Archive for May, 2015

Who Do You Think Will Win This Price War?

By abdicating the role of the global swing producer, OPEC believed it would put pressure on the relatively high-cost shale boom, forcing producers to trim production as certain plays became unprofitable.But U.S. firms haven’t assumed that role as readily as the Saudis would have hoped. Rather, they’ve been hard at work innovating their way to profitability even at $65 per barrel.

This article is especially interesting for several reasons:

(1) It’s another example of the difficulties of maintaining cartels for long periods of time. They create artificially high prices that create higher demand in markets for substitutes.

(2) The cartel needs a low price to retain its place as the dominant producer, but lower prices hurt its power to maintain the cartel.

(3) Low prices may drive progress in extraction technology, rather than cause suppliers to exit the market.

(4) International trade–in ideas as well as in products–is driving all of this. I suspect a lot of the increase in Chinese production is coming Chinese producers applying and extending technology developed by firms initially interested in getting to marginal deposits in the U.S.

Categories: Uncategorized

We’re Not Spock

A great article from Nudge co-author Richard Thayer:

Supposedly irrelevant factors, or SIFs, matter a lot, and if we economists recognize their importance, we can do our jobs better. Behavioral economics is, to a large extent, standard economics that has been modified to incorporate SIFs.

SIFs matter in more important domains than keeping students happy with test scores. Consider defined-contribution retirement plans like 401(k)’s. Econs would have no trouble figuring out how much to save for retirement and how to invest the money, but mere humans can find it quite tough. So knowledgeable employers have incorporated three SIFs in their plan design: they automatically enroll employees (who can opt out), they automatically increase the saving rate every year, and they offer a sensible default investment choice like a target date fund. These features significantly improve the outcomes of plan participants, but to economists they are SIFs because Econs would just figure out the right thing to do without them.

I disagree, though, with this:

But for decades, this realization did not affect the way most economists did their work. They had a justification: markets. To defenders of economics orthodoxy, markets are thought to have magic powers.

If by “for decades” he’s talking about sometime in centuries past, as economics was first developing, he’d be right enough. But I doubt those are the decades he’s talking about, since he says “markets are thought to have magic powers” not  “markets were thought to have magic powers.”

It’s not true that in recent decades economists have thought this way, unless he’s talking about amateurish attempts to summarize economics without any nuance or qualification. In fact, no economists of any great influence, to my knowledge, would ascribe anything like “magic powers” to markets. They all admit, with varying emphases and proposed solutions, that markets don’t always work efficiently and that information is almost never perfect.