Oxonomics

Welcome to Oxonomics

Welcome to the Oxonomics blog. Oxonomics is a peer-reviewed, academic journal established by graduate members of the University of Oxford.

Why Do Footballers Dive?

According to the conventional wisdom, when compared to other sportsmen. footballers are cowardly weaklings. Is this true? I'm currently in the US, and most Amercians point out the proclivity of footballers to rolling around in feigned agony at slightest physical contact as one reason why they don't think the sport will ever replace or supplant American's home grown sports. This is called diving. In England, the diving phenomenon is usually blamed upon foreign players. But anyone who watches footballer regularly knows that Michael Owen and Steven Gerrard are guilty of this sin all the time, while Emile Heskey spends most games falling over. The question is: Is there a rational choice explanation of diving?  Why do footballers dive more than other sportsmen?

Rationality vs Evolution

F.A. Hayek was one of the pioneers of the evolutionary approach to economics.  Rereading Hayek's The Constitution of Liberty on the difference between Gallican and Anglican concepts of liberty- the former based on Cartesian rationality and the latter on an evolutionary theory of moral intuitions and institutions(see Vernon Smith on this here)- reminds me of the history of game theory. We need look no further than John Nash’s PhD dissertation- 27 pages of typescript, double-spaced! (see the Nobel seminar here)

Food Prices and the Alchian-Allen Effect

With food prices rising, journalists have predicting that consumers will switch away from high-quality, expensive, organic or free-range food in favour of cheaper alternatives. Here is Julia Finch in the Guardian reporting on the reversal:

'Twelve months ago the big grocers reckoned the world had changed: food shopping was no longer about price, but provenance, green issues and healthy eating.

Organics were the new big seller - Asda doubled its range and at Tesco sales hit £1bn a year - while at Sainsbury's Jamie Oliver was urging the public to try something new and adventurous with sage or nutmeg.

Now, as household budgets are stretched, the grocers have done an about-turn. They are screwing their suppliers to the floor to keep price rises low, filling their shelves with promotions - and Jamie's new campaign is all about how to feed your family for a fiver.'

Guardian journalists are clearly worried that the food revolution that has drastically improved British cooking in the past ten years may go into reverse.

In Defence of Profiteering

Tim Harford has a great example of the valuable services performed by so-called profiteers here. Price gouging  communicates valuable information - it signals that there is a real and immediate scarcity. In this case customers whose needs are not immediate are deterred from buying petrol while customers who do really need petrol know that it is available. As Harford puts it:  'price-gouging is woefully undersupplied in this market' for political reasons because most retailers are terrified of being accused of profiteering.

Trashing the Western Enlightenment [or just economics]

I blogged a while ago here about Stephen Marglin's book The Dismal Science, how thinking like an economist undermines community. There is a great and caustic review of the book by E. Roy Weintraub here. It begins:

'It is not often that a scholar with no particular historical or philosophical expertise trashes the Western enlightenment in order to stomp on the discipline of economics as a manifestation of all that was lost in creating the modern world.'

Why do oil prices keep on rising?

The price of oil has now almost hit $140 a barrel as the FT observes. The article itself focuses on Saudi attempts to boast production and thus increase supply but it is worth asking the question: why is oil so expensive and why do oil prices keep rising?  Note that these questions are different. If fundamentals alone i.e. concerns about the long-run supply of oil and the predicted increases in demand as India and China keep on growing were driving the price then we might expect high oil prices. Prices would jump immediately or very quickly to the new higher levels determined by these new fundamentals. But we would not expect continually increasing oil prices unless we were repeatedly surprised by 'bad news' about fundamentals.  This doesn't seem particularly plausible . . .

Medieval Guilds and the Black Death

I've blogged before about Gary Richardson's innovative work on economic institutions in the middle ages (see here). In this more recent NBER paper, together with Michael McBride he examines how religion and institutions like the medieval guilds interacted in the face of a huge demographic shock (the Black Death). High mortality rates meant that cooperation was harder to sustained. Religion provided an alternative way to sustain cooperation.  The paper is much richer than this and is going to take me a while to disgest fully.

Someone at the Guardian needs to study economics

I wish the Guardian newspaper was economically literate; someone should probably send them a copy of Bastiat's essay on the broken window fallacy. Sadly however as this and many other articles in the past demonstrate, this is too much to ask.  Have a look at this article documenting the "costs" of England, Wales and Scotland failing to qualify for Euro 2008.

'For the first time in 14 years, not a single home nation has qualified, leaving Wayne Rooney time for a lavish stag party in Ibiza and the rest of Britain wondering just who to support. It is an absence that is set to prove more than just a sporting embarrassment. Estimates of the cost to the economy of England's failure to qualify rise as high as £2bn.'

What evidence do they have for this? Well, apparently

'The British Retail Consortium estimated that the ultimately doomed run triggered spending of £1.25bn on consumer goods in pubs and clubs, and that missing out on a place in the finals of Euro 2008 will result in a £600m spending downturn. Carlsberg reckons brewers alone will lose £15m in British sales, compared with a tournament featuring England.'

Evidently all of the money that would have been spent on beer is going to disappear altogether!

Lessons from Keynes

I've already drawn attention to the excellent work of Axel Leijonhufvud here. In his latest CEPR paper, examines the current crisis drawing on insights from Keynes. He argues the insights of Keynes into financial crises remain extremely relevant to the current credit crunch but the economic policy proposals of Keynesian economics are pretty well useless in the current situation.

Don't Restrict Free Trade in Footballers!

by Jimmy Reade

Football is receiving more and more attention from academic economists around the world for a whole host of reasons – not least game theorists have a rich field in which to apply theories on the effects of observing effort of employees, and because sports betting markets can offer an interesting insight into how markets function. 

However, it appears that many of those making decisions within football suffer from bad economics:  FIFA, football’s governing body, "overwhelmingly" voted for a proposal by its president Sepp Blatter to restrict the number of foreign players allowed in a football (soccer) team. The plan is dubbed “6+5”, allowing only 5 foreign players to play in a team of 11.

Inequality

I've been thinking recently about how the dimensions of inequality change with economic growth. As I noted in an earlier post income inequality does a poor job of measuring actual 'felt' or 'perceived' inequality. The Growth Commission acknowledges this by talking in terms of opportunities but this is pretty vague. I want to clarify what exactly I meant when I noted that increased income inequality  can be accompanied by increasing equality of consumption experiences.

The Costs of Environmentalism in an Oxford College

Environmentalists have not yet fully caught on to the fact that their well-intentioned policies often have undesirable, unintended consequences. Consider the of bioplastics instead of normal plastics in wrapping food. According to this Guardian piece:

'The substitutes can increase emissions of greenhouse gases on landfill sites, some need high temperatures to decompose and others cannot be recycled in Britain.'

Furthermore, these bioplastics are produced from crops like wheat and sugar cane. Demand for 'alternative' and supposedly environmental friendly plastics has thus tempted farmers in the developing world to shift away from food production. This has had an obvious effect on global food supplies. They are having a similar albeit smaller effect as biofuels on food prices. As one blogger has put 'bioplastics are the ''other'' biofuel'. With respect to the problems of biofuels, Noble prize winner Amartya Sen has eloquently written that

'Agricultural crops like corn and soybeans can be used for making ethanol for motor fuel. So the stomachs of the hungry must also compete with fuel tanks.'

But it is also true that the hungry have to compete  with other claims on the consciences of those in the rich world, with alternative, and to some extent competing concerns such as environmentalism. 

With this in mind I was both intrigued and worried about the fact my college's student union has proposed replacing plastic cups in the bar with cups made from 'plant starch'. I wanted to know if by doing this the student union was inadvertently contributing further to the food crisis?

The CAP and Biofuels are to Blame

Recently I wrote a post defending the practice of speculating in commodity markets like food.  Now in a letter to the President of the EU, a number of retired, big shot European politicians including Jacques Delors, Helmut Schimdt and Lionel Jospin have now joined the fray repeating the claim that hedge funds are to blame.  I suspect the reason they do so is simply to support the main contention of their letter that financial markets should be regulated. In a recent post on the Spectator website here Tim Worstall exposes how economically illiterate and morally bankrupt their reasoning is. They write:

'Quite tellingly, hedge funds have been involved in driving up the price of basic staples. It is the citizens of the poorest countries that will be most affected.

But they fail to mention the fact that reducing the food supply of Europe and reducing its ability to respond to price signals remains a central plank in the agricultural policy of the EU.  Until very recently the CAP paid farmers too 'set aside' land because it was worried about overproduction. Even now farmers are paid to maintain the rural landscape rather than actually produce food. If Delors and Jospin et al are really concerned about the food crisis, the first thing they should suggest is reforming the CAP so that European farmers have more of an incentive to respond to the scarcity of food elsewhere or repealing the European biofuels directive, instead they write:

It is time to set up an “European Crisis Committee” gathering high-profile politicians, former Heads of State and Government or Finance Ministers as well as renowned economists and financial experts of all continents.'

because this is exactly what  we need . . . another committee and another commission. I wouldn't be at all surprised if the list of former finance ministers included Delors, Schmidt and Jospin.

Inequality, Opportunity and Economic Growth

In a comment on the previous post, Bruno notes that The Commision for Growth,

'“strongly believes that growth strategies cannot succeed without a commitment to equality of opportunity, giving everyone a fair chance to enjoy the fruits of growth”; essentially arguing that if there is too much inequality, political support for the chosen growth path will erode, even if proven to be successful. Hence, the commissioners do not believe in the automaticity of the so-called trickle-down effect.'

I actually read a lot of what the Commission says about inequality and equality of opportunity as political rhetoric. This sounds disparaging but what I mean is that a commitment to equality of opportunity does not map one-to-one onto policies.  A commitment to equality of opportunity does not tell you much that is specific about policy.

Michael Spence on the Growth Commision

I saw Michael Spence present the finding of the Commission on Growth and Development yesterday at St. Antony's. The full report is now available at Growth Report.  From the presentation, I take the report as presenting the current consensus on growth and development - something that almost all economists would broadly agree with or at least find it difficult to really disagree with. 

Allan Meltzer on Fed Policy

Allan Meltzer, a distinguished economist and monetary historian is featured on Econtalk this week. It is highly recommended. In a number of  Wall Street Journal articles, Meltzer has been a prominent recent critic of Federal Reserve policy.

Here Meltzer argued against the possibility of regulating away financial risk.  In the podcast he notes that whatever regulations lawyers design, markets can circumvent. He concludes by noting

'If the government underwrites all the risks, call it socialism. If it underwrites only the failures, call it foolishness.'

And in the podcast he goes into details about the rescue of Bear Stearns.

In this piece he argues that current Federal Reserve policy is making the same mistakes the were made in the 1970s.  In the 1970s, policymakers were unwilling to bear the cost of lower output or increased unemployment now so they refused to tighten monetary policy, believing that inflation was a problem they could deal with once the threat of recession had gone away. However inflation kept on increasing, and the threat of recession never went away.  Echoing F.A. Hayek, Meltzer argues that responsible central banks must be prepared to accept minor recessions.  If they are unable to do so, then we will inevitably suffer major recessions.

Most of the talk in the US and in the UK is of the credit crunch and of recession. But as both Russ Roberts and Meltzer note in the podcast so far there is no recession. Unemployment remains low. Output growth is slowing but that is all for the moment. Inflation, however - particularly global inflation - is increasing rapidly. If we are indeed witnessing the end of the great moderation, and if Melzter is right then the policy of Federal Reserve will have to reexamined.

The Causes of Home Advantage in Team Sports

Across a range of team sports, home teams do better than away teams. This is well known. The question is why?  Tyler Cowen speculates on some of the possible causes of home advantage in basketball here.  His suggestion that 'a third component of home court advantage has to do with sleep.  People sleep better at home, if only because they don't have to go to such great lengths to get sex'.  This explanation is certainly interesting and certainly seems compatible with what we know about the behaviour of many Premier League footballers but is also unconvincing: it cannot explain why home advantage does not exist in individual sports. It is a phenomenon unique to team sports.

Jimmy Reade and myself have attempt to address the question of home advantage in football in this paper. We find that home advantage in English football has fallen since the 1980s. 

Dani Rodrik: Economic Liberalisation is not to blame for high food prices

Dani Rodrik critiques those blaming World Bank policies in the 1990s for worsening the current food crisis here.   

'It seems to me odd to fault the World Bank for advice some 15 years ago to eliminate import protection--so that domestic prices could come down at the time--while at the same time complaining about high prices now, even with the benefit of hindsight.  If developing countries had all kept their import protection, the global supply of food would have been lower today, not higher.'

As he notes that the current rise in the food prices weakens the case made for self-sufficiency in food.

Podcast on the Credit Crunch

This podcast on the 'Giant pool of money' is a nice intro to the credit crunch from a US perspective.

History of Economic Thought: the T-Shirt

From our friends at the LSE student union, the Phillips curve 50th anniversary T-shirt.

Nudged

I'm just starting to read a new book by Cass Sustein and Richard Thaler called Nudged. The author advocate a policy of libertarian paternalism.  The idea is that policymakers set defaults or frame questions in such a way that individual choice is improved from the perspective of the chooser. The most well-known instance of this isthe idea of setting the defaults for savings plans higher rather than lower in order to encourage savings. These arguments draw upon recent research in behavioural economics emphasizing the fallibility of decision making and the importance cognitive costs play in shaping our decision making. Ironically however, one of first examples I've come across so far in this book reinforces exactly this point but casts doubt on my confidence in some of their other claims. 

'The End of Inflation Targeting'?

A weeks ago in this post I drew attention to a piece by Axel Leijonhufvud on the current credit crisis. He has now expounded upon the theme of the death of inflation targeting in a Voxeu article. He makes two main points:

1. Inflation targeting requires appropriate feedback that current policy is either too tight or too lax. But in the US in the period 2003-2007 this feedback was distorted because of the exchange rate policies of other countries. As a result, because it was based only on report CPI, interest rate policy was too lax and an asset price bubble was created.
2. Central bank independence and policy transparency were founded on the idea that monetary policy could be managed by technocrats according to a mandate. But

'When monetary policy comes to involve choices of inflating or deflating, of favouring debtors or creditors, of selectively bailing out some and not others, of allowing or preventing banks to collude, no democratic country can leave these decisions to unelected technicians. The independence doctrine becomes impossible to uphold.'

Instead politicians will reclaim many of the responsibilities of central bankers. According to Leijonhufvud, their choice will amount to deciding how much stagflation to accept.

Pondering these thoughts will take some time. My first reaction is that the politicalization of monetary policy is not something I want to return to . . .  but perhaps it is inevitable.

Why Economics was Late? If indeed it was late?

A while ago Tyler Cowen asked

'the absence of a developed economics until the mid-18th century remains a startling anomaly in the history of ideas.  Why was that?'

One answer provided by Arnold Kling is that people really began to be accustomed to market economic activity only in the time of Adam Smith. Kling interprets this to support his hypothesis that market economies did not exist before the 18th century - an idea criticized in previous posts.  But there is no reason to accept this hypothesis.  Nor is it clear that economics really developed 'late'.

Betfair is an Efficient Market

How efficient are sports betting markets? This recent paper by Karen Croxson and Jimmy Reade featured in the FT.  What is the bottom line? And what are the advantages of looking at sports markets? According to the authors:

In an efficient market news is incorporated into prices rapidly and completely.  Attempts to test for this in financial markets have been undermined by the possibility of information leakage unobserved by the econometrician.  An alternative is to switch to laboratory conditions, at the price of some artificiality. Potentially, sports betting markets offer a superior way forward: traded assets have terminal values and news can break remarkably cleanly, as when a goal is scored in soccer.

We exploit this context to test for efficiency, applying a novel identification strategy to high-frequency data.  In particular we use a dataset from Betfair, the dominant internet betting exchange, on second-by-second trades on Premiership soccer matches since August 2006.  Betfair markets are very liquid: on average $6.23m is traded per match, with 49\% of that bet during the match, which equates to $22,390 traded per minute and $373 per second.

A modelling problem remains though: prices will drift due to a combination of events happening during a match, and simply due to the ticking down of the clock (one event --- win draw or lose --- becomes more and more certain as the time remaining decreases).  However, the half-time interval in football is a newsless period in which the clock is stopped, affording us an ideal opportunity to measure how quickly news is impounded into prices.  We consider goals scored on the cusp of half-time, and test whether they impact prices during half-time.

On our evidence, there is no effect of goals before half time, and hence we conclude that prices swiftly and fully update, and that markets are efficient.

Backward-looking Monetary Policy?

From today's Guardian leader:

"yesterday's [MPC] decision was not only the wrong one, it was made for the wrong reasons... ...Imagine you are driving a car. Instead of watching the road ahead, you go entirely by what is in the rear-view mirror. To work out how much petrol is needed, you look not at the fuel gauge but go solely by how much you put in at the service station 100 miles back. This is not too far from how the Bank is setting interest rates at the moment."

Presumably the editor has never looked at one of The Bank's fan charts, or something like this, indicating the Bank's forward looking policy process.

That's not to say a purely forward looking policy rule is always optimal. When expectations are forward looking, private sector responses to a shock today depend in part on expectations about future policy. A central bank may then respond to today's shock in tomorrow's policy decision, in order to influence outcomes today. That is, from the perspective of tomorrow, policy is, to some extent, optimally backward looking. See Michael Woodford make this point.

10p Tax Fiasco: the graph

Courtesy of the IFS: the income tax and NI changes coming into play in 2008-9, and the associated distribution of gains and losses by income (see below):

In Defence of Speculation

Food prices are soaring. And, unsurprisingly, a number of voices have begun to blame speculators.  According to the New Statesmen a trading frenzy amongst hedge funds and other investors is responsible for the recent spike in food prices.  This letter in the Guardian makes the same point. The finance minister of India has announced that he is considering banning trading in food futures. Vietnam has already done so.

Speculators are never popular. Historically they have been vilified in all societies. Certainly it offends moral sensibilities when big commercial farmers are set to make huge profits out of food shortages that will led to starvation for others. But speculators and speculation are not to blame for the crisis itself. Nor will banning speculation help solve the problem.

Camels v. Tractors and Explanations for the Great Divergence

The FT reports that farmers in India are abandoning their tractors in favour of camels as the price of petrol rises.  As Art Carden at Division of Labour notes this is an excellent example of cross-price elasticities of demand. And to prove his point, the article contains the following quote:

“It’s excellent for the camel population if the price of oil continues to go up because demand for camels will also go up,” says Ilse Köhler-Rollefson of the League for Pastoral Peoples and Endogenous Livestock Development. “Two years ago, a camel cost little more than a goat, which is nothing. The price has since trebled.”

But it has wider implications than this . . .

Rogoff's Open Letter to Stiglitz

I came across Ken Rogoff's 2002 open letter to Joe Stiglitz here.  Old news I know but relevant to the previous post. 

"The UN as a Global Financial Regulator"?!

This was one of more contentious proposals raised by Joseph Stiglitz today.  He was giving the May Day Public lecture in Oxford today. Details are here. The talk was entitled Meeting the Challenges of Global Governance in the 21st Century: Lessons from the Global Financial Market Debacle but it ranged right across a number of Stiglitz's favourite topics. I'll just focus on this particular proposal which came out of his diagnosis of the current financial crisis.