Sunday, February 24, 2013

Is Economics a Science?

Maybe it's just because I am getting older, but everything these days seems to be changing faster and getting ever more complicated. Look at light bulbs. When most bulbs were incandescent, replacing a burned out bulb was not too complicated. Mainly one needed just to check for a suitable wattage and the job was done. Chandeliers might have a smaller socket, so a little extra check for that is still a good idea. But the arrival of compact florescent bulbs has made the lighting aisle a much more daunting place. It might make sense to pay ten times as much for such a fancy bulb, if it will really last ten times as long, and especially if it provides the same light while using less electric power. Is the bulb really likely to last as long as the manufacturer claims on the package?

Nowadays with a smart phone one can do product research right in the hardware store. A quick search of the internet will provide an endless list of product reviews. Interpreting these is a bit challenging, though. The manufacturer may well have planted positive reviews with a convincing but unfounded aura of objectivity. On the other hand, various grouches and trolls delight in trashing whatever they encounter, highlighting every imperfection but still leaving one no wiser about which bulb to choose. It's a big help if one can find a review at a site one knows, from a source one knows well enough to be able to trust. Having found a few such informative reviews on candidate light bulbs, one can then search too to see if there are better prices close by.

That might already sound a bit overwhelming, but buying light bulbs isn't actually even that simple. It's not just that LED bulbs have entered the arena, with yet higher prices, longer lives, and higher efficiencies. What makes the lighting aisle especially bewildering these days is how quickly the prices on LED bulbs are dropping. If I know that the prices for these top-notch bulbs will drop 30% in six months, my smart strategy might be to buy a cheap incandescent to get me by in the mean time, and then come back shopping again after the price reduction. Smart choices aren't just a matter of how the market looks today, but depend too prices in the future.

Shopping for lighting fixtures is much more future-oriented than shopping for bulbs. A single fixture might last through dozens of bulbs. The fixture is also much bigger investment than a bulb, often including a significant cost for installation. If a fixture uses any sort of less common type of socket or requires any special shape of bulb, then buying the fixture becomes a gamble that the bulbs it requires will remain available for long enough in the future to get one's money's worth out of the fixture. In the best of worlds, the required bulbs will even be available at good prices!

Wouldn't it be wonderful to have a smart phone app or a website that could give accurate forecasts about product availability and pricing? Of course such a tool's usefulness would go far beyond light bulbs and lighting fixtures. It could have averted the entire housing and financial crisis! Too often people took out mortgages on houses than they couldn't afford, expecting to be able to resell the houses at higher prices before they got too far behind on their mortgage payments. If they had known that housing prices were going to stop climbing, they wouldn't have bought the houses in the first place and the foreclosures would have been averted.

Given than we can't even forecast the weather more than a few days ahead with any degree of accuracy, it seems unlikely that reliable forecasts of housing prices are likely to become available. On the other hand, as computer models of changing atmospheric pressure and temperature get ever more sophisticated, and as more weather stations are deployed across the land and sea and in orbit, weather forecasting does indeed get more accurate, even if only incrementally. Are housing markets somehow inherently more difficult to forecast than the weather?

When planning a big project, it is often advantageous not to tip one's hand. A large electrical manufacturer might want to introduce a new line of lighting fixtures that will require a new type of bulb which that manufacturer also plans to supply. Perhaps the main appeal is the fixture or perhaps it’s the bulbs, but either way if the manufacturer is the sole supplier of each then the sales of one will drive its sales of the other. But if word leaks out about the new type of bulb, then competing manufacturers will be able to enter the market at the same time or even ahead of the one that initiated the move.

Suppose that an accurate market forecasting tool were available. Surely it ought make the job easier for those competing manufacturers. The forecasting tool would tell them in advance about the new type of bulb that would be appearing soon. But such a tool could also be used by the manufacture that plans to initiate such a move. If they see that the tool has prematurely revealed their plans and spoiled the early mover advantage they would have gained, they could just change their plans to something a bit different from what the tool was forecasting, regaining their market advantage.

It's hard to believe that there's something behind the weather that delights in raining on our picnics, harder still that something would read the weather forecast to infer our picnicking plans, the better to steer the rain our way. But in the marketplace there is much to be gained by spoiling the plans of others, and utter certainty that any available forecast will be used to that end. For every player who tries to use a forecast to gain an advantage, there will be a player who acts to steer things against the forecast to tilt the advantage in their own direction. Forecasting markets is a much nastier kettle of fish than forecasting the weather!