The Economics of Moneyball

Bennett Miller’s film Moneyball (2011) recalls the story of Oakland Athletics (the A’s) General Manager Billy Beane, as he struggled to build a winning team on the lowest budget for players’ salaries in Major League baseball. Knowing he needed to find some competitive advantage without the budget to simply buy it, he turns the player selection process completely on its head. He employs statistical data analysis to rank candidates on their desirability for the A’s roster, calculating a numerical value for each player and getting the best ability with his limited budget.

This compelling film about a small team that went against all odds also manages to cover multiple economic topics: statistical analysis, entrepreneurship, market efficiency, and constrained maximizations problems.

The film chronicles a budget constraint problem:  the A’s were limited to a $40 million budget and were competing against teams with budgets in the $125 million range, such as the New York Yankees.  Billy Beane understood that the only way the A’s could succeed in a system where so much depended on wealth (which created a incredibly unfair advantage) was to innovate to find new ways to win.  By incorporating statistical analysis, the A’s could create a competitive team within their budget. The analysis allowed them to avoid biases in selection that would lead to over-valued, underperforming players.

Moneyball provides a definition of the economic term coined by Schumpeter “creative destruction” – which basically involves a process of radical innovation to revolutionize the existing approach and replace old and inefficient methods with superior and more effective ones.

Business enterprises and other institutions are dogged by inefficiencies so embedded that we consider them business as usual. For example, firms may find it difficult to be flexible with investments or initiatives that would allow them to fully tap the resources their front-line, low paid employees may have to offer. The Moneyball story shows that it is possible to break this inefficient cycle but that it may require a difficult competitive situation before even being considered. Companies and governments could reap tremendous advantage by getting ideas from all parts of their organization and encouraging change to create better products and greater productivity.  GE does this with their “workout” approach which lets large groups of employees spend a day brainstorming on ideas to address a business problem and then present their ideas to top management for an immediate “yes” or “no” – who better to ask then the people who face the issue every day?

Top of the Class

Chapter 4 of Poor Economics by Banerjee and Duflo, entitled “Top of the Class”, discusses the difficulties developing countries encounter in their school system.  Over the past several decades, school attendance rates have been rising, however, very low learning levels persist nevertheless. In examining this topic, it is important to consider whether at stake is an issue of supply, demand, or a combination of both.

Those who emphasize “supply of schooling” focus on the need to increase attendance rates in schools, which hopefully have well-trained teachers, believing that if this happens, the issue of low learning levels should work itself out.  Clearly there is some validity to this since globally the “child absentee rates vary between 14 percent and 50 percent” (PE pg 72). One of the main issues here is that “in many developing countries both the curriculum and the teaching are designed for the elite rather than the regular children who attend school” (PE pg 93).

An opposing view, that of the “demand wallahs,” is that “the quality of education is low because parents do not care enough about it, and they don’t because they know that the actual benefits are low” (PE pg 76).  This also holds true because in developing countries, parents often expect too little or too much of schools.

Clearly, there are persistent issues on both the demand and supply side of the issue, and this creates negative expectations that lead to an inefficient school system.  On a positive note, however, the expectations of schools and parents can be altered and then action taken to provide children with the kind of education that could have life changing implications.  The first step would be getting schools to recognize that they need to satisfy the academic needs of all students, giving every child an equal chance.

“Experts Tackling Education in Africa” by Gabe Joselow deals with the same issues of improving education in developing countries, but specifically focuses on Africa.  The article discusses the same fundamental “two schools of thought on the subject”: bottom up investment and top down investment.

Both are persistent issues in Sub-Saharan Africa, the lowest ranked region globally on the United Nation’s Educational Development Index (EDI).  On the supply side, there are persistent issues of attendance: “The U.N. Education Agency (UNESCO) says a quarter of all children in sub-Saharan Africa do not go to school, and account for 43 percent of the world’s out-of-school children” (Expert Tackling Education in Africa). On the demand side, it is projected by the African Union (AU) that “the continent will need to recruit more than 2 million new teachers by 2015, just three years from now” (ETEIA).

While the scope of discussion of the issues covered in Poor Economics and in the Joselow article does vary somewhat (for example, Experts Tackling Education in Africa also stresses the need to improve upon higher education, rather than just focusing on basic education). However, the conclusions drawn in both works are similar: improvements need to be made on the demand and on the supply side of the school sector in developing countries.

One particular element of this debate that deserves more attention is the cyclical nature of these supply and demand side issues.  If developing countries focus solely on increasing attendance rates in the hope that the education issue will resolve itself, this will surely lead to an inefficient and ineffective school system.  But, if there is balanced growth (supply and demand improvements), schools and parents can begin to raise their expectations simultaneously and the benefits of a well-planned and stable school system will yield an education that all can take advantage of.

 

 

Life Expectancy & GDP

Thesis: As real GDP per capita increases in a particular country, life expectancy will increase as well.

Data sets:

Independent variable – GDP per capita (Current US$):

http://data.worldbank.org/indicator/NY.GDP.PCAP.CD

Dependent Variable – Life expectancy at birth (years):

http://data.worldbank.org/indicator/SP.DYN.LE00.IN

One of the most important demographic trends over the next several decades will be the increased average age of the population.   As an example, today, about 30% of Japan’s population is over the age of 60; by 2030, this segment of the population is forecast to exceed 45% of the total.  Other markets, such as Germany and Italy, are not far behind.  Even China, with its one-child policy, will face this issue within the next few decades.

For this trend, there will be serious implications for healthcare, taxes (with less workers supporting more retired people), social security, production capacity, and other economic and social areas.  As a country’s GDP per capita rises, it is reasonable to expect quality of life – particularly food and healthcare — to improve, which should give rise to increased life expectancy for the country’s population.

Although the thesis is that there will be a strong correlation between the independent and the dependent variables, it is rare to see a pure relationship between economic variables. And since this relationship is imprecise, a random error term will likely need to be included to account for all other variables that might have an effect on life expectancy.

Several variables may present issues in determining this relationship, such as level of pollution (possibly in China or India), income distribution (oil-rich areas of the Middle East), tendency towards alcoholism (Russia) and other aspects that might come out as we examine the outlying countries to the relationship implied by the central thesis.  There may also be a lag between the two variables, as increases in life expectancy may only occur after increases in GDP have been able to impact the quality of healthcare and nutrition.

Drug Dealers

The notion that crack dealers were fairly wealthy became entrenched in the minds of the general public following the crack cocaine boom of the 1990s.  While the introduction of crack “was hardly a black-only phenomenon, it hit black neighborhoods much harder than most” (Freakonomics, pg. 111). African-American infant mortality rates skyrocketed in the 1990s, together with increased rates of underweight babies and parent abandonment. Not only that but “the number of blacks sent to prison tripled” and “within a five-year period, the homicide rate among young urban blacks quadrupled” (Freakonomics, pg. 112).

One would assume that an illegal activity so destructive to society and thereby one of the most dangerous ways to make a living, would at least provide significant economic gains to the individuals taking the risks. Chapter 3 of Freakonomics sets out to answer the question that follows from all this: why exactly do a great deal of crack dealers still live at home with their moms?

Whether it is a major American corporation or a crack cocaine gang, whether criminal or legitimate business, individuals choose occupations for certain reasons: people are motivated to get what they want, especially in situations where others may desire the same thing. “… A crack gang works pretty much like the standard capitalist enterprise: you have to be near the top of the pyramid to make a big wage,” (Freakonomics, pg 100).  The foot soldiers (low level crack dealers) receive a pitiful $3.30 an hour, hardly attractive given that they also work the streets, making themselves extremely susceptible to violence from other gangs and junkies, and at risk of being arrested and imprisoned.  

Sudhir Venkatesh, a graduate student at the University of Chicago, managed to befriend the leader of a very large local crack gang — Black Disciples leader J.T. The gang worked “like most American businesses, actually, though perhaps none more so than McDonald’s. In fact, if you were to hold a McDonald’s organizational chart and a Black Disciples org chart side by side, you could hardly tell the difference” (Freakonomics, pg. 96) Through his friendship with J.T., Venkatesh was able to interact with the gang for six years, and received notebooks documenting four years of the organization’s financial transactions. These provided many insights:

A member of J.T.’s gang could expect to face the following events during the four years recorded:

1)  Being arrested 5.9 times (pg 101)

2)  Receiving 2.4 nonfatal wounds or injuries (pg 101)

3)  A 25 percent chance of being killed  (pg 101)

4)  Pay averaging $3.30 per hour for foot soldiers (pg 102)

These statistics provide many answers, but also raise many questions. “If crack dealing is the most dangerous job in America, and if the salary was only $3.30 an hour, why on earth would anyone take such a job?” (Freakonomics, pg. 102)

The order in which the statistics are introduced paints a truly sad picture for those who must engage in such illegal activities to make money.  56 percent of children in the neighborhood where J.T.’s gang operated lived below the poverty line, which explains in part why so many may resort to criminal activity, since “the path to a decent legitimate job was practically invisible” (Freakonomics, pg. 102).

The fact of the matter is, there is no way anyone would subject themselves to such bleak chances of living a happy life if they had another option.  Under different “circumstances, they might have thought about becoming economists or writers” (Freakonomics, pg. 102).

And while they must subject themselves to the possibility of myriad terrible events, most crack dealers just want to succeed and do well in a competitive field.  Whether it is to support their families, or simply themselves, the small chance that they would reach the top of the organization provides enough economic incentive to choose the most dangerous job in America.  While crack dealers’ harsh lives are unlikely to even last long enough for them to reach the top, they are responding to incentives – just like everyone else in business does.

Low-Hanging Fruit

When assessing advancements in underdeveloped countries, health is an area that can offer enormous benefits at minimal cost to the population. But if it is that simple, why are people not taking advantage of the “low-hanging fruit available, from vaccines to bed nets, that could save lives at a minimal cost, but all too few people make use of such preventative technologies” (Poor Economics (PE), pg 41)?

Of the 9 million children under the age of five that die each year in South Asia and sub-Saharan Africa, about 25 percent succumb to diarrhea, a condition that can be prevented by using chlorine bleach to purify a family’s water supply, and can be treated with ORS (a mixture of water, sugar, and salt). Both of these are affordable to people, especially with government or NGO subsidies.

For example, in Zambia, with the help of the Population Service International (PSI), a family of six can afford enough bleach to purify its water supply for a month, costing only 800 kwachas ($0.18 USD).  “But only 10 percent of families use it” (PE, pg 42). Poor Economics authors Banerjee and Duflo highlight this statistic to ponder the fact that the populations of underdeveloped countries do not take advantage of certain simple yet effective solutions to problems.  There are, however, many other elements that factor in to the realities of health care in developing countries.

Jeffrey Sachs, author of The End of Poverty, makes the claim that “poor people are stuck in a health-based poverty trap and that money can get them out of it” (PE, pg 48). For example, breast-feeding is recommended by the World Health Organization for at least the first six month of an infant’s life, and since it costs nothing, one would think every mother would choose to breast feed. But only an astonishing 40 percent of infants globally are exclusively breast fed for the first six months.

So why then are effective and accessible options such as breast-feeding, or vitamin B supplements, iron pills, iron fortified flour, deworming drugs, and various other inexpensive public health technologies being neglected or under-used?

One reason is the ineffective nature of institutions in developing countries.  Public health doctors are often under qualified, and end up overmedicating patients. For example “the usual form of treatment for diarrhea, fever, or vomiting is to prescribe antibiotics or steroids, or both, usually injected” (PE, pg 53).  This in turn has contributed to patients’ increasing resistance to antibiotics. There have been many cases of premature aging due to overuse of steroids. On average, public health care providers in India spend only two minutes per patient.   Governments and medical institutions need to introduce initiatives to educate the public of the dangers of overusing drugs, and encourage them to take immunization measures much more seriously.

In the developing world, people have lost faith in public health care systems, and understandably so. Government centers are supposed to be open six days a week, six hours a day” (PE, pg 54). Of the 100 health care facilities visited, “56 percent of the time” (PE, pg 54) they were closed.  And so, people will continue to ignore public healthcare because they are seen to be simply ineffective. Unfortunately, people may also conclude that other health care provision services are equally useless.

The poor need to be convinced of the huge benefits of immunization and improvements are needed in the quality of treatment provided to the public.  In the long run, investment in public health will bring benefits that completely outweigh the cost.

Those fortunate enough to have grown up in developed countries, where, over time, effective public health and sanitation systems (such as required immunization for children, or effective sewage management systems) have become embedded, need not worry about basic health and hygiene issues.  While it may be a daunting task, we have the responsibility to communicate the benefits of immunization and other life-saving health and hygiene practices.  There is no single answer to the health-based poverty traps faced by the poor in underdeveloped countries, but if faith can be restored in the health care system and the benefits of immunization can be universally understood, the potential benefits could be enormous.