Michael Kimmelman at the NY Times.  Luke Froeb beat me to the punch of this one and has already got a post up, but this is too good not to share.  The article is on book sales and book culture in Germany, the latter of which is:

 sustained by an age-old practice requiring all bookstores, including German online booksellers, to sell books at fixed prices. Save for old, used or damaged books, discounting in Germany is illegal. All books must cost the same whether they’re sold over the Internet or at Steinmetz, a shop in Offenbach that opened its doors in Goethe’s day, or at a Hugendubel or a Thalia, the two big  chains.

Ok, fair enough.  The Germans don’t have any sort of monopoly on anticompetitive legislation.  We’ve got a few great examples here in the States.  And apparently this debate over the German rule is sparked by the Swiss allowing discounting of German books.  But you don’t have to be an economist to correctly anticipate the effects of a “no discount” rule on prices, right?  Or maybe you do?  Here’s the award winning line from Kimmelman:

What results has helped small, quality publishers like Berenberg. But it has also — American consumers should take note — caused book prices to drop. Last year, on average, book prices fell 0.5 percent.

I’ll bet you it caused no such thing, Mr. Kimmelman…

In case you haven’t already, I recommend taking a gander at today’s New York Time Book Review.  In it, there is a review of Naomi Klein’s new book, The Shock Doctrine, by Nobel-winning economist, Joe Stiglitz.  It’s an abomination (I’m sure the book is an abomination, too, but I’m referring to the book review). 

If you know anything about Klein you know that she is an ideological zealot, impervious to facts and reason (although I’m sure some would say the same of me.  Except in her case, it’s actually true).  I’m sure she’s well-meaning and all that, but her book No Logo (yes, I have read it), and now this book, as well (judging only by the reviews–I won’t make the mistake of reading more than one Naomi Klein book), reflect an ignorance of economics, markets and politics that can be born only of utter disdain.  I won’t belabor the point. 

But what’s truly embarrassing is that an economist of Joe Stiglitz’s stature would write an utterly fawning review of her book!  I didn’t know that Stiglitz had slipped as far as Paul Krugman into the land of the “formerly-great-now-blinded-by ideology-to-all-reason” but I can only conclude now that he has.  There is not a single word of criticism in this review.  Not one.  At one point he does note that “she’s not an economist but a journalist,” and he similarly says that she “is not an academic and cannot be judged as one.”  But one gets the powerful sense that these are actually compliments!  Rather than follow these statements by noting one or two errors of, say, oversimplification, omission or confusion (of the sort inexcusable, I guess, by an academic or an economist), he follows them with praise for her tenacity and perspicacity as a journalist and he excuses her oversimplification (apparently there is some in the book (shocking!), but Stiglitz can’t be bothered to hold Klein’s shortcomings up to the light) by claiming that her academic targets–Milton Friedman and his ilk–were guilty of oversimplification, too.  Nya, nya!  I’m rubber and you’re glue, whatever bad you say bounces off me and sticks to . . . economists I disagree with!  It’s very illuminating (but not at all in the way one might want to be illuminated by a book review.  But then I guess most reviews are more about the reviewer than the subject, right?).

And, of course, there is the obligatory, barely disguised self-promotion (remember that part about reviews really being about the reviewer).  Just read this paragraph:

Klein is not an academic and cannot be judged as one. There are many places in her book where she oversimplifies. But Friedman and the other shock therapists were also guilty of oversimplification, basing their belief in the perfection of market economies on models that assumed perfect information, perfect competition, perfect risk markets. Indeed, the case against these policies is even stronger than the one Klein makes. They were never based on solid empirical and theoretical foundations, and even as many of these policies were being pushed, academic economists were explaining the limitations of markets — for instance, whenever information is imperfect, which is to say always.

Now which academic economists were doing all this explaining about imperfect information, Joe?  I can’t recall.  Anyway, even the claims he generously makes here on Naomi’s behalf are themselves untenable oversimplifications.  Please, do show me where Friedman believes that ideas can be implemented in a frictionless world?  The claim that Friedman’s models employed simplifying assumptions is true.  But, then, that’s the point of models, even the ones Stiglitz uses.  They are called “models” not “complete, messy representations of reality.”  The implication that Friedman’s assumptions, because they were simplifications, led to results with no relevance is a claim only a journalist or a non-academic would make.   I commend one of Friedman’s most important works–The Methodology of Positive Economics–to Stiglitz’s attention.  He shouldn’t find it too troubling to read–it doesn’t even mention free markets or Ronald Reagan.  Here’s just one important bit:

A theory or its “assumptions” cannot possibly be thoroughly “realistic” in the immediate descriptive sense so often assigned to this term. A completely “realistic” theory of the wheat market would have to include not only the conditions directly underlying the supply and demand for wheat but also the kind of coins or credit instruments used to make exchanges; the personal characteristics of wheat-traders such as the colour of each trader’s hair and eyes, his antecedents and education, the number of members of his family, their characteristics, antecedents, and education, etc.; the kind of soil on which the wheat was grown, its physical and chemical characteristics, the weather prevailing during the growing season; the personal characteristics of the farmers growing the wheat and of the consumers who will ultimately use it; and so on indefinitely. Any attempt to move very far in achieving this kind of “realism” is certain to render a theory utterly useless.

Most important, however, what Friedman knew and what Stiglitz and Klein utterly ignore is that world is a messy place, and implementation of even the best academic ideas must be undertaken with appropriate expectations about the limitations of the institutions doing the implementing.  The only oversimplification here is the one (propounded by Klein, who is an ardent activist, and Stiglitz, who has no excuse) that says that because markets don’t always work perfectly, government solutions are better.  If you read Stiglitz’s review, you’ll see that all of Klein’s examples have one thing in common:  The only alternatives to the actions she abhors are ones entailing more government “solutions” to the endemic problems of the market. 

But the best part is that the refutation of her (and Joe’s) philosophy jumps off every page of her books.  For the common element in each of the actions she decries (Bush taking advantage of misery in Iraq to impose capitalism; the Sri Lankan government displacing poor fishermen in the wake of the 2004 tsunami, etc.) is that the evil being perpetrated, even by her own standards, is being perpetrated by the government!  I know enough about Klein from her other book to know that the irony of this is completely lost on her.  While advocating tirelessly for various forms of government solutions to the evils of capitalism run amok, it is completely lost on her that all of her alleged examples of such run-amokery are perpetrated by . . . governments.  I’m sure she and Joe believe that if only the right governments were in charge, then none of this would happen and the world would be a shiny, happy place.  The naiveté in that is thick.  Again, excusable for an anti-globalization hack like Klein; a bit jarring for a Nobel Prize winner like Stiglitz.

But enough ranting.  There are more important things to do.  I’ll leave you with just this:

I’ve included a longer excerpt from Friedman below the fold.  It contains not only the above bit about the usefulness of simplifying assumptions, but also a nice refutation of the specific claims Stiglitz makes about the irrelevance of models assuming perfect competition.  Frankly this may be the most embarrassing part:  That Stiglitz would make the claims he does in full knowledge that the very person he tries to tar with irrelevance had long ago penned his own clarification (and refutation) of precisely this point.  As I said, it’s an abomination.

(more…)

One of the more interesting parts of Senator Herbert Kohl’s recent Antitrust interview, in which he also discussed airline mergers, concerned antitrust’s treatment of media consolidation. Here’s what the Senator had to say:

It’s such a very important issue, media consolidation, because it has the potential to reduce if not eliminate the opportunities people have to read and think about differing opinions and independent opinions. If this were to happen, it would have a devastating impact on our society and our democracy. …

[W]e in the government must look to the public interest. We need to be very much on guard to see to it that media consolidation doesn’t happen to the extent that we have a society where the Fourth Estate has lost its spontaneity, its vigor, and its ability to encourage debate and to get people thinking. It’s so important to our democracy.

Multiplicity of independent ownership and vigorous competition is what is essential. If we have just a few companies that control vast portions of the media, I cannot imagine how that’s in the interest of anyone, except of course media owners who would profit greatly.

In sum, I believe it is very important that we in government — including here in Congress and in the antitrust enforcement agencies too — stand in the way of excessive media consolidation. And I understand that this may make some people in the private sector upset because they think maybe you’re going too far. But if you give me the choice between going too far and not going far enough, in the effort to keep the media as independent and competitive as we can, I’d rather go too far than not go far enough.

Senator Kohl’s view, then, is that antitrust should pose a significant barrier to media consolidation. I think he’s wrong.

From the standpoint of consumer welfare — antitrust’s exclusive concern — consolidations of competitors have two primary effects. They can, as Sen. Kohl would emphasize, lead to reduced product quality and diversity and higher prices. When you don’t have to compete as hard for customers because you have fewer competitors, you’re likely to slack a bit and/or charge higher prices to consumers, who have fewer alternative suppliers. Reduced competition permits you to charge prices that exceed your costs, for if competition were vigorous, you’d keep working to improve your product (and thereby win business from your competitors) to the point at which your costs equalled the price you received. Because social welfare is maximized when resources are priced very near their cost, reductions in competition can lead to allocative inefficiency — i.e., wealth losses occasioned by resources being diverted from their optimal uses.

With respect to media consolidation, the concern is that media outlets facing reduced competition will work less hard to provide in-depth news coverage and viewpoint variety. Because reduced competition may permit them to charge the same prices for their shoddier products, we’ll see lower-value leisure substituted for higher-value reporting depth and balance, which would be socially wasteful (allocatively inefficient).

Allocative inefficiency, though, is only part of the consolidation story. Competitor combinations can also result in cost savings, which ultimately benefit consumers. Economies of scale exist when the per-unit costs of production decrease as the total level of production increases. For example, by building enormous factories and utilizing assembly lines, automobile manufacturers can substantially reduce the per-unit costs of building a car. Below a certain scale of production, though, these cost-saving production processes would not be economical. For example, if one needed to build ten cars, it wouldn’t make sense to invest in a costly factory and hire an assembly line of workers who could each focus on one small part of the manufacturing process. A certain scale, then, is needed to justify investment in productive technologies that will, if employed at a certain level, minimize the per-unit costs of production. By consolidating, competitors can reach the scale that permits them to minimize their per-unit production costs. In other words, consolidation can create productive efficiencies.

So, with respect to media consolidation, which effect is likely to dominate: allocative inefficiency occasioned by enhanced market power (e.g., reduced product quality, viewpoint diversity, etc.) or productive efficiency occasioned by the attainment of economies of scale (e.g., reduced costs resulting from the elimination of redundancies, etc.)?

I suspect the latter. To see why, consider why media consolidation is unlikely to create significant allocative inefficiency and why the productive efficiencies it creates are likely to be substantial.

Allocative inefficiency requires an exercise of market power. The producer that controls the market cuts back on production either quantitatively (which will cause price to rise as consumers compete for fewer units) or qualitatively (which will cause the producer’s costs to fall). This reduction in production leads to prices in excess of costs, thereby enhancing the producer’s profits but causing a social welfare loss. But a producer cannot profitably reduce his production — either quantitatively or qualitatively — if consumers can easily turn to alternative suppliers. The upshot is that market power cannot be exercised if significant competitive alternatives either exist or could easily come onto the scene in response to a price enhancement or quality reduction. In other words, if barriers to entry are low, a producer cannot profitably increase price or reduce quality.

So how does this apply to media mergers? The happy fact nowadays is that barriers to entry in the market for news and analysis are virtually non-existent. As evidenced by the fact that you are reading this weblog by six nobodies (OK…one nobody and five prominent academics), practically anybody who feels his or her viewpoint is being marginalized can reach out and share it with the world — and consumers who feel that their perspectives are marginalized by mainstream media can easily find kindred spirits. Think the media are bunch of right-wing fascists? Go visit Daily Kos. Think they’re a bunch of pinko commies? Run to The Corner. Are you out-n-proud with both your homosexuality and your membership in the vast right-wing conspiracy? Then Gay Patriot…the Internet Home for the American Gay Conservative has got you covered. The fact is, there’s hardly a perspective out there from which you can’t find news and analysis, and if you can think of a point of view that’s currently unrepresented, come back soon. In the Internet age, nature abhores a perspective vacuum. Surely, then, Sen. Kohl is off-the-mark when he says that “media consolidation … has the potential to reduce if not eliminate the opportunities people have to read and think about differing opinions and independent opinions.”

How about the productive efficiencies occasioned by media consolidation? They’re probably pretty substantial. The most essential input for any media organization is information, a commodity that is easily transferable and can be used without being depleted. This means that a media organization with multiple outlets needs to produce its most essential input only once. To gather the basic facts about what occurred at the Senate committee hearing on matter x, both the single-newspaper media outfit and the thousand-outlet conglomerate need to send the same number of reporters: one. Indeed, it was a desire to avoid reporter redundancy that led to the creation of the Associated Press, a joint venture that allows newspapers to economize on the costs of information collection by sharing news stories with each other. It is almost certainly the case, then, that media consolidations create substantial productive efficiencies.

None of this implies that there should be no antitrust scrutiny of media mergers. I’m just predicting that most media mergers would pass muster under a fairly applied efficiency analysis. More importantly, I’m disputing Sen. Kohl’s hyperbolic claims that media consolidation “has the potential to reduce if not eliminate the opportunities people have to read and think about differing opinions” and that “[m]ultiplicity of independent ownership” is “essential.”

In today’s NYT, columnist John Tierney sends CNN’s Lou Dobbs to North Korea to experience first-hand the sort of self-sufficient (isolationist?) utopia Dobbs and his jingoist fans long for. Perhaps a little unfair, but pretty funny. Read it here (Times Select subscription required).

It has been a fine month for George Mason University. The Final Four appearance has attracted a good deal of media attention and general buzz. This week, I received a record number of phone calls from friends about Mason (”No, I dont have any extra Final Four tickets.”). As great as this news is for the university community as a whole, GMU Law had an eventful March in its own right. For what it is worth, we moved up a few (4) spots in the US News Rankings to 37 (Brian Leiter thinks we are still underrated). But I want to write about what I found to be a very interesting series of events following reports that a GMU Law faculty member would be nominated to the Federal Circuit Court of Appeals.

A week ago, the San Francisco Daily Journal reported that my friend, colleague, and prolific patent scholar Kimberly Moore would receive the nomination to the Federal Circuit Court of Appeals. The headline of the article, available here (HT: How Appealing), “Judge Whyte Passed Over for Circuit,” did not convey much enthusiasm for Moore’s rumored nomination (the article does contain favorable reactions from IP scholar Mark Lemley and practitioner James Pooley). The WSJ Law Blog also picked up the DJ story, which was essentially that while “Moore seems well-credentialed,” “the news comes as a disappointment to intellectual property lawyers.”

The blogosphere reaction to the initially lukewarm reports has been enthusiastic, approving, and very interesting to watch. Since the initial rumor broke, here is a survey of reactions from law bloggers:

Christine Hurt, of The Glom:

I only met Prof. Moore for the first time this Fall, so I’m glad I’ll be able to say “I knew her when.” Lattman, who does not seem to have had the pleasure, seems conservative in extolling her virtues, so we will do so here at the Glom. Congratulations on your well-deserved nomination!

Dennis Crouch, of Patently-O:

I commented yesterday to a reporter my belief that Professor Moore is an obvious choice and would make an excellent judge.

Crouch also notes that John Duffy, whose name had also been mentioned for the Federal Circuit position described Moore as “outstanding nominee,â€? who “has spent a large portion of her career carefully studying the judicial process of patent litigation, and she has become a leading authority in the field. She would bring extraordinary knowledge and insight to the bench. Her nomination would, I think, command broad support from the academy and the practicing bar.â€? I do not know where the Duffy comment appears.

Finally, Mike Madison of Madisonian.net notes in response to the Law Blog story:

It doesn’t report that a lot of IP faculty are (or should be) pleased. Nothing against Judge Whyte, who is an experienced federal and state court judge. But Professor Moore is an especially accomplished, thoughtful, and constructive critic of the patent system. Congrats!

Perhaps this is another example of what Larry Ribstein has described as the “decentralized knowledge” function of blogging, where specialized expert knowledge can quickly be disseminated to the public at low cost in order to fill gaps in the information disseminated by mainstream media sources?

I might as well finish off with a Final Four note. As expected, the MSM’s reaction to Mason’s other big news has also been lukewarm. I have only been able to find one expert predicting a Mason victory over Florida in tomorrow night’s action (though I am sure there are others): Andy Glockner, an editor for ESPN.com, is picking the Patriots over the Gators. I wonder what Billy Packer thinks? Of course, Vegas has also spoken, and Florida is favored by 6 at the moment. Lucky for these Patriots, the “W’s” only get handed out after the game is played.

Last week I made a few observations and asked a few questions about higher education in the wake of the Summers fiasco (which I dubbed l’Affair Étés, but apparently no one thought that was nearly as clever as I did).

Over at Prawfsblawg, guest blogger Jonathan Zittrain takes NYT columnist John Tierney (for my money, the only reason to buy the Times other than the weather map and the movie listings) to task for his assertion that universities would do well to adopt a for-profit corporate model of organization. Bill Henderson piles on. Zittrain’s argument is, essentially, that the profit motive would subvert “proper” higher education.

Zittrain’s key conceit is to turn the tables on Tierney and assert that newspapers would, in fact, be better if they adopted a less market-responsive stance and emulated the universities Tierney is so quick to criticize. He says,

[w]e might actually know more about our world if journalists had tenure and were free to pursue stories wherever they led, without fear of financial repercussion.

The funny thing is, newspapers operate in an extremely competitive market. If Zittrain were right, they would already be doing this (or failing). Oh — and it turns out, according to Bill Henderson, they are! He quotes the Times’ Howell Raines:

Hiring mistakes are rarely shown the door at the Times, and the paper can be stuck with them for years. After a probationary period of fourteen weeks would-be staff members get tenure for life.

Now, to what effect? Has this behavior, along with myriad others, served newspapers like the Times well? I doubt anyone would actually make that claim. Tierney’s point is that tenure helps to insulate university faculties from market forces, to the detriment of students’ education. He asserts (perhaps incorrectly) that newspapers tend to take a different tack. Countering in response that newspapers would be better if they, too, were more insulated from market forces hardly scores any points.

But Zittrain goes on:

The idea behind a profession — law, medicine, journalism — is that it exists as something other than simply a raw market-responding entity. There are ideals associated with it, and members of the profession are to see those ideals as influencing their behavior independently of market forces (while also having good arguments about what those ideals should be).

This strikes me as dangerously naive. It means one of two things:

1. We can and should rely on the idealism and self-restraint of professionals untainted by market incentives.
2. Someone or something other than the market can and should police the professions (hmmmmm . . . who could it be . . .? Why, the government, of course!)

Forget #2 for now (it doesn’t factor in Zittrain’s analysis). Does anyone really believe #1? Leave aside the reality (which Zittrain does seem to acknowledge) that even relatively-insulated professionals are still subject to important market forces — does anyone really think we’d be better off with a greater degree of ideology and self-appointed moral arbiters to guide the professions?

If you do, please run out and buy this book: Armen Alchian, Economic Forces at Work (Liberty Fund, 1977). Turn to page 151 and read Alchian & Kessel’s 1962 article, Competition, Monopoly and the Pursuit of Money. Alchian and Kessel point out that, because property rights are attenuated in monopolies (and other “nonowned” institutions like nonprofits), more resources in these non-competitive environments will be used to satisfy “personal interests” rather than profits. Perhaps this will be a personal interest in fulfilling the noble ideals of the profession. Or, as Alchian and Kessel emphasize, it may be a personal interest in discrimination, pretty secretaries and easy work environments.

I have never understood why the world is so quick to believe the insiders in the academy (or journalism, for that matter) when we claim to be motivated by the “public good.” The same mechanism that takes the profit motive out of the equation also insulates insiders from the repercussions of extreme self-regard and makes these claims dubious. Precisely where market constraints are at their lowest we defer most fully to the insiders’ relatively un-monitored, unaccountable motives. That seems perverse.

Higher education and print media (oh — and health care. Can’t forget health care) may be two of the last bastions for defenders of the odious notion that the public good and markets are incompatible. But as Larry Ribstein has noted:

The Times is . . . selling a product. I also think that, in doing this, it is performing a public service, like every other profit-seeking business.

In contrast, Zittrain seems to belive that profit-making and good journalism are incompatible. He fears that

[i]f newspapers were to grant tenure to journalists, they might be less responsive to market demands and therefore less profitable.

In other words, the idiots out there who, you know, buy newspapers, think “good journalism” entails something quite different than what Jonathan Zittrain thinks it entails, and a newspaper that catered to his (inherently superior) vision would inevitably go belly up. Actually, he’s probably right. I gather that almost no one buys the NYT anymore. But he is wrong to imply that “selling a product” effectively is inconsistent with “public service.” The two are actually intimately entwined, and it seems quite elitist to me to suggest otherwise here.

I agree with Zittrain on one point: There is a great benefit (to those who can afford it) to getting a liberal arts education.

[T]here’s a world out there beyond the raw vocational skills needed for one’s next phase of life, and . . . there is a benefit — an incredible privilege — to have a number of years to view the world according to one’s intellectual curiosity, seeking and building truth for truth’s sake, and learning to know it when one sees it.

But to me, this suggests that universities that look a lot like today’s universities would continue to exist and thrive in a more competitive, more accountable environment. The market does not lead to the lowest common denominator as Zittrain implies; it leads to a diversity of choice, responsive to the range of consumer demand. It is rather the current model that is static — and troubling.

On several occasions, I have posted entries criticizing editorials from the New York Times. To be fair, I suppose I should praise the Times when it gets things right — as it does with today’s editorial on the outsourcing of computing work. My only quibble is that the editorial fails to mention the fact that this supposedly terrible outsourcing benefits consumers by lowering prices. Kudos to the Times, though, for going after the doomsayers.

One of my students brought to my attention this pearl of wisdom from (what appears to be this week’s forthcoming) The Ethicist column in the NYT:

I am a 13-year-old boy. My school has a monthly pizza sale. Parents buy pies from a pizzeria and sell them to us for $1 a slice. I bought a whole pie at the pizzeria and offered slices for $2 to kids at the end of the long line. A school counselor stopped me. She said that I was unethical and was “taking advantage of people.” I thought I was providing a service to people based on the principle that “time is money.” Who is right? Ben Gammage, San Diego

Time may be money, but how much, really, for an eighth grader, who is not paid to attend school? And do we really want all our interactions based on the variable-pricing airline-seat model? Were pizza a necessity of life (as many teenagers regard it) and in short supply, you would have been been guilty of profiteering, as your counselor charged. But there was plenty of pizza, so you didn’t exploit anyone. And pizza does remain a luxury, so nobody was compelled to buy your pricier slices. (Were they? I assume there was no gunplay.) Thus your actions were not unethical, but they were poor social policy — if that’s not too fancy a way to describe undermining a pizza party.

Your counselor’s concern was valid, if poorly expressed. The dollar-a-slice deal made possible a schoolwide pizza party, affordable fun for everyone. Judging by the long line, it’s something people enjoy.

You turned it into a two-tiered system — kids with money don’t wait; kids without money do — shifting it from a we’re-all-in-it-together event to something less communitarian (if more profitable).

The errors here need no pointing out in this forum, I presume. I am glad that he stopped short of condemning the kid outright (unlike the kid’s school counselor), but I’m surprised, given the extent of the truly fundamental flaws in his analysis. Maybe this will turn out to be just a rough draft and the published version will look different. But I doubt it.

This isn’t Randy Cohen’s (he’s the Ethicist) first outing on TOTM. It surely won’t be his last.