Recently, Amazon had one of its big “Prime Day” sales, a two day event where a variety of products would be sold at various discounts. And while looking through some of the offers available, I was reminded of a post from co-blogger Jon Murphy from a year ago. In this post, he examines the FTC’s case against Amazon as a monopolist. One of the things he points out is that the FTC gets a key point exactly backwards. What they considered to be evidence of monopolistic behavior on the part of Amazon is, in fact, evidence of robust competition. Discussing Nessie, a price adjusting algorithm used by Amazon, he makes the following point: First, the goal of Nessie was to compare Amazon’s price increase to other retailers.  Thus, the existence of the project shows that Amazon faced substantial competition in its ecommerce market; competition they had to monitor and adjust to.  Second, the fact that Nessie was programed to reduce prices to previous levels if the other competitors didn’t increase theirs indicates that Amazon is a price-taker, not a price-maker.  They have to follow the market price; they cannot just increase their prices as they wish. Amazon’s behavior is not of a monopolist but of a competitive firm. The existence of Nessie actually proves Amazon faces a highly competitive ecommerce industry. How does this relate to the recent Amazon Prime Day sale? Well, one of the items I was interested in was a particular pair of wireless headphones. Amazon had marked them down to less than half of the normal retail price. And upon seeing that, I immediately knew, without needing to check, that both the Best Buy and the Target right around the corner from where I live would also have marked those items down to the same degree. Because the retail market (ecommerce and otherwise) is a highly competitive space, retailers are price-takers, not price-makers. Like Jon Murphy pointed out, if you’re a price taker, you can’t raise your prices when your competition is keeping their prices low. And the other side of that coin is if your competition lowers the price of some item, you have to do so as well. So I decided to pick up those headphones, but I got them from Best Buy rather than through Amazon, because that way I didn’t have to wait for the two-day shipping to get the item. (First world problem, I know!) I’ve seen this play out in other markets too. Steam is a popular platform for digitally distributing PC games. Every now and then, Steam will have a big sale lasting several days. (In the subculture of PC gaming, there’s an ongoing joke that these sales result in people having a massive backlog of games they purchased but still haven’t gotten around to playing yet – this might describe me as well!) As soon as one of these Steam sales goes live, Microsoft will suddenly put out a big sale for digital downloads of Xbox games on their digital market. Sony does the same for digital downloads for their PlayStation system. If one service cuts prices, they all have to cut prices. Even though gaming is dominated by just a few large companies, the market remains highly competitive. This also explains a phenomenon I’ve noticed over the years, which I’m sure you’ve noticed as well, dear reader. The holiday shopping season has gotten much longer than it used to be. I remember when “Black Friday” really was just a one-day event taking place the Friday after Thanksgiving. But then, some retailers started doing Black Friday weekend, extending through Saturday and Sunday, and that became the norm. Now, lots of retailers start their “holiday shopping deals” well before Thanksgiving and they continue on until Christmas. As soon as one retailer decides to expand their offerings, everyone else has to do it too. I take all of this as a good sign. Suppose you enjoy video games, but you exclusively play them on the PlayStation. Even in this case, you can benefit from competition and get PlayStation games at lower prices anytime Steam decides to offer a sale on PC games to PC gamers. Even though you’re not a customer in the PC gaming market, you still get the benefit of that competition. Even if you dislike ordering products online and prefer shopping in person, you can still get products at your preferred brick-and-mortar retailer any time Amazon lowers prices for their customers. Take a moment to appreciate this as we roll into the holiday shopping season this year – and remember, gifts are good! (0 COMMENTS)

In an EconoLog post 10 months ago, I commented on a Wall Street Journal report that Yahya Sinwar understood “the Israeli psyche” after spending nearly two decades in jail in that country. He was the Hamas leader thought to have planned the operation that massacred 1200 Israelis and took more than 200 hostages, most of them civilians, on October 7, 2023. I suggested that, if one plans to organize something like that, one should understand methodological individualism rather than focus on some imaginary collective psyche (“Methodological Individualism and the Hamas Ruler,” December 14, 2023). I wrote: If Hamas ruler Yahya Sinwar had learned methodological individualism, things would be different. He might have been tempted by a broader individualist philosophy and might have treated “his” people in Gaza better, including by not using them as human shields and not spending public money on tunnels. But even if he had only known methodological individualism, his life might not be on the line right now. Methodological individualism is essential to understanding social groups (the Israeli society, for example) and organizations (the Israeli government). There was a high probability that the political incentives on the other side (and in Iran) would result in a forceful military response, which would be detrimental to the poor Gazeans and to himself. Incentives always boils down to individual incentives. It wasn’t sure that the response would respect proper moral restraints vis-à-vis civilians, but that was likely not part of the terrorist’s concerns; it should be part of an individualist’s concerns, though. Sinwar, who later became Hamas’s chief ruler, was killed by the IDF on Wednesday. ******************************* A surreal and sarcastic vision of Yahya Sinwar lying in state (0 COMMENTS)

  In my Wall Street Journal op/ed on the 3 Nobel Prize winners, “A Nobel Prize in Economics for the ‘Inclusive’ Free Market,” published on line on the afternoon of the award and in print the next day, I wrote: The Nobelists’ contribution is to lay out empirical data on the specific economic institutions that helped or hindered economic growth and then to examine the factors that led to those institutions. They point out, as Adam Smith did, that property rights and the rule of law are key. What I didn’t get room to say, given my tight word constraint, is that in their book Why Nations Fail, Daron Acemoglu and James A. Robinson gave short shrift to Adam Smith. Look up Smith in the index, and you’ll find one reference. Go that page and you’ll see that the reference is to the “invisible hand.” That’s it. No mention of institutions, which is a huge part of An Inquiry into the Nature and Causes of the Wealth of Nations. And there’s no mention of The Wealth of Nations in the 17 pages of References. I was looking at the blurbs at the front of the book this morning and found this one by Niall Ferguson: Synthesizing brilliantly the work of theorists from Adam Smith to Douglass North with more recent empirical research by economic historians, Acemoglu and Robinson have produced a compelling and highly readable book. Acemoglu and Robinson do discuss recent empirical research by economic historians. The book is compelling and highly readable and their bibliographical essay references a number of works by Douglass North. But the authors did not mention the work of Adam Smith. I gave above the only mention of Smith that I could find. Postscript: Since writing my op/ed, I came across this piece by Ryan Young of the Competitive Enterprise Institute. It’s excellent. (0 COMMENTS)

How much do you know about Bruno Leoni? Friedrich Hayek credited Bruno Leoni with shaping his ideas on laws and legislation. James Buchanan said that Leoni identified problems that led to his own work on public choice. How is it possible, then, that so few of us know of the groundbreaking Italian political philosopher? But it seems, well, we don’t talk about Bruno… EconTalk fan fav Mike Munger and host Russ Roberts set out to change this in their recent conversation about Leoni. Munger begins by recounting Leoni’s eventful, “frenetic” life. A political philosopher, Leoni taught a post-war course called “Doctrine of the State,” which Munger describes as more like doctrine of freedom and law. Indeed Munger believes it to have been a “signpost” along the way to both Austrian economics and public choice. Leoni shared the lecture stage with Hayek and Friedman (indeed this was the origin of his Freedom and the Law). He was an early and active member of the Mont Pelerin Society, and he was elected its second president just before his death. Despite his untimely death, Leoni had a significant influence on three different parts of what we now think of as mainstream classical liberal scholarship- 1. Hayek’s distinction between law and legislation, 2. James Buchanan’s identification of problems with political consent and political authority, and 3. the law and economics movement. Let’s turn to the legacy of Leoni, and START talking about him. After listening to the episode, we encourage you to ponder the questions below, and even more that you’ll take time to share your responses in the comments.   1- Munger tells us that F.A. Hayek attributed his famous distinction between law and legislation to Leoni. What is this distinction, and how does Munger explain the differences in Hayek’s conception to that of Leoni? Is living in a world of more laws (relative to legislation) to be desired? Why or why not? (And lest we inspire Munger’s wrath, what role do transaction costs play in your answer?)   2- What are the three characteristics Munger describes as comprising Leoni’s conception of the rule of law? Why does Munger say that in Leoni’s ideal system, “If the system is operating properly, there are no cases that come before a judge?”   3- How is Leoni’s conception of the rule of law different from the sort Roberts describes (~44 minutes)? What role is there for tradition or precedent in Leoni’s ideal, and to what extent do you find this role sufficient?   4- What are the problems with [written] law as Roberts recounts? To what extent do you see Leoni’s theory, as recounted by Munger, as addressing these problems? Why, under Leoni’s purported system, would judges not need to be trained in jurisprudence or worry about precedent?   5- Roberts and Munger close with a discussion of universality, one of the characteristics of the rule of law for Leoni. They note the “Golden Rule” as one of its more common iterations. What’s the problem with this iteration according to Munger? (Hint: he says it’s not do unto others as you would have them do unto you., and it’s also the part that Hayek leaves out.)   (0 COMMENTS)

Daron Acemoglu, Simon Johnson and James Robinson were recently awarded a Nobel Prize in Economics, partly for work emphasizing the role of good institutions in economic development.  They used a variety of creative statistical techniques to get around the thorny problem of how to establish causality.One problem in establishing causality is that a group of successful countries might share a number of distinctive characteristics. If most successful countries share characteristics X, Y and Z, then it is difficult to know whether any one of those characteristics played a decisive role in development.Normally, we tend to assume that a large number of observations provides more “statistical significance” than does a single anecdote. But is that always true? Consider the following claim: Differences in institutions, differences in culture, and differences in natural resource endowments all play a major role in explaining the relative wealth of nations. I believe that these three claims are true.  I also believe that the strongest evidence in favor of these three claims does not come from reams of statistical analysis, rather it comes from three very powerful anecdotes.  Good institutions:  Korea provides a near perfect example of the importance of having good institutions, which is a term economists use to represent an economic and legal system conducive to wealth creation.  When Korea was divided after WWII, there was relatively little difference between either the culture or the resource endowments of the two halves of the country.  If anything, the North was somewhat richer. Today, South Korea is vastly richer than the North.  It’s almost impossible to think of a plausible explanation that does not in one way or another reflect differences in institutions.  Yes, Korea is just a single data point.  But it is overwhelmingly persuasive, in some ways more so than a regression of 200 nations that tries to establish the importance of good institutions. If you are the sort of person who likes a simple explanation for complex phenomena, you might wish to stop here.  Korea seems to clearly demonstrate the overwhelming importance of institutions.  Unfortunately, further south there’s another powerful anecdote, with a very different implication. Good culture:   People who emphasize the role of culture in economic development, often point to the impact of Chinese diaspora on the economies of Southeast Asia.  Singapore (76% Chinese) is much richer than Malaysia (23% Chinese), which is significantly richer than Thailand (14% Chinese), which is significantly richer than Indonesia (1% Chinese.) But is that information actually decisive?  Perhaps Singapore is rich due to the policies of Lee Kuan Yew.  Malaysia has more natural resources than Thailand.  Thailand was not exploited by colonial powers in the way that Indonesia was.  One can always dream up all sorts of ad hoc explanations for any given correlation. I’m actually much more persuaded by a single anecdote: Malaysia.  The 23% of Malaysia’s population that are Chinese are much richer than the remaining 77% of the population (mostly ethnic Malays, but also some Indians.) Does that prove that culture matters?  Perhaps the Malays are being discriminated against.  In fact, it is the Chinese that are being discriminated against, as Malaysia has a strong affirmative action policy favoring the Malays.  Thus it’s very hard to think of any explanation for the relative success of Chinese Malaysians that does not involve some aspect of culture (which is admittedly a broad category.) As an aside, I’m perplexed when progressives make the argument that economic disparity is prima facie evidence of discrimination.  Jewish Americans have considerably higher average incomes than Christian Americans (even white Christian Americans).  Do progressives actually wish to argue that this disparity reflects the fact that America discriminates against Christians?  How would that differ from offensive arguments made by anti-semites? Natural Resources:  When I was young, the north coast of South America had three little colonies called British Guiana, Dutch Guiana and French Guiana.  Today, British Guiana is just Guyana, Dutch Guiana is Suriname, and French Guiana is a part of France.  Even five years ago, both Guyana and Suriname were fairly poor.  Today (in 2024), Suriname has a per capita GDP of $6700, while Guyana has shot up to over $26,000 (and will be two or three times higher by the end of the decade.) There is simply no plausible explanation for Guyana’s success that does not reference Exxon’s recent discovery of large oil deposits off the country’s north coast. To summarize:  From Korea, we know that good institutions are really, really important.  From Malaysia we know that culture is really, really important.  And from Guyana we know that natural resource endowments can be very, very important.  Lots of things are very, very important! I worry that people often have trouble holding multiple explanations in their mind at the same time.  Consider that right next to Guyana you have poverty-stricken Venezuela.  But Venezuela is even more oil rich than Guyana (although that’s partly offset by its larger population.). A person obsessed with monocausal explanations might look at Venezuela and conclude that natural resources were a curse. A better way to approach the problem is to note that more than one factor is very, very important.  From Guyana, we know that natural resources can be very conducive to growth.  But from North Korea we know that bad institutions can be extremely negative for growth.  Venezuela has ended up with really bad institutions in a country with large oil reserves. Here’s how I approach the tricky problem of establishing causality in economic development.  Start with the single best anecdote, the single example that seems to be the cleanest test.  Then look for confirmation from slightly less clean examples. After the two Koreas, you might look to East and West Germany prior to 1989.  Or to Taiwan and Mainland China during the Mao era. After Malaysia, you can look at Chinese minorities in other Asian countries, or Indian immigrants to Africa, or Jewish immigrants to America.  Thomas Sowell has documented many more such examples showing the importance of culture. After Guyana you can look at other oil-rich low population places such as the UAE and Kuwait. If the single most powerful anecdote is mostly confirmed by the next best examples, then you can have even more confidence that it wasn’t just some sort of fluke.  You know that you are on the right track. But now the hard part starts.  We have general sense that extreme communism in North Korea hurt their growth, but which specific aspects of the system were most damaging?  That’s a much harder question.  You might look to other cases that share some characteristics of North Korean communism, but not all. We have a general sense that Chinese culture is favorable for growth, but which specific aspects?  We might look at other Confucian cultures in East Asia.  Or we might look at other “middleman minorities” in various parts of the work.   We have a general sense that oil and gas can be very important, but what other natural resources seem to matter? One piece at a time, we gradually fill in the jigsaw puzzle, and a coherent picture starts to emerge.  There are no short cuts, no easy answers, no monocausal explanations. (0 COMMENTS)

[Editor’s note: Welcome to the second of our new series on Price Theory problems with Professor Bryan Cutsinger. You can view the posts from last month’s problem here and here. Share your proposed solutions in the Comments. Professor Cutsinger will be present in the comments for the next two weeks, and we’ll again post his proposed solution shortly thereafter, May the graphs be ever in your favor, and long live price theory!]   Question: According to the Energy Information Administration, crude oil jointly supplies gasoline, heating oil, jet fuel, lubricating oils, asphalt, and many other products. Suppose the widespread adoption of electric vehicles (EVs) reduces gasoline demand but does not affect the demand for the other products jointly supplied by oil. How will the widespread adoption of EVs affect the prices of these other products? (1 COMMENTS)

In his book Living Together, David Schmidtz makes a simple but profound observation about one of the most quoted passages from Adam Smith‘s The Wealth of Nations. Smith says: It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. A hasty reading of this passage might lead some to believe Smith is claiming that the only motivation we might have to help one another is by seeking personal gain. But Schmidtz helpfully clarifies what Smith is truly saying: Second, it makes perfect sense for the author whose first book treated benevolence as primary to subsequently ask how to respond benevolently to trading partners. Why, as a benevolent person hoping to truck and bater with brewers and bakers, do you address their self-love? Answer: because you want them to be better off for having come to you. Notice that Smith does not say bakers are motivated solely by self-love. He says we address ourselves not to their benevolence but to their self-love (WN, Book I, chap. 2). This is a reflection on our psychology, not theirs. He is offering insight not into the self-love of bakers but into what it takes to be benevolent in our dealings with them. In sum, the author of Moral Sentiments gives center stage to virtue and benevolence, but, in elaborating what benevolence means, the author of Wealth of Nations belabors the obvious: namely, a man of true benevolence wants his partners to be better off with him than without him. The point of addressing other people’s self-love is to give them their due. That’s what it’s like to succeed in one’s attempt to be sympathetic. When we understand market exchange in this way, we can see how markets help foster and promote something that is profoundly virtuous and humanizing in us. At our worst, humanity can seek to make ourselves better off at the expense of others. But when we freely truck and barter with each other and agree on a mutually beneficial exchange, we improve our own situation by also improving the lives of those around us. We make people better off by dealing with us than they otherwise would have been. A very different perspective was articulated by Harold Daggett, head of the International Longshoremen’s Association, a prominent labor union. As was highlighted recently by Jim Geraghty, Daggett made the following complaint about E-ZPass replacing tollbooths on the highway: Take E-ZPass. The first time they come out with E-ZPass, one lane, and cars were going through and everybody sitting in their car and go, ‘What’s that all about? I’m going to get one of them.’ Today, all those union jobs are gone, and it’s all E-ZPass. People don’t realize it, everybody’s got three cars, everybody got an E-ZPass on the window, and they go through like it’s nothing, and they get billed in the mail. They didn’t care about that union worker working in the booth. Daggett’s motives are a far cry from the benevolence promoted by Adam Smith. Daggett clearly recognizes that for the drivers, E-ZPass represented a significant improvement. It enabled people to get where they were going faster, with less congestion and less wasted time, and made the process of paying much simpler and less of a hassle. And the benefits of E-ZPass extend beyond that. By reducing congestion, they reduced pollution, which means the benefits spilled over to more people than the drivers who are no longer waiting to go through the toll booth. Research also revealed that this had a particularly striking health benefits for people who lived close to tollbooths. Implementing E-ZPass led to a significant reduction in both premature births and low birth weights for families living near the replaced toll plazas. But to Daggett, none of these benefits seem to matter. He seems to be motivated not by a desire to for drivers or the public in general “to be better off with him than without him.” Instead, he is pointedly bitter than drivers and families couldn’t be kept in a worse off position in order to make union workers better off. The common idea that union leaders are motivated by benevolence and those who advocate for free market exchanges are lacking in sympathy could not be further from the truth. There is nothing benevolent about insisting other people be made worse off for your benefit, and there is great benevolence in wanting to make sure those you deal have been made better off because of you. (0 COMMENTS)

A Ukrainian official said Tuesday that American politicians are pressuring Ukraine to lower the minimum age of conscription from 25 to 18 to make more young men available for combat. “If this information has surfaced, I can confirm it: American politicians from both parties are putting pressure on President Zelensky to explain why there is no mobilization of those aged 18 to 25 in Ukraine. The argument of our partners is that when the US fought in Vietnam, people were drafted from the age of 19,” Serhiy Leshchenko, an advisor to President Volodymyr Zelensky’s chief of staff, wrote on Telegram. This is from Dave DeCamp, “U.S. Politicians Are Pressuring Ukraine to Lower Draft Age to 18,” Antiwar.com, October 15, 2024. And Leshchenko names names (or, at least, one name): Right before Zelensky signed the bill lowering the draft age to 25, he received a visit from Sen. Lindsey Graham (R-SC), who called for younger Ukrainians to be sent to the frontlines. “I would hope that those eligible to serve in the Ukrainian military would join. I can’t believe it’s at 27,” Graham said. “You’re in a fight for your life, so you should be serving — not at 25 or 27. We need more people in the line.” Freedom to choose your own occupation is so precious. I know that various of my pro-freedom allies think that the First Amendment is our most important amendment. But I think the Thirteenth Amendment is even more important. (Although I admit that that Amendment hasn’t been tested since 1918 and that the Supreme Court flunked the test.) I hate to see American politicians advocating that in countries where the people are much less free than we, those countries’ governments should reduce that freedom even more. As one prominent American politician likes to say, “Mind your own damn business.”   (0 COMMENTS)

Substitution is an important concept in economics, whether we consider the consumer or the producer, and whether the latter produces bubble gum or, like a state, national defense. If the price of a good (or service) increases relatively to the price of other goods, a rational consumer will partly substitute another one that is anyhow substitutable according to his own preferences. Similarly, if the price of an input increases relative to the price of another, a rational producer will substitute some of the latter for some of the former. For example, if the price of labor increases relative to the price of robots (a sort of capital goods), the firm will substitute some robot use for some labor services. (Co-blogger Kevin Corcoran provided further explanations in a recent post.) There is much formal theory explaining the rationality of such substitutions either for the consumer who maximizes his utility or the producer who maximizes his profits. As I suggested, the theory also applies to a rational government or army, which does not make formal profits but is instead interested in maximizing its production of defense (or aggression) output, at least up to a point (in more sophisticated theories of the state, other maximands also exist). A story from The Economist just provided an illustration of substitution in war production (“Why Economic Warfare Nearly Always Misses Its Target,” October 3, 2024). The magazine explains how today’s “economic warfare” consisting in “sanctions” or export restrictions doesn’t seem to have the intended effects. The goal is to deprive the enemy or potential enemy of “strategic good” or, in our mercantilist world, deprive a commercial “adversary” of essential inputs. The methods of economic warfare generally do not work because few goods have zero substitute. Using input substitutes will cost more or reduce production but it will continue. Workarounds will be found. The Economist‘s illustration relates to what happened when, between August and October 1943, American airplanes bombed Schweinfurt in Germany, a city where half the Third Reich’s supply of ball bearings was produced. Ball bearings were used in many war implements, from engines to automatic rifles. In the short run, after the production capacity in Schweinfurt was destroyed, the German government substituted other inputs and, after some time, was able to restart the production of the ball bearings it still “needed” despite higher cost: It was quickly discovered that, in many cases where manufacturers used to swear by ball bearings, simple bearings would suffice. For the uses that remained, extensive stockpiles could be drawn upon, which bought time to build replacement plants and, eventually, engineer ball bearings out of many military supplies. A US government report produced two years later found “no evidence that the attacks on the ball-bearing industry had any measurable effect on essential war production.” It presumably imposed higher costs to the warring enemy, though. ****************************** DALL-E, to whom we owe the featured image of this post, did a good job for a bot, but the reader will easily find many errors and glitches. Your blogger bears the responsibility for inventing the name of the German manufacturer portrayed. Bombing of a ball bearing factory in Germany during WWII, with a bit of artistic license from DALL-E and the other artist involved (0 COMMENTS)

  As I do every year, I get up at about 3:00 a.m. PDT every Columbus Day (aka Indigenous People’s Day or Canadian Thanksgiving) to see who won the Nobel Prize in economics. I then estimate whether I know enough about his, her, or their work to write a piece in the morning for the Wall Street Journal to run. This year was no exception. The editors titled my op/ed “A Nobel Prize in Economics for the ‘Inclusive’ Free Market,” Wall Street Journal, October 14, 2024. When 30 days are up, I’m allowed by my contract to run the whole thing. Meanwhile, here are 2 paragraphs: The Royal Swedish Academy of Sciences awarded the Nobel Memorial Prize in Economic Sciences to three economists. The recipients are Turkish-born Daron Acemoglu and British-born Simon Johnson, both of the Massachusetts Institute of Technology, and British-born James A. Robinson, an economist and political scientist at the University of Chicago. They received the award “for studies of how institutions are formed and affect prosperity.” And: As I noted in my 2013 review of “Why Nations Fail,” Adam Smith observed that natural resources were less plentiful in the future Canada and the U.S. than in Latin America. But the economic institutions that Spain’s government set up in Latin America were less geared toward the free market and property rights than those that the British set up in the northern part of North America. It’s a pity that Messrs. Acemoglu and Robinson didn’t cite Smith’s insight. Nor did they cite economist Mancur Olson’s 1982 book, “The Rise and Decline of Nations,” which anticipates the Nobelists’ hypothesis. I wish I had been aware of co-blogger Pierre Lemieux’s devastating critique (scroll down at the link) of Acemoglu’s and Johnson’s Power and Progress before writing my WSJ piece. P.S. I go after Acemoglu in the last paragraph for his support of the Brazilian government’s attack on free speech. (0 COMMENTS)