Sunday, 18 January 2015

Try this: MRUniversity videos

My posts have been a bit video-heavy lately, but that just probably reflects what I've been doing over summer - like catching up on things I've been meaning to watch for a while. Here's the next bit of online teaching aid - videos from MRUniversity (brought to us by Tyler Cowan and Alex Tabarrok from the Marginal Revolution blog). These short videos have been around for a while and are a bit dry and mostly involve talking to powerpoint slides, but many of them cover real world economics that don't receive good coverage elsewhere. At the moment they're progressively adding videos on principles of microeconomics. However, I prefer the videos on great economists, such as this one on Adam Smith's theory of growth:


Friday, 16 January 2015

Is capitalism exploitation, or liberation?

Tyler Cowan (at Marginal Revolution) pointed out this excellent post by Jonathan Haidt from the NYU-Stern School of Business, where he shares two stories about capitalism in video form, both of which are useful in teaching. First, "Capitalism is Exploitation":

and then, "Capitalism is Liberation":

The longer video (embedded in the post but also available on YouTube) makes an attempt to reconcile the two views on capitalism, and is well worth watching too. Jonathon neatly sums up my view on capitalism in the longer video when he says: "Capitalism is liberation, but the way it liberates is by unlocking the incredible innovative spirit of humanity, and part of that innovation is ever new forms of exploitation". One of the challenges for government policy is to encourage innovation while reining in exploitation.

Wednesday, 14 January 2015

Out-of-control rent increases in Auckland - why?

The Auckland housing market seems to always be in the news lately. This week though there has been more of a focus on the increasing rents in Auckland (see for example here or here from the New Zealand Herald in the last few days).

A simple market diagram helps explain why rents are increasing in Auckland (see below). House price inflation is high - and the cost of the house (e.g. mortgage repayments, council rates which are linked to increasing house values, and insurances which are similarly linked to increasing house values) is the greatest contributor to the costs of landlords. So, because landlords' costs have increased the supply curve shifts up and to the left from S0 to S1 (which we refer to as a decrease in supply - at each and every level of rent, landlords are willing to supply fewer properties to prospective tenants). On the other side of the market, demand has increased from D0 to D1 - largely because of greatly increased immigration (although there are a large number of students looking for accommodation at the start of the new year, there is probably a similar number of students whose rental contracts are expiring). So, a decreased supply and an increased demand leads the market (in the diagram below) to move from the equilibrium E0 to the new equilibrium E1, where the equilibrium rent is higher (R1 rather than R0). Note that because supply and demand have both shifted, the effect of these changes on the number of rental properties available is ambiguous (it could have increased, decreased, or stayed the same, depending on the relative size of the shifts in supply and demand) - though on my diagram the quantity of rental properties has increased slightly from Q0 to Q1.

That's all pretty straightforward market analysis. However, I didn't want to focus this post on the comparative static results (i.e. how the old equilibrium differs from the new equilibrium), so much as on the market dynamics. That is, how the market moves from one equilibrium to another. In the diagram above, the market is initially in equilibrium at E0, and the rent is R0, and there are Q0 properties rented. Then there is a decrease in supply, coupled with an increase in demand. Landlords now want to supply fewer rental properties at the original rent R0 - they only want to make QS properties available. On the other side of the market, tenants want to rent many more properties at the original rent R0 - they want to rent QD properties. Since QD is much greater than QS, there would be a problem of excess demand (or a shortage) for rental properties at the original rent R0.

The market resolves this problem by allowing the price to change - in this case the rent will increase (until it reaches the new equilibrium rent R1). In general, excess demand should lead the price to increase. But how?

In this case, there are more tenants looking for properties at the current rent than there are properties available, as evidenced here:
Well-priced central Auckland rentals are attracting dozens of prospective tenants to open homes, with many people queuing to see a vacant property, a real estate company says.
Joe Schellack, general manager at Crockers Property Management, said up to 40 people were showing up to viewing sessions for some rental properties in the central city and city fringe areas.
Since there is a shortage of properties, if you are a tenant then you are likely to miss out on a property at the going rent. How can you ensure that you don't miss out? One way is to find a landlord, and then offer to pay them a higher rent in exchange for ensuring that you get the property and don't miss out. That might seem a little far-fetched, but it appears to be what is happening:
A two-bedroom Devonport home advertised for $500 was rented for $550 a week after the tenant decided he was so keen that he would pay over the asking price, she said.
So the rent increases because tenants start to bid the rents up. Eventually we end up at the new (higher) equilibrium rent, but with no shortage of rental properties. The reason there would be no shortage any more is because as the rent increases, some of the prospective tenants choose not to try and rent a property (in the central city or wherever) because the higher rents are more than they are willing to pay; and as the rents increase more landlords are willing to supply their properties to prospective tenants - the quantity of properties demanded decreases and the quantity of properties supplied increases, as the rent increases.

On a final note, although economists often focus on equilibrium (as we have here), economists mostly recognise that markets usually exist in some disequilibrium state. This is because there is a large number of complex factors that constantly affect markets, such that any given market couldn't possibly ever get to equilibrium. That doesn't mean that comparative static analysis is useless, only that it will help to explain some of the tendencies in the market, rather than the absolute state of the market at any point in time. So, when demand increases the price tends to increase, and when supply decreases the price tends to increase, and so on. Which is also why economists use that phrase ceteris paribus (all other things being equal) when talking about changes in markets.

Tuesday, 6 January 2015

Review: Think like a freak

I've used some of my holiday (and pre-holiday) time to catch up on some reading. One of the books I've read recently is Think Like a Freak by Steven Levitt and Stephen Dubner. Levitt is a professor of economics at the University of Chicago and a previous winner of the John Bates Clark medal (awarded to the American economist under age 40 who is adjudged to have made the most significant contribution to economic thought and knowledge). His research covers areas like the economics of crime - an overlap with one of my research interests. However, I wasn't sure whether I was really looking forward to this book and I had been putting off reading it for a few months (it way published last May).

I hadn't read reviews of Think Like a Freak, but Levitt and Dubner's first book (Freakonomics) was very good, especially where they were writing about Levitt's own research, which often makes use of cute natural experiments. However, the supply of cute natural experiments is pretty limited, and I don't think their second book (SuperFreakonomics) was nearly as good, especially where they had to rely much more on packaging other people's research than on Levitt's own contributions. The second book was able to pull some excellent content gathered from their blog though. So, given the trajectory the series was on it's fair to say I had reasonably low expectations of the book.

When it comes to pop-economics books, I can usually judge them on the number of contributions they will eventually make to my first-year teaching (i.e. how many cool new examples, or quirky applications, or improved ways of explaining economic concepts can I draw from them?). So, I was disappointed that there was little contribution there for me. There is not a great deal in the way of applied economics at all, and much of the book came across to me as re-hashed parts from the first two books, or re-packaged stories that I have read elsewhere. If you've read the first two books, you may feel the same way.

Having said that, the book wasn't intended to follow the same formula as the first two. It's pitched as more of a self-help book. As the authors note on page 9:
The first two books were rarely prescriptive. For the most part, we simply used data to tell stories we found interesting, shining a light on parts of society that often lay in shadow. This book steps out of the shadows and tries to offer some advice that may occasionally be useful, whether you are interested in minor lifehacks or major global reforms.
However, if you're already attuned to an economic way of thinking about the world, the self-help bits come across as largely common sense and the value of the book will be lost on you. At that point you're probably better switching to some Tim Harford instead.

It wasn't all bad though. Some of the stories were still useful or interesting - for instance, I always like new examples of the unintended consequences created by incentives and the book provided me with a few, and the discussion of why Nigerian email scammers admit they are from Nigeria. Being let off the hook on why SuperFreakonomics gave away the secrets of the algorithm that uses bank data to identify terrorists (from SuperFreakonomics) was good too (see also this Levitt paper from 2012 (gated)).

Overall the book wasn't the worst I have read over the last year (I won't name and shame that title), but far from the best either. Looking forward, unless Levitt has identified some new cute natural experiments to share, I have to agree mostly with the conclusion to Nick Summers' review on the Bloomberg BusinessWeek site:
This is how brands end, with the sound of scraping the bottom of a barrel Malcolm Gladwell has already rummaged through. In the book’s last chapter, about the virtues of quitting, Levitt and Dubner wonder if they too should throw in the towel. “After three Freakonomics books, can we possibly have more to say—and will anyone care?” I think they know the answer.
Other reviewers share Nick's pessimism about the 'Freakonomics brand' (see David Runciman at The Guardian as one example), or for a couple of less negative reviews see Mahmoud Kassem at The National or Philip Roscoe at Times Higher Education.

Friday, 2 January 2015

Try this: "We the economy" short films

If you're looking for a series of short films that explain economic concepts or key features of the modern economy, it's hard to go past "We the Economy". Each of the 22 films in the series is directed by a leading filmmaker, and each film focuses on some aspect of the U.S. economy or on some economic concept, answering a key question (like "What causes a recession?", "What is money?", or "What are the causes of inequality?"). The films are grouped into five 'chapters' covering the basics of the economy, money, the role of government, globalisation, and inequality. Every 5-8 minute video is well worth watching, regardless of whether you are new to economics, or a seasoned lecturer looking for something to use in your teaching.

My personal favourite was "Supply and Dance, Man!", although "The Unbelievably Sweet Alpacas" is also hard to beat. The human shadow puppets in the "Recession" video are pretty cool also. Thanks to Vulcan Productions and Cinelan for putting this collection of shorts together for us. And there is more bonus content available on YouTube.


[HT]: Jodi Beggs at Economists Do It With Models, who has a starring role in one of the videos, and an uncredited cameo in at least one other.