Why do H&M and Gap disagree?

While European retailers like H&M (biggest Bangladesh garment buyer), Benetton, Marks & Spencer and Carrefour will act to together to elevate Bangladesh factory safety standards, US firms like Gap, Wal-Mart, J.C. Penney and Target are each acting alone. Why?

Sounds like retailers are facing the prisoners’ dilemma. 

Picture for a moment 2 (guilty) suspects. Questioned by the police, each one can confess or remain silent. When one confesses and the other does not, the talker gets a less severe sentence. If both are silent, then they are released; if both confess, then they get equal jail time.

And therein lies the dilemma. Do you base your decision on what you think the other individual will do? The problem is that each one’s fate depends on what the other prisoner does. And, neither knows the other’s strategy.

An example of economic game theory, the prisoners’ dilemma involves strategizing against a second party that has the power to affect the consequences of your decisions. Whether looking at disarmament negotiations, Democrats and Republicans, or H&M and Gap, the basic strategic patterns are similar. John Nash won a Nobel Prize for his research about Game Theory.

So yes, retailers have compelling ethical incentives to elevate safety standards in Bangladesh. However, because an ethical strategy coincides with profit considerations, each one’s decision is all about competition and the prisoners’ dilemma.

Sources and Resources: This Washington Post article provides good background on how retailers disagree about elevating factory safety and here is the  6 page agreement that most US firms are not signing. For more on the prisoners’ dilemma at econlife, you might enjoy posts on OPEC, Congress, Ivy League schools and World Cup soccer. Please note that this post includes some excerpts from previous posts on the prisoners’ dilemma.

• Once there was a computer therapist named ELIZA. While her developer thought she was just a machine, the people who talked to her liked her patience and enjoyed her empathy.
• In the operating room, da Vinci is a robotic surgeon whose sense of touch engineers have begun to develop.
• Factories have robots that move, slice, sharpen and precisely place objects.
• And what about Roomba, the vacuuming robot?

A human surgeon uses da Vinci.

Researchers predict that by 2025 computers will have caught up with the processing power of the human brain. Calculated in flops–floating-point operations per second–the processing power of the human brain is 10 petaflops. (A peta is the next level after giga and tera.) If we agree with Moore’s Law, then every 18 months, computer capacity doubles. So, going back to the first computers in 1940, with processing capacity doubling every 1 1/2 years, it will take until 2025 for computers to have the 10 petaflop capacity of the human brain.

But…what then?? What if computers can equal the human brain’s capacity (and that is a BIG if)?

With computers able to do human jobs more productively, economist Paul Krugman says we wind up with a “capital bias” that is controlled by an affluent elite. Leaving many of us behind, the income gap will increase and inequality will accelerate.

Disagreeing, a second group says “capital bias” creates jobs. Technological leadership brings production back to the US from the developing countries. Yes, it requires structural economic change but people have always worried about the deleterious impact of machines. In 18th century England, the Luddites worried that mechanized looms would create joblessness by replacing people. Instead, we got railroads and steel factories and more production, more jobs, more wealth and a rising living standard. In 1900 a typical worker put in 2300 hours a year. Now that number is down to 1800.

Deciding whether robotics will be good or bad for jobs takes us to Joseph Schumpeter and creative destruction. The transition to robotics has begun. Replacing old technology, it is another example of the disruptive impact of innovation.

Sources and resources: Radiolab tells us more about ELIZA, here, and Slate discusses Da Vince here and Haptics (the touch part) here. However, the best article I read about the economics of artificial intelligence was in Mother Jones. Meanwhile the Krugman postion is here and the oppostion is here. Finally, for the overview, here is the Schumpeter, creative destruction explanation, a TED talk on “Robots Will Steal Your Job, But That’s Okay,” a 60 Minutes segment, and a NY Times discussion.

If I pay $100 for a 50 channel cable package, then choosing the 25 channels I really watch should cost me $25. Yes?

I suspect Senator John McCain agrees. But it might not work out that way if his legislative unbundling proposal is passed by Congress.

Currently, consumers buy cable packages that provide access to groups of programs. A typical bundle, this Comcast offer includes “over 160 channels…40 commercial free music channels …17,000 on demand choices” for “as low as” $49.99 for 6 months. In 2005, the average household watched only 15 of the 96 channels in its subscription and paid close to $600 annually.

So, would à la carte be better?

Demand:

According to academic studies, no one is sure if unbundling will save us money. One Temple University researcher unbundled cable packages into “7 mini-tiers by channel genre” and concluded that we would save 35 cents per household per month. On the other hand, one of 2 FCC studies concluded that unbundling would be beneficial but the other did not.

Trying to assess the impact on the consumer, economists have created alternative package scenarios. They have cited consumer surplus, transaction costs, “option value” and monopoly power. They list the other bundles we buy like season tickets and newspapers (a bundle of articles). They cite huge cable price increases and lack of choice.

Supply:

On the supply side, analysts refer to the high fixed costs that relate to the expense of wiring and establishing a network and then to the low marginal cost of expanding and implementing it. They remind us of programming costs and licensing fees. Unbundling could upset the revenue stream that facilitates the current industry structure. It could mean the demise of less popular channels. Or, it could encourage more productivity and new industry approaches.

So, with all of these demand and supply variables and more, how to decide whether unbundling makes sense? Maybe we don’t have to decide. One journalist suggests waiting for internet competition to upset the current market model.

Sources and Resources: While this WSJ article summarized the unbundling issues and alternatives most clearly, this academic paper has 51 pages of everything you ever wanted to know about cable TV and bundling. In addition, for lots more reading and the source of more of my facts, I suggest this New Yorker column, this Slate article, this Atlantic discussion and here is the McCain proposal. After reading it all, I can only say that the countless variables are all in flux because of technological innovation.

From “Unbundling Cable Television:An Empirical Investigation” by Dmitri Byzalov

Does your barista have a Ph.D?

When people have too much education for their job, the reason might be “cascading.” Explained by 3 researchers in a recent paper, the cascading story starts with the tech boom. During the 1990s, as tech firms popped up everywhere, so too did the demand for highly educated human capital.

Fast forward to 2000 when the tech bubble bursts and these highly educated individuals have to job hunt. Add the flow of new college grads and you have too many people chasing too few jobs that require their cognitive skills. The result? Highly educated individuals are doing jobs that require less knowledge. On the occupation ladder, they are cascading downward.

Although most of the cascading research is bleak, the good news is that more people want to become teachers. After having lost many of its gifted and talented to other occupations like the law and medicine, the teaching profession is again more attractive. With a 17% acceptance rate, Teach for America has become as selective as competitive colleges.

Our bottom line? Cascading might represent a reason that the unemployment rate has dropped so slowly in the US. Having hit a high of 10% during October, 2009, the unemployment rate was still 7.5% during April. The authors of  the cascading study believe that less demand for highly skilled tech workers is one reason. They agree that manufacturing is declining and we have had structural and cyclical unemployment. Also though, they suggest that cascading is creating unemployment and underemployment when it “crowds out” lesser educated workers.

Sources and Resources: For more discussion on cascading, this Freakonomics podcast was interesting while the paper on which it is based, “The Great Reversal in the Demand for Skill and Cognitive Tasks” provides all of the details and the math.

Thinking about our mixed economy in which government and the market intermingle, I have always gravitated to this quote from former Secretary of the Treasury, Lawrence Summers:

• “In the history of the world, nobody has ever washed a rented car.”

And now, doing a bit of research on the colonial United States, I wanted to share the same ideas from 18th century economist Arthur Young:

• “The magic of property turns sand into gold.”
• “Give a man the secure possession of a bleak rock, and he will turn it into a garden; give him a nine years’ lease of a garden, and he will convert it into a desert.”

Finally though, maybe this comment from a blogger at The Economist can take us a step further. His example is a case study on military airplanes and how maintenance workers who had long term oversight of the same equipment felt “ownership” more strongly than specialists who were responsible for the engine or the wing of thousands of aircraft. His point is that it all depends on how the job is structured.

My bottom line? In our mixed economy, can we retain the incentives of “ownership?’

Sources and Resources: I recommend reading the entire blog from The Economist for a full discussion of the origins and limits of the Summers quote. And, for slightly more about Arthur Young, here is a brief bio.