Supply and Demand Curves with the "Wrong" Slope

"Personal Increasing Returns" is a way to describe goods for which consumers can purchase access to a lower price.  An important instance is human capital, where consumers reduce the leisure-opportunity cost of consumption by investing in skills.  Another is consumer financial management, which Sala-i-Martin and I studied in this JPE paper about purchasing access to cheaper future consumption.  The demand for illegal drugs can also be understood in this way.  

It's one model with various variable labels.  A marginal cost curve sloping the "wrong" way unifies the applications.  My purpose here is to compare and contrast this and other non-trivial instances of wrong-sloping supply and demand curves.

The “supply” curves shown in Figures 2 and 5 of "Personal Increasing Returns" are closely related to what price theory has traditionally described as “forward-falling supply curves.”  Examples are Marshall [Book IV, Chapter XIII] and Adams and Wheeler [1952], although they focus on diminishing marginal cost at the industry level rather than the personal level.^[1]  Either way, sufficiently strong complementarities are required. 

[click image to see side-by-side]

Although "Personal Increasing Returns" assumes constant input prices, including the relative price of human capital h, upward-sloping input supply could introduce upward-sloping elements in Figures 2 and 4.  This occurs at quantities where the complementarity between h and q (e.g., human capital and labor supply) is insufficient to offset increasing input prices.  Still, such supply curves are known as forward falling as long as they have a declining portion.  Each quantity has a unique marginal cost, even if each marginal cost does not correspond to a unique quantity.

While Marshall’s formulation with firm-level supply that is a function of industry output may produce a forward-falling industry supply curve, the complementarity could be on the demand side instead.  Becker [1991] posits that a consumer’s demand curve may be shifted out by market-level demand, particularly in markets for “social activities in which people consumer a product or service together and partly in public.”  As a result, the market level demand curve slopes up in the price ranges where the complementarity is sufficiently strong.  In that range, an increase dQ in the market quantity shifts the sum of individual demands even more than dQ due to the social interaction, so price must increase to choke off that additional demand (that is, limit the increase in the sum of demands to dQ).  Still, each quantity on the market-level curve corresponds to a unique price, even though a single price may not correspond to a unique quantity.

The snob-good model is the opposite of Becker’s social interactions in that some of the consumers value the good more when others are not consuming it.  The resulting demand curve may have a backward S shape, with only the elite consuming at the highest prices.  As the price falls enough to induce the general population to consume, enough elites may leave the market to reduce total demand, thereby generating the middle part of the S.  Once enough elite are gone from the market, further price reductions increase market demand.^[2]  Unlike Becker’s demand curve, the snob demand model can have multiple market prices corresponding to a single quantity.

The economics of “backward bending” supply curves and the demand for Giffen goods is entirely different.  In those cases, the usual substitution effects on supply or demand are more than offset by income effects.  For the backward-bending supply curve, the supplier’s alternative to production is consumption of a normal good; the classic example is the supply of labor.  A Giffen good has income and substitution effects in opposite directions because it is an inferior good.

^[1] Stigler [1949, p. 165] is reluctant to discuss much about forward-falling supply without sufficient demonstration of its importance in practice.  Respecting that principle, "Personal Increasing Returns" points to education decisions, vehicle choice, drugs and alcohol pricing, and other situations where consumer action can significantly affect a price they pay.  Boulding [1955] refers to “falling supply price.”

^[2] See also the Veblen [1899] model, algebraic versions of which can be found in Leibenstein [1950]. 

Adams, Robert W. and Wheeler, John T. (1952). "External Economies and the Falling Supply Curve." The Review of Economic Studies 20(1): 24-39.

Becker, Gary S. 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price." Journal of Political Economy 99(5): 1109-16.

Boulding, Kenneth E. 1955. Economic Analysis. New York: Harper & Row.

Leibenstein, H. 1950. "Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand." The Quarterly Journal of Economics 64(2): 183–207.

Marshall, Alfred. 1890. Principles of Economics. London: Macmillan

Stigler, George J. 1949. The Theory of Price. Macmillan.

Veblen, Thorstein. 1899. The Theory of the Leisure Class. New York, NY: Macmillan.

Dublin Chaos Last Night: Firsthand Account

Between 1 and 2pm local time, young school children were stabbed in Parnell square by a single assailant.  We were less than a mile away at John Mulligan's pub at the time; learned about the stabbing on the news during the afternoon.

Not yet aware of events, we went by Parnell Square about 90 minutes later.  A few dozen men aged 20-40 were cursing at the police (gardai).  Presumably they were locals given that several were yelling in Gaelic.

About 3 blocks south of Parnell Square is the OConnell bridge, the one nearest Trinity College, where at 8pm two buses and a police car were set on fire.  We were on Fleet Street, which is about 2 blocks west.  We heard helicopters, which suggested trouble although many tourists and locals were still conducting business as usual.  As we walked down Fleet Street, in the direction of the bridge, a couple of white teen males pushed passed us wearing black face masks and wearing at least 2 empty backpacks each.

I thought about telling the teens that face masks are for criminals.  Undoubtedly they were criminals about to commence looting, which was occurring about that time at about five merchants near the bridge.  The criminals did not look like poor people and certainly were not emerging from a poor neighborhood.

The criminals likely numbered several dozen, which is a small percentage of the number of people present.  The bridge is in the heart of the tourist area and near Trinity College (itself a tourist attraction).  Of course, there are many pubs, some catering to tourists and others to locals.  A fraction of those who had drunk by 8pm were interested spectators.

We saw merchants calmly removing merchandise from their shelves, as if they were instructed to do so or were following a precautionary drill.  Trinity College was being evacuated, said a Trinity College staffer as we briskly walked past.  Students were flowing out of the campus.  I asked a few where they were evacuating to and they said “home, away from here.”  Several minutes later we would learn that our hotel lobby, about 3/4 mile west, was locked as a precaution.

A block west of Trinity College we saw many police.  They seemed organized, but quite nervous.

Note that the fires and looting are unprecedented in recent Dublin history yet the merchants and criminals seem prepared.  This fact pattern suggests to me that maybe law enforcement had intelligence about organized retail crime and in prior weeks had warned merchants about that capability.

The chaos has been attributed to “misinformation” (about the knife assailant's nationality) and “right-wing” political sentiments.  Regardless of any advance warning, this looks like organized crime is a big factor in addition to, or rather than, something political.

We saw a bus burning and smelled smoke throughout the area within a quarter mile of Trinity College.  This was a bit confusing to at least one of our kids, who was worried about “bombing,” because we had just returned from Northern Ireland where we learned about sectarian violence that had ended 20 years ago (Dublin is not part of Northern Ireland, which is thriving in terms of tourism, construction, and more).

The next morning I heard an elected official say that she was eager for the criminals to serve time in jail — not a response I would expect in Chicago.  (Although Chicago as part of USA does provide greater free speech rights—see below).  Reportedly the attacker was detained by unarmed civilians (update: one was a food delivery man who used his motorcycle helmet as a weapon).  Police are typically unarmed, too.

PS.  In Ireland and Northern Ireland it is illegal for “any person in a public place to use or engage in any threatening, abusive or insulting words or behaviour with the intent to provoke a breach of the peace or being reckless as to whether a breach of the peace may be occasioned.” Perhaps that explains why the pro-Palestine protest we saw in Derry was rated G?

"Justicia Social" Failed Venezuela's Indigenous and Mestizo Populations

“Capitalism is the road to hell, to the destruction of the world.  …it’s the freedom to oppress, to invade, to kill, to annihilate, and to exploit.”  Hugo Chavez, 2009.

“Help me become President and I’ll help you get the land back.”  Hugo Chavez, 1998.

 

The quotes summarize lessons increasingly being taught in U.S. grade schools, high schools, and colleges.  Particularly referenced in “social justice” lessons are indigenous peoples, whose representatives also backed Chavez.  The lessons should be considered with robust reasoning, and compared to data.

My purpose here is to consider the case of Venezuela, where Hugo Chavez was President beginning in 1999, as an alternative to “capitalism” for indigenous peoples and their descendants.  At the time of the above quotes, if not now, two-thirds of the population of Venezuela was mestizo, meaning that each had a mix of indigenous and European ancestry.  A related comparison can be found elsewhere: Cuba and Puerto Rico from 1950 to present.

While many teachers of U.S. students dream about trying something other than capitalism, it became a reality for Venezuelans.  Land was redistributed in the name of equity.  So were petroleum assets, also as promised.

 

Chavez shirts sold well on college campuses.  U.S. intellectuals on the left were “mesmerized” by Chavez.

 

One direct result of land reform was violence.  Food became scarce.  No longer satisfied with the assets of “rich people,” the government came for the small businesses too.  Over 7 million Venezuelans have left the country in the past ten years, when the population was about 30 million.

 

This alternative to capitalism, steeped in “justicia social,” did not go well for people with indigenous ancestry.  My comparison here is not with nirvana, but with the capitalism they had before and the capitalism they will get wherever the migrants end up.

 

“Anti-capitalist” and “de-colonial” teachers today rarely mention Venezuela, Cuba, or other real-world alternatives to capitalism.  With only a few exceptions, there is no attempt examine the mistakes of the past so that next time can be different.  Does the omission reveal laziness, or some interest in repeating such experiences?

 

[Image source: https://twitter.com/venanalysis/status/1447981828254617604]

No More Troubles

 

• The violence seemed like it would never end; bombings, shootings, and kidnappings became so commonplace that they were almost expected, a grim part of the daily news cycle.
• Even simple tasks, like going to the shop or sending the kids to school, were fraught with uncertainty.
• The politicians seemed unable or unwilling to bring about meaningful change, trapped in their own ideologies and the weight of history, if not poorly incentivized.

 

This was Northern Ireland during the three decades of the Troubles, itself preceded by 300 years of conflict between Ireland and Britain.  During the Troubles, about 1/500 (cumulative) residents of Northern Ireland were killed by shootings, bombings, civil unrest, and the like.

 

I have been reading Leon Uris’ Ireland: A Terrible Beauty published in 1978.  Although Uris is known for his fiction, this is a non-fiction travel book.  It has lots of bitterness and anger and would not be easy for a British reader to stomach.  It is difficult to understand from today’s perspective.

 

A peace agreement was reached that has lasted 25 years now, even through Brexit.  Today “No more troubles” is a slight exaggeration, but there has been a reduction of almost two orders of magnitude according to the Global Terrorism Database.

Something worked well in Northern Ireland.  U.S. President Clinton and U.S. Senator Mitchell get a lot of credit for brokering the 1998 Good Friday agreement.  Interestingly, nobody seems to remember exactly which part of Ireland Mitchell’s father was from; perhaps that ambiguity helped the negotiations.

Note: per GTD coding, Israel (country code 97) does not include the West Bank or Gaza.

Image Credit: Generated with AI (Bing Image Creator) ∙ October 8, 2023 at 6:48 AM

Private Property: That Spot

Spot is the dog featured in an eponymous short story by Jack London.  Spot’s owners desperately want to be rid of the dog.  They tried shooting him.  There is an attempt to kill Spot with an axe.  They tie up Spot and leave town.  Spot is set lose on a river ice floe.  Spot always finds his way back.

On several occasions, governments (and others) have tried to eliminate private property.  Yet, it finds its way back.  After the Russian Revolution, most of the urban housing stock was nationalized.  The government used its authority over those properties to punish political opponents as well as those who did not perform well in their state-appointed jobs.  But, as documented in this UChicago History dissertation, still tenants traded apartments, improved them, and passed them on to heirs.

 

The nationalization of agricultural land has yielded similar results.  During China's Great Leap Forward, villagers risked their lives to reallocate communal land into individual plots, a scheme starkly against the official Marxist ideology.  This informal system of property rights helped prevent starvation in the villages that adopted it.  Kate Xiao Zhou calls it How the Farmers Changed China.

 

Private agricultural plots emerged in the Soviet Union too, even with some government approval.  As Nellie Ohr explains in her Stanford dissertation “In 1930 Stalin had declared that [collective farm] members could own a few livestock and use a small private plot of land for personal consumption.  However, these rules were often unclear….”  Economist Gregory Grossman estimated that “the approximately 50 million such tiny ‘farms,’ whose area represent only about 3 percent of the national total of cultivated land, have a gross output which is more than one fourth the gross output of Soviet agriculture.”  [Paul Samuelson was infamously surprised that private agriculture in the USSR, cultivated by uneducated peasants without the benefit of scale economies, would be more productive than government farms.]  See also The Private Sector in Soviet Agriculture.

 

I recently visited some friends working at a major consulting firm in London.  Of course, the firm is a capitalist enterprise, but regarding its office space the management decided that the workspaces would be a common resource for all employees.  The management now has its own Spot moments, as employees use the same workspaces day after day, informally treating them as their own.

Economics Lessons from the Kibbutzim

In March 2023, I visited Ma'agan Michael Kibbutz and had a meeting with a former Israeli government official charged with managing the government bailout of about 200 kibbutzim.  Both offered empirical lessons about the challenges of communal living.

 

Background and Description

Ma'agan Michael was one of the few kibbutzim not bailed out.  It is one of the wealthier and more populous kibbutzim, with approximately 2000 residents. (Kibbutzim is the plural of kibbutz, which is described in more detail below but might be briefly described as a voluntary socialist community in Israel.)

 

In an earlier era, this kibbutz and the others followed a more egalitarian model.  For example, children were once raised communally in dormitories and would visit their biological parents for only three hours each day.  This alone was a big sacrifice for families for the sake of ideology, not to mention harmful actions that adults might occasionally take against children knowing that their parents were not around.

 

Now nuclear families live together in their own residence.  Every family receives an income that varies only according to the age and structure of their family.  As of 2023, that was about $3,500 per month.  Dining and laundry are in common. Rent, healthcare, formal education, and those two services are "free" -- not taken out of the $3,500.  A family can purchase and own household appliances for their residence.  Some get a washer and dryer because the community laundry takes too long.

 

Part of the kibbutz is something like a car rental agency.  They have a fleet of cars.  A central office holds the keys.  A member could pick up a car key and use a car for the day.  I believe that this was charged against their $3,500. Much of the accounting is done on computer with a fab system.

 

Some of the members are employed outside the kibbutz, but nonetheless must surrender all of their earnings to the community.  A partial exception would be earnings during periods of sabbatical.  One three-year sabbatical is permitted per lifetime.

 

Forty-five hours per week of work is required from all adults, with some categorical exceptions.  Mothers are required only 37.5 hours per week.  Retirees do not work at all; their Israeli-government pensions go to the community.

 

More than 90 percent of the land in Israel is government land, including the land allocated to Ma'agan Michael since at least the 1940s.  It is a prime seaside property, as you can see in this photo.  They once fished in the Mediterranean but now operate a couple of different kinds of fish farms on their property.  They also have a couple of factories for manufacturing.  The plastics factory they founded in 1963 has annual sales approaching $100 million, which helped them avoid the financial crises experienced by most other kibbutzim.

 

 

The common areas of the kibbutz can be compared to a college.  The dining room resembles the college cafeterias from my own college days, which are not as upscale as modern college dining facilities.  The grounds are less neatly kept than college campuses are (the beach photo is not typical in that regard).

 

Problems with communal living, even on a small scale

 

As Ran Abramitzky discusses in his book The Mystery of the Kibbutz, and labor economists have observed with employment contracts, work effort can be a problem when pay is not tied to performance.  The kibbutz, where members have often known each other since birth, tries to police this by watching each other.  They can expel a member from the kibbutz for poor performance, which is a serious punishment.

 

The kibbutz also looks hard at the work ethic of persons applying for membership.  However, membership in the kibbutz is voluntary, and individuals cannot be compelled to stay.  The most productive members have a significant financial incentive to leave.

 

Perhaps a more serious problem is occupational choice and human capital accumulation.  With uniform pay, members have little financial incentive to excel in their jobs, particularly in roles they find unfulfilling.  While the kibbutz covers the cost of formal education, much of human capital development in conventional labor markets occurs after formal schooling is completed.

 

Too much is democratized on the kibbutzim.  First, there is the challenge of reaching agreement, leading to significant and frustrating indecision.  Second, incentives are lacking to acquire and utilize information relevant to collective decision-making.  An individual could work hard to determine the right answer, but his vote hardly counts (the paradox of voting).

 

Financial decisions are a prime example.  Few kibbutz members have an incentive to learn about, say, present values.  About fifty years ago, numerous kibbutzim initiated projects that seemed viable if the time value of money were ignored, but were big losers from an NPV perspective.  The abundance of failures among those projects was a major reason that kibbutzim would later be bailed out.

 

Equality, including gender equality, was an important ideal of the early kibbutzim and, to a large extent, still today.  Nevertheless, despite the ideology, gender segregation by occupation seems just as strong as it is off kibbutz.  All but one of the laundry employees I saw were female.  All of the tractors and heavy machinery were operated by men.