The Last Straw/Frank McNally: We're all familiar with the Economist's globalisation indexes, in which the local price of a Big Mac or a Starbucks latte is used to measure whether a currency is at its "correct" level against the dollar.
But in a letter to this newspaper on Thursday, William A. O'Gorman raised a more interesting issue: whether, at €1.50, The Irish Times (IT) is at its "correct" level against the price of a pint of stout. Mr O'Gorman did not ask this in so many words. He did point out, however, that when he started drinking stout, it cost "one shilling and four pence", and the IT cost tuppence. "One could therefore buy eight copies of The Irish Times for the price of a pint," he said; whereas now, the exchange rate has fallen to "fewer than three" ITs for the same stout unit.
Clearly, he considers the rise in the IT's value against the pint a bad thing. What is equally clear is that others would disagree. The newspaper's commercial executives and the temperance movement, to name just two groups, would probably favour further moves towards parity. The question is: where exactly does price equilibrium lie? Luckily, with its D-plus in Leaving Cert Economics, this column feels qualified to answer.
First, some basic points. We must obviously go back several decades to Mr O'Gorman's first pint, and the intervening period has seen important changes in newspaper technology. Like Guinness, The Irish Times would only have been available in black and white back then, a situation now happily changed. This is not to criticise Guinness for failing to go colour like the rest of us: I'm sure they had their reasons.
The newspaper has also expanded greatly in recent years, something you can't say of the pint. The IT now offers special supplements every day, whereas stout has no special supplements at all, except maybe iron. On the other hand, in areas where it matters, the IT has been a guardian of tradition. For example, the paper is still served at room temperature, even in Dublin. But don't get me started on that.
Anyway, back to economics, and the issue of whether the products have achieved the correct price level vis-à-vis each other. Clearly we cannot go too far down the road of direct comparison here without running into the problem of our old friend Heteroskedasticity. I can see you nodding in familiarity with the term. So, since one of us may know what Heteroskedasticity means, I'm going to drop the subject before I embarrass myself.
A more important issue is Marginal Utility. When we mention buying three or eight ITs with the price of a pint, we are of course speaking hypothetically. Even our most enthusiastic readers tend to restrict themselves to one copy a day. Thus the paper may be said to have low marginal utility.
For example, it's pleasant to sit in a pub on Saturday afternoon, sipping a pint and reading the IT. But if we must choose between ordering extra stout or extra The Irish Times, we will probably order another pint, because that offers a better chance of increased happiness, whereas a second copy of the paper - however excellent - would incur the Law of Diminishing Returns.
Then, say, while we're having the second pint, we notice that the horse we backed in the 3.10 at Plumpton - as recommended by The Irish Times - has just won. We now must decide how much of our extra wealth to spend: what economists call our Marginal Propensity to Consume. Ingrates that we are, we're still not going to buy another copy of the newspaper. More likely, we'll choose a third pint.
I mention this only to hint at how dangerous it would be if the trend Mr O'Gorman complains of were in the opposite direction. Even at three pints per IT, our marginal propensity to complete the crossword is severely diminished. After eight pints, we're liable to spend the night asleep on a park bench, drooling (what economists call the Trickle-down Effect), with the newspaper on top of us. Of course, daily consumption of eight pints would soon lead to inflationary pressures. This is where the issue of Elasticity comes in. If you drink eight pints and your trousers are what economists call "relatively inelastic", button-loss is inevitable.
So in summary, what is our answer to the question about the IT-pint relationship? Well, like all economists, we have no idea really, and only time will tell. An exchange rate of fewer than three pints per newspaper may or may not represent price equilibrium. All we can say with confidence is that any more than three pints may reduce equilibrium generally.