This week in research #19

Here's what caught my eye in research over the past week (a really quiet week):

• Strozza et al. (open access) find that COVID-19 mortality disproportionately affected those of lower socioeconomic status and exacerbated existing social inequalities in Denmark, using Danish population register data
• Nguyen finds a positive association between temperature and women's exposure to intimate partner violence across 34 developing countries, and that women from rural areas, those from poor households, those having low education, and those living with low-educated partners are particularly vulnerable to intimate partner violence as temperatures increase

The recorded video of my Professorial Lecture, titled Beyond the Buzz: The Sobering Economics of Alcohol, is now available on YouTube. Watch it here if you weren't able to attend in person. Like and subscribe, or whatever.

When analogies fail... Marine Protected Areas edition

In The Conversation last week, Mark John Costello (Nord University) wrote an article explaining the economic benefits of Marine Protected Areas (MPAs). MPAs are areas where fishing is prohibited. The article is interesting, and in short it makes the case that MPAs have unrecognised (or under-recognised) economic benefits, in terms of positive spillover effects on fishing and tourism.

However, this bit struck me as really odd:

Although it may seem counterintuitive that a full restriction of fishing in an area will result in more fish elsewhere, this happens because MPAs act like a reservoir to replenish adjacent fisheries.

In financial terms, the capital is invested and people benefit from the interest on the investment. To count the establishment of an MPA as a cost to fisheries is like claiming that interest earned on money is a cost.

I had to read that second paragraph a couple of times, because it didn't make sense to me. And it didn't make sense to me because it doesn't work as an analogy. Let me labour that point by unpacking the analogy.

First, think about a financial investment. The return on the financial capital that the investor employs is the interest that they receive. The less financial capital they invest, the less interest they will receive. Now think about a fishery. The return on the natural capital is the value of the fish that the fishermen take from the fishery. The less natural capital in the fishery, the less fish the fishermen can take.

Now think about a marine protected area. The MPA sets aside some of the fishery (some of the natural capital). Lower natural capital means that the fishermen will be able to take less fish. The fishermen will receive a lower return from their fishing. Now go back to the financial investment. The equivalent of an MPA for the financial investment is setting aside some of the financial capital. Lower financial capital means that the investor will receive less interest. The investor will receive a lower return from their investing.

The establishment of a MPA really is a cost to fisheries. Fishermen can take less fish. Unlike Costello's claim, this is nothing at all like "claiming that interest earned on money is a cost". It is more like claiming that 'losing interest that you would have otherwise earned if the financial capital hadn't been set aside and paying no interest is a cost'. Which it is. It is what economists refer to as an opportunity cost. Costello's analogy fails.

The rest of the article is interesting and does raise some important and valid points. There may be spillover benefits to fishermen outside of MPAs because the MPA can act as a nursery for young fish. Focusing solely on the fish that were not taken in the MPA area would overstate the cost to fishermen, if they are able to take more fish from outside of the MPA. Tourist operators also benefit from the MPA, because tourists like to look at wildlife, including fish. The case that MPAs have significant benefits is strong. It's a pity that the analogy that was employed to make part of the case was much weaker.

Loss leading with free puncture repairs

Driving to work this morning, I saw an advertisement on the back of a bus for free puncture repairs from Top Town Wheel and Tyre in Te Rapa. Why would a tyre retailer offer to fix punctures for free? As I note in my ECONS101 class, when we see an interesting pricing strategy in the real world, it is likely that it is a strategy that is working for the firm.

In this case, the free puncture repair offer is an example of loss leading, which I discussed with my ECONS101 class a couple of weeks ago. Loss leading happens when a firm sells some of their goods or services intentionally at a loss, in order to encourage more customers to visit them, with the goal of getting those customers to buy other goods and services that the firm can profit from. Offering free puncture repairs, which costs the retailer some staff time and some consumables, will make a loss.

What is the tyre retailer hoping to profit from? Once a customer arrives at Top Town with their punctured tyre looking for a repair, Top Town can easily up-sell the customer to a replacement tyre (which is not free) if the puncture cannot be repaired. That is probably the case fairly often (in my experience, more than half the time when I go to get a puncture repaired, the tyre has been damaged beyond repair). Top Town then profits from the replacement tyre, which they wouldn't have sold if the customer hadn't been encouraged (by the free puncture repair offer) to go to Top Town in the first place.

There is also a soft form of customer lock-in at work here too. Having discovered that their puncture cannot be repaired, the customer could go to a different tyre retailer to get a replacement tyre. However, that involves some additional hassle, time, and effort. Why go somewhere else, when they are already at a tyre retailer? In other words, there is a switching cost here - the additional time and effort required to find and travel to a different tyre retailer represents the cost of switching to an alternative seller. That switching cost, however minor, may lock many customers into buying their replacement tyre from Top Town, rather than going somewhere else. By doing so, they avoid the switching cost.

So, offering free puncture repairs is a smart pricing strategy for Top Town, which likely increases their profits. The surprising thing may be that every tyre retailer doesn't do the same.

Book review: Economists at War

Economists have a key role in advising the government about fiscal and monetary policy. At no time is this more important than during times of crisis. And no crisis is quite like a war. So, I was really interested to read Alan Bollard's 2020 book Economists at War, which the subtitle promises to explain: "how a handful of economists helped win and lose the world wars".

The book essentially covers seven economists: Takahashi Korekiyo, H.H. Kung, Hjalmar Schacht, John Maynard Keynes, Leonid Kantorovich, Wassily Leontief, and John von Neumann, with one chapter devoted primarily to each of them. Bollard is clear that the book is not a biographical account of their lives, and neither is it an economic history of the world wars. Instead, the book focuses on:

...a description of the complex and sometimes terrible positions these economists found themselves in, and how they used their economics and their personalities to address this.

I enjoyed this book, mostly because of the gaps in my own knowledge of the history of economics that it helped to fill. I had never heard of Korekiyo, Kung, or Schacht, and had read little about Kantorovich or Leontief, although I am of course quite familiar with their key contributions to economics, for which Kantorovich and Leontief each won the Nobel Prize in the 1970s. The book appears to be well-researched and thorough in its treatment of each of its subjects, and Bollard shares a lot about their lives outside of economics and on either side of the world wars in which they were key figures. So, in that sense, the book is perhaps more biographical than Bollard may have intended.

As you may expect from a collection of the key figures in economics at the time, there were a large number of connections between them. Many of them met in person, or taught or studied at the same institutions (albeit at different times). However, that leads to the main detraction from this book for me. Because each chapter is devoted to one of these economists, there is a fair amount of repetition across the chapters. There is even, in a few places, repetition within chapters. I felt like those repetitive parts could have been edited out without great loss, and would have made the book flow a little better.

I learned a great deal from reading the book. It gave me a new appreciation of the Japanese economy in the inter-war period, and the rampant corruption in the Chinese government of Chiang Kai-shek, Also, I hadn't appreciated the challenges that Russian economists faced during the premiership of Josef Stalin:

Among his many paranoias, Stalin distrusted economists and particularly mathematical ones. He had said the planned economy of the USSR was 'dizzy with success', and therefore any criticism would be seen as being anti-Soviet. Instead he called for what he labelled 'political economy', which should provide ideological support for party policies. Mathematical economics could be seen as removing the need for ideology and supporting self-regulating market mechanisms, which was a very dangerous direction.

It strikes me that there may be an interesting parallel with modern times, with governments having a preference for ideology over economics. Anyway, that is a story for another time. The key point is that Kantorovich in particular faced some real difficulties in Soviet Russia, given that he was a mathematical economist.

Overall, I rate this book highly, but in avoiding being biographical and simultaneously avoiding being an economic history of the world wars, it sits somewhat awkwardly in the middle. I've read better books on how economics (and operations research) was applied during World War II (Blackett's War, which I reviewed here). And there are better biographies of Keynes and von Neumann - Keynes is well covered in The Worldly Philosophers (which I reviewed here), while Prisoner's Dilemma (which I reviewed here) is a good book on von Neumann. This book does collect good stories of the life and economics of some of the more obscure (in my view) but still important economists of the time, so is worthwhile in that respect, for people interested in the world's economic heritage.