Economics

At Alexander Kjerulf’s Chief Happiness Officer blog is a list of the top five reasons why “the customer is always right” is bad for business: 1. It makes employees unhappy. 2. It gives abrasive customers an unfair advantage. 3. Some customers are bad for business. 4. It results in worse customer service. 5. Some customers are just plain wrong. I think these reasons hit the nail right on the head (and he includes some fun examples). (Via a comment at Behind the Counter, a blog that often includes examples of the Florida Wal-Mart where its author works getting ripped off by horrible customers.) A variant of “the customer is always right” that also drives companies in the wrong direction for some of the same reasons is “the executives are always right.”

David Friedman has put up a few thoughtful posts about global warming on his own blog, as well as engaged in some discussions in the comments at another blog. He summarizes his own position as: global warming is probably real, is probably but not certainly anthropogenic, is probably not going to have large effects on size and frequency of hurricanes and is probably not going to have large effects on sea level. It is a real problem but not, on current evidence, an impending catastrophe.The posts at his own blog are: “Global Warming, Nanotech, and Who to Believe”“Global Warming, Carbon Taxes, and Public Choice”“Physics, Economics, Hurricanes, and Mistakes” and the two discussions in comments on the Backseat Driving blog are: “Responding to the ’no big deal’ denialists”“The Duke lacrosse controversy and attitudes to global warming”Brian at Backseat Driving says on the first post that “Friedman responds in the comments to this post. The people replying to him in the follow-up comments do a far better job of it than I would.” In my opinion, Friedman completely wipes the floor with those who replied to him. On a related subject, Chris Mooney gives his take on William Broad’s article in the New York Times about criticism of Al Gore’s movie: Let me be clear: I have seen An Inconvenient Truth, and I found it almost entirely accurate. Gore has done a tremendous job of drawing attention to this issue and he gets the science right by and large. But my question as a point of strategy has always been: Why include the 1 to 5 percent of more questionable stuff, and so leave onself open to this kind of attack? Given how incredibly smart and talented Al Gore is, didn’t he see this coming?He points out some specific areas where Gore got it wrong (which Chris also pointed out to me in conversation at last summer’s Skeptics Society conference–this is no change of position for him). John Horgan picks up on the same Broad story, and notes that: What fascinates me about Broad’s stories is that they seemed to at least implicitly contradict the view of global warming purveyed by his Times colleague Andrew Revkin, who spoke about global warming at Stevens in December 2005. Blogging on Broad’s article last fall, I wondered, “Is there dissension at the New York Times on the issue of global warming”? I’m still wondering. Maybe I should try to get Broad and Revkin to visit Stevens again and hash this out. Brian would love that.And goes on in a subsequent post to quote from and refer to Chris Mooney’s blog post. ...

Glen Whitman has assembled “a taxonomy of all the questions that ought to affect our choices about dealing with global warming.” His list so far includes: 1. The existence of global warming. (He assigns a 95%+ confidence level to this.) 2. Human contribution to global warming. (He assigns 90% confidence to this, but is uncertain about how much of the effect is due to human activity, though he references David Friedman’s point that this doesn’t make much difference to whether or not we should do anything about it.) 3. Magnitude of the warming effect. 4. Net harms or benefits due to warming. (He observes that the latter is often ignored.) 5. Extent of decentralized response. (How much will be done in the form of individual activity, changes in land prices, etc. to reduce negative impacts?) 6. Marginal impact of collective abatement efforts. (If all nations cooperated, how much of the negative effects could be abated or mitigated?) 7. Marginal impact of unilateral abatement efforts. (What can the United States do on its own, or at least without the assistance of emerging economies not likely to cooperate, and how much effect could that have?) To which he adds that there are many more questions about specific proposed responses, their marginal efficacy, and costs. If you have further suggestions for his list, post comments at Agoraphilia.

Ross Anderson and Tyler Moore have published a nice paper that gives an overview of recent research in the economics of information security and some open questions (PDF). The paper begins with an overview of the relevance of economic factors to information security and a discussion of “foundational concepts.” The concept of misaligned incentives is described with the now-standard example of how UK and U.S. regulations took opposite positions on liability for ATM fraud is given–the UK held customers liable for loss, while the U.S. held banks liable for loss. This led to U.S. banks having incentives to make their systems secure, while UK banks had no such incentives (and the UK has now reversed its position after this led to “an epidemic of fraud”). other examples are given involving anti-virus deployment (where individuals may not have incentives to purchase software if the major benefit is preventing denial of service attacks on corporations), LoJack systems (where auto theft plummets after a threshold number of auto owners in a locality install the system), and the use of peer-to-peer networks for censorship resistance. The authors examine the economics of vulnerabilities, of privacy, of the deployment of security mechanisms including digital rights management, how regulation and certification can affect system security (and sometimes have counterintuitive adverse effects, such as Ben Edelman’s finding that TRUSTe certified sites are more likely to contain malicious content than websites as a whole). They end the paper with some open issues–attempts to develop network protocols that are “strategy-proof” to prevent cheating/free-riding/bad behavior, how network topologies have different abilities to withstand different types of attacks (and differing vulnerabilities), and how the software development process has a very high failure rate for large projects, especially in public-sector organizations (e.g., as many as 30% are death-march projects). There are lots of interesting tidbits in this paper–insurance for vulnerabilities, vulnerability markets, the efficacy of spam on stock touting, the negligible effect of music downloads on music sales, and how DRM has moved power from record labels to platform owners (with Apple being the most notable beneficiary), to name a few. (Hat tip to Bruce Schneier’s blog, where you can find links to a slide presentation that covers the highlights of this paper.)

I’ve been awarded a Thinking Blogger award, courtesy of Larry Moran at Sandwalk: Strolling with a Skeptical Biochemist. Thanks, Larry! As per the rules of this award-meme, I must tag five other blogs that make me think: 1. Glen Whitman and Tom W. Bell at Agoraphilia 2. The Technology Liberation Front 3. Martin Geddes at Telepocalypse 4. Ed Felten at Freedom-to-Tinker 5. Kevin Carson at the Mutualist blog

In November, Arizonans voted to increase the state minimum wage from $5.15/hour to $6.75/hour, and there is now some anecdotal evidence of job loss for teen workers in South and Central Phoenix. Pepi’s Pizza in South Phoenix is laying off three of its 25 workers and Mary Coyle’s Ice Cream Parlor has cut back on hours and not replaced two workers who quit (despite the fact that its owner, Tom Kelly, voted for the increase). Kelly notes that he also increased the wages of those who were already making above minimum wage, with the net effect being an additional $2,000/month in expenses. The Arizona Republic article notes that the majority of the state’s 124,067 workers aged 16-19 already made well above minimum wage before the change, 30.1% of workers making minimum wage fall in that age range, and 30.4% of minimum wage workers live with a parent or parents.

After Steve Jobs said that he’d prefer to have the iTunes store sell DRM-free music, but is forced into DRM by the music labels, Edgar Bronfman of Warner Music said that his company will have nothing to do with DRM-free music: “We advocate the continued use of DRM,” Bronfman said, adding that music deserves the same anti-piracy protections as software, TV broadcasts, video games and other forms of intellectual property. “We will not abandon DRM nor services that are successfully implementing DRM for both content and consumers."This quote appeared in an article reporting Warner’s dismal results: its fiscal first-quarter profit fell 74% because of fewer album releases and soft domestic and European sales. Its shares fell nearly 6%. The New York-based recording company said net income for the period that ended Dec. 31 declined to $18 million, or 12 cents a share, from $69 million, or 46 cents, a year earlier. Revenue fell 11% to $928 million.The competition at EMI, however, feels differently: Music label EMI Group is in talks to release a large portion of its music catalog for Web sales without technological protections against piracy that are included in most music bought over the Internet now, sources said on Thursday. … One source familiar with the matter said that EMI was in talks to release a large amount of its music in an unprotected MP3 format to various online retailers.EMI’s plans apparently include talks with Shawn Fanning’s SnoCap about releasing MP3-format music through MySpace. Which company is more likely to still be in business under the same management ten years from now?

The Recording Industry Association of America has a web page arguing that we’re all getting a fantastic deal on compact discs because, if they had gone up in price along with the Consumer Price Index, they’d be over $33 each. As Ben Woods points out, by that same argument Texas Instruments calculators that cost $20 in the mid-1980s should have cost over $300. In fact, the recording labels engaged in price fixing, by setting “minimum advertised pricing” on CD retailers, which caused prices to stop their downward trend in 1996–and causing a decline in sales as prices increased. If you want to sell more CDs, lower the price. (Via Techdirt.) UPDATE (February 9, 2007): This post at kuro5hin from January 2003 on “RIAA vs. MP3 vs. Adam Smith” addresses compact disc pricing and demand. UPDATE (February 10, 2007): And this post at Techdirt reports on a study that shows no measurable effect on CD sales from online downloads (as opposed to, say, CD prices).

Long or Short Capital reports that: [Conceptual] artist Jonathon Keats has digitally generated a span of silence, four minutes and thirty-three seconds in length, portable enough to be carried on a cellphone. His silent ringtone… is expected to bring quiet to the lives of millions of cellphone users, as well as those close to them.Given the duration of the ringtone, Keats should expect to get sued by the estate of John Cage for copyright infringement.

Rather than increase the Earned Income Tax Credit or reduce payroll taxes, Congress is moving forward with an increase in the minimum wage. Gary Becker and Richard Posner have written a Wall Street Journal op-ed titled “How To Make the Poor Poorer” which describes the likely consequences of this feel-good legislation: Although some workers benefit -- those who were paid the old minimum wage but are worth the new one to the employers -- others are pushed into unemployment, the underground economy or crime: The losers are therefore likely to lose more than the gainers gain; they are also likely to be poorer people. And poor families are disproportionately hurt by the rise in the price of fast foods and other goods produced with low-skilled labor because these families spend a relatively large fraction of their incomes on such goods. Because most increases in the minimum wage have been slight, their effects are difficult to disentangle from other factors that affect employment: But a 40 percent increase would be too large to have no employment effect; about a tenth of the work force makes less than $7.25 an hour. Even defenders of minimum-wage laws must believe that beyond some point a higher minimum would cause unemployment, otherwise why don't they propose $10, or $15, or an even higher figure? Good intentions don't make for good legislation. UPDATE (February 9, 2007): Glen Whitman writes about how the minimum wage debate is largely symbolic on both sides, though this time it could be different. UPDATE (September 6, 2007): I just came across this interesting post at the Coyote Blog about how minimum wage changes affect his specific business. UPDATE (October 10, 2007): Here's a nice summary of U.S. minimum wage worker statistics, including: According to the U.S. Department of Labor, the median annual income of a U.S. worker is $32,140. Federal minimum wage is currently $5.85 an hour, or about $11,500 per year — just above the poverty line. Of the 76.5 million people paid by the hour in the United States in 2006, 2.2% make minimum wage or less. Here are some generalizations we can make about minimum wage workers: Most minimum wage earners are young. While 2.2% of all hourly workers earn minimum wage or less, just 1.4% of workers over the age of 25 are paid at or below the Federal minimum wage. More than half (51.2%) of minimum wage workers are between 16 and 24 years old. Another 21.2% are between 25 and 34. Most minimum wage earners work in food service. Nearly two-thirds of those paid minimum wage (or less) are food service workers. Many of these people receive supplemental income in the form of tips, which the government does not track. Most minimum wage earners never attended college. Just 1.2% of college graduates are paid the minimum wage. If you only have a high school degree, you’re more likely (1.9%) to be paid minimum wage. Those without a high school degree are nearly three times as likely (3.7%) to earn minimum wage. 59.8% of all minimum wage workers have no advanced education. Finally, as you might expect, part-time workers are five times more likely to be paid the minimum wage than full-time workers. UPDATE (November 25, 2012): There has been an accumulation of evidence that a moderate minimum wage is a net benefit, improving both wages and employment in some cases (reference to The Economist, Nov. 24, 2012, p. 82, "Free exchange: The argument in the floor"). Historical Comments Einzige (2007-02-03): Economics Professor Russel Roberts, over at Cafe Hayek, recently posted a brief survey of the empirical evidence on the effects of the minimum wage. Like the story of the broken window, it’s a lot easier to point to the benefits of a minimum wage than to the costs, but that doesn’t make the costs any less real. ...