Oliver Griffiths

Santa, Elves and Comparative Advantage

One of the great things about autumn in the US as a parent of young children is the steady flow of diversions. October is all about the lead up to Halloween. November is all about Thanksgiving. December is all about the holidays. So, as we approach the end of November, the kids' questions about Santa Claus are just round the corner.

As everyone knows, Santa Claus has helpful elves that make all the presents for all the children around the world, for Santa to distribute on one frantic chimney-to-chimney delivery. This raises several problems, including why a number of the presents my children will receive will have 'Made in USA' or 'Made in China' printed on them. I think I have the answer to this particular problem: it's comparative advantage.

I have no doubt that Santa's elves could make anything and I assume that they could make it all better and cheaper than anyone else. They have absolute advantage in producing all goods. But does it follow that it makes sense for them to produce all the presents that Santa will give out? In a word, no.

The elves will be much better at making some things than anybody else (let's say wooden trains), but they will be only a little better than other people at producing other things (let's say board games and chocolate). The elves have a comparative advantage in producing wooden trains. If they specialise in producing wooden trains, they can trade the excess production - which everyone else will value highly because they can't do it as well - for lots of board games and chocolate that they can make better, but only a little better, than other producers. Specialisation in goods where they have comparative advantage will be far more efficient. It will take the elves less time to put together the full order list for Santa, allowing them more time to enjoy the Northern Lights. And it will provide an explanation for why the chocolate in the stocking will have 'Made in the USA' printed on it.  

It may sound inconsequential but it is a powerful - and comforting - real-world conclusion. Is China going to end up manufacturing everything? No. Is Brazil going to dominate global markets for all agricultural produce? No.

Comparative advantage was first set out by Robert Torrens in an essay on the Corn Laws in 1815. It concluded that Britain - at the time the emerging 'workshop of the world' - should buy wheat from Poland, even if a bushel could be produced cheaper in Britain than Poland. David Ricardo then took the plaudits for comparative advantage in his Principles of Political Economy in 1817. For a good contemporary exploration of comparative advantage, see Tim Harford's fun Undercover Economist.

Posted at 09:30 25 November 2008 by Oliver Griffiths  |  Comments[6]

Counterfeits and crack pipes

I am just back from a study tour looking at the enforcement of intellectual property rights (IPR) in LA. This was a mix of the old (a bust on a stall in Santee Alley selling fake Chanel bags) and the new (talking to the studios about how they plan to compete with peer-to-peer file sharing).

I'm not sure if it was because the tour was organised by the French Embassy but fake Chanel bags ended up being a theme of the trip. We witnessed boxes of Chanel fakes (including some baseball caps whose bad taste would cause heart attacks at Chanel Design Central) being opened by Customs and Border Protection agents at the LA-Long Beach port complex. The scale of the challenge they face is immense - the port handles 5 million containers annually, which represent 45% of the US total and are worth $350 billion in two-way trade flows. To put that figure in context, it is roughly the same as total EU imports of goods into the US last year. Roughly $70 million of counterfeit merchandise was intercepted at the port last year. The most seized item? Shoes from China.

Two other themes were the diversification of counterfeited goods and the increasing participation of organised crime. The attractions of counterfeiting are that margins can be big and the punishment tends to be probation rather than jail time (I suppose reflecting a misguided societal view that IPR infringement is a victimless crime). It's an issue that we're taking very seriously in the UK. To take one example, our Fake Free London initiative aims for London to be free of counterfeits by the 2012 Olympics. But of all the items on display in LA, the one that caught my eye was not a straight counterfeit at all: a (working) branded hi-liter pen concealing a crack pipe.

The IPR challenge to the entertainment industry is well documented. The Motion Picture Association reckon that piracy led to a $18 billion of lost revenue for the industry in 2005. This is about much more than dodgy DVDs (though, incidently, the MPA reckon that it takes pirates about 13 hours from infringement to having mass-produced counterfeit DVDs on sale). Fast, cheap broadband access is one of the great benefits of our age - but also a real headache for the studios. They are looking to work with ISPs to address endemic peer-to-peer file sharing. The agreement between rights-holders and ISPs brokered by the UK government earlier this year is one promising approach - we are currently consulting on legislative options to address illicit P2P file sharing as well. The studios are also looking to compete with pirates in the content market, through products such as high quality video on demand. As a technology late-adopter, video on demand will be relevant for me in about 2015.

Posted at 14:07 30 October 2008 by Oliver Griffiths  |  Comments[1]

Consumer Patriotism

On a recent trip to the local bike shop I overheard another customer deliberating between two bikes - a Cannondale and another make. Now the British government doesn't endorse any particular bike brand.  But I do. I love Cannondales and own two. But they're definitely pricey, as the customer in the bike shop discovered. The Cannondale was about $100 more expensive than the other, equivalent bike and he quite naturally asked why it cost more. The assistant's answer was that it was because Cannondales are made in the USA (in Pennsylania) while the other make was made in Taiwan. This isn't the reason I buy them but it got me wondering about the premium that home producers can charge over competitors from abroad for similar goods. And whether you could put together a league table comparing the different level of premium that home producers could charge in different countries.
 
The economist's answer is that you should just buy the best goods at the best price. End of story. That will force the competition to catch-up or get out of the business, raising standards across the board. But emotion seems to pull the other way. This phenomenon has been given the rather grand title of consumer patriotism.
 
A 2007 Zogby poll found that one in three Americans would be willing to pay four times as much for American-made toys over foreign substitutes (which in effect means Chinese goods, as China has over 90% of the global market in toys). Paying four times as much sounds absurd. But if true, MBA graduates must be flooding into toy manufacturing. Japanese consumers have also, famously, been willing to pay a substantial premium for Japanese rice - though in that case supposedly because of a superior level of stickiness. (Consumer patriotism - if only I had known the phrase - also dictated the choice of our family car. My father bought a succession of unreliable estate cars made by British Leyland. It didn't save British Leyland.) One of the least effective consumer patriotism initiatives was - or so I recall from law school - a Buy Irish campaign that was brought to the European Court of Justice for being in contravention of Article 85 of the EC Treaty (one of the EU's competition articles, now changed to Article 81) because it discriminated between producers in the EU. One defence put forward was the fact that sales of Irish goods had actually dropped during the campaign. So my initial international consumer patriotism league table runs: USA, Japan, UK, Ireland. 
 
Anyway, the customer in the bike shop decided not to buy the Cannondale.

Posted at 20:49 21 September 2008 by Oliver Griffiths  |  Comments[2]