Bastiat’s Bastions

Chavez remains committed to taking what is not his or Venezuela’s as you can see from this article from the AP news service.  While Venezuela may “compensate” the oil companies for their shares, the oil companies’ losses of majority interest will not be compensated. 

Moving entitlement protection from property and contract law where exchanges are voluntary to tort law, where exchanges are not voluntary, as is the case with nationalizations, when it is only a matter of “might makes right,” should be viewed with a great deal of skepticism (see my earlier post on the Banning of Butts in the Bayou State). Of couse, the real effect, that Chavez does not recognize, is that foreign investment in Venezuela and other Latin American countries where Chavez’s populism is likely to encourage nationalization, is likely to come to a screecthing halt.  And many of these countries are unlikely to be able to support the same level of investment through their own generated funds through savings, as the poor have a difficult time saving and investing.

Expect a disaster.

MC

The Daily Comet editorializes on this past year’s seafood market. It seems as if Americans cut back on eating seafood this past year, while spending more money buying seafood. Assuming that the demand for seafood held steady during this period, does this article imply a violation of the law of demand? What does this imply about the elasticity of demand? Is it elastic, inelastic or unitary elastic?

The points will for commenting on this by just answering the questions posed will only go to the first one to answer the questions correctly. To get points after a correct answer has been posted in the comment section will require a well-thought comment on some aspect of this story.

MC

Shameless, I know, but I thought that would get some of our readers’ attention. However, this post is about an “un-initiation”. Read the NY Times article here.

The basic story, allegedly, is that the national offices of Delta Zeta sorority (more or less) kicked out nearly 2/3 of the members of their chapter on DePauw University’s campus.

The national offices say they were concerned with the declining membership of the DePauw chapter. The officials came to campus to conduct interviews, ostensibly concerned with the members “commitment to recruiting new members”. Members were told to look their best. After the interviews were conducted, 23 of the members were essentially asked to leave the sorority, leaving only 12 members. Those asked to leave were deemed to be deficient in their “commitment to recruiting new members.”

However, some former members allege this stated reason is a red herring, and the officials’ determination seemed to be unrelated to the members’ actual willingness to recruit. These former members suggested that national officials were worried that the reputation of the sorority, as measured by student stereotypes, was negatively affecting recruitment. (The word “socially awkward” was used by students when stereotyping members of the sorority.) These same former members claim the “commitment to recruitment” was the excuse used to purge the sorority of “undesirable” members.

As it turned out, every one of the overweight members of the chapter was deemed deficient in their commitment to recruiting, as were several minority members. Lending credibility to the former members’ allegations, half of the remaining 12 members quit the sorority voluntarily after the actions of the national office.

So why discuss this in an economics blog?

This is interesting to me for two reasons. First, it gives me a chance to discuss two economic theories – club goods and franchises, both of which you folks wouldn’t likely catch in an introductory class. Second, it gives me an opportunity to introduce you how economists think about discrimination. I’ll focus here on the clubs and discrimination, and get to the franchises another day.

As mentioned, the first of the theories is the economic theory of clubs, which applies to all clubs, not just sororities and fraternities. Believe or not, some economists sit around and try to think about what it is that a club “does”, and even what is the optimal size of a club. In a nutshell, the economic function of a club is to provide a shared economic good (or experience) to its members, while often excluding those goods (experiences) from non-members.

Examples of clubs include chess clubs, sororities, Sam’s Club, writers of this blog, and season ticket holders of LSU football. The fact that people have been joining sororities for years seems to suggest there is some benefit of this club. People would not incur the costs (both monetary and time) of joining clubs if there was no benefit.

Though some groups will accept all members that are willing to pay the “dues” (do sororities?), the exclusivity is often very important. Each of my examples above has a differing requirement on membership or dues, and each provides a different experience. As an aside, I should note the initiation for new members of this blog is quite secretive, but does not involve hazing of any kind, but does include some razzing.

No discussion of clubs and exclusivity would be complete without a classic from Groucho Marx, who said, “I don’t want to belong to any club that will accept me as a member.” Think about this statement – it is a pointed commentary on exclusivity.

Before we condone or decry the actions of DZ’s national office, a bit more thinking is in order.

1. Is it fair to allow limiting membership of groups? That is, is it reasonable that clubs should be able to decide who is a member of their club?

2. If a sorority restricts its membership to people with the characteristic of being thin, is this acceptable?

3. What if “thin” is replaced with “studious”? Or “socially at ease”? Or “nice”? Or “white” Or “female students at DePauw”? Or “female students”?

4. Does it make a difference if we change the word “club” or “sorority” to “krewe”, “country club”, “professional baseball team”, “college”, or “circle of friends”?

5. Where is line drawn?

When it comes down to it, the formation of clubs (at least one that does not accept all comers), leads to some form of discrimination occurring. Even if one favors one group, one is discriminating against another. Isn’t purchasing a Beyonce album discriminating against Johnny Cash albums? Surely this is not immoral, nor illegal.

Is it wrong for Harvard to discriminate against people with low ACT scores? Is it wrong for the New Orleans Hornets to discriminate against slow white guys named Chad Turner (even though he has a deceptively quick first step a solid 3-point stroke) because his vertical leap is only 19 inches?

Now re-read questions 1 through 5 above? Do you pause a second longer?

The point I am trying to make is this: some of that discrimination is illegal (a positive statement), some of it is morally wrong (a normative statement), but it is all discrimination.

Where should the lines be drawn?

–CT

Some disclaimers:

I was (still am?) aptly characterized by the term “socially awkward” during my college years.

In the interest of disclosure, I was not a member of a fraternity (or a sorority), though have several friends and family members that were. I’m not anti-DZ, anti-sorority, anti-fraternity, or anti-Greek system. I realize that each chapter of a sorority (fraternity) is different.

And while I don’t personally condone the activities of DZ’s national offices, this post it is intended to be less about a particular situation, and more about the economics of clubs and the difficulty we have in delineating what type of discrimination is legal/illegal and moral/immoral.

And to head off (or at least delay) a few comments/complaints, I do realize there is a huge difference between the real world situation in the article and the scenarios I outlined above. I asked above if the members of the group have the right to choose its members in a fashion they wanted, while in the article the national organization is making the membership decisions. I’ll attempt to address this difference in part II.

Take a look at this item from the editorial page of the Daily Comet on February 23rd. I’m not sure I understand it.

The basic thrust is that Mardi Gras parades are provided to the residents for “free”, though the author admits it is fun for those who do the parading. The editorial goes on to state that in Terrebone Parish, almost $8 million is spent on parades. What the author apparently wants us to do is to “imagine for a moment what Mardi Gras would be like without all those generous people.” Later, it continues, “That is big money and a huge reason for our communities to thank the people who give so much to ensure that the rest of us have such a great time at Mardi Gras.”

Apparently, the author is looking for a thank you card? But I am not so sure one is deserved. Read on…

Do the paraders care about just my happiness? If they did, I think the parade would look different. I like parades, elaborate floats, and catching beads, but renting a flat bed truck and throwing plasma screen TVs off the back would be superior in my opinion. Paraders don’t have only my happiness in mind, or are grossly misinformed about what makes me happy. Admittedly, plasma screen TVs are harder to throw than aluminum doubloons, but wadded up $20 dollars bills fly pretty well.

Am I supposed to be impressed by the economic impact of the $8 million spent on parades? I am not impressed. To be fair, I am not certain the editorial above is purporting the economic impact of Terrebone Parish’s Mardi Gras celebrations are $8 million. But nonetheless, the economic impact is surely not $8 million, giving me an opening for an economics lesson. In fact, for Terrebone parades, the economic impact is likely to be very close to $0.

Economic impact studies often fall to account for what are called “leakages” and fail to realize that different forms of leisure spending are substitutes. When Tom Benson was threatening to move the Saints out of New Orleans, many articles and studies cropped up trumpeting the economic development ramifications or economic impact of having the Saints in New Orleans. All but the very best of these studies are flawed because they fail to take into account these leakages and substitution. In fact, the consensus is that professional sports franchises in general have a negligible economic impact, period. But back to Mardi Gras…

Let’s tackle substitution first.

Imagine for a moment that, by decree, Mardi Gras was cancelled by a curmudgeon of a new mayor. Does that mean that the $8 million spent on Mardi Gras would evaporate? That people would hoard money under their mattresses? Or does it mean that the $8 million that would have been spent on Mardi Gras would instead be spent on other leisure activities, say at restaurants, bars, on family picnics, and college baseball games. It is the latter. Mardi Gras parades and other forms of leisure activities are indeed substitutes. In that sense, there is no economic impact of Mardi Gras in Terrebone parish (New Orleans will be a different story).

Loyal readers will see a resemblance here to our blog’s very first post on an essay written by our blog’s namesake concerning the economics of purposely breaking window to drum up spending.

Now, on to leakages. Even if $8 million dollars were spent on Mardi Gras in Terrebone Parish, and even if we erroneously assume that this $8 million would not have been spent without Mardi Gras occurring, it is highly unlikely that all of the $8 million of spending benefits businesses that are located in Terrebone Parish. That is, the economic impact would be less than $8 million.

Say, $1 million dollars of spending accrues to business located in Jefferson Parish. Say that another $1 million in spending was enjoyed by ACME Bead Producers, whose corporate profits are sent back to their headquarters in Albuquerque, New Mexico where their executives spend their lavish bonuses.

For another contrived example, say the Saints pay Drew Brees $10 million dollars in 2006, but Drew rents only a $500 a month apartment in New Orleans, spending all of the rest of his time and money in San Diego. In this case, clearly $10 million dollars is a vast overestimate of the economic impact Drew Brees has on the area, as a significant fraction of the money “spent” by the Saints has “leaked” to San Diego. These leakages serve to lessen the stated economic impact, and good studies of economic impact correct for leakages.

Given that there is no economic impact of Mardi Gras in Terrebone Parish, is the story different in New Orleans?

It is a much different story. For New Orleans parades, a significant fraction of the spending Mardi Gras creates is spending by non-residents. It would not be correct to say the economic impact tourist dollars are $0. If not for Mardi Gras, these tourists would not be spending money in New Orleans – it is Mardi Gras that brings them to New Orleans. Stated a bit differently, the substitutes for Mardi Gras spending for these folks are college baseball games in Cleveland, or parties in Tulsa, and these expenditures would not have helped the New Orleans economy.

So for the people who put on parades that attract out of town tourists, I say thank you for bringing in dollars to the New Orleans economy.

And to the folks in Terrebone Parish, a much, much, smaller thank you for providing me a bit of entertainment and a few cents worth of plastic. While they did not give me a TV, it is unlikely I would have enjoyed any happiness from the $8 million they spent on other leisure activities, so I am slightly better off with the parade.

And as long as I am thanking people, I want to thank Detroit auto workers for their time; they work a 40 hour week for a living…

Just for the record, there could be an economic impact if the Terrebone Parish parades bring in non-local people. It seems quite likely to me there are few such people attending local parades.

I began this post with a complaint abut the editorial – just to complete that thought, my guess is the author of the editorial doesn’t understand substitution or leakages.

A closing thought or two…

If there is an economic impact of holding parades that attract tourists, do you think it would be correct to say that cities compete in throwing the best parades or having the best parade atmosphere? Is it now suddenly very important to have the best parades? Does this have anything to do with why tourism officials are so sensitive to safety perceptions in New Orleans? I also heard this was a more family friendly Mardi Gras. Could this be cause for concern?

By the way, I heard Mardi Gras in Galveston this year was hopping. Mardi Gras in Clemson was very lame.

–CT

F. A. Hayek, in his influential article, “The Use of Knowledge in Society,” discussed the problem of planned economies, like Soviet Russia.  He claimed that not only was there a serious incentive problem, but more importantly, there was a knowledge problem.  The problem is that no single person can know all the information required to produce even simple products, yet alone everything that a society needs in order to prosper.  This formed the basis of Leanord Read’s famous essay, “I, Pencil,” (which some students may recall Milton Friedman used in his film, “Free to Choose”), which tells how no single person knows all of what it takes to make a simple wooden lead pencil. 

Market economies solve this problem through prices that convey useful information about the relative availabilities of productive resources (answering the question of how to produce) and relative wants of people (answering what to produce).  Here is a very insightful article that appeared in the Washington Post on Hayek, the Wikipedia project, open-source software projects, and prediction markets.  It is well worth reading and thinking about.

 MC

Recently, I posted an article about the Opportunity Cost (OC) problem in Lafourche Parish (the LP). Here we go again. The article in the Daily Comet on Friday, Feb. 23, 2007, was good for another laugh. The parish government wants to hire an engineer to oversee public drainage issues. That is laudable. Without proper drainage, things flood around here. Even with proper drainage, we could still have some flooding problems. Flooded housing and businesses is costly, and, as they say, “an ounce of prevention….”

What is just laughable, is that the parish is offering a salary of a whopping $50,000 a year for this job. Now, I don’t know what kind of engineer or what kind of qualifications they expect with a $50,000 salary, but they better expect one with no engineering degree, with no relevant experience and one who does not expect water to seek its own level or that water runs down grades (I would have said downhill, but in case you haven’t noticed, we really don’t have anything that could be called a hill in Lafourche Parish).

It looks as if they need someone who knows how to set pay levels that match what good employees can get elsewhere, the parish needs someone who can recognize opportunity costs.

Parish adminstrators do not really expect to hire anyone for the job.

MC

As you may have heard, Sirius Satellite Radio and XM Satellite Radio are working on a merger, and some expect them to walk down the aisle to take their vows before the end of this year, as is reported in this story in Reuters (and I heard this on NPR’s “All Things Considered” from Jim Zarroli the afternoon after I posted this article–click on the “Listen” button to hear Zarroli’s radio report).

However, there are two serious roadblocks ahead of them:  two government agencies are sure to speak up to express problems with this union.  The less serious, but more immediate roadblock is the FCC which established rules prohibiting the two satellite radio licenses to be held by the same person or company, as a merger would surely put those licenses in the same hands.  The other objector is sure to be the Anti-trust Division of the Department of Justice, who must give their stamp of approval for any merger, supposedly to protect the public against monopoly power.  Certainly, a merger between XM and Sirius would create a monopoly in Satellite Radio.  Or would it?

The question of whether this combination would amount to a monopoly depends on how the market is defined.  The market could be defined rather narrowly as the market for satellite radio.  It could be defined a bit more widely as the market for high quality music recordings and live performances, in which case, iPods (and podcasts and iTune) and other ways of distributing high quality music recordings and live performances would surely compete with satellite radio.  One of the problems of satellite radio is that its growth and the growth of the CD music market has been constrained by iPods and other MP3 type devices.  Of course, the high price of satellite radio has also restricted the amount of activity in this market, but note that price does not restrict demand, but rather restricts quantity demanded (note that the high current price for satellite radio could be because of market power already in the market).

Because of the high fixed costs of launching satellites and the high fixed costs of some programming, such as the Howard Stern Show, there are huge economies of scale in satellite radio.  When demand is small and there are some economies of scale in the market, there is what has been termed a “natural barrier to entry.”  If demand is small in the neighborhood of declining average costs, or small relative to minimum efficient scale (MES), no more than one firm can survive in the market, as reducing the output of a single firm below the MES level would only serve to increase average costs, and the price that must be obtained for more than one firm to survive—one firm could, in this case, price below the other and force the other out of the market.  In other words, competition can increase prices to consumers if demand is small relative to MES.

There is also the real question about whether or not strict government regulation of this market might not be contributing to monopoly tendencies in this market, or more specifically, to economies of scale.  Regulation requires the firm to face compliance costs.  These costs, as a percent of output, usually fall as output rises.  In other words, a smaller firm faces almost the same regulatory compliance costs as a much larger firm, contributing to economies of scale and the natural barriers to entry in the satellite radio market.

If the Anti-trust Division of the Department of Justice finds that there are significant economies of scale involved so that one firm could achieve small per unit costs than could be achieved with two firms in the market, they might allow Sirius and XM to merge.  Surely, though, they would require the merged firm to relinquish one of the two licenses, so that, should demand rise sufficiently for another firm to enter at some future date, entry would not be stopped by licensing.

One possibility that should be examined is whether or not there are “economies of SCOPE” with some other industry, such as with a satellite/cable TV, so that a merger with, between say VHI and Sirius, and Telemundo and XM, might provide the lower costs so that each might be able to survive and compete.  There could even be economies of scope with some other product or industry, such as retailing.       

Personally, I would rather like to see a merger between Sirius and Toys R Us.  The new company could be called “Sirius R Us–and Us Mean It.”

MC

Follow this link to a paper by Bryan Caplan and Ed Stringham that won $25,000. Any paper that wins $25,000 is worth, at least, a quick look.

In the article, the authors make the case (a pretty convincing case) that Bastiat and Mises were both ahead of their time in relation to public choice economics. Basically, these guys believed that the public was susceptible to holding incorrect views on economics. It’s worth a read.

NM

Chavez goes even further in pulling the wool over the eyes of the Venezuelan voters.  The Vandal of Venezuela, the Furious Fuhrer, and the Great Thief, steals from the rich, and unlike his supposed idol, Robin Hood, keeps what he steals to remain in power, not to help the poor (remember, if the Marxists were right, the North Koreans would be well fed, instead of starving and having to extort the world with nuclear weapons to feed their overgrown army).  Chavez, to remain in power, has begun to harshly enforce the country’s price controls on food.  We have already pointed out how he has threatened to nationalize grocery stores if they do not comply with his edicts.  

The problem is that that is a rather empty threat.  Either grocers comply with the price controls and face extended losses, so that their businesses become worthless or they break the laws and lose their businesses.  Either way, they lose their businesses.

So, some businesses will decide they may as well skirt the law.  What does Chavez do?  Increase the penalty.  Throw the offending business owners and managers in jail. 

What Chavez’s price-fixing edict reminds me of is one by another dictator, the Roman Emporer Diocletian.

In the year 302 A.D. the Roman emperor Diocletian “commanded that there should be cheapness.” His edict declared:

“Unprincipled greed appears wherever our armies, following the commands of the public weal, march, not only in villages and cities but also upon all highways, with the result that prices of foodstuffs mount not only fourfold and eightfold, but transcend all measure. Our law shall fix a measure and a limit to this greed.”

Why do you think Diocletian found food prices higher wherever he marched with his armies? What result would you anticipate from the command that “there should be cheapness?”

What result do you anticipate from Chavez’s edict that food prices stay low?

MC

  

We saw how Chavez in Venezuela has pulled the wool over the eyes of many of Venezuela’s poor, promising the riches of the oil fields and the riches of food distributors.  Now Bolivia is getting in on the “nationalization” act, better known as theft, turning private businesses into public enterprises, and here, without so much as compensating the current owners.  Taking what does not belong to you, what belongs to others is theft, plain and simple.  You may not like the way that someone else acquired their present holdings, but unless it was by out and out theft, “nationalization” is nothing but government sponsored theft. 

MC