Basketball

Cool article in Sunday's NYT magazine about measuring the performance of basketball players.

It's a harder problem than measuring the performance of baseball players. With the exception of playing defense, baseball isn't really a team sport. It's more a series of one-on-one matchups that can be easily analyzed.

But the Rockets are clearly thinking pretty hard about applying analysis to this performance measurement problem. They've broken down, for example, what actions a player might take that help the player's resume but don't help the team win. And that's a good lesson for any manager --- sports fan or not --- trying to measure employee performance in settings where performance is hard to measure.

Here's the best line of the article:

It turns out there is no statistic that a basketball player accumulates that cannot be amassed selfishly. “We think about this deeply whenever we’re talking about contractual incentives,” he says. “We don’t want to incent a guy to do things that hurt the team” — and the amazing thing about basketball is how easy this is to do. “They all maximize what they think they’re being paid for,” he says. He laughs. “It’s a tough environment for a player now because you have a lot of teams starting to think differently. They’ve got to rethink how they’re getting paid.”

"They all maximize what they think they're being paid for" --- that's a starting place for a course on organizational economics, just like the one I teach.

Friedman and Hayek

A former student wrote this week to ask some questions about an old lecture. I directed him to what I think is one of the very most important ideas in economics: The notion that a fundamental role of prices is to convey information that guides individuals' choices in a socially productive direction.

I can't improve on what Nobel-laureate Friedrich Hayek wrote about this in 1945, so I'll just link to it.

Focus on H.21 through H.24, in particular. (H.24 might be my favorite paragraph of economics ever. It totally rocks!)

Thomas Friedman, the NYT columnist, will be speaking in SLC next month, and a frequent theme of his columns is that we need to get the price signals right so that people will make socially efficient investments in energy technology. He supports higher taxes on carbon-based fuels.

This notion of getting the price signals right is straight out of Hayek. Now, there's nothing in Hayek about taxes and further Hayek's work is often held up as an intellectual justification for free markets not government taxation. How do we get from Hayek to "tax carbon"?

In Hayek's conception, prices come from perfectly competitive markets with no externalities. His discussion of tin, for example, fits this. Perfectly competitive markets without externalities "work", in the sense that they achieve a socially efficient allocation.

My interpretation of Hayek is that when markets "work" --- which they very frequently do --- we should be really, really careful about messing with them. Because government interference can mess up the price signals, which will mess up individuals' choices. Government subsidies for housing loans, for example, can mess up the prices (that is, interest rates) for home loans, and cause people to make poor choices. (Sound familiar?)

But, economists have learned a lot about when markets "work" and when they don't. Markets can fail to achieve the best outcome when externalities are present. In cases like this, prices will send the wrong signals, and we'll get a not-the-best outcome. Friedman's point is that we need to use the power of markets (with a boost from tax policy) to send the right signals.

So, go listen to Friedman (and look for me there), and read Hayek.

Whaling

More winter reading: I recently finished Nathaniel Philbrick's "In the Heart of the Sea." It's about the 1820 wreck of the Nantucket -based whaling ship Essex. This true event is believed to have been the catalyst for Melville's fictional Moby Dick.

I learned a lot about the industrial organization of whaling --- Very interesting industry! Seems to have been a lot of labor-market-related knowledge spillovers that allowed the little island of Nantucket to dominate this industry. But those advantages were eventually outweighed by the fact that Nantucket's harbor isn't really that good. Any really big ship had to be unloaded far from shore, and whale oil brought in to the town by small boat. This is expensive, and eventually the industry moved.

Oh, and plus there was a horrible disaster on the Essex when an angry sperm whale attacked. For some reason Philbrick spends most of his pages on that rather than the economics of whaling...

The most relevant passage in the book to today's economy was this:

Making (Nantucket's) level of profitability all the more remarkable was the state of the world's economy in 1819. As Nantucket continued to add ship after ship to her fleet, mainland businesses were collapsing by the hundreds. Claiming that the "days of our fictitious affluence is (sic) past," a Baltimore newspaper reported that spring on "dishonored credits, deserted dwellings, inactive streets, declining commerce, and exhausted coffers."

Sounds familiar. And serves as reminder that economic times have been bad before. They'll get good again.