Stumbling and Mumbling

The economics of Pop Idol

From the people who gave us this comes this fine analysis of the economics of Pop Idol and manufactured celebrities. It's a great read, especially by the standards of German economics. Some highlights:

Why do we experience this shift from "self-made" stars to "manufactured" celebrities?...Whereas self-made stars become endowed with market power through the very mechanisms which create them, celebrities have inferior opportunities to capture the value created by their appearance. Therefore the media companies are able to capture the bulk of the profits from "manufacturing" celebrities.

Superstars may be replaced by fabricated celebrities who draw large audiences without having substantial bargaining power to get the created value.

Simon Fuller described his manager-client relationships with the Pop Idol contestants as "partnerships" in which he recieves between 25% and 50% of their earnings.

Reality shows like Pop Idol cost about half as much to produce as typical new drama or sit-coms.

And here's an older classic paper (pdf) on how companies cope with the market power of key workers.

Expertise: King's red herring

Why should the Bank of England have operational indepdendence? I fear that in his Adam Smith lecture (pdf) on Sunday, Mervyn King may have mis-stated the argument. He said:

Responsibility for setting interest rates has been delegated to a group of people - the Monetary Policy Committee - with the appropriate technical competence...Expert judgment is needed because changes in the way the world works mean that monetary policy cannot be run on auto-pilot.

I've got two problems with this.
1. In theory, the Chancellor could set interest rates by drawing on as much expert advice as the MPC has. The MPC doesn't, in principle, have an advantage in expertise. It has an advantage in credibility. Markets trust the MPC more than it trusts politicians to hold inflation down. Indeed, it's quite possible - as Paul Ormerod argues here (pdf) - that no feasible amount of expertise would allow us to predict and control inflation.
2. In practice, monetary policy does seem to have been run on auto-pilot for most of the time since 1997. The chart shows that interest rates have closely followed a Taylor rule (more here) since then*. The two main deviations were in 1997-98, when policy was tighter than the rule warranted, and in 2002-03, when it was looser, possibly because the Bank took out insurance against a protracted US downturn and US deflation - just as the Fed did. It's not obvious that it required great expertise to follow this path, or that a Chancellor would have done much different; coincidentally, the excess tightness came straight after the general election.
* The rule I used is (0.5 x output gap) + (1.5 x RPIX inflation) + 1.6. This means rates should be 5.4% when output is at its potential level and RPIX inflation is 2.5%. I'm using the Treasury's estimate of the output gap.

The Bank celebrates stupidity

Here's the new £20 note featuring Adam Smith. What puzzles me here is the note's celebration of the division of labour. Smith, of course, had mixed feelings about this. Yes, it increases output. But it also dehumanizes and stupefies us:

The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. (Book V part 3)

Should the Bank really be celebrating Smith's view of the division of labour?

The daylight savings anomaly

Reuters reports that the FTSE 100 has "slipped on US jitters." This might be another to add to New Economist's list of bad explanations for market moves.
What it doesn't say is that it's perfectly common for the UK market to fall the day after the clocks change. This paper (pdf) by Lisa Kramer, Mark Kamstra and  Muarice Levi estimates that the market fell by an average of 0.4% on the Mondays after the clocks went back between 1969 and 1998. The market also falls (on average) after the clocks go forward in the spring.
A similar thing happens in the US.
A criticism of these results is here. And here's a reply (pdf) to them.
The reason for this, the authors say, is that the change in the clocks disrupts our sleep patterns  and so makes us more anxious and hence likely to shun risky investments.
The story here, of course, is not merely about trivial moves in share prices. It's about decision-making. If investment decisions can be clouded by systematic changes in our circadian rhythms, what other decisions can be  so affected? 

Crime: two recent papers

Barbara Reid, the mother of the murdered Manchester schoolboy Jessie James, wants to reintroduce conscription to reduce teenage crime. Is she right?
Coincidentally, two new economics papers bear upon this very question. This one suggests conscription doesn't work. The authors conclude that:

Participation in military service increased the likelihood of developing a criminal record in adulthood.

So what would stop gun murders? This new paper (pdf) by Naci Mocan has a depressing finding - the death penalty. People respond to incentives.
Of course, there's much to be said against the death penalty. But perhaps our opposition to it carries a cost, of murders that would not otherwise happen.

Why I bang on

I’ve been troubled by one of Pootergeek’s posts. Not (just) this one, but this, wherein I’m accused of “always banging on about” managerialism.
I don’t bang on about it because I’m obsessed. I do so for three other reasons:
1. Inequalities in power and wealth – such as the huge salaries paid to bosses – are typically justified by managerialist ideology, the belief that good, knowledgeable leadership can solve our problems. It’s surely important for egalitarians to point out that this ideology is at least questionable and possibly plain false.
2. Managerialism is, as Alasdair MacIntyre pointed out, a defining feature of our age. It’s so ubiquitous that people don’t see it - the mark of a successful hegemony. As Jolie Holland (with whom I’m genuinely obsessed) said, culture is the stuff you don’t notice.
Of course, the clash between Islamism and “Enlightenment values” is more salient. But salience is not the same as importance. Does the bigger threat to “Enlightenment values” really come from a handful of fanatics, or from a ruling class that apparently values a faith in limitless know-how over liberty? And shouldn’t a genuine left challenge those in power, rather than those on the margins?
3. There’s one big reason why I bang on about managerialism – because no-one else does.
Too many people write simply to ingratiate themselves with a tribe – left, right, pro-war, anti-war, anti-Muslim, whatever. I try (and probably often fail) to bring a little diversity. If others banged on more about managerialism, I’d bang on less.

Some limits of CBA

David Smith calls for the government to use more cost-benefit analysis. Such is the irrational way policy is made, there’s a case for doing so. However, CBA has some limitations:
1. It requires enormous computational power to get it right. Take NICE’s decision not to offer Velcade on the NHS. I suppose this was a correct decision, in a sense that Velcade is not cost-effective relative to other cancer drugs. But this is not the relevant comparison. The important question is: is Velcade cost-effective relative to the least cost-effective government spending anywhere else? The answer to this is almost certainly “yes.” But to apply this question to every single spending decision – every civil servant, every purchase – is just impossible.
2. Some long-run benefits and costs are unknowable. For example, in the years before anyone had heard of global warming, coal-fired power stations might have seemed a good idea.
What’s especially unknowable is the impact institutions have upon our preferences and character. For example, a strong argument for a freer market economy is that it encourages self-reliance and independence. But this benefit – if it accrues at all – takes decades to become evident.
3. Costs and benefits accrue to different people. Take a rise in the minimum wage. With the price-elasticity of demand for labour low, this benefits tax-payers, who gain from lower tax credit and benefit payments. But it hurts the least employable workers – those with mental illness or low intelligence – who can barely hold a job. How should we weight their costs against our benefits? It’s a cliché – because it’s true – that CBA can be blind to justice.
4. Who decides what policy options get considered? David gives the example of comparing three ways of reducing property crime. But a fourth possibility – corporal punishment – isn’t considered. Why not?
5. CBA is vulnerable to rent-seeking. Powerful bureaucrats can overstate the benefits of their departments – that’s how they became powerful in the first place. 
These are, of course, only a handful of the practical problems with CBA; more philosophical ones are discussed here and here.
CBA’s advocates, of course, say these quibbles only show that CBA must be used carefully. But isn’t it just idealistic to suppose this will be done? Rationalists can be impractical too.   

What leadership?

There's much to be said for Ruth Kelly's proposals to reform local government; more decentralization and greater accountability. However, in emphasizing the need for "strong leadership" Ruth is merely  betraying New Labour's faith that leadership is always the solution.
But is it? I'll grant that good leadership  does exist sometimes, as evidenced in Cesc Fabregas's description of Arsene Wenger:

He makes us feel so good that we have extra motivation. We want to prove to him that he wasn't wrong with us, we want to show that we're worthy of playing for him (Daily Express, so no link).

But isn't Arsene Wenger  exceptional? Is good leadership feasible in the mundane world? There are three questions here:
1. Can people at the top of hierarchies really have the knowledge and judgment to manage well?
2. Was Jeffrey Nielsen wrong to argue in this book that leadership often de-motivates workers?
3. Is our faith in leadership based upon a cognitive bias - the fundamental attribution error - which leads us to overly attribute events to human agency? Could it be that we believe in leaders for the same reasons primitive men believed in the sun god?
You know my views. But they're not the point. The point is that we should at least question whether "strong leadership" really is the solution New Labour thinks it is.

MPs: a modest proposal

Complaints about MPs expenses raise a question. Why don't we just put the job of being a constituency MP up for tender?
Candidates should say how much they'll do the job for, along with descriptions of what they'll do and evidence of competence, and voters should pick accordingly.
We do this for builders, why not for MPs?
If the main parties are to compete on the basis of alleged competence rather than differences of policies and principles, shouldn't we select them in the same way we select tradesmen?

Despairing of bloggers

Not only do I despair of democracy sometimes, I also despair of bloggers. You've all linked to this. But none of you have done the obvious, and cross-referenced with this.
It's a good job one of us is on the ball. The results show that there are no Americans called Amanda Hugenkiss, Hugh Jass or Al Coholic. There's not even a Mike Rotch - though 180 answer to Mike Hunt.
There is though - wait for it, wait for it - precisely one called Seymour Butts.