economics


From MSNBC:

Americans are hunkering down and saving more. For a recession-battered economy, it couldn’t be happening at a worse time.

Economists call it the “paradox of thrift.” What’s good for individuals — spending less, saving more — is bad for the economy when everyone does it.

Some experts say consumers have been so shaken by how fast their wealth has shrunk, so burned by credit card debt, that they might not resume their robust spending for years, if ever.

“People are not saving; they are building financial bomb shelters,” said Mark Stevens, who runs a management consulting firm, MSCO, in Rye Brook, N.Y.

This article pertains directly to my master’s thesis: first, choices made by the individual that benefit the individual are not the same as those that benefit the economy and vice versa. Secondly, don’t frame the question as saving — frame the question as ‘not buying shit they don’t need and don’t have the money for.’ Americans had a negative savings rate on average for several years. We paid for stuff with credit card debt and leveraging against our houses, and I would receive six calls to refinance my mortgage per day. Every day. The article quotes Cornell’s Robert Frank, who mentions that this frenzy of consumption was unsustainable. Building a fortune on rampant consumer spending, in order to spend more yourself? Just another illusionary bubble that got popped.  And illusions die hard.

Now we’re saving hard to make up for it, and because the media tells us we should be worried (just like it told us to spend spend spend — and the ads are still there) — it reinforces the perception that we are in trouble, and that everyone else is saving, and that conformity effect is a subtle nudge towards not spending — even though the gist of the information here is that you should be spending for the good of our consumer society. Shades of 2001 with buying as a civic duty.

I don’t think that is going to work this time. This Prisoner’s Dilemma is brutal, and humans are conditioned to react twice as strongly to the idea of loss as to the idea of gain.

Matthew Conrad, a financial manager at Complete Wealth Management in Orange County, Calif., says he knows of people who drive a BMW or Mercedes and eat macaroni and cheese for dinner several nights a week. That suggests some are making an awkward shift from free-spending habits and are reluctant to give them up.

Grant McCracken theorized a remarkable idea about consumption, which he called the Diderot effect. The story goes that Diderot had a cozy little study, somewhat ramshackle but pleasing, and then he received a gift of a marvelous dressing gown from a dear friend. This dressing gown, of red velvet, made the rest of his study look shabby in comparison, so Diderot began to replace his study piece by piece until he had a fantastic room that matched the gown. And then he wrote about it.

The Diderot unity is a masterpiece of psychological connection: it asks that objects which are invested with similar qualities and meanings become grouped together and associated with each other, even if there is no actual linkage between them. For example, the BMW has more in common with the Rolex and the Bang & Olufsen coffeemaker than with Kraft Dinner; it implies that someone with a BMW should not be having to eat mac and cheese.

The Diderot effect is when the consumer decides that they need to obey the need for psychological consistency and commitment: when they choose to replace their existing goods with ones that match their lifestyle — or alternatively, reject new goods because they do not fit the existing Diderot unity. If you go down to the local farmer’s market and look for the people buying organic produce, you are going to find more Priuses than Hummers.

Diderot Unity Exhibit A: If I had a million dollars

But we would eat Kraft Dinner. Of course we would, we’d just eat more. And buy really expensive ketchups with it. That’s right, all the fanciest Dijon ketchups! Mmm. Mmm-hmm.

Diderot Unity Exhibit B: Stuff White People Like.

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Vance Packard (no relation to Packard Motor Co.) wrote a book called Hidden Persuaders in 1957. It was deeply critical of market research and advertising and marketing, and topped the NY Times Best Sellers list. Reading his book (and the sequels The Status Seekers and  The Waste Makers)  is heartbreaking, because what it shows is that we’ve come so far, and yet we haven’t learned a thing. Women in 1956 bought 80% of consumer goods for the household, but marketers still aim ads towards men. A bigger car makes people feel safer, and people are ashamed to drive a car beyond three years old. Marketing put Eisenhower in power as the big daddy of the US, and fought the brand war between Republicans and Democrats with Nixon and Agnew. And advertisers aim their marketing to children on a reprehensible scale.

Packard identifies the usage of psychology in advertising, and catalogues the ways in which advertising markets things people do not need by manipulating desire. There are three things of particular note.

1.People don’t say they want what they really want. You can’t trust people to say ‘I want a smaller, more fuel-efficient car’ and then actually buy the damn thing.

2. Americans are peculiar because they automatically assume that bigger = better. They are also unable to stop working, and even during leisure time they must feel as if they are doing something. Hobbies and tours are big business. (This is particularly true, looking at the rise of virtual business in There, Second Life, WoW etc. The biggest dream of many people in virtual worlds is making a living from playing a game.)

3. People are irrational. Ridiculously, stupidly, easily manipulated irrational. But irrationality, Packard concludes, is luxury, and it makes people feel better that they can afford to  make irrational choices. He’s just suspicious of the amount of manipulation that goes on to influence people to make these choices.

Critiques of Packard basically state that it’s not that easy to manipulate people, and sometimes advertising doesn’t work, and our understanding of psychological buying is not perfect.

Sometimes advertising doesn’t work for particular products. But the world we live in is mad for buying and planned obsolescence, its economy is dependent on buying more and more, and that’s the world advertising and marketing helped make. Some dude got trampled to death at a Walmart during the Christmas rush by a mob that just wanted to buy a $388 flatscreen TV. This is a metaphor for all of us: we’re the security temp and the mob and the store and the Black Friday sale.

Why Not Start the Weekend on Wednesday?

We are twice as productive as our parents. We don’t have to be twice as rich, twice as consumptive, and twice as dangerous. Why not work half as much and stay the same?

Economists worry that slowing consumption harms the economy. It doesn’t have to.

If this were a gradual process, mass unemployment would not result. People would simply earn less, spend less, wear a few more secondhand clothes, and spend more time reading or going for walks.

And the alternative is trapping ourselves in a mad struggle to run a hedonic treadmill, buying more and more because we always want more than we can sate ourselves with, always comparing ourselves to our neighbors and always coming up short.

According to economists Mark Aguiar and Erik Hurst, leisure time for women has increased by at least four hours a week since 1965. Men have done even better. That may well understate the leisure gains. A hundred years ago, many people would start working at the age of 10 or 12 and work until they died. Now it is common to spend fewer than half our years working; the rest of the time we spend studying, traveling, and in retirement.

The “work less, spend less” movement is winning. It’s a shame it hasn’t noticed.

One of my friends, Dan, worked at a discount retailer when on hiatus from his PhD program. I still remember his rant about how cheap a box of Ralph Lauren shirts were, and how stupidly marked up the prices were. A $20 dress shirt is made in Bangladesh for 20 cents. A $200 dress shirt is also made in Bangladesh for 50 cents, and then they mark the price down by 50% and you think you’re getting a fantastic deal.

Fashion is bullshit, and everyone in the fashion industry knows it.

http://www.nytimes.com/2008/12/04/fashion/04SHOPPING.html

What seems inevitable is that the pain will worsen as the price reductions provoke questions among consumers of how stratospheric profits must have been when the economy was riding high. How great, really, was the surcharge to consumers for participating in fashion fantasy?

“I was in Saks last week, and there were these staggering discounts and it’s not even Jan. 1,” Tim Gunn, the “Project Runway” host and chief creative officer of Liz Claiborne, said Tuesday, before a discussion on “Redefining the Rules of Fashion in Today’s Economy,” sponsored by the textile manufacturer Dow XLA. “I was told by easily half a dozen sales associates that if I opened a Saks credit card, I’d get another 15 percent off. What I wonder is, “What are the real margins?’

courtesy of Jessica Shannon and flickr

courtesy of Jessica Shannon and flickr

If you look at images of money or play with fake money, or do puzzles involving words associated with money, you get the flip side of the priming effect from the hot coffee experiment.

Basically, people who were encouraged to think about money subconsciously become more independent, self-reliant, and less generous than people who were not primed. The ones with money on their minds  refused help from others, did not provide help when asked, and were more likely to keep the reward for participating in the study for themselves rather than give it to charity.

I’m a graduate student. I need books.

Also, I’m in the Netherlands. Lots of books in the libraries here are in Dutch. I can’t read intellectual Dutch; right about now I’m at “De witte eendje vliegt boven het brug.” Or “The little white duck flies over the bridge.” In America I would just camp out at the library.

So here are my shitty options:
1. order from America on Amazon or B&N; pay 30% less for the books in USD but get screwed on shipping charges and wait up to 3-4 weeks for delivery

2. order from Amazon.co.uk, pay 35% less for the books, but pay in GB pounds and a little more for shipping each individual object.

3. order from Bol.com and pay for shipping inside the Netherlands, but pay in Euros with a 10% discount (and actually I couldn’t sign up on their site at all)

4. buy from a bricks and mortar retail store immediately, in Euros, with no discount, and a possible markup over the MSRP

5. buy from a used bookstore, if they have the books I want in English

I don’t like any of these.

But then I found

6. http://betterworld.com/

An online reseller of textbooks (from the US) used and new, which are previous editions, used books and library discards. They donate percentages to encouraging worldwide literacy, recycle books, limit waste, and my god, they’re cheaper than Amazon. And the shipping fees to the Netherlands were 10-21 business days for $3.97. And they carbon-offset all their purchases automatically.

Use the code READRIGHT for a 10% discount on top of their sale prices.

Cheap, green, socially responsible.

You had me at cheap, Better Worlds, but if you weren’t so nice I wouldn’t feel so good about linking to you. Like I was somehow doing the world a favor by promoting you to my friends.

I bought Understanding Comics, The Medium is the Massage, and Influence: Science and Practice (thanks, Matt). Feel free to borrow them when I get them here.

From the BBC: an analysis of why people prefer the same things, driving up demand and creating a bubble. 

In short: we think stuff other people like is stuff worth having. It’s got nothing to do with objectivity. 

This includes fads and trends, like Tickle-me-Elmos and Uggs; stocks and investments, like houses (people price their houses according to what the last three guys in their neighborhood sold theirs for); and people, from popular kids to married men.

Here we see the dark side of the wisdom of crowds — crowdsourcing, political trading, Web 2.0, etc. have been these big buzzwords lately. The wisdom of crowds takes the idea that crowds are smarter than the average individual: when estimating the weight of a bull, the crowd’s guess (an average of each individual’s guess) is more accurate than most individuals, even experts.

But the truth is that while crowds can be wise and useful and accurate, they can also be really really dumb. Surowiecki, in his 2004 book, mentions unreliable crowd results and why they occur. Basically, they can set the standard for what is correct and exclude outliers, and they can overrule the good sense of individuals. It’s important to remember that everything is complex: the crowd is both comforting and helpful, yet dangerous and unreliable. 

And our crowd, these days, isn’t just one farmer’s market in Surrey. It’s the whole damn world.

Flora's Mallewagen, Hendrik G. Pot, oils c. 1630

Flora's Mallewagen, Hendrik G. Pot, oils c. 1630.

Flora’s Mallewagen depicts a historic get-rich-quick scheme: a group of 17th-century Dutch weavers have abandoned their trade to invest in tulips. Not just any tulips: rare tulips of certain lineages, black tulips, tulips infected by a rare disease that creates an intense multi-color pattern, as if the tips of the petals had been dipped in ink. The painter depicts a literal “ship of fools” sailing a cart with the Goddess of Flowers.

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