SLIGHTLY UNBALANCED IN THE MEMBRANE

I’m halfway through Larissa Macfarquhar’s excellent profile of Paul Krugman and am really identifying with the story of the young Krugman, especially the part where he decides to become an economics major instead of a history major because he’s more interested in the “why” than the “what.” (I made the opposite decision, but am not sure it was the right one…but anyway, that’s for a whole ‘nother post.) One thing that piqued my curiosity was the discussion of specialization and international trade:

…[W]hy would countries trade goods that were almost the same? Because consumers like to have a choice, and, as Avinash Dixit and Joseph Stiglitz had pointed out a few years earlier, the same logic of increasing returns to scale that Krugman had identified as an essential dynamic in trade could apply to a single brand as well as to a whole industry.

No doubt consumer choice drives trade in similar items. But I’ve been thinking a lot about choice lately, and it’s led me to wonder, first of all, what do we mean by choice? And is choice really always what we want, or just something that we believe is good, in spite of our best interests being elsewhere? After all, as a consumer, choice isn’t cost-free; to be able to make a good choice and feel like you have any idea of what you’re doing, you have to invest time into learning about what you’re choosing.

The example given – trade in cars between Germany and Sweden – seems like an example of a truly beneficial choice for consumers. While a Volvo and a BMW will both get you from point A to point B, there are clear differences between the two. A Volvo is (supposedly) safer and more sensible; a BMW is more expensive and more fun to drive.  And the large investment to buy a car seems like it justifies investing a chunk of your time into learning just what the differences between the two makes are.

But then there are other products whose differences are a) not obvious, and b) probably not worth investing the time into learning about these non-obvious differences. To use what’s becoming a weird favorite example of mine, take toothpaste. You’ll probably go through, oh, about 200 tubes of toothpaste in your adult life. Which means you’ll spend about $10 a year buying it. Yet apparently the competition is so fierce for this $10 a year that toothpaste makers keep thinking of new ways to differentiate their toothpaste from the other guy’s. Crest alone currently lists 42 different toothpastes on crest.com, divided into 6 (overlapping) groups. Are the benefits across brands and types of toothpaste so unevenly distributed that the health and well-being of your teeth depends on which one you buy? Doubtful.

So this seems like a case where hyperchoice brings the consumer little actual benefit relative to the cost. The amount you spend on toothpaste is so trivial that you really are wasting your time to try to understand what you’re buying. The only real benefits from this go to a subset of the toothpaste producers who are duking it out for your dollars. They can capture more of the market by constantly coming out with meaningless new bells and whistles that look appealing, and also might be able to gradually increase their prices across the whole sector if you’re perceiving that their new bells and whistles justify spending a little more per tube. (See the body wash market, for example – liquid body wash costs far more than regular bar soap, and has become a huge driver of profits in the last 10 years or so.)

Or, to use an example that doesn’t involve a product in your bathroom, how about mutual funds?  The average investor is utterly clueless when it comes to which funds they should choose in their brokerage account, yet that hasn’t stopped the number of funds from exploding. I’m of two minds here. On the one hand, having this much choice seems very frustrating. On the other, you can’t really be frustrated by something that’s so opaque that you don’t even understand how little you understand it. And so most investors, having made their choices, muddle through, blissful in their ignorance of how well they’re doing relative to how well they could be doing.

I realize that a lot of these questions are at their core philosophical rather than economic. Would be interested in checking out any research that’s been done on some of them, though.

Today we’ve got allegations from Joe Sestak that the White House tried to buy him off to get him out of running for Senate in Pennsylvania. If true, this strikes me as a really good example of the failings of the White House political operation. Let’s say I’m the president and I’m trying to get my legislative agenda through Congress.  Arlen Specter, who recently switched parties, is unhappy because Sestak is threatening to unseat him. Well, that’s bad for Arlen Specter but as a Democratic president it should be exactly the situation I want. An Arlen Specter under great pressure from the left is proving to be a solid Democrat. An Arlen Specter who isn’t under pressure from his left…you can file that one next to “Joe Lieberman,” or worse (Evan Bayh, Ben Nelson).

Of course, maybe this is one of those crazy double bank shots where Rahm Emanuel wants to keep pressure on Specter while trotting Sestak out there to preserve plausible deniability. Given recent history I kind of doubt it, though.

Haven’t felt too inspired on the politics front lately, so it’s time to turn to music. In no particular order, here was some stuff that I bought in 2009 and loved:

1. Frank Zappa, Roxy and Elsewhere. The funkiest Zappa I’ve heard to date, and arguably the loosest Zappa band of this period. The two drummers never get in the way of the groove.

2. Keith Jarrett, Facing You. Ted Gioia does a good job summing this one up; my only complaint is that “In Front,” the first track, is such a towering masterpiece that the rest of the record never feels quite at that level.

3. Miles Davis, The Complete Jack Johnson Sessions. As a curious college radio DJ, I pulled “Right Off” off the shelf one day and threw it on the air without any idea what it was going to sound like. It rocked. I still remember the guy who called in thanking me for playing this oft-ignored classic. Unlike the complete Bitches Brew box, this box’s bonus tracks often reach the heights of the original album.

4. Art Tatum, Piano Starts Here. I avoided listening to Tatum for years. I was too insecure a pianist to handle Tatum, who is not only to this day considered a technical apex of jazz piano, but also managed to throw in enough subtle harmonic maneuvering to show that the guy had brains to match his brawn. “Come on people, Tatum is for show-offs. I’d rather take my cue from Monk and the hard boppers anyway – they knew that it isn’t about how many notes you play,” I used to say. Everyone: I was wrong. I’m probably still not going to try to emulate Tatum anytime soon, but I can’t deny that he was legit. Watch.

5. Chris Potter Underground, Follow the Red Line – Live at the Village Vanguard. Craig Taborn is one of my favorite piano players. He can play in any bag, inside or out, electric or acoustic. Here he tears it up on Rhodes without even a bass player helping out. To the non-musicians out there, this is like winning a 1,000-meter race naked – you’re running so fast that nobody can tell you aren’t wearing anything. The compositions here are really strong, electric music played with heart.

6. King Crimson, Discipline. That this record isn’t more heralded speaks to the bankruptcy of most rock criticism. I have to admire Robert Fripp for having the guts to make an album like this at 35, an age at which most rockers are starting to think hard about taking gigs at your local dog track. KC’s earlier work still felt like a very British rock band (with prog and proto-indie touches), and they sounded damned good at it. Fripp could have coasted or succumbed to his own ego and surrounded himself with mediocre players. Instead, he brings in a guy as formidable as Adrian Belew to share guitar duties, has Tony Levin playing Chapman Stick, and decides to have everyone collaborate on these weird odd-meter tunes (I’m still trying to work out the hemiola on “Indiscipline”). You’d expect a nerdy, cold mess. The actual result is a crushing rock album.

7. Jimmy Smith, Groovin’ at Small’s Paradise. Smith’s earliest work is not quite satisfying for me. The great chops are always evident and Jimmy is playing really well, but the sound of the organ wasn’t fully settled yet – where the B3 drawbar settings Jimmy was using in 1958 sounded smooth and lean, the ones he was using in 1956 are more bouncy with the organ percussion too prominent; comparisons to a roller rink organist’s sound are too close for comfort. For this reason I’m always wary of stuff recorded before The Sermon. Yet these live sessions prove that in mid-1957, he was already there. I’ve said it before elsewhere on the Internet, but I’ll say it again: Jimmy Smith was an unheralded master of arranging tunes. The orchestration can sometimes seem like an afterthought, but the form is always played with in a wonderful way. I love the intros that Smith comes up with on this record. It’s sad that live recording was done so rarely during this period; I wish there were more documents of Jimmy playing in clubs, stretching out for 10+ minutes per tune like he does on these tracks.

Others that deserve mention but that I haven’t digested thoroughly enough yet:

Clark Terry, Serenade to a Bus Seat

Steve Lacy, Soprano Sax

Sonny Criss, Sonny’s Dream (Birth of the New Cool)

Weather Report, Weather Report (the 1970s debut album, not the 1980s one of the same name)

Mahavishnu Orchestra, Between Nothingness and Eternity

So the big meme this week is all about how Facebook and Twitter make it harder to trust your friends, because their definitions of “friend” include lots of people you don’t actually know well:

In some cases, social networks themselves may be contributing to the decline in trust. Platforms such as Facebook and Twitter have allowed people to maintain larger circles of casual associates, which may be diluting the credibility of peer-to-peer networks. In short, the more acquaintances a person has, the harder it can be to trust him or her. Mr. Edelman believes the Facebook component has “absolutely” played a role in diluting trust levels.

As usual, I think the really interesting insights probably come from digging deeper into a claim like this. For instance, I have to wonder how personality plays into trust and how many friends you have on Facebook. Do extroverts have more than introverts? If that’s the case there are all sorts of other conclusions you could probably make.  As I understand it, introverts tend to generally score higher on metrics of intelligence than extroverts (and they do better in school).  And given that they are, well, introverts, it’s plausible that introverts already instinctively discount what most of their Facebook “friends” have to say. Are extroverts more credulous by nature? In fact, the Ad Age article hints at something like this going on in the final grafs:

Christina Smedley, global head of Edelman’s consumer practice, said there is still a core group of influencers that can change how people trust and influence the actions of others. And consumers, whether they are close to them or not, will follow their lead.

“There are … consumers who still only trust the people they see every day or their 120 friends on Facebook,” Ms. Smedley said. “But there are those that trust all 380 of their friends on Facebook. And there’s opportunity for brands with both groups. If marketers can find those action consumers, they can build campaigns that work through their parameters and get some very good results.”

This is pretty amazing. It turns out that the backstory to the Amazon/Macmillan flap is that for Amazon, e-books are themselves loss leaders:

Amazon’s business model was, in fact, the reverse of the one used so successfully by Gillette, selling razors at little or no profit but making it up on high-margin razor blades. In this case, the $9.99 retail price for the books (the blades) was actually less than the $12 to $14 “wholesale” price Amazon paid to publishers. That loss, however, was made up for by the high profit margins on the Kindles (the razors), which sell for $260 to $490.

The genius behind the deeply discounted book price is that it seems to have greatly accelerated the inevitable transition from physical books to digital ones, while allowing Amazon to build a commanding lead in the digital space. That has not sat particularly well with book publishers, which continue to get the overwhelming share of their profits from hard-copy sales and don’t welcome competition on pricing or the prospect of getting strong-armed by a dominant distributor. But as long as Kindle was the digital reader of choice for nearly 3 million consumers, there wasn’t much they could do to challenge Amazon’s dominance.

I never would have figured that a major Internet company would find it in its interests to sell information at a loss and sell hardware at a huge profit, but there you have it. The corollary to this is that if we assume Pearlstein describes the model accurately, then if you figure an average profit of $200 per Kindle that means Amazon has good reason to think that you aren’t going to buy anywhere close to 60-70 books before you plunk down more cash to upgrade yourself to the Kindle Magnum.

(via Brad Delong)