An economist walks into a bar | Robert Litan | TEDxKC


Translator: Nga Nguyen
Reviewer: Queenie Lee So, there are these two guys
that walk into a bar, “No, I’m not going to go there.” It could be the beginning of a joke. But I really want it
to be the introduction to the notion of artificial scarcity. And you’ll see why in a minute. So let’s go back to the bar. The first guy, he approaches the first woman
that he sees, offers her a drink. She turns him down. He, then, decides
to work his way down the bar, and of course, all the women
watching this, they see what he’s up to, and they all turn him down. Now, our guy, I’m going
to call him the anti-hero. He hasn’t learned from this experience in the real world. So he decides to go to the virtual world. He goes to the Internet
and joins Cupid.com, and he tries the same technique,
and sure enough, with the same result. They all turn him down. So our anti-hero is in trouble. But you know what?
Cupid.com is in trouble too. And the reason they are, is that the women
who have joined Cupid.com are being inundated
with offers from men for dates. They get turned off, they quit. And as they quit, men quit.
Cupid is in trouble. Who are you going to call,
to solve this problem? No, the answer is more obvious
than Ghostbusters. (Laughter) You call an economist. (Laughter) Don’t laugh, you call an economist. (Laughter) In fact, you call two of them. This is Muriel Niederle of Stanford,
and Dan Ariely of Duke. And they’ve spent a lot of time, studying the problem
of artificial scarcity and abundance, in the online dating context,
which is the reason Cupid called them up. And they wanted to know
how to fix their problem, and the two economists said they had an idea that was
as simple as it was profound. Just put a sharp limit
on the number of date offers that men could make
to women each month. This is the notion of artificial scarcity. Taking what looks like
an abundant resource, which is date offers, and artificially constraining them. And the economist said to Cupid
that if you do this, the men will take their offer seriously. They’ll look at more than just
the women’s pictures, and they actually look at their profiles. And the women will know this, and they’ll be more likely
to accept date proposals. Artificial scarcity help save Cupid.com and other dating sites
that copied the technique. Today, online dating
is a two billion dollar industry in North America alone. Now, I want to talk about a lot more than online dating
and artificial scarcity. Much bigger topic. I want to try to show to you
how economists and their ideas have contributed to the rise
of the entire Internet economy and to some of the iconic
companies within it. I’m sure many of you
are familiar with the notion of “Name-Your-Price” travel. That was invented by Priceline. Well, “Name-Your-Price” travel
was really not the key to their success. Because, if you could name your price,
what price would you bid? Zero, right? Or one or two. And obviously the airlines
or the hotel charges would not accept the offer. The key to Priceline
was not their great advertising. It wasn’t the fact
that you could do searches online. No, the real key to Priceline success, by the way, it’s a 60 billion dollar
company, market cap today. The real key is they make you
this proposition. They say that if you bid a particular price
for a hotel room or a flight, and Priceline decides to accept it,
you’re bound to pay it. This is called
the conditional price offer. And in basically what it does,
it induces you, as the traveler, to take your offer seriously, in the same way that the artificial restriction
on the dating proposals that Cupid.com did for men. So who is the brilliant guy
behind the conditional price offer? (Laughter) He’s a smart guy, but Captain Kirk
was not the inventor of the idea. He was the pitchman,
and he still is for Priceline. No, the real genius behind Priceline
was this guy: Jay Walker. Jay studied economics
as an undergraduate at Cornell. And he actually listened and thought two steps beyond
what his lecturers told him at Cornell, and came up with the idea
of the conditional price offer, which led to Priceline and revolutionized
the entire travel industry in the US. I have another example. It’s one that you’re also
very familiar with. It’s a search page at Google. It could be in any other search engine, and what I want you to pay attention to
is that right-hand side, the ads over there. Google collects
about 50 billion dollars a year from advertisers, large and small, seeking placement on that right-hand side. They auction off the sites. But that’s not how the system started, because when Google was launched, online advertising was in its infancy, and Google, believe it or not, went door to door,
advertiser to advertiser, trying to get them to place an ad
next to a search term. Highly laborious, you quickly can see
this is not going to scale, as the number of searches
exploded on Google. And so the founders of Google
asked two young engineers, Eric Veach and Salar Kamangar, to come up with an automatic system
that would solve this problem. Well, they were instinctively
attracted to auctions. But they were thinking about
another problem. That is if they auctioned off the sites, they feared that the advertisers
would bid a very low price and then incrementally
raised their prices just a little bit and keep the auctions going forever. And if this happened, and a lot of searches
were also going on at the same time; the whole site would crash. So, as an engineering solution,
they came up with this idea. That the winning auction,
or the winning placement will be the price, the second highest price
that was bid plus one penny. This would cut off the auctions,
really simplify the process, and in the process, also solve another problem
called “the winner’s curse.” I’m sure many of you
have participated in auctions, may have regretted winning because you felt like you paid too much. Pretty obvious point. But the CEO of Google
at the time, Eric Schmidt, still wasn’t sold on the second
price auction as the way to go, until he ran into this man. Totally by accident in a party. This is Hal Varian. At the time, he was Dean
of the Information Sciences School in Berkeley, and a world-leading expert
on auctions and also the Internet. Schmidt asked Varian, “Does this second price auction
make any sense? Why not the first price?” And Varian pondered the question,
and came back to Schmidt, and he said, “You know,
those two engineers, they have reinvented
what this guy came up with.” This is William Vickrey,
he was an economist at Colombia, who proved mathematically, that the second price auction was the ideal solution
to the winner’s curse. And you know what? That won him
the Nobel Prize in Economics in 1996. Well, now you’re Eric Schmidt, you think “Well, economists,
they may be able to help Google.” So he persuades Hal Varian
to leave his tenured position at Berkeley, and join Google
as its first chief economist. Varian then goes on to hire
an army of statisticians and economists, who helped refine the online
ad auction process, and also develop other services
for the Mountain View giant. You know, they say that imitation
is the best form of flattery. Well, guess who was watching,
Microsoft from up north? Their chief competitor
or would-be competitor, Microsoft. They wanted their own Hal Varian. And they got her. This is Susan Athey. Susan is a rock star
economist at Stanford, world-leading expert in auction theory, and she splits her time teaching with also working
as an economist at Microsoft. I have a third example; it’s bigger than the first two. It’s the entire business of web retailing. It’s a 300 billion dollar industry
in the United States alone. And you all know
the poster child of web retailing; it’s Amazon.com. Now many of you may think
that Amazon’s success is due to its fantastic system
of warehousing and inventory control. It’s able to basically send out
all that stuff that you order online. But you know, Amazon
and other web retailers would not be as successful as they are without a highly flexible
transportation system that actually would
deliver all that stuff. And guess who helped bring
that system to reality. Economists. Because back in 1980,
when Jeff Bezos was just a teenager, the airline and the trucking industries
were heavily regulated. Every fare and every route that they
charged, or they flew, or they drove had to be approved by the government. In fact, there was a rule
that set to an airline that owned a trucking outfit: it couldn’t deliver merchandise
more than 20 miles away from the airport, at which the merchandise landed. This rule was obviously in place to protect other truckers
from competition, which of course was the whole point
of airline and trucking regulation in the first place. That’s why economists long opposed it. But they also opposed it
for another reason. There are lots of airlines
and trucking firms. They’re not natural monopolies
in the same way that a local utility is that needs regulation
in order to prevent price gouging. No, airlines and trucks
should never have been regulated. And three of the economists who were most insistent
about this are in this picture: Michael Levine, Alfred Kahn,
and Darius Gaskins, and trust me, there were many more,
who have been writing for decades that we ought to get rid
of this crazy system. Well, there were two politicians,
courageous politicians who finally listened
to these guys and women, and persuaded Congress in 1978,
and 1980 respectively, to dismantle the system of airline
and trucking regulation against the stiff opposition,
of course, of those industries. And you may not recall,
but prices fell after deregulation. But more importantly for my story is that deregulation
unleashed vigorous competition, between the two giants
of the transportation industry: UPS and FedEx. They went on to develop a highly flexible
and efficient transportation system that was ideal for the Internet economy. So that 20 years later, when Jeff Bezos
and other web retailers came along, they were able to tap into
and use this system. In fact, Jeff Bezos,
if you’re watching this, you should send a thank you note to three of the economists
that I showed before and many of the others
who made your fortune possible. I want to conclude with one final example, has nothing to do with the Internet, unless you want to count
the 32 million people, who play some form
of online fantasy sports. I mentioned sports
because I’m a sports nut, and I want to talk to you about Moneyball. I’m sure many of you have seen the movie. It’s based on a book,
yes, go ahead and applaud. Fantastic book and movie,
and it is written by this man, Michael Lewis, who by the way, I think he’s probably one of the best
non-fiction writers in America or the world for that matter. And Moneyball, as you know, was about Billy Beane,
the general manager of the Oakland As who built a great baseball team
on a shoestring budget. But Moneyball really
wasn’t a traditional baseball movie. In the same way, that Bull Durham
or Field of Dreams was. You know, the real hero
of Moneyball was this guy. Now many of you may not recognize him, but I submit to you: he had as big influence on baseball
as Hank Aaron or Babe Ruth. Because he applied
economics and statistics to showing how it’s possible
to produce winning baseball. He invented a field called sabermetrics that was used by Billy Beane
and other baseball teams to build their rosters. In fact, it is used
throughout professional baseball, not just there. Sabermetrics is used
by professional basketball teams, football teams, and even hockey teams have people like Bill James
on their staff. Economic thinking
has revolutionized sports. You know, in the course of my career, I’ve had a good fortune to meet many
many people in the business world. But unfortunately, from my perspective, too many of them
have no respect for economists. They say we’ve never met a payroll –
“we” meaning the economists. What do they know? Well, economists helped
build the Internet economy. Economists help make it possible
for Amazon and other web retailers to deliver all that stuff that you order to your doorstep,
efficiently and promptly 24 – 7. Economists shape the system
of online advertising, especially online auctions. Economists make it possible for you to get five-star hotels
at three-star prices. Economists may even
have made it possible for you to have a date and conceivably for you
to have met your spouse. I think economists deserve some respect. (Laughter) (Applause) That answers it, don’t you?
Thank you very much. (Laughter) (Applause)

78 Replies to “An economist walks into a bar | Robert Litan | TEDxKC

  1. Hey Bezos! You didn't build that! And neither did the politicians, teachers, police, firemen build that! (Or even engineers, for that matter!)

    You know who did build Amazon.com? Economists did! Yay for the underappreciated economists!!

    You were just along for the ride, Mr Bezos. Please remember to send the thank you note … 'mkay? And don't forget to pay your Taxes to the Man while you are at it.

  2. Micro-economics… respect, perhaps begrudgingly.

    Macro-economics…. you can beg and plead, but you've got some real balls to even dare to ask for respect.

  3. "President Obama earlier today renewed his call to raise the federal minimum wage. It is not an accident that he did so while addressing a crowd of about 6,000 people gathered in Milwaukee at a festival hosted by the local A.F.L.-C.I.O..

    The most significant beneficiaries of high minimum wages are unions, since the high minimum wage prevents competition from those willing to work for less."
    –¬†http://www.economicpolicyjournal.com/2014/09/obama-calls-for-minimum-wage-hike.html

    Hey, economists, you have something to say about this? Oh, right I forgot, you guys took out an Ad in NYTimes in favor of the minimum wage.

    You economists want another Nobel Prize for showing how creating "artificial scarcity" in jobs works via increases of the minimum wage? Try harder, losers. [OK, now I'm just trolling. ]

  4. Robert, you had me until your speal about "natural monopolies", such as with utility companies, where gov't regulations keep costs down by preventing gouging. This runs counter to all of the other arguments you made in the same context, where prices drop when there is deregulation and competition.

    The idea that governments somehow magically keep costs down through regulation is the worst kind of fairy tale:
    1) Government regulation is not free. We pay through taxes for all of those government employees who have the job of regulating.
    2) When government becomes a middle man in business, the door is opened for lobbying, which increases benefits to companies through specialized regulation that puts possible competitors at a disadvantage. The cost of lobbying is passed on to the consumer.
    3) Governments allow monopolies to exist! If the gun of government force is brought into business, the highest bidder decides where that gun is pointed!

    C'mon. You are obviously an intelligent man. Why are you peddling such bullshit?

  5. It's a great talk but me thinks he is assigning too much credit to economists when discussing Amazon's success.  The regulations that existed in the transportation and airline industry were probably put in place by "socialist" economists of the post-war era who wanted to end price gouging by monopolies.  So a new generation of economists made a "correction" Рis that a big deal?  It's like Nixon being credit for opening up China.  Who the hell was responsible for isolating them?  Every business transaction has an economic angle to it and that is obvious.  To that extent economics plays a role in every transaction.  But when economists continue to peddle proven failures like the Laffer curve, they bring discredit to the entire profession.

  6. Wow, too bad local businesses and grocery stores couldn't afford to hire a rock star economist to suck money and decent jobs out of local economies and into the ¬†multinationals, Asian manufacturers and rock star economists. We should all send thank you notes to the economists who made this economy and the support it gives to local businesses, jobs and investments possible. Or maybe not…

  7. Stop elevating Jeff Bezos , he  is a %$^)(*&^.
     
    Amazon is the biggest Abuser of the H-1 Visa Program. Over 67% of Amazon programmers and code writers are from India.
     
    Amazon is well known for their hostile and unfriendly work environment toward women, zero personal growth, Zero flexibility.
     
    Jeff Bezos gets his kick out of¬†¬† psychologically abusing and humiliating upper manager, for instance among the many cruelties he'll asked sub to hand-write a 40-page documents on accomplishments. Every week in addition to your responsibility. If this guy isn‚Äôt a psychopath and a sociopath — I do not know what is.
     
     Jeff Bezos is know for is lack of philanthropy, zero community involvement, Zero Charity, zero connection to Amazon employees, their goals and objectives. 
     
    Warehouse workers in PA, Kansas, Kentucky Nevada New Hampshire
     South Carolina Tennessee TX, have it worse they suffer from unprecedented abuse, physical and psychological threat, not to mention the heat stroke during the throbbing summer heat, and freeze their bums off in winter. Amazon can't care less.
     
    Amazon is known for their hostile work environment- from warehouse  worker  to upper manager, women, Indians workers ( H-1) have it worse they abuse them at wile- they can fight back- their contract is with Amazon take it or leave it mentality , or leave the country. specially  those in the rust belt  suffer  the  most physical  and  psychological abuse.

  8. Yeah, basically this guys doesn't prove anything. He just says economists have minor role in some online services developement – and sometimes he even connect 2 disconnected things to imply economist had a (crucial) role. He is highly overstating the economist role. Many, many other things took part in the development of those online services. I know this is tough time for economists since one can hold them responsible for crises but still … just keep on working and thinking, and not on how to falsely find nice results¬†to economists's work afterwards.
    And I wish all economists read Adam Smith, both The Theory of Moral Sentiments and The Wealth of Nations – not only excerpts from the latter.

  9. ok, so two engineers reinvented Vickrey's Nobel Prize-winning work — doesn't that mean it wasn't that hard to think up? (‚Ć I would have thought otherwise‚Ķauction theory seems like the only rigorous part of economic theory ‚Ķ just seems to go against his end conclusion. Since an economist did not apparently come up with the idea to do a 6th-price auction or whatever Google does.)

    Want to hear the other side on Moneyball & deregulation.

  10. Deregulation leads to a better economy. I'm surprised the Liberals and Democrats in the audience didn't hang him for such heresy.
    Economy-killing regulation is a fundamental tenet of the liberal religion, that is why we must never elect those religious zealots.

  11. Obviously economists impacted all of these developments. Who sets the value of currency? Economists. Who is responsible for devising abstract economic systems, riddled with flaws, designed in such a way that that they can and have been infinitely exploited by greedy bastards? Economists. Why is the global market in dire disrepair and yet somehow still chugging along on the same crash course at an accelerated rate? Fucking economists. Understand: when you find yourself working 40 hrs a week, being forced to pay ridiculous amounts for mandatory goods and services, while paying taxes(with threat of imprisonment should you fail to comply)to a government that is balls deep in embezzlement: it is the 'master engineering' of economists that paved the way. Your resources and rights are being stolen from you…leading to a mass authoritarian takeover of humanity and your being told to 'earn your place'. Youll never get close to level of the true criminals. You paid for your own enslavement. The pyramid desperately needs to be leveled. Demand your rights.

  12. That's all very interesting, but he speaks as though economists are all so underappreciated that they get spat on in the street or something. I missed the part where he explains why it's necessary to pity economists. Are they all living in squalor while they stave off disasters that threaten us all?

  13. http://blogs.wsj.com/economics/2015/09/29/brookings-economist-resigns-under-pressure-from-warren/ just read this. He may be an educated man, but that doesn't mean you should trust him.

  14. Tupacca101 month agohttp://blogs.wsj.com/economics/2015/09/29/brookings-economist-resigns-under-pressure-from-warren/  just read this.  He may be an educated man, but that doesn't mean you should trust him.

  15. Most of what he was explaining is behavioural economics which plays a key part in much of our lives; i would suggest anyone interested in this field and how it has come to prominance over the more mathematical based economics read 'MisBehaving' by richard thaler.

  16. I work for a major delivery company in the United States. one of the biggest reasons they do have regulations for the Trucking industry is safety. from tires to breaks horns, lights, and to have a predictable route. it sounds dumb but it's very important. Life Safety is very important!

  17. maybe cupid is in trouble because of its sustainability model of its customers probably because its forced somehow through agreements to share markets with other dating websites and apps¬†which is a problem for those who are truly looking to find the right one because of the loop loop forever loop loop and loop here loop there might as well call it the loop business model of match no match of here there here there and so specifically for each site¬†resulting in time consuming at cost of daters…then I age and age and age and still single but uglier¬† *sigh¬† whats the economy timeline for dating website boom…is it when everyone gets tired of online dating and never finding the right one forever…the non free website which some people cannot afford

  18. Well, a good attempt @ selling economics. He should mention the global financial crisis of 2007 as the work of economics as well. Every field has its downside. You cannot talk about physics without mentioning that it made the tragedy of Hiroshima possible. Instead of going on about the internet economy and online dating, y didn't he speak to the problem of climate change, food security and poverty. Problems which modern economics made possible and has no solution in sight.

  19. What was the point of this talk? Respect economists? Economists are people like everybody else. Some economists are driven by free market/neo-liberal ideas ,such as Litan. (The type that will write so called free trade agreements that transfer power from citizens to private corporations). Then there are economists that believe we need a new direction, such as, perhaps controlling the financial system in such a way that we don't end up with another financial crisis. (Refer to the current estimated value of the derivatives market: 1 Quadrillion $, Panama papers, money controlling governments) Seemed to me like Litan was just trying to push a specific ideology here. Boring as hell.

  20. What a load of old cobblers.  May I assure Robert and his colleagues, that I have never bought a single thing in my entire life, in response to advertising, no matter its format.  Furthermore, I have never at any time needed the assistance of an "economist" in my personal and professional lives.  [aerospace engineer]

  21. I can't really find the point of this presentation. It just shows which decisions have been influenced by economists. So what?! You can find examples of decisions that have been influenced by some group for every single profession.

  22. This whole talk is thoroughly contained within the notion that the Market is a humane and healthy way of dealing with resources and human interaction.

  23. The great miracle in online advertising has really been though, finding a way that people actually click on those things.

  24. I still don't understand why the idea of government intervention is seen as bad. With airlines themselves being in an oligopolistic market surely without the use of government intervention price fixing cartels will/have formed leading to this market which should be competitive to acting as though it is a monopoly. Additionally if the market itself was seen as contestable, William Baumol himself even said that contestable markets do not act as though competitive. Due to consumers needing time to respond to a new firm entering the market at a lower price the idea of perfect contestability is about as realistic as perfect competition.

  25. I cannot agree with his logic.

    Scarcity makes people feel stifled and disheartened.

    The false replies and coning people (advertising)

  26. You spend money the same way you spend time and thought Р£££ $$$ is just a middle man between selling your labour and buying what you value

  27. Economics (/…õk…ôňąn…ím…™ks, iňźk…ô-/) is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work.

  28. totaly idiotic.
    google is the monopolistic access to the market.
    you know nothing about economics. google is selling your marketplace and mine.
    you pay for that in products. google forces competition to crazy seo standards. you pay for that too !!
    THEN, the government doesnt get all that money.. shareholders get the extortion money.
    so You pay AGAIN ! in taxes. Busted.
    then they figured out thet can cheat too ! !.. so now you pay a forth time when the buddy buddy networks charges extra !

  29. I never knew economists played a vital role. I used to think they were all talk and not thing meaningful to back it but they have infact built the tracks for the train. Train being the Web retail industry or any online industry for that matter.

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