The voodoo of lobster economics
theglobeandmail.com
theglobeandmail.com
In neoclassical economics, we assume rational actors. So it must be 2. But why would a Bengali villager get much less utility out of a lobster dinner than a San Francisco yuppie? Sesfood is a staple in Bangladesh, and lobster is a delicacy. [1] The answer is because they're poor: measured by the market, they, ostensibly, ascribe less value to everything than the San Francisco yuppie.
That's an interesting result. The San Francisco yuppie derives far more utility from that lobster than the Bengali villager does. Why? Because he's richer. By the measure of the market, the rich derive far more utility from everything, and the market allocates scarce resources to those who value them the most.
[1] This is not an example out of an economics textbook, where country A sells something it doesn't value to country B who does value it.
Edit/Clarification: the essence of social welfare economics is in trying to do interpersonal utility comparisons that yield a social utility function that behaves as much as possible like a personal utility function. Arrow's theorem tells us that this is not possible to do perfectly; any attempt to do so will result in one of several significant deviations from what we consider "utility" for a single person.
Utility is a very specific tool devised to model choice behavior. It is a basic idea of utility theory that "Vikram gets much less utility from the lobster than Yolanda" is not a meaningful statement within the framework. There's no wrangling or wiggle-room with this point; interpersonal utility is formally incomparable.
Similarly, it is well-trodden that markets tend to allocate scarce goods to those with the greatest willingness and ability to exchange other scarce goods for them; market theory doesn't presume to say anything about who enjoys the scarce goods the most. This is why, beyond choice and market theory, we need something that addresses social value systems. Utility does not pretend to do this, except to the extent that an individual may value social justice in their personal utility function.
So, while I take your point that my post was technical and, yes, dry, them's the ropes when it comes to utility theory. Correct statements tend to be boring ones that don't evoke human interest. If one wants to evoke human interest (a perfectly reasonable goal) I think it's best not to mix in half-appropriate technical concepts when there is substantial potential for confusion.
[0] For anyone who is curious, I estimate 80% of Ariely's "irrational" examples are easily explained by understanding that making optimal choices with imperfect information has a cost in time and effort; when you price in this cost in time and effort, making suboptimal-but-easy-to-make or even random choices is actually perfectly rational within the framework.
You could also make the argument that the villagers have the opportunity to have $60 of enjoyment at a bargain price, whereas the San Francisco yuppies must pay a high price.
You can't have it both ways. The only affect that the market has on the local market for lobsters in Bangladesh, is via the price in Bangladesh, i.e. the price the fishermen pay.
So to the extent that they are affecting the market in Bangladesh, they must be paying higher prices, and therefore the parent comment applies.
>But unless you're an economist, you have to posit that the enjoyment from a lobster dinner is the same whether you're a Bengali villager or a yuppie in San Francisco. In a sense they're giving up $60 of enjoyment to get a couple of dollars of cash.
The economists are in fact correct. You cannot measure enjoyment in dollars, because $60 will buy a lot more additional enjoyment for a Bengali villager than a San Francisco yuppie. So the villager would be willing to give up the enjoyment of a lobster dinner for much less than $60, which is precisely what they are doing.
Huh? I could take a friend to a restaurant and order two of the same dish. Odds are sky-high that enjoyment from eating the same dish, prepared in the same restaurant, against the same cultural background, would be rather different.
Well, to me they are still bugs of the sea. Vile, really.
https://www.youtube.com/watch?v=lR5yWTf2ajE&t=4m33s
tl;dw westward expansion in North America meant people were increasingly living in areas without plentiful lobster -> refrigeration and canning made shipping lobster west possible -> lobster was fished heavily to meet demand -> lobster populations declined -> rare lobster means expensive lobster
There is still bad lobster in existence today. I grew up in Maine and at once point worked in the lobster-fishing industry. Later on, to my dismay, the Army used to feed us lobster that had been boiled until it was water flavored meat. Such a waste.
I loved the taste of lobster as a child. Feed me caviar then, and I'd be completely grossed out.
"Lobsters were so abundant in the early days—residents in the Massachusetts Bay Colony found they washed up on the beach in two-foot-high piles—that people thought of them as trash food. It was fit only for the poor and served to servants or prisoners. In 1622, the governor of Plymouth Plantation, William Bradford, was embarrassed to admit to newly arrived colonists that the only food they “could presente their friends with was a lobster … without bread or anyhting else but a cupp of fair water” (original spelling preserved). Later, rumor has it, some in Massachusetts revolted and the colony was forced to sign contracts promising that indentured servants wouldn’t be fed lobster more than three times a week."
From http://www.psmag.com/navigation/business-economics/how-lobst...
Boggles the mind.
[1] http://gene-callahan.blogspot.com/2014/05/rich-and-poor.html
I was disappointed that the article's title promised something really interesting or counterintuitive -- instead, it's just a pretty normal cost breakdown.
But given the title, he will get people who think they are being ripped off to read it, and then they will perhaps find they aren't really being ripped off, there are just a lot of hands between them and the lobster's origin.
Amazon Seafood, anyone?
The voodoo nature is probably around almost all the value being constructed by multiple layers of profit taking middlemen in a supposedly blue collar occupation. This is seen as the norm for the FIRE economic sector, seems odd in a blue collar sector.
I'm mystified why no one vertically integrates. If "Red Lobster" owned their own fleet of boats and hired men, they would cut out a lot of profit currently going to multiple stages of middlemen.
Or if not big business, one dude could fish during the season, fill his personal warehouse, then go food truck it or whatever for the rest of they year and haul down an immense profit.
It would appear that they're trying to do that. Not via fishing, but farming:
http://articles.orlandosentinel.com/2012-04-08/business/os-d...
What I found interesting was that the economics are affected by both spatial and temporal locality. The part about holding tanks that could keep lobsters alive for months to sell them out of season when prices were higher is a good reminder that eating seasonally can be as import for affordability as eating locally.
It can be locally grown or imported. It depends on the client. Some buy in bulk from local farmers, keep it (paying storage costs) then sell later.
Anyway, I think the markup at the restaurant is the highest. Maybe on the coast you can get a 2 lb lobster for $30, but that would be a ridiculously low price elsewhere. A steakhouse I went to last week in Nashville was charging $160 for a one pound lobster!
I actually found the middle-men involved to have a reasonable markup on the product. The price really gets jacked up at the restaurant where they have all of the overhead to cover.
So the moral to me is to cook your own food!
On the other hand, I remember buying live lobsters between $5 and $8 a pound in a Boston grocery store. According to this article that would be a very small markup (and maybe sometimes lobsters were a loss leader).
Wait. What happened to the codfish? Overfishing?
Yep. If you were wondering why so many east coasters are in Alberta digging for oil this is why.
http://en.wikipedia.org/wiki/Collapse_of_the_Atlantic_northw...
It's a fascinating story. The collapse happened suddenly, in the early 1990s, and the stock of Atlantic cod has yet to recover.
Larry's value out of the water: $8.00
Value after staying at LobsterWorld: $9.30
Value after staying at Tangier (aka lobster spa): $11.60
Value after flying FedEx: $14.40
Value after passing through wholesaler: $17.40
Value on plate: $52.20
It looks as though the 'voodoo' (if there is any) of lobster economics is mainly set by the restaurant who marks up the product.
An excellent lobster dinner for $30 is good value. I now knew, however, that the actual cost of Larry was barely $10 a pound. But that’s the formula in the restaurant business. “On the industry standard theory,” Chris said, “a third of what you sell it for is food cost.”
Restaurant Man by Joe Bastianich:
http://www.amazon.com/Restaurant-Man-Joe-Bastianich/dp/B00B9...
Linen is the number-one evil, because it is expensive and no one pays for it. Same with bread and butter. ... paying a dollar and a quarter for a tablecloth and thirty-five cents for each napkin that someone gets dirty before they even have their first drink is a drag.
Just because a meal is expensive doesn't mean it suddenly pays more of the rent. It's the profit margin while he's making a loss on other meal.
If all those diners had bought a $40 meal instead, the rent would not have magically decreased.
The amount of effort put into these industries boggles the mind.
Also,"The Secret Life of Lobsters" is a great book. It was a best seller so it must have had wider appeal than youd think.