Tyler Cowen's Blog, page 53

What is the economic impact of Facebook?

Here is some media coverage of a recent Facebook study of its economic impact in terms of revenue and jobs.  Facebook claims it added $227 billion to the global economy, but they approached the question the wrong way.

The correct method is to treat jobs as a cost of Facebook, not a benefit, admittedly that is not how politics works nor is it how corporate PR works.  We should measure the benefits directly by consumer time use studies, much as Austan Goolsbee and Peter J. Klenow did in their paper on the internet (pdf).

My question today is this: what is the most accurate one line back-of-the-envelope estimate you can come up with for the gross benefits of Facebook, not bothering to subtract for the costs of running the site?  Here is one (hypothetical and illustrative) example, for America only:

100 million regular users, one hour a day, time valued at $10 an hour, and multiply for $365 billion a year.

You will notice this method implicitly captures the value and disvalue of the ads on Facebook.  The better and more useful the ads are, the more time people will spend on the site.

I don’t devote time to Facebook (I can thank MR for that), so surely you can do better than I in building a plausible one-line estimate.  Please leave your answer in the comments.

Institutions are not always so important (or easy to measure properly?)

Jinfeng Luo and Yi Wen from the St. Louis Fed have a new working paper (pdf), “Institutions Do Not Rule: Reassessing the Driving Forces of Economic Development”:

We use cross-country data and instrumental variables widely used in the literature to show that (i) institutions (such as property rights and the rule of law) do not explain industrialization and (ii) agrarian countries and industrial countries have entirely different determinants for income levels.

In particular, geography, rather than institutions, explains the income differences among agrarian countries, while institutions appear to matter only for income variations in industrial economies.  Moreover, we find it is the stage of economic development (or the absence/presence of industrialization) that explains a country’s quality of institutions rather than vice versa.

The finding that institutions do not explain industrialization but are instead explained by industrialization lends support to the well-received view among prominent economic historians — that institutional changes in 17th and 18th century England did not cause the Industrial Revolution.

I am reminded of a puzzle which I think was first posed by Jeff Sachs.  Go back to 1960 and choose any measure of institutional quality you want.  Then see how well it predicts cross-national growth since then.  And that is doing the exercise knowing how the answer comes out!

Assorted links

1. Scott Sumner on Keynesian excuses.

2. Alan Krueger working for Uber.  And dating average is over.  And rendering Tyler Cowen obsolete.

3. Newspapers are still deep in a financial hole.

4. Divorce machine gun markets in everything.  And Croatia wants to peg to the Swiss franc (!) for mortgage protection.

5. Department of Uh-Oh: more competition leads to higher antibiotic prescription rates.

6. Matthew Slaughter is now Dean of Dartmouth business school.

7. The legal system that is German.  They got the ruling right, I say.

8. Paul Krugman’s estimate: “So, Draghi’s big announcement seems to have raised expected European inflation by one-fifth of a percentage point.”  Alternatively, Daniel Davies on why QE might prove effective.

9. “If everything is clean, then he will be impressed.”

The Supply Curve

Here is our video introducing the supply curve from our principles of micro-economics course at MRUniversity. Supply, Demand and Equilibrium are available now. Next week, elasticity!

How to read fast, I mean really fast markets in everything

As part of a publicity stunt, author James Patterson is giving away 1,000 self-destructing digital advance copies of his latest novel, Private Vegas. If you score one, you have 24 hours to finish the entire book before the text vanishes forever. And if that’s just not risky enough, Patterson is selling a real self-destructing copy (for a whopping $294,038) that includes a dedicated bomb squad, among other creature comforts. There are likely much better ways to spend six digits in record time, but it’ll probably be the most exciting reading experience you ever have — no matter how good the story might be.

There is more here, via Kurt Busboom.  Much better than my advice, it would seem.

Who is moving out of the U.S. labor force?

Read the recent testimony of Robert E. Hall (pdf):

Most of the decline in participation occurred among teenagers and young adults. The fi�nding that these e�ffects tend to be larger in more prosperous families points strongly away from much of a role for rising influence of benefi�t programs, because these programs, especially food stamps, are only available to families with incomes well below the median.

So what is going on here?  Could it be “culture”?  Hall cites, suggestively, time use surveys showing that sleep and personal consumption of video are up strongly.

Toward a new, gender-based economic theory of the Indian caste system

This is just published in the Journal of Development Economics, from Chris Bidner and Mukesh Eswaran, and the title is “A Gender-Based Theory of the Origin of the Caste System of India”:

We propose a theory of the origins of India’s caste system by explicitly recognizing the productivity of women in complementing their husbands’ occupation-specific skill. The theory explains the core features of the caste system: its hereditary and hierarchical nature, and its insistence on endogamy (marriage only within castes). Endogamy is embraced by a group to minimize an externality that arises when group members marry outsiders. We demonstrate why the caste system embodies gender asymmetries in punishments for violations of endogamy and tolerates hypergamy (marrying up) more than hypogamy (marrying down). Our model also speaks to other aspects of caste, such as commensality restrictions and arranged/child marriages. We suggest that India’s caste system is so unique because the Brahmins sought to preserve and orally transmit the Hindu scriptures for over a millennium with no script. We show that economic considerations were of utmost importance in the emergence of the caste system.

There are ungated versions of the paper here.  Here are earlier MR posts on the Indian caste system.  I think I am not enough of a rational choice theorist to believe in any explanation of this sort, still it is sometimes better to try and fail than never to try at all…

The pointer to this paper is from Michael Clemens.

Elsewhere in central banking news…here are the real stories…

Fighters for one of the factions battling for control of Libya seized the Benghazi branch of the country’s central bank on Thursday, threatening to set off an armed scramble for the bank’s vast stores of money and gold, and cripple one of the last functioning institutions in the country.

The central bank is the repository for Libya’s oil revenue and holds nearly $100 billion in foreign currency reserves. It is the great prize at the center of the armed struggles that have raged here since the overthrow of Col. Muammar el-Qaddafi in 2011.

There is more here.  And in collapsing Yemen, the Iran-funded Houthi fighters seem to have the central bank tightly under guard.  Mario Draghi does not in fact have the toughest job in the world.

What we really need to know about QE

From the letters page of the FT:

Sir, Whether the European Central Bank chooses to embark on a programme of sovereign QE (or quantitative easing, as it used to be known) is of little day-to-day interest to most citizens of the EU. Whether the compilers of dictionaries accept that QE is now a word in its own right — as opposed to an abbreviation — is of far more relevance to us scrabble players. Using a Q without needing a free U it would rapidly be up there with Qi (the Chinese word for life force) as one of the most useful words in the lexicon.

Richard Kemmish

Surbiton, Surrey, UK

I would think that for the foreseeable future QE would be ruled an abbreviation, not a word, although enough years of macroeconomic misery eventually could flip this the other way.

“Some abbreviations, however, are acceptable Scrabble words because they have entered common parlance.”

Here are other “Q without U” words which are eligible for use in Scrabble.

Arrived in my pile

Ian Morris, Foragers, Farmers, and Fossil Fuels: How Human Values Evolve.

A Tanner Lecture, with comments by Richard Seaford, Jonathan D. Spence, Christine Korsgaard, and Margaret Atwood, and edited by Stephen Macedo.  Due out March 22.