scarcity Economics by Tom Streihorst

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Tom Streihorst, a filmmaker and writer who publishes articles on finance and economics, pens an excellent essay titled “Post-Scarcity Economics” in The Los Angeles Review of Books:

We fly across oceans in airplanes, we eat tropical fruit in December, we have machines that sing us songs, clean our house, take pictures of Mars. Much the total accumulated knowledge of our species can fit on a hard drive that fits in our pocket. Even the poorest among us own electronic toys that millionaires and kings would have lusted for a decade ago. Our ancestors would be amazed. For most of our time on the planet, humans lived on the knife-edge of survival. A crop failure could mean starvation and even in good times, we worked from sun up to sundown to earn our daily bread. In 1600, a typical workman spent almost half his income on nourishment, and that food wasn’t crème brûlée with passion fruit or organically raised filet mignon, it was gruel and the occasional turnip. Send us back to ancient Greece with an AK-47, a home brewing kit, or a battery-powered vibrator, and startled peasants would worship at our feet.

And yet we are not happy, we expected more, we were promised better. Our economy is a shambles, millions are out of work, and few of us think things are going to get better soon. When I graduated high school, in 1975, I assumed that whatever I did, I would end up somewhere in the great American middle class, and that I would live better than my father, who lived better than his. Today, my son doesn’t have nearly the same confidence. Back in those days, you could go off to India for seven years, sit around in an ashram, smoke pot and seek spiritual fulfilment, and still come home and get a good job as a copywriter at Ogilvy and Mather. Today kids need a spectacular resume just to get an unpaid internship at IBM. Our children fear any moment not on a career path could ruin their prospects for a successful future. Back in the 1970s, pop stars sang songs about of the tedium and anomie of factory work. Today the sons of laid-off autoworkers would trade anything for that security and steady wage.

Most of us are working harder, for less money and with no job security. My father and I both worked at the same large corporation but there was a difference, a difference determined by our respective eras: he was staff, I was freelance. When he got sick, the company found him doctors, paid his salary, put considerable effort into his recovery. Had I ever gotten sick, they would have simply forgotten my name. He yelled at the CEO habitually without any fear of losing his job. I mouthed off once to a middle manager and was never hired again. He had a defined benefit pension paid for by the corporation, the government gave me a tax break should I choose to save for my own retirement. The company had legal and moral responsibilities to him, which both he and they viewed as sacrosanct. All they owed me was a day’s pay for a day’s work. His generation gave their you to a corporation, and the corporation took care of them in their old age. Today loyalty, if it exists at all, goes just one way. Many of my college buddies, are unemployed at 50, or earning less than they did ten years ago.

He discusses economics in the context of Paul Krugman, Keynes, and Alan Greenspan. Worth a read.

The Secret Science of Ticket Scalping

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I actually consider it more of an art than a science, but this is a nice synopsis on how ticket pricing drives scalpers:

Most concertgoers don’t usually consider ticket prices as incredibly low. After barely keeping up with inflation for decades, concert prices have risen wildly since 1996, or around the time when baby boomers, who helped start the industry, aged into a lot more disposable income. (It was also around this time that Internet piracy made the music industry more reliant on concert revenues.) These days, prices can seem incredibly high. Barbra Streisand, who charged more than $1,000 for some seats at a concert in Rome, inspired so much anger that she canceled the show. Yet to an economist, the very existence of scalpers and companies like StubHub proves that tickets are far too cheap to balance supply and demand. Pascal Courty, an economist at the University of Victoria, in Canada, who has spent the better part of 20 years studying the secondary-ticket market, has identified two distinct pricing styles. Some artists, like Streisand and Michael Bolton, seem to charge as much as the market will bear — better seats generally cost a lot more; shows in larger cities, with higher demand, are far more expensive, too. (If you want to catch Bolton on the cheap, head to Western New York.) The second group comprises notable acts, like Bruce Springsteen and Pearl Jam, that usually keep prices far below market value and offer only a few price points. An orchestra seat to see the Boss in Jersey costs only about $50 more than the nosebleeds in Albany.

Springsteen’s style might seem more altruistic, but performers who undercharge their fans can paradoxically reap higher profits than those who maximize each ticket price. It’s a strategy similar to the one employed by ventures like casinos and cruise ships, which take a hit on admission prices but make their money once the customers are inside. Concert promoters can overcharge on everything from beer sales to T-shirts, and the benefits of low-priced tickets can accrue significantly over the years as loyal fans return. In part, this explains why artists like Springsteen and Petty are content to undercharge at the gate while others, perhaps wary of their own staying power, are eager to capitalize while they can.

Regrettably, I once bought a ticket to a Red Sox game from a scalper that turned out to be a fake. These days I usually buy direct from source. I’ve had good luck with StubHub as well.

On the Sky-High Racing Pigeon Market

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The Associated Press reports on the lightning-fast pigeon named Bolt, who became the world’s most expensive racing bird when his Belgian breeder sold it for 310,000 euros ($400,000) to a Chinese businessman:

One-year-old Bolt, named after the Jamaican Olympic superstar sprinter Usain Bolt, and with an outstanding pedigree of proven champions to match, was the latest Belgian-bred pigeon to claim record prices. Yet the sums paid surprised anyone involved in the sport, auction house Pipa said. The previous record for a sale of a single bird stood at 250,000 euros ($322,000) from January 2012.

At a time when a crisis is holding Europe in an ever tighter grip, a feathered handful of prime fowl of some 450 grams (a pound) is reaching unparalleled levels. The full auction of the Leo Heremans coop, 530 birds in all, also yielded a world record of 4.345 million euros ($5.58 million) more than double the previous record from last year.

I had no clue there was a market in racing pigeons!
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(via @tylercowen)

The Rationality and Virtue of Voting

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An interesting post from Steve Randy Waldman on whether it makes sense to vote (and whether it is virtuous to do so). He invokes in an interesting analogy and moves on from there:

All of these arguments are right but wrongheaded. We don’t vote for the same reason we buy toothpaste, satisfying some personal want when the benefit outweighs the cost of doing so. Nor, as Winecoff and Arena effectively argue, can we claim that our choice to vote for one side and against another is altruistic, unless we have a very paternalistic certitude in our own evaluation of which side is best for everyone. Nevertheless, voting is rational behavior and it can, under some circumstances, be a moral virtue.

Let’s tackle rationality first. Suppose you have been born into a certain clan, which constitutes roughly half of the population of the hinterland. Everyone else belongs to the other clan, which competes with your clan for status and wealth. Every four years, the hinterland elects an Esteemed Megalomaniac, who necessarily belongs to one of the two clans. If the E.M. is from your clan, you can look forward to a quadrennium in which all of your material and erotic desires will be fulfilled by members of the other clan under the iron fist of Dear Leader. Of course, if a member of the other clan becomes Dear Leader, you may find yourself licking furiously in rather unappetizing places. It is fair to say that even the most narrow-minded Homo economicus has a stake in the outcome of this election.

Still, isn’t it irrational for any individual, of either clan, to vote? Let’s stipulate that the population of the hinterland is many millions and that polling stations are at the top of large mountains. The cost of voting is fatigue and often injury, while the likelihood of your casting “the decisive vote” is pretty much zero. So you should just stay home, right? It would be irrational for you to vote.

Read the rest here.

Americans Living Larger

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Recession? What recession? Bloomberg reports:

The percentage of new single-family homes greater than 3,000 square feet has grown by one-third in the last decade, according to data released last month by the U.S. Census Bureau. The increase has occurred even while 4.3 million homes have been foreclosed upon since January 2007, a result of the housing- bubble collapse and economic meltdown. Slightly more than 1 in 4 new homes built last year were larger than 3,000 square feet, the highest percentage since 2007.

This is even more mind-boggling:

The Census Bureau reports that the average size of a U.S. house rose in 2011 to 2,480 square feet, up from 2,392 square feet in 2010. The 2011 figure is 62.6 percent larger than the 1,525-square-foot average size in 1973.

So people are buying fewer newer homes, but when they do, they want to get that 3,000 square foot McMansion. Makes total sense.

The Economics of Bank Robberies

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Crime doesn’t pay when it comes to robbing banks, a new study finds… Economist Neil Rickman of the University of Surrey and his colleagues were given unusual access to financial data from the British Bankers’ Association. Such data about robberies are not usually disclosed to the public because it is commercially sensitive and could encourage copycat robbers. The data details:

In 2007, there were 106 bank robberies or attempted robberies at the 10,500 bank branches, compared with 7,500 robberies of other businesses. (In the U.S. in 2006, there were about 12,000 bank robberies.) Although bank robberies in Southern California tend to occur in higher numbers at branches near freeway entrances, the British team found no link to branch size, branch location, or how busy a particular branch is. Of all those robbed, only 13 were targeted twice and only one three times. About a third of attempted robberies were unsuccessful, and about 20% of the successful robbers were ultimately caught and convicted.

The average take in a British bank robbery is a modest 12,706.60 euros (about $15,887) per person, compared with an average of $4,330 in U.S. bank robberies. Given that the average U.K.wage for fully employed people in Britain is about 26,000 euros, a bank robbery “will give him a modest lifestyle for no more than 6 months.” If he robs two, he will still have only a modest lifestyle. Four robberies, and the odds are excellent that he will land in jail…Using a firearm in the robbery increases the average take by 10,300 euros (nearly $13,000). Each additional member of the gang raises the take by 9,033 euros ($11,600), but that means the average take per robber is lower.

Successful criminals study econometrics, the authors conclude, but based on the data provided, robbing banks is still a bad idea, economically speaking.

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(hat tip: Tyler Cowen)

Is Everything For Sale?

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Michael J. Sandel, a political philosopher at Harvard, is the author of What Money Can’t Buy: The Moral Limits of Markets. Ahead of the book launch, in a post adapted for The Atlantic, he cites examples of things that are for sale around the world:

• A prison-cell upgrade: $90 a night. In Santa Ana, California, and some other cities, nonviolent offenders can pay for a clean, quiet jail cell, without any non-paying prisoners to disturb them.

• Access to the carpool lane while driving solo: $8. Minneapolis, San Diego, Houston, Seattle, and other cities have sought to ease traffic congestion by letting solo drivers pay to drive in carpool lanes, at rates that vary according to traffic.

• The services of an Indian surrogate mother: $8,000. Western couples seeking surrogates increasingly outsource the job to India, and the price is less than one-third the going rate in the United States.

• The right to shoot an endangered black rhino: $250,000. South Africa has begun letting some ranchers sell hunters the right to kill a limited number of rhinos, to give the ranchers an incentive to raise and protect the endangered species.

• Your doctor’s cellphone number: $1,500 and up per year. A growing number of “concierge” doctors offer cellphone access and same-day appointments for patients willing to pay annual fees ranging from $1,500 to $25,000.

• The right to emit a metric ton of carbon dioxide into the atmosphere: $10.50. The European Union runs a carbon-dioxide-emissions market that enables companies to buy and sell the right to pollute.

• The right to immigrate to the United States: $500,000. Foreigners who invest $500,000 and create at least 10 full-time jobs in an area of high unemployment are eligible for a green card that entitles them to permanent residency.

Also interesting is this list of (strange) things people do to make money:

• Sell space on your forehead to display commercial advertising: $10,000. A single mother in Utah who needed money for her son’s education was paid $10,000 by an online casino to install a permanent tattoo of the casino’s Web address on her forehead. Temporary tattoo ads earn less.

• Serve as a human guinea pig in a drug-safety trial for a pharmaceutical company: $7,500. The pay can be higher or lower, depending on the invasiveness of the procedure used to test the drug’s effect and the discomfort involved.

• Fight in Somalia or Afghanistan for a private military contractor: up to $1,000 a day. The pay varies according to qualifications, experience, and nationality.

• Stand in line overnight on Capitol Hill to hold a place for a lobbyist who wants to attend a congressional hearing: $15–$20 an hour. Lobbyists pay line-standing companies, who hire homeless people and others to queue up.

• If you are a second-grader in an underachieving Dallas school, read a book: $2. To encourage reading, schools pay kids for each book they read.

So is there a market for everything?

In its own way, market reasoning also empties public life of moral argument. Part of the appeal of markets is that they don’t pass judgment on the preferences they satisfy. They don’t ask whether some ways of valuing goods are higher, or worthier, than others. If someone is willing to pay for sex, or a kidney, and a consenting adult is willing to sell, the only question the economist asks is “How much?” Markets don’t wag fingers. They don’t discriminate between worthy preferences and unworthy ones. Each party to a deal decides for him- or herself what value to place on the things being exchanged.

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Related:  One of the best pieces I’ve read on the black market for organs is this investigative piece in Bloomberg. Chilling.

The Quarter Million Pounder with Cheese

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What is the world’s most expensive burger? It will be at least €250,000, if Mark Post has something to say about it. That’s because Mark Post wants to create the burger entirely from scratch, with meat grown in a laboratory. Dr. Post, who works at Eindhoven University in the Netherlands, hopes to disrupt one of mankind’s oldest industries:

Raising animals is a resource-intensive process. About 30% of the world’s ice-free land is used for it. Yet of the nutrients in the plants these animals eat, only around 15% is turned into meat. As the human population grows, and grows richer, demand for meat is increasing. Dr Post hopes to satisfy at least part of that demand by making the stuff in factories, in a way that converts about 50% of the nutrients into something people can eat.

For now, that something is not exactly fillet steak. Dr Post’s cultures, grown from stem cells, are sheets 3cm long, 1.5cm wide and half a millimetre deep. To make the world’s most expensive hamburger 3,000 of them will be needed.

The stem cells themselves are extracted from cattle muscle and then multiplied a millionfold before they are put in Petri dishes and allowed to turn into muscle cells. When they have done so, they are encouraged to exercise and build up their strength by being given their own gym equipment (pieces of Velcro to which they can anchor themselves in order to stretch and relax spontaneously). The fatty cells of adipose tissue, needed for juiciness, are grown separately and then combined with the muscle cells before the whole thing is cooked. In theory, one cow could thus supply as many hamburgers as a million slaughtered animals can today.

Producing meat in Petri dishes is not commercially viable, but Dr Post hopes to scale things up—first by growing the cells on small spheres floating in tanks and ultimately by using scaffolds made of biodegradable polymer tubes, which would both add the third dimension needed for a juicy steak and provide a way of delivering nutrients and oxygen to the steak’s interior.

 Lab burgers — a dinner of the future?