This week’s package is a little more on the reading side. The Economist dug up the book review of a 1980s book. And read up about how sometimes, product pricing is all about business and little about economics especially when demand function starts entangling with supply. This is the sort of thing that always happens with super high-class sort of thing – or maybe it’s just high-class because of marketing.
Perhaps people are learning more about Professor Waldfogel’s theories since more retailers are rolling out gift certificates for this festive season. How about signaling your care or love for someone through the Internet or your mobile phone instead? Stefana Broadbent, a tech anthropologist speaks on how the Internet enables intimacy.
Finally, a little read on xanthan gum from moreIntelligentLife, a stabilizer – in your food but not something particularly good for your health I heard..
If the recent entries suddenly appear to be skewed towards recommending readings from The Economist, I’ve to admit that this is happening because I’ve got the chance to stick around the computer as much as the previous week and have come to make more use of the stuff I read on my hardcopy of The Economist.
And strangely, the magazine is pretty obsessed with the food industry this couple of days. It could well be a result of the recession, which has made the food industry a little less boring compared to the days when finance was hot and occupying too much coverage on papers (both the times when they were bubbling and when the crisis came). Perhaps more importantly, it was the trend that the food giants were transforming. And these transformations are catching the attention of regulators. The Economist discusses how the line between food and drugs are blurring as manufacturers are slapping health and nutritional claims on what they call ‘functional foods’. A briefing on Nestlé reveals how these food giants are now operating. In many ways these industries’ methods and Research and Development expenditures are fast resembling those of Pharmaceutical industries. For some, it is probably comforting to know that our food is going to do more than keep us full and alive; for me, I think it’s pretty scary to be munching with foods that promises too much (“to improve nature”) and yet claims to contain “no weird stuff”.
Beyond the boring regulatory stuff and operations of the food giant, the big players appears to be engaging in some rather interesting competition and some potential integrations. Hostile bids are somewhat frowned upon in these times of business especially when Cadbury is growing faster than Kraft (that’s if you read the article that is linked) and I’m pretty confident that Kraft will not be able to acquire the British chocolatier without revising their bid.
When the economy gets into recession, people become anxious about their jobs, worried about not being able to get employed or having not enough money to finance their spending, so they get sick more easily. Right? Wrong! Fortune magazine ran a story that tells otherwise; in fact, it even surfaced the inverse relationship between death rates and unemployment rates!
Interestingly, people are actually working too much in most developed world today. Reducing work would make them healthier and perhaps allow them to live better lives though it might not satisfy all their wants. In any case, no amount of work would be able to satisfy all their wants in the first place. The implication of this is that there is actually an optimal income level for each person involved in a particular job. In a sense, an economy at any one time has an optimal national income so that the population is healthy (optimal health-productivity balance, long life expectancy and lower mortality).
In the field of the sciences, research and achievements at the cutting edge is often poorly understood by High School (or Junior College) students. Take for example this year’s Nobel Prize for Physics; it was given to physicist Charles Kao, “for groundbreaking achievements concerning the transmission of light in fibers for optical communication” and two other physicist “for the invention of an imaging semiconductor circuit – the CCD sensor”.
Not many of us actually concern ourselves with the workings of the CCD sensor (it’s something found in digital cameras) nor optical communications and I’m sure pre-college education focuses on none of that. Students who are really interested in Physics might not be able to directly draw links between the inventions and discoveries made by the Nobel Laureates and the stuff he reads or study about. The maturity of a subject like Physics almost definitely ensures that stuff studied at the forefront is highly specialized and in some sense, narrow.
On the other hand, economics is more accessible than it appears to be. The Nobel Prize for Economics this year was awarded to economists (Oliver E. Williamson) “for his analysis of economic governance, especially the boundaries of the firm”; and (Elinor Ostrom) “for her analysis of economic governance, especially the commons”. It is interesting to note that both of these economists are studying workings of important economic agencies (or agents) outside the workings of the traditional market mechanisms.
The prize rightly demonstrates a heightened appreciation of economics as a subject to study cost-benefits and incentives rather than one that scrutinizes money. Posner neatly summarizes Williamson’s work and its implications in his entry while Becker discuss the inherent difficulties in real world organizations on Becker-Posner Blog. It should be easy for a JC student with background in economics to realize the link between Williamson’s work and the stuff he/she is studying after reading Posner’s entry. It is the ability to draw this link that reflects how much of a science the study of economics actually is – the basic principles of incentives, cost-benefits analysis all applies even when there might not be the perfect information or perfect rationality in the real world.
The Straits Times caught my attention again the week before with a particular article by Robert Skidelsky, which was a contribution to Project Syndicate. In Keynes versus the Classics: Round 2, Skidelsky highlighted the problem with today’s Keynesians being unwilling to work out the implications of irreducible uncertainty for economic theory. The article was essentially a response to the two economist, Krugman (his article) and Cochrane (his response here and here) who are engaging in an academic quarrel of sorts.
Krugman started out criticising the love for elegant economic theories of classical (implicitly speaking, Chicago school) economists. And Cochrane shot back, arguing that to attribute excessive fluctuations in the market to ‘irrationality’ is theoretical nihilism. And we all know that all that buying and selling has got motivations behind them even if these were results of false information, pure emotional preferences. I like Skidelsky’s analogy about the theater on fire (which might have been used previously by other economists as well):
It’s like what happens in a crowded theater if someone shouts “Fire!” Everyone rushes to get out. This is not “irrational” behavior. It is reasonable behavior in the face of uncertainty.
I’m not sure if Robert Skidelsky is a Post-Keynesian like Hyman Minsky but his extensive research into John M Keynes has brought him to write several volumes about this economist once touted as a saviour of capitalism. In any case, I believe Keynes simply sprinkled some important ideas that are pertinent to our study of the economy and there is definitely a need for further studies into the insights of Keynes about our modern capitalist economy and possible save it from itself once again.
The economy doesn’t (always) tend towards equilibrium as classical economics textbooks suggests. But things are worst when things tend towards an equilibrium that doesn’t benefit the society in general, many social phenomena that I’ve described in a previous post. The social/market forces are pushing the situation towards something no one wants; without an authority mandating stuff, no one have the incentive to help reach the collectively beneficial outcome.
In a recent article by James Surowiecki in The New Yorker, he discusses how success of big banks builds upon success and bring about the mega big banks that results in a concentrated banking system. It is thus possible that we allowed banks to grow big and stay so because the market naturally tends towards that and we have problems assessing the welfare gains from increasing bank sizes, as suggested by Surowiecki:
The trouble is that the “market” for banking is so distorted—by switching costs, by government subsidies and guarantees, and by the banks’ market power—that it’s hard to know whether big banks are adding value or are simply exploiting their oligopolistic positions.
The only problem that we know with the concentrated banking system is that they increase financial risk. That being said, regulations will have to start moving towards managing the risk that is contained in the financial system and if this really do result in policies that have to limit the size of banks then so be it. The government is the only one who can act as a dam holding up the floodwaters of market forces.
