Harvard Responds to Monopoly Publishers

Reading this article by Ian Sample of the Guardian reminded me of a conversation that I held with a professional economist who studies competition policy. I asked about his most recent research area and he mentioned to me that like many other micro-economists, he was concerned about the cost of academic journals in the discipline. In his view, many of them received the input of working professionals at low cost and then charged well above the marginal price. Going ahead,  he asserted that this state of affairs would only get worse because the main journals in the subject of economics were each a monopoly in its area and therefore had no incentive to charge as close to the margin as possible.  

Coming down several years later, it seems that the market power of major academic journals has persisted and that the academic institutions are reacting to the overall cost in addition to the relentless rise in prices every year. Harvard University's Librarian, has issued a memorandum to its staff suggesting that they ought to reconsider and possibly cut their relationships with leading publishers of academic journals. It takes the power of a a top university with other clout of its own to bring his issue to the fore. 

In my view, the fact that universities and scholars contribute most of the content alone does not mean that the pricing policy by publishers must favor them. The really interesting part for a student of economics is the realization that these institutions are using their understanding of their contribution to journals to try and bargain for lower costs. I also think that it is not enough to merely withhold association with the publishers. It would be a far more interesting point if they brought to fruition the idea of open access to academic knowledge. this would force a tactical response from the publishers and the competition would without lead to a reduction of the price of knowledge towards the margin.    

  

Formula 1 and Freedom Indices

People with more than a casual interest in sports have probably encountered arguments or wondered whether athletes from autocratic governments differ from others in performance across sports disciplines. More recently, I have come to consider whether the Formula 1 franchise has been expanding its races towards in a way that reflects interest in the style of political management or not. In the last decade, Formula 1 has grown in terms of demand for races across the Asian continent and this culminated in bringing in new races in Bahrain, China and India. 

It is noteworthy that the hosting of a Formula 1 race requires investments in top level infrastructure in addition to being able to attract substantial corporate sponsorship. The three new entrants into the Formula 1 races have different political economy indicators even if they share attributes that make then attractive places. To start with, India is a large and growing economy and an unqualified democracy.  China is at this moment in time, the most sought after investment destination and one that would be attractive to the owners of the Formula 1 franchise because of this fact that global corporations are chasing its large market. Bahrain, is a smaller country whose citizens are not politically free at all but is a nation whose rulers have a lot of public money to pour into the construction of a state of the art race track. 

A couple of weeks back, the Grand prix race in Bahrain was held with visible agitation from its population. Whereas all the technical requirements were in place, the demonstrations that occurred during the weekend of the race led to the loss of a life in addition to disturbances that did concern some teams. To my mind, the Formula 1 is a private business and its owner(s) are perfectly entitled to seek partnerships for hosting races wherever they can. That notwithstanding, I think that Formula 1 should begin to carefully survey indices that measure the degree of political and economic freedom as it chases the next set of partners for hosting races. When a business of this stature begins to expand aggressively towards the most repressive regimes in the world, it is time for its owners to take some time and think clearly and ensure that they are sure that this expansion model will remain valid. 

US Dollar Replaces Zimbabwean Dollar

In my reckoning, few countries have a more opinionated, if wrongheaded leader that the African nation of Zimbabwe. Robert Mugabe has led this country since it independence from Britain and his record for the first decade was decent but it is clear that his endurance in leadership has probably outlived its utility. Not only is the political scene characterized by necessarily toxic relationship to the Zimbabweans with different political views, but the intransigence in economic policy led to a disaster evident in the high rates of inflation and the collapse of that local currency.

And yet, given the human ingenuity and liberalized currency policy of the United States, the Zimbabwean Dollar has been replaced by the US currency as the effective currency. This happened because citizens of the country realized that harsh political rhetoric from the leadership is one thing but that the need to anchor their income to a stable currency was prudent. As Lydia Polgreen of the NYT covers in detail, all transactions have shifted to US dollars and the Zimbabwean dollar has all but disappeared. This has in turn had the effect that finding change for small transactions is difficult because of the absence of Us coins in that country. This relative shortage of coins reflects the fact that coins are more difficult to transport across long distances and also that seignorage allows paper currency to carry its value over long distances.     The lesson here is that money may be a store of value but it is also a commodity subject to demand. Just ask Zimbabweans.

Students Of Law Need Econ 101 More Than Deans

It is altogether sensible to posit that individuals pursue education with a view to improving their future income. This rule of thumb holds pretty well for a majority of people but it is not immutable. Many people pursuing education understand that attending college is definitely useful for raising the prospects for one's income. And yet as expected, the demand for education has to reckon with the supply of places by universities whose managers understand that certain courses have greater demand and price them accordingly.

In this pithy article in the Slate Magazine, Reynolds Holding applies fundamental economics reasoning to law schools and concludes that many of the deans have maintained an upwards price adjustment in real tierms despite the evidence that many graduates are often unable to pay for education loans due to a reduction in demand for graduates from law schools. His point is right but I am clear that it is not for the law deans to make an adjustment because they are seeking to maximize revenues and will price at the margin. Instead, this article ought to be read more keenly by the students entering law schools who ought to understand that given the employment situation and expected wages, education in law at prevailing rates may not be a good deal. It is clear that it is the students of law who are "irrationally exuberant". The law deans are merely providing supply due to existing demand. iIt matters less for the moment that the demand is based on an inaccurate assessment of expected incomes.   

Did Facebook Price Instagram Correctly?

Journalist covering technology reported late last week that Facebook acquired a fast-growing but not well-known application known as Instagram. That Facebook would make an acquisition of a photo sharing application was not as surprising as the price that was paid for the new firm. It was surprising because not only was the firm very small but had virtually no revenues yet. It appeared to me that the value ascribed to the firm by Facebook was on the higher side.  

Writing in the Guardian, John Naughton writes about the difficulty of valuation of technology firms and gives examples of valuations that brought acquiring corporations to grief. The gist of the article though is that there is an emerging bubble for technology firms. I am cautious in declaring that there is a definite bubble but the salient feature here is that valuation of firms is a matter of intelligent guesses filled with hopes of future performance. The valuations are not to be taken much too seriously and so the answer to title question of this post is unlikely to be answered with certainty.

Busting Collusion Over Books

I did not record it on this blog but it occurred to me that the tough bargain that Apple reached with the publishers on e-books was potentially troublesome. At the time, the idea was that publishers wanted an alternative that ensured that they maintained control of the cost of e-books in the quest to break the perceived  stranglehold on the market by Amazon. Notwithstanding my admiration for Apple, I support the enquiry by the US Department of Justice with the claim that Apple and the publishers colluded to fix prices and thereby raise their revenues in way that was harmful to buyers.

Brian Balker of the Guardian provides the background together with details of the claim by the US Government here. In spite of my reluctance to support government intervention against businesses, I think that this has sufficient justification. To start with, Amazon had placed most publishers in a place where they were the prices of e-books were moving towards marginal cost. The agreement that forms the justification for this suit ensured that publishers maintained the bizarre pricing that made no sense to anyone else but the few publishers. Since then, even Amazon has had to be more cautious in pricing books because it could have been isolated since the iPad gave substantial power to Apple. 

Latin American Leaders Start Assessment of Drugs War

For a whole generation, the world has concentrated on a law and order approach to the control and eradication of production and transportation of narcotics and other drugs. It is clear that this so-called war has been fought with public support and hard military responses but has not yielded acceptable results. The state of affairs in Latin America alone today's shows that there is need to accept that the approach has been unsuccessful. It is encouraging that in spite of the fact that the public in many countries are not naturally drawn to legalization and regulation, it is possible to form a persuasive case that the "War on Drugs" has failed.

Jamie Doward captures the frustrations of Otto Perez Mollina of Guatemala who hopes to convince his colleagues at an upcoming summit to consider a new approach. To my mind, this conversation is required even if the results of the discussion would be difficult to sell as apolitical decision. I applaud this because many other leaders in the neighborhood have been making similar declarations in light of the toll on human life. the political risks to the leaders attending the conference are real but there is no greater evidence than four decades of a well-articulated approach that has created insecurity and militarized drug trade and production.  This fresh approach alerts one to the idea that ideology is sometimes responsible for demonstrably poor public policy.

  

Who Needs a Financial Products Agency?

It is very clear to any keen observer that financial engineering does not necessarily result in products with social value. In many cases, those who work actively to design sophisticated financial products are not always certain of their real effects on markets or other products. Staring from this realization, it is unsurprising to me that many well-intentioned people are keen to ensure that financial engineering is limited to producing products with proven social value. Gretchen Morgenson of the NYT presents that same argument and features the paper by Eric Posner and E. Glen Weyl of the University of Chicago. The two professors state that there is a distinction between the real economy and the financial services industry and this may justify regulation of the latter and not the former.

The summary of their proposal contained in this paper is that the creation of a Financial Products Agency is necessary o ensure that there is adequate testing of the social value of new products before release to the market. To my mind, the reasoning about the distinction between real markets and the financial services industry is impeccable but the proposal for creating an agency for determining social value is less convincing. Indeed, I think that it is a very bad idea that is incapable of putting to effect. My reason for this skepticism is that the determination of social value would be difficult to determine because market participants would not define it in the same way. In addition, placing a regulatory committee to determine what social value a product would have is a very nebulous endeavor that would introduce subjectivity to these decisions.   

The only way for society to ensure that socially useful products continue to thrive is to communicate to institutions that generate these solutions that they will bear the costs of any failures. It is not necessary to require clairvoyance on the part of an agency or body.