The peanut butter Pop-Tart is not an innovation

Today’s Wall Street Journal has an article about the use, overuse, and misuse of the word “innovation” in modern business, particularly with respect to consumer products. The number of instances of S&P 500 CEOs using the word in their earnings calls has doubled since 2007. Sadly, this misuse and overuse threatens to remove all meaning from the word. Witness the example offered in the article’s title: Kellogg’s new peanut butter Pop-Tart, which Kellogg executives tout as one of the most important innovations of 2013. Peanut butter filling instead of cherry or strawberry or chocolate, an innovation? Really?

Next time your boss starts droning on about innovation, it might be helpful to stop and analyze: Is she talking about building the next iPod or the next Pop-Tart? Does “innovate” mean just “stay competitive”? And if so, where is the innovation in that? …

In this context, to innovate can often mean falling short of the word’s Latin roots (of “new creation”). It’s more modest: simply keeping pace with rivals.

They used to call it competitiveness—a word fraught with the implication that others might win. Now it has been elevated to innovation, a more regal way to describe what business has always done: Adapt.

That’s a great point, and it’s a point that Schumpeter and Austrian economists have made for over a century — there are many different ways that firms adapt to the effects of rivalry in markets, and one of them is innovation. But, you might reply, Schumpeter emphasized the role of product differentiation in lessening the effects of rivalry, by making your new product less substitutable for the existing competitor products, and isn’t a peanut butter Pop-Tart an example of product differentiation? (Technically speaking, my answer to that question is no, but that may be me being pedantic, which is what I do …)

That’s where an old post from Roger Pielke Jr. is helpful:

In recent comments I was asked about what I mean when I use the term “innovation.”  I use the term as Peter Drucker did:

Innovation is change that creates a new dimension of performance.

Roger tweeted the link to that old post in response to the WSJ peanut butter Pop-Tart article today. Does Drucker’s definition help; is it “operationalizable”? Only if you define “sell more peanut butter Pop-Tarts” as the new dimension of performance!

“That—that—is what we are for: voluntary associations, in all their richness and bewildering complexity”

The above is a quote from Duke political economist (and friend of KP) Mike Munger, who also blogs at Kids Prefer Cheese and Euvoluntary Exchange, and is a frequent guest on EconTalk. Mike’s written a thoughtful and interesting reflection in the Freeman on what libertarians stand for. In many ways it’s a riff on Toqueville and his analysis of American society, which remains fresh and relevant today in Mike’s view (and mine). While it’s eminently quotable, please do read the whole thing, especially if you don’t identify as a libertarian. Mike’s insights might change your thinking about what libertarians do stand for.

Why is he bothering to reflect on what libertarians stand for?

The government is not providing the basic services that our more idealistic fellow citizens expect, and they want to know why. The things they think they wan [sic]—healthcare, pensions, schools, the war on terrorism, and the war on drugs—are a litany of failures. We don’t need to pile on and say we’re against those things. We need to offer an alternative.

In other words: What positive, optimistic alternative vision of society (yes, of society, the social thing, where you actually talk to other people and work together) can we offer? Unless we can answer that, the next question will be, “Why don’t Libertarians care about real people?”

I have been making this argument to my colleagues with respect to energy and environment policy for some time. I team-teach a sustainability course with a geologist and a philospher, both of whom are politically Progressive and have typically advocated large-scale top-down regulation and government control to address global warming. As they have seen the reality of using political institutions to make collective decisions, they have expressed frustration; as they have heard my lectures on public choice and political economy and read some of the political economy literature on environmental regulation, they have expressed some ideas similar to what Mike said above.

So I’ve been focusing on alternatives — liberty allows for experimentation and for individuals to make choices that express their environmental values. The more of those experimentation and expression processes we foster, the more likely we are to devise lower-carbon ways to achieve what we want to achieve. That’s one application of the vision that Mike describes.

But a lot of people don’t think about the connection from liberty to experimentation to thriving, and default to expecting “the government” to solve collective problems. In general, people pay too much attention to politics:

If citizens ignored politics, things wouldn’t be so bad. But we are worried that our excessive focus on politics will cause us to ignore society and each other. If we fail to connect as social beings in complex reciprocal exchange relations, modern “democratic” life becomes anomic and mean, just as Tocqueville foresaw.

That—that—is what we are for: voluntary associations, in all their richness and bewildering complexity.

If you want to go out and persuade some people to work with you, and all voluntarily work for the benefit of each, then that is libertarian social change. If someone wants to opt out and form a different association, they are free to do so. And that’s a good thing because you get diverse experimentation in problem solving.

And I really like his conclusion, which makes me feel happy, large, empowered, and connected (four feelings I never experience in political collective action):

Libertarians are for voluntary action, always. It is because we are for society—a vibrant, active society—that we resist the expansion of state power.

It is because we are for giving people a chance to reach their full potential that we doubt the motives and effectiveness of government. Political coercion corrupts the human spirit; political leaders tell us they take our wealth for our own good, and political processes straitjacket independent thought—the essence of liberty.

We are for individuals, working together in complex, interconnected organizations they have designed in their efforts to solve problems.

We are for liberty, for celebrating the infinite and infinitely varied capacities of the human mind. Libertarians are for a limitless sense of the possible, for the idea that for a society of truly free and responsible citizens, nothing is impossible.

Alexis Madrigal: Why are gasoline prices falling?

Freshly returned from a few months spent with his new baby (congratulations!), Alexis Madrigal at the Atlantic wonders why gas prices are falling in the US. He notes that the national average is the lowest it’s been in almost three years.

He identifies a few factors that influence gas prices, most notably world oil prices. These prices have fallen, due both to demand and supply factors, and most importantly how higher gas prices induced consumers to change their behavior:

But they [gas prices post-Arab spring] couldn’t go too high because, at least here in the U.S., demand has softened. Americans are buying (slightly) more fuel-efficient cars, on average. And younger people are driving less.

Which is all a pretty rational response to the big run up in gas prices during the mid-2000s.

He then points out (courtesy of Brad Plumer) something that shows just how complex the dynamics are in gasoline markets — gasoline and diesel are joint products, so to produce more diesel you get more gasoline. Diesel is in high demand in Europe, thanks in part to the economical and energy-efficient, yet also sassy and full of fun, TDI diesel engines from Volkswagen and Audi (and it’s an interesting question to ask why US regulations still provide such barriers to TDI diesel, but I’ll leave that as an exercise for the reader ;-0 ). If you are refining diesel in the US to export to Europe, you will increase the supply of domestic gasoline, shifting the supply curve out. In the face of that softened demand, that’s going to mean lower prices.

A couple of neat points, but this post is mostly an excuse for me to say how glad I am that Alexis is back from paternity leave! I missed his writing.

One year after Superstorm Sandy: Charities, price gougers and the state

Popular Mechanics magazine headlined an article with the question, “One year after Superstorm Sandy, has anything changed?

Well, sure: over the last year the state governments in New York and New Jersey have put a lot of time and money into punishing a few businesses that provided shelter and gasoline to people whose lives were disrupted by the storm. Why, you ask? Because the prices offered by these businesses after the storm hit were somewhat higher than the prices offered by the businesses before the storm hit.

One example, a Holiday Inn Express in Brooklyn recently agreed to pay a total of $40,000 to settle a complaint, part of it to customers and part to the state, because the state concluded the $400+/night rate charged to the customers was too much higher than the $170/night rate charged the week earlier.

As is perhaps obvious, government prosecution of post-emergency price-raising retailers will produce real world consequences. The question for economists is whether on balance the costs of the policies are worth the benefit secured. So far as I know there is no study that tries to answer this question in a comprehensive manner. (Best effort so far: here.)

In related news, the New York Attorney General’s office has reached an agreement with four charities that had collected money to help Sandy victims but not yet spent all of the funds. Under the agreement the four groups committed to a time table for spending most of the remaining funds.

Charities and for-profit enterprises both have provided many useful goods and services to people whose lives were disrupted by Sandy. If the soft price cap imposed by price gouging restrictions reduces for-profit supply responses during emergencies, then the restrictions add to the hardships that charities seek to address (and perhaps also to public demands that government do something, even something foolish).

At Bleeding Heart Libertarians, Matt Zwolinski continues to explore price gouging issues in a couple of recent posts. In “Price gouging and the poor” he takes on the common claim that state laws against price gouging are particularly valuable for protecting poor persons. In “World Cup ‘price gouging’?” he examines the Brazilian government’s declaration it will monitor hotel room prices for the upcoming 2014 World Cup competition and act to prevent abuses. Given that most people willing and able to travel internationally to attend World Cup matches in Brazil next year are far from poor, the two posts make a nice pair. (Related is my February 2012 post “Super Bowl price gouging complaints.”)

Saudi Arabia and OPEC oil output

A careful comparison of Saudi Arabia’s oil production behavior with rest-of-OPEC production provides a way to see the consistency in Saudi behavior where many analysts have missed it, according to the authors of a report forthcoming in the journal Energy Policy. Sometimes Saudi and rest-of-OPEC production movements are positively correlated and other times negatively correlated–a relation that hides the consistency in Saudi policy according to the authors. But if stability of the world oil market post-1973 is identified as the Saudi goal, it can be seen that Saudi acts jointly with rest-of-OPEC to reduce output at times of declining world demand but works to counteract rest-of-OPEC declines by boosting output during supply interruptions elsewhere.

Here is a bit more from the introduction to the article:

OPEC quadrupled crude oil prices nearly 40 years ago, and since then we have witnessed a large literature about how OPEC and its key producers have acted within the world oil market. A substantial part of this literature stems from the analysis by Griffin (1985).1 Yet there has been surprisingly little agreement about some of the most important questions, such as the role of Saudi Arabia and whether it coordinates its production decisions with its partners in OPEC. Smith (2005, p. 75) does not find clearly discernible consistency in the actions of Saudi Arabia, while Kaufmann et al. (2008, p. 348) find no clear relationship between Saudi production and that from the Rest of OPEC.

This article re-examines these questions, with a special focus on Saudi Arabia’s decisions about its levels of oil production and exports.2 Although others have used a single model for Saudi Arabia over time, we believe that Saudi behavior has varied, depending upon the circumstances.3 In many years Saudi Arabia has acted together with the Rest of OPEC, restricting its exports together with its OPEC partners as demand declined, and expanding its exports when demand increased. The most notable examples of proportional restriction in exports during recessions are 1974–1975, 1998, 2002, and in 2008–2009. At other times, however, the Saudis have acted independently from the Rest of OPEC, most notably at those times of supply interruption elsewhere in OPEC: 1978 in Iran, 1980–1981 in Iraq and Iran, 1990 in Kuwait and Iraq, 2003 in Iraq, 2011 in Libya. On these occasions, rather than matching the export cutbacks elsewhere in OPEC, the Saudis increased their exports to offset the interruptions.4

This variation in Saudi export behavior over time is evident in the correlation between the changes in Saudi oil exports and changes in exports from the Rest of OPEC. In most “normal” periods (excluding interruptions and recoveries), the correlation is relatively high, at about 0.7. But during interruptions the correlation becomes negative. Although the average correlation since 1973 is 0.19, this masks the wide variation over time: strongly positive during “normal” periods but negative during and after supply interruptions.

We analyze these different periods separately, distinguishing between normal periods and interruptions, and between increases and decreases in Saudi exports. Within this complexity, we find consistent behavior by Saudi Arabia.

Links are in the original source an go to the article bibliography or footnotes. It may be gated for some readers (but try finding Energy Policy through your local public library if it provides access to electronic publications, or use this link to an earlier version of the article).

The authors of the article are Khalid Alkhathlan, Dermot Gately, and Muhammad Javid.

History of thought course video: Hayek and the knowledge problem

Not surprisingly, given the title of this blog and the focus of my research, the last video in the series for my history of economic thought course provides an introduction to Hayek and the knowledge problem.

Hayek’s work in the 20th century explored a range of ideas, one of the most important of which was the argument that the fundamental economic challenge in a society is the coordination of plans and actions among agents in an economy, all of whom have diverse goals and make choices based on their own perceptions and private knowledge. The knowledge problem has implications for questions from the socialist calculation debate of the 1920s and 1930s to the modern policy analyses of the regulatory state.

Take a gamble on “The Bet”: It is a balanced history of the Simon-Ehrlich conflict on population and scarcity

Paul Sabin, “The Bet,” Yale University Press, 2013.

Paul Sabin’s The Bet offers perhaps the best-researched, best-written and most thorough account of the history and meaning of the famous 1980 bet between population pessimist Paul Ehrlich and resource optimist Julian Simon. Sabin is unceasingly fair in his treatment of the antagonists, a tough trick to pull off when working with such charged material.

In fact I’d say Sabin is too fair to Ehrlich, who predicted famine and social collapse in the 1960s, 70s, 80s, and 90s and recommended policies that (inadvertently / unintentionally / because he didn’t know better) would have helped cause those calamities.

The book is recommended if you are interested in population, natural resources, or environmental policy.

Anti-price gouging laws can increase economic welfare

An article by Robert Fleck of Clemson, forthcoming in the International Review of Law and Economics, presented a theoretical case that price gouging restrictions can be value-enhancing under certain conditions. I was skeptical, but Fleck is careful in building his case.

The key qualifier above is under certain conditions. In “Can Prohibitions on ‘Price Gouging’ Reduce Deadweight Losses?” Fleck agreed it is obvious price caps can cause shortages, and price caps designed to apply specifically during emergencies can create shortages at times during which shortages are especially harmful to consumers

But he found a special case for which such laws may be on net beneficial, namely: when consumption of the good creates external benefits, and the price gouging limits are foreseen to create shortages under unpredictable high demand conditions, and production is fixed in the short run, and resale of the good among consumers is impossible, then the policy can induce consumers to buy larger amounts of the external-benefit generating good.

His primary illustration was flu vaccinations, for which production is completed before the flu season type is revealed to be either “high demand” (flu epidemic) or “low demand” (normal). In the absence of shortage-inducing price limits, consumers wait for realization of the flu season type before deciding whether to get a flu shot. Given a price gouging-based price cap and resulting predictable shortage, Fleck explained, more consumers buy a vaccine production prior to the flu season (i.e. before revelation of the flu season type). Because by assumption consumption of the good has external benefits, inducing greater consumption can create net increases in overall economic value.

Fleck clearly stated that his result doesn’t generalize to all price gouging restrictions. While he suggested a few light stories of the potential external benefits associated with drinking water, gasoline, home electrical generators, and chain saws, he didn’t play these alternatives up. (For good reason, too. Unlike flu vaccinations “consumed” at point of retail purchase, these other consumer goods are readily resold. A resale market undermines consumer incentives to purchase the good before the demand type is known and so does not lead to an increase in overall consumption.)

He concluded by raising the possibility the widespread adoption by states of price gouging proscriptions might reflect growth of relatively efficient types of regulation at the expense of less efficient regulation, or perhaps the laws persist because they are not as costly as they otherwise may seen. On this point I remain skeptical.

As Fleck emphasized early in the paper, the model shows that price gouging limits may be on net beneficial, but it does not conclude they must be on net beneficial. In addition, even when the policy may be on net beneficial it will fail to maximize total benefit, and so in theory there are better policies. Finally, he said, the laws would have to be tailored to apply mostly under the restrictive conditions set out above. Price gouging restrictions under other conditions will reduce overall surplus. Fleck suggested (for Hayekian knowledge problem reasons) it was unlikely that policymakers would be so well informed as to be able to identify just which products and at which times the laws should apply.

Overall he has a unique and interesting theoretical case built with traditional microeconomic tools. Other attempts at providing an analytic foundation for price gouging laws are ad hoc and unpersuasive (comments on Rotemberg here, comments on Rapp here and here). But despite Fleck’s offering an efficiency-based justification for price gouging limits, the relatively strict conditions for his theoretical case make the model an unlikely base of support for any existing price gouging policy.

Colorado merchants have pricing freedom

Flooding in Colorado has caused damage across nearly 2,000 square miles of the state. While many businesses are chipping in to help people affected, some people are concerned that lack of a state anti-price gouging law leaves consumers exposed to unjust price increases.

A Denver Post story begins:

Flood-ravaged Colorado is one of only 15 states where price-gouging during an emergency is not illegal — it’s merely capitalism.

To some it might be socially reprehensible and ethically wrong, but legally there’s nothing to prevent a businessperson from upping the cost of necessary post-disaster supplies to meet the pressing needs of those affected by the event.

“The price of a product or service alone is not a scam if it’s fully disclosed,” Colorado Assistant Attorney General Jan Zavislan said. “If the consumer has the information and has the right to shop around, but the sources in an emergency aren’t there, it might be an outrage to people, but there’s no specific law on the price itself.”

As communities begin the process of cleaning up from the floods and taking an inventory of insurance coverage — if any — more immediate needs of food, water, fuel and shelter can be met with surprise over their cost.

As long as a merchant is clear on the price — even if it’s 10 times the rate it had been before the disaster — then there’s no law broken.

The article doesn’t actually cite examples of price gouging in Colorado, just notes that nothing in state law would prevent it. (Another story online said a Longmont, CO resident reported that a septic company nearly doubled it rates after the flood, but that’s it so far as I can find.)

The article explains that a bill to prohibit price gouging in Colorado was vetoed in 2006 by then-Gov. Bill Owens. Owens said, “[the bill] violates the fundamental principles of our market-based economy.”

NOTES: The Denver Post article states Colorado does have an anti-price gouging law solely for needed drugs, the price of which cannot rise more than 10 percent during a disaster declaration.

By the way, by my count 34 states have anti-price gouging laws and 16 states do not have such laws (see my list and the related graphic). The article claims 35 states with and 15 without. Maybe I need to update my list.

Perverse outcomes of water subsidies

I’m intruding on David Zetland’s turf, but in this 2012 Guardian article from 2012 Roger Cowe makes some compelling arguments about why agricultural water subsidies lead to perverse outcomes, do not help the poor, and waste a precious, scarce resource. Water is the only industry in which regulation more perversely stifles self-organizing processes for managing scarcity than electricity. His conclusion is apt:

Like most other perverse subsidies, the goal of improving access to water is not at issue. The perversity arises because making water cheap, especially to crop farmers, leads to excessive use and unintended, environmentally harmful consequences. And the poor, who are often the main targets of subsidies, typically don’t benefit. Irrigation benefits landowners rather than their tenant farmers. And surprisingly, consumption subsidies do few favours for poorer families.