There is a specter haunting Europe (2)

Britain is one of the world's more over-priced property markets. Prices can go into free-fall.

So what should be done about that? Cut interest rates to prop up prices? Or use the inevitable carnage as an opportunity to massively expand housing supply...to deliver a step-change improvement in the real lives of real people?

My (contrarian) vote is for the supply side expansion.

The elephant in the very-tiny-room during any conversation about housing in Britain is that the quality of housing really sucks. A country as rich as Britain need not live in homes that are so small that a standard "bedroom" is about the size of an American walk-in closet. Where double bedrooms don't fit double beds. Or where faucets that mix hot and cold water are an exotic luxury.

The simple and obvious solution is to develop large tracts of high quality housing, either on greenfield sites or by bulldozing some of the existing housing stock. But this simply has not happened. Is there a subtle but powerful political pressure from property owners defending high prices?

A counter-argument that is sometimes reflexively trotted out is: Britain is a small island and land is scarce. This is pure hokum. Britain can easily import tomatoes or milk. Britain can't import land. A very similar argument was used in the 80s to justify Japan's over-priced "rabbit hutches" and its heavily subsidized rice farms.

More realistically, a supply side expansion that might happen during this downturn is that sellers might be forced to spend more on the house to sell it at the same price. This will not get picked up as deflation in the published house price indices. But that investment will be a welcome improvement in the real lives in real people.

There is a specter haunting Europe

Here is why I am very happy being a renter

Science or religious war?

Are neo-classical and behavioural economics truly irreconcilable? Are the foundations of one of our great sciences crumbling before our eyes? Or, is behavioural economics a useful elaboration on the neo-classical tradition, that enriches rather than wrecks the great neo-classical insights?

My chips are on the enriching rather than wrecking side of the argument. Right here, right now, I clearly am in the minority. The sloppy-thinking chat tends to pit one tradition against the other.

Here is Elizabeth Kolbert, writing in the New Yorker.

"Rational calculators are supposed to consider their options, then pick the one that maximizes the benefit to them. Yet actual economic life, as opposed to the theoretical version, is full of miscalculations, from the gallon jar of mayonnaise purchased at spectacular savings to the billions of dollars Americans will spend this year to service their credit-card debt. The real mystery, it could be argued, isn’t why we make so many poor economic choices but why we persist in accepting economic theory."

Notice the condescension. "The real mystery...why we persist in accepting economic theory." She illustrates this self evident truth - that the assumption of rational economic behaviour is so broken that it is pitiful - with a personal anecdote.

Ms Kolbert was buying a book on Amazon for her work when a message popped up on her screen "add $7.00 to your order to qualify for FREE Shipping". She hesitated. Her nine-year-old twins wanted a Tintin book. She clicked it into the shopping cart and checked out, saving The New Yorker $3.99 and spending $12.91 of her own money.

Then comes the sucker-punch. "From the perspective of neoclassical economics, self-punishing decisions (such as this purchase of a Tintin comic) are difficult to explain." Really?

Neo-classical economics is very comfortable thinking about the Tintin comic as a bundle of information (about prices), services (delivery) and physical product (the comic book itself). Remember complements and substitutes from Econ 101? Amazon reduced the price of that bundle by flashing a free shipping advert on Ms Kolbert's screen, which reduced her tacit search costs, and by waiving the delivery charges. This prompted a purchase which otherwise wouldn't have happened. Lower price, more sales. This is the demand curve from Econ 101. There is no more unsurprising result in neo-classical economics.

Notice that the neo-classical theory makes no claims about the mechanism by which people maximize utility. In the neo-classical view people maximize utility the way a dog catches a frisbee. The calculations a dog needs to make to catch a frisbee are way beyond the scope of what a dog, or human, can consciously perform. Yet, dogs and humans successfully catch millions of frisbees every day.

This is where behavioural economics comes in. It sheds more light on the heuristics that people actually use while maximizing utility. This might prompt governments or businesses to use those heuristic mechanisms. For example, tax collections in America increased when taxes were collected at source. Once the money is in my bank account I am much more reluctant to give it to the government. Brilliant behavioural insight. By Milton Friedman, the godfather of neo-classical economics.

None of this challenges the one thought central to all of neo-classical economics: people respond to incentives. The way in which different people respond to different incentives is infinitely varied, which is why economic life is fascinating to observe.

Debark?

Much better than disembark.

Found it in Isabel Allende's Zorro. Thought it was Allende's genius that had conjured up the elegant new word. But http://www.m-w.com/ assures me that the word has been in use since 1654.

Stealing Music?

Fans and musicians are enjoying each other's presence at the South by South West music festival, unencumbered by record companies. And they are talking about how they can do just fine, forever after, without record companies.

It's good to move beyond the toxic divisions of the digital rights/ copyright wars and start the conversation about how the music industry ought to work.

Record company jobs and copyright laws serve a useful purpose if they bring together artists and fans. Everything else is secondary.

Nemo's dad can become Nemo's mom

It's true. Sure, it is not appropriate material for Disney movies. But the scientific fact is that when Nemo's mom was ate by a shark, Nemo's dad could have just turned himself into a mom.

All clown fish start their lives off as males. The live in colonies inside an anemone, typically on coral reefs. The largest fist in each colony is the breeding female, the next largest the breeding male. A number of smaller, sexually inactive clown fish also live in the anemone. If one of the breeding couple dies, the biggest of the sexually inactive lads will step-up-to-the-plate and become a breeding male. The promotion always goes from sexually inactive lad to breeding male, because if the fish who died was female the breeding male will become a breeding female.

There is a rigid hierarchy from sexually inactive lad, to breeding male to breeding female. Promotion up the hierarchy is based on an objective criterion: size.

It is fairly common for reef-fish to be able to change gender. A quick Google search did not reveal the genetic basis for this gender identity. But clearly gender in reef fish is something more subtle than X and Y chromosomes.

Acknowledgements: this post was inspired by a visit to the Sea Life aquarium in Birmingham

If you want to start a revolution...

...use radio. If you want to suppress a revolution use TV.

Radio forces people to focus, and listen to your words, and engage their imaginations. With TV, people are more focused on the colour of your tie than on what you're saying.

Just heard this on BBC Radio 4 ten minutes ago. I love the Marxist interpretation. TV is the ultimate capitalist plot to foil revolution by feeding the masses an opiate.