A couple years ago NPR's Planet Money podcast had an episode about Somali pirates. (The pirate part starts at 9:35). There was all sorts of interesting stuff about division of labor, allocation of shares, pirate venture capital, etc. Some of this paralleled early modern piracy (as given a scholarly analysis in Peter Leeson's work and a romantic perspective in innumerable books and movies since Treasure Island) but in other respects it's very different. In particular, whereas early modern piracy was mostly about seizing cargo and the crews were left alone if they surrendered promptly, Somali piracy is more similar to piracy in antiquity in that it's basically maritime kidnapping. The typical instance of Somali piracy isn't that different from what a young Julius Caesar experienced when he was kidnapped by pirates and held for ransom on his way home from political exile in Asia Minor. One interesting detail in Plutarch's report is that, "When these men at first demanded of him twenty talents for his ransom, he laughed at them for not understanding the value of their prisoner, and voluntarily engaged to give them fifty."
It's not entirely clear if we should take Plutarch's report at face value (he also tells us that Caesar constantly insulted his captors as being, for instance, too uncivilized to appreciate his poetry) but for the sake of argument let's accept that Caesar rather brashly gave away too much information in the game of price discovery. According to a hostage negotiator quoted by This American Life, giving away this information is apparently typical of hostages and is counter-productive to their release as it narrows the bid-ask spread. Economists would describe hostage negotiation as a bilateral monopoly price negotiation that is structurally just a special case of chicken. That is, unlike a barrel of oil or a freight car full of soybeans which can trade on an extremely liquid market with innumerable buyers and sellers, a hostage has exactly one seller (the kidnappers) and exactly one buyer (the employer and/or family of the hostage). When there is only one buyer, the opportunity cost for ransoming the hostage is zero. Likewise, the employer and/or family has no realistic alternative means to recover the hostage. In order for everybody to walk away happy, we need a cooperate-cooperate outcome: the kidnapper has to give up the hostage and the employer/family has to give up a ransom. This structure also characterizes art theft, which in practice is not a matter of fencing art on the black market but ransoming art to a museum's insurance company.
If we model a bilateral monopoly negotiation only two things should matter. The first is, as always in a game of chicken, the willingness to accept failure. The more willing you appear to walk away, the more bargaining power you have. In a more protracted game this can cash out as willingness to delay which we can treat as a defect-defect outcome on the installment plan. In fact in the Planet Money episode on Somali piracy, the hostage's party did balk and break off negotiations for weeks at a time until the pirates were willing to come down on price.
The other thing that should matter is the capacity to pay. If the pirate knows for an absolute fact that the hostage's people simply can't raise more than a million dollars then it would be pointless for them to demand two million dollars. Of course there is an issue of information asymmetry in that the hostage's party has much better information on its assets than do the pirates and so the pirates may be skeptical of the hostage's party pleading poverty (especially if the hostage has foolishly told them how much money they can get). We see this at work in the TAL story's point that kidnapping insurance holds the condition that you can't tell anyone you have kidnapping insurance.
Here's something that the econ model tells us shouldn't matter: the going rate. In normal markets the going rate matters, but only because it provides the opportunities for substitutes and this creates the "law of one price." For instance, when I go to a grocery store and see a loaf of bread for $4 I won't buy it. An economist would say I forgo this purchase because I know perfectly well that the going rate for a loaf of bread is about $2.25 and so I can go elsewhere and get bread cheaper. Similarly if I go to the Honda dealer to buy a Honda Accord, it is relevant for me to mention price quotes offered by other Honda dealers for an Accord or even how much Toyota dealers ask for a Camry because it is entirely credible that I'll walk off the lot and go to rival car dealers offering very close substitutes for this dealer's cars. However if my sister is locked in a basement in Ciudad Juarez and the kidnappers can credibly commit to not letting her go unless I raise $x, it is completely irrelevant that in the past kidnappers accepted ransoms of $x/2 since I don't have the relatively good fortune of dealing with a kidnapper who demands $x/2 but am stuck with one who demands $x. There are no other places where I can buy the freedom of my sister and so the only price that matters is the one being demanded by her particular kidnappers. (Note to any cartels reading this: I don't have a sister).
And nonetheless, much like how most people who haven't studied statistics balk at the idea that the ratio of sample size to population size is irrelevant to statistical inference, people seem to have a strong intuition that the "market price" is relevant to a bilateral monopoly even though the whole idea of a bilateral monopoly is that there is not really a market but only a series of discrete one-off transactions. In the absence of substitutability, "comparable" transactions are irrelevant as they don't imply opportunity cost. This is the main thing I found so fascinating about the Planet Money episode, over and over again the hostage's party balked at the pirates demands as unreasonable in being out of line with the "market price." We only get the pirates' story second hand, but apparently at no point did they explain to the hostage's party that "market price" doesn't really exist in a bilateral monopoly. (Maybe Mogadishu University needs a better econ department).
There are two ways, which are only partially incompatible, to look at why people insist that there is a market price. The simple model is to see us as making Bayesian inferences about the price the other party is willing to accept. If a pirate asks me for $10 million when I know that previous ransoms for similar hostages from similar pirates were about $1 million, I face two possibilities. It may be that I'm facing an usually greedy or unreasonable pirate and $10 million really is the price from which he will not budge. However it seems more likely that I'm dealing with a regular pirate, who like most pirates in the past will ultimately settle for about $1 million but who is just floating a high initial figure in case I'm especially bad at this. In this sense the distribution of prices for similar transactions may not be directly relevant in the sense of providing opportunities for substitution (or the credible threat to avail myself of them) but it is still relevant as information about the zone of possible agreement. This is consistent with the Planet Money story in that Filipinos are cheaper to ransom than Europeans by an order of magnitude. Presumably this reflects Bayesian inference on the part of the pirates from the hostage's nationality as to how much the hostage's party should be able to raise. Alternately we could imagine that pirates always start with the same bargaining position but the Filipinos are less able to pay and so the pirates eventually reach this through ad hoc price discovery on a case-by-case basis. This strikes me as implausible though and I think pirates probably learned pretty quickly what they can reasonably expect for each nationality.
This is a nice explanation and it has the appeal of bending but not breaking the economic model of the actor, but it's not clear how seriously we want to take it and even if it's ultimately true it may not reflect the subjective experience. For instance, one of the main explanations for racial discrimination is that it reflects Bayesian inference about aspects of human capital that aren't readily observable. This model was devastated by Devah Pager's audit study showing that employers prefer to hire white men with a criminal record rather than black men without a criminal record, whereas the "statistical discrimination" model predicts that ascriptive discrimination should be weaker than and diminish greatly in the presence of information about relevant traits at the individual level. In the wake of the Pager study the best case you can make for the statistical discrimination model is that our intuitions are Bayesian in the aggregate but are too low level for us to override with directly relevant information (or, for that matter, with the conscious desire to avoid stereotyping on legal or ethical grounds). It's not unlike the argument that evolution made sex feel good so that we will propagate our genes, but it still feels good when you use birth control. So we might prefer a model that is ultimately consistent with people using prevailing price as information in bilateral monopoly negotiations, but is proximately and subjectively more about meaning.
Although the discipline of economics has many valuable things to teach us about how markets work, especially in the long-run, the subjective experience of someone bargaining does not necessarily reflect thinking through how a rational actor would apply price theory (competitive markets) or game theory (monopolistic markets) to the situation. Rather people take moralized approaches to exchange and seem to apply various relational models to exchange, which includes not only market exchange but also gift exchange, patron-client ties, and primitive communism. Moreover, even when people accept that a situation is one of market exchange it does not come naturally to think of price like modern economists think of it, as "market clearing." Rather much as people intuitively expect physical objects to behave by Buridan's impetus rather than Newton's inertia, people's intuitive notions about price can have less to do with how economics thinks of it than how Aristotle, Aquinas, and Marx thought of it, as "just price" or "fair price." We see the Aristotelian/scholastic/Marxist understanding of price institutionalized in price controls and laws against gouging. The intuition many people seem to feel is that the long-run prevailing price has moral weight and deviations from this price (as for instance in a supply or demand shock leading to "gouging") are immoral. Hence historical bread riots often involve not exactly stealing food but rather mobs enacting vigilante price controls. Most recently we saw this is in a class action lawsuit against concession prices in movie theaters. As an American and someone who studies exchange professionally, economics comes naturally enough to me that my immediate reflex to this story is to think this guy needs to understand two-part tariffs and tell him if he doesn't like the theater's prices nobody is forcing him to go there or to eat once he arrives. However the fact that somebody felt sufficiently indignant to sue over being offered the opportunity to buy a bucket of popcorn for $6 shows us that the perspective assumed by academic economics doesn't necessarily come naturally to people. Similarly, when the hostage's party is negotiating a ransom with pirates both the pirates and hostages may be behaving in ways that are ultimately consistent with a game of chicken under conditions of bounded rationality and Bayesian inference about asymmetric information, but in the immediate subjective sense they may simply be feeling that the recent run of ransoms sets an expectation of what it is fair to pay for this particular hostage.
Oh, and one more thing about Caesar. Plutarch tells us that after he was ransomed he got some ships, raided the pirates, and had them all crucified.
In his convention speech, he suggested that Muslims need to earn the rights that all other Americans enjoy.
I love Bill Clinton. But I didn’t love his speech Tuesday night in Philadelphia. Given the job of humanizing his wife, he came across as genuinely smitten. But he failed to do what he’s done in every convention speech he’s delivered since 1992: tell a story about where America is today and what can be done to move it forward. He called his wife a great “change maker” but didn’t define the change America needs right now.
But the worst moment of the speech came near its end, when Clinton began to riff about the different kinds of people who should join Hillary’s effort. “If you love this country, you’re working hard, you’re paying taxes, you’re obeying the law and you’d like to become a citizen, you should choose immigration reform over someone that wants to send you back,” he said. Fair enough. Under any conceivable immigration overhaul, only those undocumented immigrants who have obeyed the law once in the United States—which includes paying taxes—will qualify for citizenship. Two sentences later, Clinton said that, “If you’re a young African American disillusioned and afraid … help us build a future where no one’s afraid to walk outside, including the people that wear blue to protect our future.” No problem there. Of course African Americans should be safe from abusive police, and of course, police should be safe from the murderers who threaten them.
His convention speech re-introducing his wife to the country was an uneven, but ultimately effective, performance.
Just before Bill Clinton strode onstage to be his wife’s character witness, his wife’s convention planners played a video tribute to him. “When he said stuff, you believed it,” a man dressed in union gear said of Bill Clinton, “because you lived it.”
This was no accident: An overwhelming number of voters don’t trust Hillary Clinton. That credibility and character gap is the one thing that might stop Americans from electing a second President Clinton. And so the master of persuasion bragged on and on about his wife: career highlights, familiar anecdotes, and enough warm and cheesy sentiments to launch a thousand wedding toasts.
“If you were sitting where I am sitting and you heard what I heard at every dinner conversation and … on every long walk, you would say this woman has never been satisfied with the status quo about anything,” Bill Clinton said. Having been the candidate of change in 1992, Bill Clinton knows his wife faces headwinds against Donald Trump’s promise of radical, unruly change. “She always wants to move the ball forward,” Bill Clinton said. “That just who she is.”
When something goes wrong, I start with blunder, confusion, and miscalculation as the likely explanations. Planned-out wrongdoing is harder to pull off, more likely to backfire, and thus less probable.
But it is getting more difficult to dismiss the apparent Russian role in the DNC hack as blunder and confusion rather than plan.
“Real-world” authorities, from the former U.S. Ambassador to Russia to FBI sources to international security experts, say that the forensic evidence indicates the Russians. No independent authority strongly suggests otherwise. (Update the veteran reporters Shane Harris and Nancy Youssef cite evidence that the original hacker was “an agent of the Russian government.”)
The timing and precision of the leaks, on the day before the Democratic convention and on a topic intended to maximize divisions at that convention, is unlikely to be pure coincidence. If it were coincidence, why exactly now, with evidence drawn from hacks over previous months? Why mail only from the DNC, among all the organizations that have doubtless been hacked?
The foreign country most enthusiastic about Trump’s rise appears to be Russia, which would also be the foreign country most benefited by his policy changes, from his sowing doubts about NATO and the EU to his weakening of the RNC platform language about Ukraine.
The most ardent Bernie Sanders supporters must confront the fact that there is more in their way than corruption and stupidity.
PHILADELPHIA––Tara Kurek describes herself as an orphan. By the time she was a teenager, her parents had descended from prescription drug abuse to heroin addiction. “They didn’t raise me,” she said. “I’ve been emancipated since I was 16 years old.”
The pressures of national academic standards have pushed character education out of the classroom.
A few months ago, I presented the following scenario to my junior English students: Your boyfriend or girlfriend has committed a felony, during which other people were badly harmed. Should you or should you not turn him or her into the police?
The class immediately erupted with commentary. It was obvious, they said, that loyalty was paramount—not a single student said they’d “snitch.” They were unequivocally unconcerned about who was harmed in this hypothetical scenario. This troubled me.
This discussion was part of an introduction to an essay assignment about whether Americans should pay more for ethically produced food. We continued discussing other dilemmas, and the kids were more engaged that they’d been in weeks, grappling with big questions about values, character, and right versus wrong as I attempted to expand their thinking about who and what is affected—and why it matters—by their caloric choices.
Four decades after he asked his wife to set aside her own ambitions, he asked Americans to return her to the White House in her own right.
On Tuesday night, Bill Clinton spoke before thousands of delegates at the Democratic National Convention, and did his best to repay a debt he’d incurred 45 years before. He met Hillary in 1971, and she married him four years later. “I really hope,” he said, “that her choosing me and rejecting my advice to pursue her own career was a decision she would never regret.”
Now, as she pursues the presidency in her own right, he took the opportunity to reintroduce her to the public, spending most of his time on stage rehearsing the years before she became a national figure. “Cartoons are two-dimensional,” Clinton said, and did his best to render his wife vivid, human, and real.
It was a speech that aimed to move past some of the central paradoxes of Clinton’s candidacy. She sacrificed her ambitions to advance her husband’s career, but his success has now enabled her own rise. Most Americans view her unfavorably, and yet she has just become the first woman to be a major-party nominee for the president.
Stock-market crashes, terrorist attacks, and the dark side of “newsworthy” stories
Man bites dog. It is one of the oldest cliches in journalism, an acknowledgement of the idea that ordinary events are not newsworthy, whereas oddities, like a puppy-nibbling adult, deserve disproportionate coverage.
The rule is straightforward, but its implications are subtle. If journalists are encouraged to report extreme events, they guide both elite and public attitudes, leading many people, including experts, to feel like extreme events are more common than they actually are. By reporting on only the radically novel, the press can feed a popular illusion that the world is more terrible than it actually is.
Take finance, for example. Professional investors are fretting about the possibility of a massive stock-market crash, on par with 1987’s Black Monday. The statistical odds that such an event will occur within the next six months are about 1-in-60, according to historical data from 1929 to 1988. But when surveys between 1989 and 2015 asked investors to estimate the odds of such a crash in the coming months, the typical response was 1-in-10.
The Democratic chairwoman had few supporters—but clung to her post for years, abetted by the indifference of the White House.
PHILADELPHIA—As Debbie Wasserman Schultz made her unceremonious exit as chairwoman of the Democratic National Committee, what was most remarkable was what you didn’t hear: practically anybody coming to her defense.
The Florida congresswoman did not go quietly. She reportedly resisted stepping down, and blamed subordinates for the content of the leaked emails that were released Friday, which clearly showed the committee’s posture of neutrality in the Democratic primary to have been a hollow pretense, just as Bernie Sanders and his supporters long contended. She finally relinquished the convention gavel only after receiving three days of strong-arming, a ceremonial position in the Clinton campaign, and a raucous round of boos at a convention breakfast.
Washington, D.C., has embarked on an aggressive clean-energy plan, but a big challenge will be making sure it doesn't worsen existing inequalities.
WASHINGTON, D.C.—For homeowners and renters, drawing energy from solar panels on their roofs can be very cost-effective: Some estimates put monthly electric-bill savings between 10 and 30 percent, and on top of that, households that install solar systems can get 30 percent of the cost as a tax credit. But for many, installing solar panels is simply not within reach: Setting up such systems can cost tens of thousands of dollars, which means that their use—and subsequent savings—are predominantly enjoyed by wealthy households.
That's why, as Washington, D.C., moves forward with its clean-energy plan—which would have at least half the city's power coming from renewable sources by 2032—it is doing so with an eye on inequality. The city has mandated that a portion of the money set aside for solar initiatives—just under one-third—target low-income neighborhoods.
The First Lady took to the stage at the Democratic National Convention, and united a divided hall.
Most convention speeches are forgotten almost before they’re finished. But tonight in Philadelphia, Michelle Obama delivered a speech that will be replayed, quoted, and anthologized for years. It was as pure a piece of political oratory as this campaign has offered, and instantly entered the pantheon of great convention speeches.
Obama stepped out onto a stage in front of a divided party, including delegates who had booed almost every mention of the presumptive nominee. And she delivered a speech that united the hall, bringing it to its feet.
She did it, moreover, her own way—forming a striking contrast with the night’s other speakers. She did it without shouting at the crowd. Without overtly slamming Republicans. Without turning explicitly negative. Her speech was laden with sharp barbs, but she delivered them calmly, sometimes wryly, biting her lower lip, hitting her cadence. It was a masterful performance.