OFF: consumer economics (was: Hawkwind MP3's)

[Doug Pearson]

On Fri, 4 Apr 2003 16:38:30 +0100, M Holmes
<fofp at HOLYROOD.ED.AC.UK> wrote:
>Doug Pearson writes:
>
>> What evidence?  ...
>
>What you'd need for proof is an instance where we
>could compare a band with zero secondhand value with
>a time when there was positive secondhand value and
>show that new prices were higher in the second instance
>when nothing else at all had changed. For obvious reasons,
>those experimental conditions can't be satisfied.

Yes, you're correct that your hypothesis is unprovable.  The only times
when secondhand CD/LP values go from zero (or close to zero) to high values
is when the CD/LP in question is not available *at all*, new, and *only*
secondhand, so that NO royalties are being paid.  (From that standpoint,
once could argue that high secondhand prices "cause" *lower* royalties, but
of course, that would be confusing correlation with causality.)

>You believe that the music
>business is an exception for particular reasons and
>I'm as yet unconvinced.

I believe that the record business is different from those in which
consumers *are* concerned about resale value (goods like homes,
automobiles, "collectibles"/antiques/investments, etc.).

>> Since we don't live in a world where people are shot for
>> selling secondhand CD's, there's no way to verify whether
>> that's a true conclusion or not.
>
>No, but it would tell us whether or not you believe
>this effect would occur *at all* in the music business.

Except that your hypothetical situation does not reflect the music business
(or any "business").  It would only show whether I believed the effect
would occur in a music business that worked by different rules than the one
in our universe.

>My point is that the absence of any secondhand
>value would lead to lower new prices on average
>but not necessarily in every specific instance.

Yes, I certainly agree that low secondhand prices will, generally, more
often than not, lead to lower new prices (and that lower new prices will
also lead to lower secondhand prices), but I'm not convinced that *higher*
secondhand prices will lead to higher new prices on a regular basis,
especially because, as I said before, I believe that the highest secondhand
prices are caused by the lack of availability of new equivalents, which
makes discussion of "new" prices moot.

>I agree that the resale value of a movie ticket is
>zero after the movie is shown.

(Yes, I'm certainly not claiming it's zero *before* the movie is shown,
even though I wasn't clear on that.)

>I do not agree with the first part (sorry for being unclear)
>and it's not an argument until you prove that consumers in
>general don't care about the resale value.  I'd be quite
>interested in how you think that might be proven though?

They still buy movie tickets, right?  If people are
willing to buy things that have no resale value, that
clearly shows that, at least in some cases, they do
not care about resale value.  I've said several times
that I believe that consumers, in general, DO care
about resale value of certain purchases, BUT that
purchasing a CD is more analagous to purchasing a
movie ticket than it is to buying an automobile.

>Well that's the part where I'm ignorant. I admit I'd blithely assumed
>that in general where prices were higher that led to higher royalties
>for bands.

No, it's the higher royalties that lead to higher retail prices.  The
manufacturer passes the royalty cost onto the wholesaler, who passes it
onto the retailer, who passes it onto the customer.  Not the other way
around.

>Is this in fact the case? presumably then most bands
>try to pressure retailers to sell CD's for as close
>to a penny as they can get because the lower the price,
>the higher the sales and the more royalties they'd
>get?

You left out the words "over wholesale price" between "a penny" and "as
they".  But yes, of course the lowest possible retail price is always in
the band's best interest, unless they're retailing their music themselves.

>> (However, I'll add that a royalty system where
>> bands/artists received a percentage of retail
>> for every CD sold, either new or secondhand,
>> WOULD be much more fair to the artists than the
>> current system.
>
>That's a different argument and I won't automatically assume you're
>right. Why do you think this would be more fair?

Yes, *completely* different argument ... but I would think the reasoning
would be obvious.  Do you want that explanation in economic terms, or moral
terms?

>Why a percentage of secondhand sales if that's not
>how it's done on primary sales?

Because retail sale is the more accurate reflection of the music's "worth",
since it represents what the end users, those who appreciate the music,
value it at.

>I'm also leery of the ceteris paribus assumption
>here. If the band gained cash from this system then
>someone would lose it and I doubt that they wouldn't
>modify their behaviour due to that, and that could
>be in some way which cut overall royalties.

That statement is contradictory to your original theory.  Adding royalties
to the cost of secondhand CD's would add to the price of secondhand CD's.
You claim that higher prices of secondhand CD's leads to *increased*
royalties for the band.

And more bluntly, bands currently receive zero royalties on used CD's.
Even if this hypothetical system were to decrease overall sales of used
CD's, *any* amount of royalty on used CD's is greater than zero ...

-----------------------------------------------------

>Indeed, but this is the first disinflationary period
>since the 1930's isn't it? So now both factors are
>present and bingo, we get a stocks bubble a credit
>bubble and now after asset rotation out of stocks, a
>housing bubble. Coincidence?

Inflation has certainly gone up and down plenty of times (but it's been
pretty low overall at least since the '89 scare), and we're not seeing
actual deflation yet (but it remains a likelier possibility than anytime
since the 1930's).  But I think the housing bubble is part of the same
economic bubble that the stock market was, not a follow-up; it's just that
it's more effort to sell a house than a share (or to change mutual fund
distributions), and people are likelier to hold onto a house until they
absolutely cannot.  That makes it act slower.  (Similar to what I describe
with mutual fund managers vs. individual shareholders.)

>The Fed certainly has decided that it's better to
>try to keep the bubble going that take the medicine
>that deflation will bring.
>However, Austrian theory says that the longer you run
>a bubble and the more people and debt that it involved,
>the worse the aftermath. I'd contend that Greenspan has
>averted a recession at the cost of a depression.

You may be right.  Are they guilty of wishful thinking for a soft landing
instead of a crash?  The latest indicators would seem to make those pretty
slim hopes ...

>> >I believe that there are no non-economic terms to
>> >pretty much everything.
>>
>> And this is the main problem I have with both
>> Marxists and Libertarian Laissez-Faire Capitalists
>> (a pox on both your houses!).
>
>Well, mold anyway.

Nasty.  I'll take that back then, I wouldn't even wish that on the
collective farm chief who insists on following the five-year-plan's
directive for increased potato production at the expense of carrots, even
though the market stalls are full of rotting potatoes and the peasants are
rioting for carrots.

>> One can quantify the economic
>> loss of taking the time to stop to smell the
>> flowers (based on time spent and "potential wages
>> lost" or something like that), but not the non-
>> economic enjoyment that is gained by smelling said
>> flowers.
>
>I just doubt this. Simply ratchet up an offer of
>money not to smell the floers unil someone takes
>it and you have a measure of what smelling the
>flowers is worth to them.

And the economic reason for making the decision to pay people not to smell
the flowers would be ... ???

>No. If I pay more for beer than you do it doesn't
>necessarily mean I enjoy it more than you do, it
>just means that enjoying beer is worth more to me
>than enjoying beer is worth to you. There might
>unltimately be a measure of subjective enjoyment
>(some brain activity reading perhaps) but that's
>not quite the same thing.
>
>Perhaps this is what you meant and we're actually in
>agreement here?

More or less.  I think there *is* a difference between the economic worth
of certain activities to different people, which can be quantified in
economic terms; and the individual, subjective, enjoyment, of the same
activities, which cannot be quantified, except in the broadest senses.
That's why there's no way to prove, as the article you cite mentions,
whether being too rich makes you unhappier (or happier).

>> But those are economic *consequences* of a decision
>> made for non-economic reasons, not economic *reasons*.
>
>Economics is about choices not money. Money is merely
>one way in which we measure the value to people of
>different choices.  In that this is about a choice,
>it's economics. Economics is about human behaviour
>when confronted with options, it's not necessarily
>about money or finance.

The problem, then, that I see with economics, is that it doesn't *offer*
any ways to measure the value(s) of those choices, *except* by means of
money.  Money does explain an awful lot of them, but not all, by a long
shot ...

>I see we disagree about even what economics is. If
>you're saying that some choices are made without
>recourse to money then I agree (though I don't
>necessarily agree that it would be impossible
>to determine monetary values to the individual
>of the various choices). I do not agree that choices
>made irrespective of money are not economics.

There are already many other areas of science that deal with different
aspects of human decision-making: linguistics & mathematics, philosophy &
logic, psychology, and physiology & neural biology, to name a few of the
heavies.  For any one field to claim it has all the answers would be a bit
conceited.

>Perhaps, though at some point a manager of a porrly
>performing 401K presumably has to sell if only to
>stem further losses. The evidence is indeed that
>they'll be less skittish than individuals. In this
>case that often means they lost a lot more on bahalf
>of their clients and they can now only claim to be
>placed for the recovery.

Also, when a large mutual fund dumps a particular stock, that can have an
overall effect on the market indicators, while an individual shareholder's
actions are negligeable, so those managers probably realize that if they
dump the contents of one fund, it reduces the value of *all* their funds.

>I guess money borrowed isn't perceived by many as the
>same as money earned.

And therein lies a good part of the appeal of Las Vegas!

>Rents have fallen in SF though prices have risen.

Yes (although the price increases have dramatically slowed since the boom
years).

>This kind of "divergence" is actually very common
>in bubbles, particularly at the peak phase.
>There was similar divergence between the Nasdaq
>and Dow indices just before the bust started.

The other interesting thing is that, just as prices fall before rents,
higher prices fall before lower ones.  The prices of *luxury* real estate
in the bay area has been falling for several years now, but not yet enough
to average out the price of middle class houses (partially, I'm sure,
because people have sold the luxury houses they could no longer afford they
payments on, and used the proceeds to buy considerably more modest ones).

------------------------------------------------------

>Perhaps, but given the details of electricity
>deregulation, these people were certainly geniuses
>at being stupid.

The details of electricity deregulation are certainly not simple!  And
electricity is a market VERY different from any retail market, including
most other energy sources (such as oil).

>Given socialism's record of providing things, it'd
>actually be much better to have the non-essential
>things passed over to the various mini-soviets.
>Unless e actually prefer people to starve or die in a
>health queue.

In the USA, where agricultural food is semi-socialized
(those milk subsidies!), people aren't dying of
starvation.  However, because medical services are
(for the most part) not socialized, there *are* people
dying because they're not getting medical procedures
that they need but can't afford.  Other industrialized
countries with socialized health care (Sweden, Canada,
etc.) have longer life expectencies than the USA.
Which latin american country has the highest life
expectency?

>PG&E went bankrupt because deregulation meant that
>they bought electricity prices at the marginal cost
>at 24 hour spot prices (that is they were barred
>from buying wholesale and from arranging contracts to
>supply for say a whole winter)

This was only a problem because the energy trading
firms were able to fraudulently drive up the spot
prices; there was nothing to force them to sell
electricity, as you say below, "at around the price it
costs to make it".  The only thing "unfree" about that
market was the manipulation by the energy traders.

>and there were price caps on what they could sell on
>to customers.

I did mention that this part was certainly not "free market".  I wouldn't
deny that!  And as I said, that's the firewall that saved the customers
(i.e. all the businesses and residents of California) from the same fate
that befell PG&E.

>A more fucked up and less free market system
>would be hard to devise without a great deal of
>thought and the failure mode would be obvious to
>a bright six year old if explained in terms of
>sweets.

At the point when the deregulation scheme was
legislated, spot prices were considerably lower than
long-term contract energy prices, and had been for
some time (which makes economic sense to me - with a
contract, you're paying a premium for stability, in
much the same way that the inefficiencies built into
the milk distribution system are the premium paid for
the stability of the food supply).  When people see
what looks like a "good deal" (in this example, cheap
spot market energy prices), they don't want to believe
that it might turn bad in the future (there's that
pesky behavioral psychology again).  50 year old
politicians are probably *better* at living in denial
than bright six year olds.

>It also saved them from having electricity some of
>the time.

It's been proven that any electricity "shortages" were manufactured by the
traders in order to jack up prices.

>Basically you stole cash from the pensioners who had
>shares in PG&E.  Woops, that turns out to be the
>Californian state.  I'll bet the taxpayers hurt for
>that too.

Not nearly as badly as if every company in California
was bankrupted.  And as for the, "oh those poor
pensioners" argument (which was made in lots of op-ed
columns at the time), two words: diversified
portfolio.  At the same time, some other pensioner was
seeing (albeit temporarily!) a huge increase in his
stock holdings from his shares in Enron.

>What it was is a monumental cockup.

No argument there!!!

>What it wasn't is an example of anything like a
>free market any more than forcing AndyG to buy CD's
>individually at whatever price the owner asked

Isn't an owner selling good/services for the best price he/she can get the
essence of the "free market"?  That's what the electricity traders did to
PG&E.

>Maybe once they've tried absolutely everything else,
>they'll try free markets and you'll get electricity
>at around the price it costs to make it.

Electricity isn't like milk.  If you don't like the price, you can't wait
on buying anymore until you drive across town to the other store that has a
lower price.  The entire cockup shows that unlike with retail industries,
competition in the electrical market drives prices UP, towards the higher
price (as the lower-cost vendors try to match it - by the end of the
crisis, EVERY provider/trader in the california market was doing this),
rather than down towards the lower price.

>Exercise for the reader:

[snip, sorry]

>Jeese Doug, we're not talking Evil Geniuses here.

Thanks for the demonstration of 20/20 hindsight.  Unfortunately, the Enron
balance sheet debacle (completely separate from the California power
crisis!) makes it pretty clear that the people in charge there were
thoroughly evil, and pretty damned smart.

>> Like I said, free markets for CD's = good; free
>> markets for essential foodstuffs = bad (IMHO).
>
>Hardly. In our rigged milk markets for example, we
>pay farmers not to have cows in order to cut down
>on the excess milk. We pay a fixed price
>to farmers above the market rate and so we still get
>more milk than we need.

Which prevents potential milk (or other foodstuff) shortages.  A good thing
IMHO.  I've never live through a food shortage, but my mother grew up in
rural missouri during the great depression.  I would not want to share that
experience.

>This also applies to butter, meat, etc and
>is why european food prices are around triple US food
>prices even before the cost of taxation for all the
>above is taken into account.

I was wondering why I keep seeing all those photos of starving children in
Europe who can't afford food.  It must be priced out of their hands by
those evil socialist governments!

>Yeah, I'm sure glad they regulate essential services.
>I can't wait for it to happen with CD's.

I can live with shortages of CD's (heck, I'm living with a shortage
of 'Hawklords/25 Years On' CD's right now with very little complaint), but
living with shortages of food or electricity would really, really suck.

        -Doug
         jasret at mindspring.com