This is about the drought in California, but it’s a roundabout story.
When I was in my early teens in the late 1970’s, I was into (board) wargames. Going hand-in-hand with that was an interest in military affairs.
This was the Cold War, so any intelligence coming out of the Soviet Union that became public was interesting trivia that got written up in some wargaming publication.
I don’t have any of those magazine any more, and I’ve tried to find this reference without success. But here’s what I recall.
There was some sort of exchange of military officers between the U.S. and the Soviet Union. Basically, everyone goes to some events to reduce tensions, and spies as much as they can on the side.
So the magazine was debriefing one of these American officers, and he stated flat out (in maybe 1979 or so) that the Soviet Union was a paper tiger.
When asked why, he said that the most telling thing was that he visited a base that had been clearly spiffed up for his visit. These things are planned months in advance, so everything he was supposed to look at was clearly in tip-top shape. But his job was to look at stuff they weren’t expecting.
And what did he notice? That the grass at the base was dead and painted green. It was summer, and it was dry (I seem to recall that the base was in north Central Ukraine), but to that officer, it said a lot about the budget priorities of the Soviet Union that they couldn’t afford to water the grass at a base they knew in advance that they’d be showing off to visitors.
NSFW. Click the link if you don’t know what that means.
If you haven’t heard, there’s an undergraduate at Duke his is public about doing porn to pay her bills. What I have below is the fourth part of series on The Source about her experience. My guess is that most of you won’t have a problem with what’s shown: if you do, don’t watch.
This video mostly covers her at a convention meeting fans. Just like, say, baseball … the fans pay cash for autographs and staged photos.
Towards the end of the video, she counts up her take from that day, and it’s $981. That’s revenue.
She figures it cost her $600 in expenses to do the show (flight, hotel, meals, incidentals), which she calls overhead. The distinction between fixed and variable costs in microeconomics is more situation-specific than most students are aware of. In this case, that overhead is a variable cost from the perspective of her whole life, because she didn’t have to do the show. But, once she’s decided to do the show, the overhead is a fixed cost of that show (because she could probably work longer signing autographs to increase her revenue without increasing those fixed costs). I know … more complex than you may need.
Then she recognizes that those overhead costs apply to both days of the show, while she hasn’t counted the revenue from the first day. She figures she made $600 more in revenue the previous day, subtracts out $100 in other expenses, and figures she cleared $800 for the weekend.
I’m not sure how she’s set up for tax purposes. But, the video doesn’t say anything about that, so let’s assume that she’s a proprietor. Then that $800 is the accounting profit from her business, and that goes straight into her bank account as individual income.
But she recognizes and mentions that she did a lot of work for that $800 (and I don’t mean something crude about porn, I mean just working at her convention booth).* Presuming she did two 8-hour days, that works out to about $50/hour: comparable to what professors in the SUU School of Business make (not me, I’m a peon). So, it’s great money for an undergraduate, but she’d probably be making that in 15-20 years anyway.
Now, here’s where the porn comes in. Her accounting profit is $800. But her economic profit would subtract out many things, most importantly opportunity costs. The reason most people don’t do porn is not that they can get paid better at other jobs, but that they suspect that doing porn is blocking them out of future job possibilities that might pay more. So it’s not so much an opportunity cost as the cost of opportunities foregone.
In this case, I think those opportunity costs fall mostly on the actual doing of the porn, rather than on going to conventions. So for this particular weekend, her accounting profit is $800 and her economic profit might be the $500 excess she makes over working some other job back at school.
But, for her career, let’s say she makes $100K. That’s accounting profit. She’s willing to do that because her economic profit is less than that, but still positive and presumably large. Just to throw out a number, perhaps her opportunity costs are $60K, so she’s left with $40K in economic profits. When you choose not to do porn, you’re thinking that the opportunity costs of that far outweigh the accounting profits. When you put it that way, the difference between someone who does porn and someone who does not is largely their subjective evaluation of their opportunity costs: if you don’t think they’re large, you do porn, if you do think they’re large, you don’t.
I like this video, although it could be done with lots of products other than wine.
There’s actually some hugely complex microeconomics going on in the background, which you can peruse after you watch this video entitled “Expensive Wine Is for Suckers” from Vox.
The way that we normally think about supply and demand is that quality is a shift variable for demand: perceived higher quality shifts demand to the right, increasing prices and quantity.
What they’re discussing in this video isn’t contradictory to that, but it’s not simple to see that.
If you’ve ever had me for a face-to-face class, this is an example of what I’m getting at when I bring the clear piece of polycarbonate plastic to class and have two students hold it up in front of the projector so that we can see it’s shadow on the board.
What they’re arguing instead is that price is a shift variable for quality, in a graph with quantity and quality on the axes instead of quantity and price. That’s weird, right? What would demand look like in the graph if we change the vertical axis from price to quality? It would be upward sloping.
Why is that so?
Go back to the case of the typical demand and supply with quantity and price on the axes. When we figure out the slope of demand, we hold quality constant (holding other stuff constant is what ceterus paribus means). So, for something of constant quality, when the price is higher, we buy less. That makes demand slope down (when going from left to right). Quality is then a shift variable in that framework because if we held quality constant to trace out that demand, then if we allow quality to change we must be going to a different demand.
Now, do the same thing, except let’s label the axes as quantity and quality, and hold prices constant. What will demand look like as quality improves but price stays constant? Well, you’ll buy more, right? That means that in a graph with these axes demand slopes upwards (going from left to right): higher quality is associated with higher quantity bought.
What they’re saying in the video is that higher price is a signal of higher quality. This means that it’s a shift variable. Now this is a bit weird, but hold actual quality constant on that upward sloping demand in quantity-quality space. A higher price is a signal of higher quality, meaning you’ll buy more, and that demand will shift to the right at that particular quality you’ve been holding constant. This is complex, but it works because “signal of higher quality” and “particular quality” are not the same thing: the first is an expectation, while the second is a fact.
The bottom line is that the people in the video aren’t irrational for thinking that the high priced wine tastes better only when they’ve been told it’s price is higher. All they’re doing is using the signal they were given the same way they always do.
What’s irrational is that we do stuff like this all the time, and we don’t realize that it’s the behavior that’s weird, not the decisions based on it.
Unfortunately, the takeaway from this may be that the best thing is to let other people buy expensive stuff and serve it to you as their guest.
Marine archaeologists and wine connoisseurs have known for a long time that wine brought up from shipwrecks is often quite good and even improved (as long as its seal isn’t broken underwater).
So a winemaker decided to experiment. They sank some wine on purpose.
When they brought it up, taste tests showed it was better, and chemistry tests showed some of the reasons why.
So they decided to start selling it.
And what did our government do? Ban it. As unfit for consumption. Without ever obtaining a bottle upon which such a claim might be made.
It gets worse. The agency that did this is one I’ve never even heard of (and my gosh as a macroeconomist aware of current events I can probably name a few hundred agencies in D.C. off the top of my head). You guessed it; it’s the ATTTB. You remember them, don’t you?
Their justification for this? That the ocean isn’t sanitary. Umm … maybe … but don’t you think that misses the forest for the trees?
In a parting shot, the agency threatened to revoke our Federal Alcohol Administration Act permit, even though the couple dozen cases involved are a minuscule fraction of our total annual production of fine wine.
I’d call that a pretty serious threat: stop your experiment on a minuscule of what you produce or we’ll kill your whole business. Note that this isn’t stop selling the minuscule fraction, instead it was stop the experiment: you can’t even drink it for fun.
Yet to the best of our knowledge, the bureau has neither acquired nor tested a single bottle of our product.
Seigneurage is the scary name macroeconomists give to the wealth that accures to you from being able to print money.
That wealth has to come from somewhere right? When governments print and spend new cash, what they are doing is depreciating the value of the cash the public already holds. We call this an inflation tax.
Here’s a really cool example. Because some people regard pieces of currency with certain sequences of serial numbers to be lucky, the government can actually sell them for more money.
It turns out that Asian buyers are willing to pay $6 for a one dollar bill, if its serial number contains four consecutive eights.
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