Book review: Reinventing the Bazaar

I just finished reading John McMillan's 2002 book Reinventing the Bazaar. Diane Coyle at The Enlightened Economist has recommended this book many times (including earlier this year), and it's a recommendation that I am glad I followed through on and I fully concur.

The subtitle is "A Natural History of Markets", but I don't think the title or subtitle quite do the book justice. Most treatments of economics, including in most textbooks, treat markets as a given, and fail to really explain the inner workings of market design. McMillan's book does an outstanding job of filling that gap. It seems to be getting rarer over time that I end a book with pages of notes on little bits that I can add to my teaching, but it certainly was the case with this book.

McMillan is neither a market evangelist nor a market skeptic. He cleanly dissects the more extreme arguments on either side, especially in the concluding chapter, and charts a more centrist path throughout the book. I particularly liked this passage:

The market is not omnipotent, omnipresent, or omniscient. It is a human invention with human imperfections. It does not necessarily work well. It does not work by magic or, for that matter, by voodoo. It works through institutions, procedures, rules, and customs.

The focus of the book is on explaining institutions and market design, using real-world examples of what has worked and what has not. There are several pages devoted to the 1980s reforms in New Zealand, which was interesting to see (although based at Stanford University, McMillan is a kiwi, so the use of New Zealand as an example should come as no surprise). However, I don't think everyone would quite agree with the conclusions about the success of taking the 'shock therapy' approach.

McMillian also commits a sin in my eyes by defining health care and education as public goods (which they are not, because they are excludable). I can forgive him that one indiscretion though, because the book is wonderfully written and easy to read. It helps that he and I appear to share similar views about the market, as his conclusion demonstrates:

The market is like democracy. It is the worst form of economy, except for all the others that have been tried from time to time.

I really enjoyed this book, and I highly recommend it to everyone. 

Try this: Riding the Korean Wave and using K-Pop to teach economics

I use a bit of popular culture to illustrate economics concepts in class, but some of the videos I use are getting a bit dated (although The Princess Bride movie is a timeless classic). Maybe it's time for a refresh?

In a new working paper, Jadrian Wooten (Pennsylvania State University), Wayne Geerling (Monash University), and Angelito Calma (University of Melbourne) describe using K-Pop examples to illustrate economic concepts. K-Pop is incredibly popular worldwide, and increasingly going mainstream, so it is something that students will likely be familiar with.

Wooten et al. created videos with English subtitles and link them to the sorts of economics that is taught in principles classes. Specifically, in the paper they illustrate with three examples:

1. EXO-CBX, "Ka-Ching", which can be used to illustrate scarcity, trade-offs, and opportunity costs;
2. Blackpink, "Kill this love", which can be used to illustrate sunk costs and decision-making; and
3. BTS, "No", which can be used to illustrate comparative advantage, negative externalities, arms races, and zero-sum games.

The music4econ.com website has many other videos as well (not just K-Pop). Using music videos in teaching is not a new idea (I've posted about it before here), and there are many examples of other forms of pop culture being used to teach economics (such as Broadway musicals, The Office, and The Big Bang Theory). This website can be added to the list.

Enjoy!

[HT: Marginal Revolution]

The gravity model and cultural trade in restaurant meals

One of my favourite empirical models to work with is the gravity model. It is an extremely high performing (in terms of both in-sample and out-of-sample forecast accuracy) model when used in migration and trade contexts, and quite intuitive. Essentially, in a gravity model the flow (of goods and services, or people) from area i to area j is negatively related to the distance between i and j (so, if i and j are further apart, the flows are smaller, most likely because it costs more to move from i to j), and are positively related to the 'economic mass' of i and j (so, if i and/or j is larger, the flows from i to j will be larger).

I have used the gravity model myself (e.g. see this post), and so have my students (e.g. see this post). I particularly like it when I find examples of unexpected uses of the gravity model. For instance, there was this paper on running the gravity model in reverse to find lost ancient cities (which I blogged about here). 

Most of the time, a gravity model of trade involves goods and services that cross borders. However, that is not the case in this recent article by Joel Waldfogel (University of Minnesota), published in the Journal of Cultural Economics (appears to be open access, but just in case there is an ungated earlier version here). Waldfogel is probably best known for his work on the deadweight loss of Christmas (see also here), but in this research he looks at the cultural trade in restaurant dining.

The interesting thing about this article is that the data isn't really trade data at all. Restaurant meals don't cross borders. Instead, it is the intellectual property that is crossing borders, which is why this article relates to the literature on cultural economics. Waldfogel uses:

...Euromonitor data on aggregate and fast-food restaurant expenditure by country, along with TripAdvisor and Euromonitor data on the distribution of restaurants by cuisine.

He links each cuisine to an origin country (i in the description of the gravity model above), and the country location of the restaurant as the destination country (j in the gravity model description). He then calculates measures of 'trade flows' in restaurant meals, both including and excluding fast food, and runs a gravity model using those data. He finds that:

As in many models of trade, distance matters: a 1% increase in distance reduce trade by about 1%... Common language and common colonial heritage also matter.

Those are pretty standard results in the trade literature using gravity models. Then:

Which cuisines are most appealing after accounting for rudimentary gravity factors?... Excluding fast food, the ten most appealing origins are Italy, China, and Japan, which all have similar levels of appeal, followed by the USA, India, France, Mexico, Thailand, Spain, and Turkey. When fast food is included, the USA rises to the top, and the others remain in the same order.

Finally, on the balance of trade in restaurant meals, he finds that, of 44 selected countries:

...three are substantial net exporters: Italy (with net exports of $158 billion), Japan ($44 billion), and Mexico ($17 billion). Substantial net importers include the USA ($134 billion), Brazil ($39 billion), the UK ($20 billion), and Spain ($20 billion).

I was a little surprised that Spain was such a net importer of cuisine from other countries. I guess that reflects that Spanish cuisine isn't as available outside of Spain as many other European cuisines are. The US and UK being large net importers is not a surprise though.

The results are mostly uncontroversial. However, I did take issue with some of the choices. Waldfogel codes all "pizza" restaurants as Italian. I'm not convinced that Pizza Hutt or Domino's count as Italian food - more like generic fast food, most of which was coded to the US. It would be interesting to see whether re-coding pizza would make any difference to the results - possibly not, as Waldfogel does test for the impact of coding "fried chicken" as either domestic or US and that appears to make little difference.

The gravity model is clearly very versatile, and deserves much greater attention in research than it currently receives. This research demonstrates a slightly new direction for it.

[HT: Offsetting Behaviour, last year]

Putting demography back into economics

As a population economist, I am receptive to the idea that population concepts like migration, population growth and decline, population ageing and the age distribution, etc. are important things for economics students to understand. So, I read with interest this 2018 article by Humberto Barreto (DePauw University), published in the Journal of Economic Education (sorry, I don't see an ungated version online).

In the article, Barreto uses an interactive Excel spreadsheet that creates population pyramids from dummy or live data, to illustrate population concepts for students. The spreadsheet is available freely online here. It's mostly reasonably intuitive, but to get full value from it you probably need to read the full gated article and work through a couple of the exercises Barreto describes. As far as putting demography back into economics is concerned, Barreto quotes 1982 Nobel Prize winner George Stigler (from this 1960 article):

"In 1830, no general work in economics would omit a discussion of population, and in 1930, hardly any general work said anything about population.”

However, the key problem with using a tool like this is not the tool itself, it is the opportunity cost of including population concepts into an economics paper - what will be left out in order to accommodate the population concepts? Barreto does acknowledge this point in the concluding paragraph to his article. In an already crowded curriculum, it is difficult to see where population concepts could best fit. It would be challenging to squeeze it into an introductory economics paper, for instance. In the overall programme of study for an economics student, encountering population concepts would probably make most sense as part of macroeconomics where there are strong complementarities, and where the Solow model already appears (but where population change is treated as exogenous). On the other hand, in universities that already have a demography or population studies programme, teaching population concepts might create an uncomfortable situation with economists teaching in an area of expertise for another discipline. However, I've never been one to respect disciplinary boundaries, with various bits of political science, psychology, and marketing appearing in my papers (albeit through an economics lens).

Anyway, coming back to the topic of this post, Barreto's spreadsheet is interesting and may be of value in helping to understand population concepts that are important for economics students. Enjoy!