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 a new book, the former Middle East peace negotiator Dennis Ross explores just how close Israel came to attacking Iran, and why Susan Rice accused Benjamin Netanyahu of throwing “everything but the n-word” at Barack Obama.
Updated on October 9, 2015 at 12:40 p.m.
When Israeli Prime Minister Benjamin Netanyahu arrives in Washington early next month for a meeting with President Obama, he should at least know that he is more popular in the White House than Vladimir Putin. But not by much.
This meeting will not reset the relationship between the two men in any significant way, and not only because Netanyahu has decided to troll Obama by accepting the Irving Kristol Award from the American Enterprise Institute on this same short trip. The meeting between the two leaders will most likely be businesslike and correct, but the gap between the two is essentially unbridgeable. From Netanyahu’s perspective, the hopelessly naive Obama broke a solemn promise to never allow Iran to cross the nuclear threshold. From Obama’s perspective, Netanyahu violated crucial norms of U.S.-Israel relations by publicly and bitterly criticizing an Iran deal that—from Obama’s perspective—protects Israel, and then by taking the nearly unprecedented step of organizing a partisan (and, by the way, losing and self-destructive) lobbying campaign against the deal on Capitol Hill.
Some of Charles Schulz’s fans blame the cartoon dog for ruining Peanuts. Here’s why they’re wrong.
It really was a dark and stormy night. On February 12, 2000, Charles Schulz—who had single-handedly drawn some 18,000 Peanuts comic strips, who refused to use assistants to ink or letter his comics, who vowed that after he quit, no new Peanuts strips would be made—died, taking to the grave, it seemed, any further adventures of the gang.
Hours later, his last Sunday strip came out with a farewell: “Charlie Brown, Snoopy, Linus, Lucy … How can I ever forget them.” By then, Peanuts was carried by more than 2,600 newspapers in 75 countries and read by some 300 million people. It had been going for five decades. Robert Thompson, a scholar of popular culture, called it “arguably the longest story told by a single artist in human history.”
A new report details a black market in nuclear materials.
On Wednesday, the Associated Press published a horrifying report about criminal networks in the former Soviet Union trying to sell “radioactive material to Middle Eastern extremists.” At the center of these cases, of which the AP learned of four in the past five years, was a “thriving black market in nuclear materials” in a “tiny and impoverished Eastern European country”: Moldova.
It’s a new iteration of an old problem with a familiar geography. The breakup of the Soviet Union left a superpower’s worth of nuclear weapons scattered across several countries without a superpower’s capacity to keep track of them. When Harvard’s Graham Allison flagged this problem in 1996, he wrote that the collapse of Russia’s “command-and-control society” left nothing secure. To wit:
What’s the balance between preparing students for college and ensuring they aren’t killing themselves in the process?
Kids who go to elite private high schools enjoy lots of advantages. They have access to the most challenging academic classes at reputable institutions, with staffs that are well-equipped to help them prepare for college. Parents pay an average of $10,000 per year to ensure their kids this privilege.
And yet the rigor that these opportunities demand can come with an extra cost for the students themselves. A recent study surveyed and interviewed students at a handful of these high schools and found that about half of them are chronically stressed. The results aren’t surprising—between the homework required for Advanced Placement classes, sports practices, extracurricular activities like music and student government, and SAT prep, the fortunate kids who have access to these opportunities don’t have much downtime these days. These experiences can cause kids to burn out by the time they get to college, or to feel the psychological and physical effects of stress for much of their adult lives, says Marya Gwadz, a senior research scientist at the New York University College of Nursing.
The leaderless GOP begins its search for a speaker anew, starting with a campaign to draft Paul Ryan.
First Eric Cantor. Then John Boehner. Now Kevin McCarthy.
Conservatives in and out of Congress have, within a span of 15 months, tossed aside three of the four men most instrumental in the 2010 victory that gave Republicans their majority in the House. When the leaderless and divided party gathers on Friday to begin anew its search for a speaker, the biggest question will be whether that fourth man, Paul Ryan, will take a job that for the moment, only he can win.
Ryan, the 2012 vice presidential nominee and chairman of the powerful Ways and Means Committee, has for years resisted entreaties to run for speaker, citing the demands of the job on his young family and his desire to run the tax-writing panel, which he has called his “dream job.” And he did so again on Thursday, within minutes of McCarthy’s abrupt decision to abandon a race he had been favored to win. “I will not be a candidate for speaker,” Ryan tweeted. Yet the pressure kept coming. Lawmakers brought up his name throughout the day, and there were reports that Boehner himself had personally implored him to change his mind.
Kids who are adopted have richer, more involved parents. They also have more behavior and attention problems. Why?
Being adopted can be one of the best things to happen to a kid. People who adopt tend to be wealthier than other parents, both because of self-selection and because of the adoption screening process. Adoptive parents tend to be better-educated and put more effort into raising their kids, as measured by things like eating family meals together, providing the child with books, and getting involved in their schools.
And yet, as rated by their teachers and tests, adopted children tend to have worse behavioral and academic outcomes in kindergarten and first grade than birth children do, according to a new research brief from the Institute for Family Studies written by psychologist Nicholas Zill.
A new tally of the those killed last month makes it the deadliest-ever disaster at the annual pilgrimage.
The death toll in last month’s Hajj stampede in Saudi Arabia is roughly double the number that the country first reported, the Associated Press is reporting.
The Saudi estimate of the disaster was 769, but the new estimate, based on an AP count, suggests that 1,453 people died in the stampede. This new number would make it the deadliest catastrophe in the history of the event.
The Hajj draws roughly 2 million pilgrims to Mecca each year, an observance that lends its host, Saudi Arabia, unrivaled prestige across the Muslim world. It also saddles the kingdom with billions of dollars of costs and logistical considerations. Over the course of the past 40 years, several of the pilgrimages have been marred by deaths caused from stampedes, the collapse of infrastructure, violence, and fires.
What insight can the new video game Prison Architect offer into the structures and complexities of incarceration in America?
The first person to die in an electric chair was William Kemmler, a peddler from Philadelphia who murdered his common-law wife in the summer of 1890. 1000 volts of electricity, tested the day before on a luckless horse, knocked Kemmler unconscious, but didn’t stop his heart. In a panic, the warden doubled the voltage. 2000 volts of alternating current ruptured Kemmler’s capillaries, forming subcutaneous pools of blood that began to burst as his skin was torn apart. Witnesses reported being overcome by the smell of molten flesh and charred body hair; those who tried to leave found that the doors were locked. The next morning, The New York Times called the execution a “disgrace to civilization … so terrible that words cannot begin to describe it.” The irony, lost on no one, was that until that morning, electrocution had been promoted as a more humane form of capital punishment.
Many high-school graduates must choose between two bad options: a four-year program for which they’re not academically or emotionally prepared, or job-specific training that might put a ceiling on their careers.
Two years ago, my nephew was set to graduate from Maryland’s Towson University with a degree in political science. After six long years, both he and his parents were ready to breathe a sigh of relief—he had made it to the finish line. He had never been excited about school, and his parents had worried about his lack of enthusiasm, wishing he could be engaged in something that ignited his curiosity and provided him more of a motivation to focus, something more hands-on and practical. But they also knew that without a bachelor’s degree, my nephew’s ability to move into a rewarding career, earn a middle-class salary, and enjoy some economic security would be very limited. And they worried that if he didn’t complete that degree before he turned 25, he likely never would (a reasonable concern, given national statistics on college completion). Determined to launch him into adulthood with the strongest possible foundation they could, they persuaded him to go to college and crossed their fingers.
American politicians are now eager to disown a failed criminal-justice system that’s left the U.S. with the largest incarcerated population in the world. But they've failed to reckon with history. Fifty years after Daniel Patrick Moynihan’s report “The Negro Family” tragically helped create this system, it's time to reclaim his original intent.
By his own lights, Daniel Patrick Moynihan, ambassador, senator, sociologist, and itinerant American intellectual, was the product of a broken home and a pathological family. He was born in 1927 in Tulsa, Oklahoma, but raised mostly in New York City. When Moynihan was 10 years old, his father, John, left the family, plunging it into poverty. Moynihan’s mother, Margaret, remarried, had another child, divorced, moved to Indiana to stay with relatives, then returned to New York, where she worked as a nurse. Moynihan’s childhood—a tangle of poverty, remarriage, relocation, and single motherhood—contrasted starkly with the idyllic American family life he would later extol.