Economics in Action

Add contemporary art to the long list of topics that have been illuminated by economics research. Don Thompson of York University, Toronto has studied this market and in his new book, “The $12 Million Stuffed Shark”, examines why art prices reach such staggering heights. Just weeks ago, Damien Hirst auctioned his “Beautiful Inside My Head Forever” collection for nearly two hundred million dollars: enough to buy 272,108 metric tons of rice. Professor Thompson graciously agreed to an interview:

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What made you study economics in the first place?

It was probably one of those undergraduate surprises; I took a micro course, enjoyed it, took a course in European Economic History and loved it, took a macro course, and launched on a career.

Has being an economist changed the way you appreciate art?

No, you still lust after art that touches your soul that, you want to live with and wake up to. However, knowing the prices of art affects how you look at it, particularly in a contemporary art museum. The “if one like that sold for $20 million there must be something there I haven’t seen, I’ll look harder and reach hard” syndrome is hard to avoid.

Is the economics of contemporary art like other areas of economics, or did you have to build it from the ground up?

I spent a year working on The $12 Million Stuffed Shark because I did not understand how artists got selected to rise to the highest levels (being sold in Sotheby’s or Christie’s evening contemporary auctions), or why prices were 10 or 100 times what seemed reasonable in the absence of scarcity. And because of my profession and personal curiosity, I wanted to learn more.

Money seems to be disappearing. The value of homes has gone down and the banks are in huge amounts of debt and have to be bailed out by the government. But where has all of the money gone?

Money consists of two main elements.

The first is cash (notes and coins). The total amount of cash in the UK is just over £50bn, with about £43bn circulating outside the banks and £7bn in banks’ safes, tills and cash machines.

But cash is a relatively small proportion of the total amount of money. So what is the rest?

Read More: Where has all the money gone? John Sloman

This week Princeton University economist Paul Krugman was announced as winner of this year’s Alfred Nobel memorial prize in Economics (PDF link, YouTube video). He is well known for his work on currency markets, including his advance prediction of the housing bubble and current financial crisis (YouTube link). However, this prize recognises earlier work in which he advanced our understanding of international trade.

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We find out via Marginal Revolution that, amongst other things, Krugman has used economic arguments to explain why British food used to be so bad.

An early paper by Krugman applies serious economic analysis to the admittedly silly topic of interstellar trade. Trade between star-systems poses special problems; for one thing, because of the huge travel times even for near-light speed freight vessels. Because of Einsteinian relativity, humans or aliens would experience time differently on the journey to those financial backers who remain on the home planet, so it’s not obvious how interest should be calculated. Those working on these problems, admits Krugman, are a small band, “but the Force is with us.”

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Two odd pieces of economic research have been highlighted in the Ig Nobel Prizes, awarded each year by the magazine the Annals of Improbable Research.

The first study examined tips given to lap dancers. Unfamiliar with lap-dancing, Geoffrey Miller and colleagues read up on the relevant sociological and feminist literature before getting eighteen dancers to record their earnings for two months. They found that earnings were greater when the dancers were ovulating: the male patrons expressed a preference for dancers who were currently fertile, even if not consciously aware of the difference.

The other study was by behavioural economist Dan Ariely and colleagues, who found that the placebo effect of a pill was weakened when the pills were discounted in price. In other words, some medicines are more powerful in virtue of being more expensive.

The full references are Geoffrey Miller, Joshua M. Tybur, Brent D. Jordan (2007) “Ovulatory Cycle Effects on Tip Earnings by Lap Dancers: Economic Evidence for Human Estrus?” Evolution and Human Behavior, vol. 28, 2007, pp. 375-81; and Rebecca L. Waber, Baba Shiv, Ziv Carmon, Dan Ariely (2008) “Commercial Features of Placebo and Therapeutic Efficacy” Journal of the American Medical Association, March 5, 2008; 299: 1016-1017.

While loans to poorer people are at the root of a financial crisis here in the West, Tina Goodman, a Masters student in International Economics and Finance at the University of Queensland, Australia, is seeing how loans to the poor in West Bengal are helping people out of poverty.

West Bengal is an eastern state in India with a population of around 82 million, the fourth most populated state in the eastern region of India. Tina is finding out about microfinance and the effects it has on individuals and communities. She is also looking at development issues within India and successful policies that have been advocated by economists.

While in India, Tina has been filming her discoveries and experiences. You will be able to view this film on this site when she returns in December; meanwhile, you can follow her journey through her blog.

Mohammad Yunus is a great believer of microfinance and its strengths. In 2006 he shared the Nobel Peace Prize with the Grameen Bank due to his pioneering ideas. He was the founder of the Bank which has ‘reversed the conventional banking system by removing the need for collateral and creating a banking system based on mutual trust, accountability, participation and creativity.’ (Grameen Bank)

For further reading see the Nobel Peace Prize 2006

Matthew Reisz reports in the Times Higher Education about the rebirth of economics, ‘today the “dismal” science of economics is sexy’. Tim Harford and Stephen Levitt are held somewhat responsible for the distinct change in attitude, with simple economics being used to explain anything from ‘rational crime’ to ‘the teenage oral sex craze’.

The publication of The New Palgrave Dictionary of Economics compiles contributions from not only 1500 economists but also other fields, a Swedish zoologist for example, supporting the end of ‘dismal’ economics.

Read more: Matthew Reisz (2008) Figure It Out Times Higher Education