(Roughly) Daily

“In economics, the majority is always wrong”*…

 

“Grumpy Cat,” whose image has flown across the internet– and graced the front page of the Wall Street Journal

One may imagine that economics has little bearing on the more frivolous frontiers of everyday life; but in fact it explains why one consumes so much “animal antics” online and so little Shakespearean seriousness…

Economics sometimes has surprising applications. One example is the Alchian-Allen theorem, an observation that came from a footnote in an economics textbook in the 1960s about how quality demand is affected by transport costs…

The Allen-Alchian theorem explains why places with high-quality produce (Allen and Alchian had in mind apples in Seattle, which is where apples come from in the US) nevertheless do not always get to consume that same high quality (they pointed to the market for apples in New York city, where no apples grow) because of the relative costs faced by consumers in each case (for New York consumers, a high-quality apple, once you account for transportation costs, was actually relatively cheaper than a low-quality apple compared to relative prices in Seattle). Hence the market sent the high-quality apples to New York.

You’re still with me? It’s all about relative costs. When you move something, or impose any fixed cost, the higher-quality item always wins, because it now has a lower relative cost compared to the lower-quality item.

The interesting idea is that this also applies in reverse – namely when we remove a fixed cost. The internet does this: it removes a cost of transport, and it does so equally for high quality and low quality content. Following the Allen-Alchian theorem, this should mean the opposite. Low-quality items are now relatively cheaper and high-quality items are now relatively more expensive. This idea was first explained by Tyler Cowen, but the upshot is that the internet is made of cats

The internet lowers the cost of “transport” for every idea, high and low quality alike. It’s the opposite of the apples situation. It means that low quality apples are now relatively cheaper. It means that cats-doing-funny-things is now relatively cheaper than say German Opera. Economics insists that when demand curves look like this we can expect more cat watching, and less German opera watching.

This theorem means that we expect a lower quality, “bittier” consumption to proliferate on the internet (as a technology that lowers transport costs of high-quality and low-quality ideas alike). Which is what we observe. So that’s a win for micro-economic demand theory.

Is this really what’s happened?  Have we all gotten dumber?  Read more– including the arguments, pro and con– at “The internet is made of cats – and you can blame economists“: and read the paper the lays out the “economics of cute” in “The Alchian-Allen Theorem and the Economics of Internet Animals.”

* John Kenneth Galbraith

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As we come to terms with the fact that all our bases are belong to them, we might spare a slightly skewed thought for Giuseppe Arcimboldo; he died on this date in 1593.  An Italian painter best known for creating partraits composed entirely of such objects as fruits, vegetables, flowers, fish, and books, he is considered a Mannerist… though he might well be the first Surrealist.  He was certainly cited by many– from Dali through Ocampo to Švankmajer– as an influence.

Arcimboldo’s portrait of Rudolf II, Holy Roman Emperor, painted as Vertumnus, the Roman God of the seasons, c. 1590-1

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Self-portrait

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Written by LW

July 11, 2014 at 1:01 am

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