Capitalism – Page 15 – artdiamondblog.com

Renaissance Florence: “A Really Vibrant, Flexible, and Free-Market City”

Source of book image: http://covers.booktopia.com.au/big/9781421400594/the-economy-of-renaissance-florence.jpg

(p. 176) Chapters 4 and 5 deal with manufacturing, by far the main source of employment in the city. The Florentine textile industry had developed thanks to the Arno River, which provided water and power, and had become a market leader in Europe for high-quality products. Production was based, as everywhere in Europe, on a putting-out system–but strictly confined to the city. The author describes the organization and its changes over time, stressing, as for international banking, the flexibility of firms and their high turnover. Workers were organized in guilds, but the author stresses their nature as political associations rather than their economic role. Florentine guilds did not restrict the access to profession nor stifle innovation. Chapter 6 describes the banks catering for urban market–including local branches of international banks as well as smaller local firms, plus pawnbrokers, both Catholic and Jews. Local banks appeared thoroughly modern in their business and the resort to banking services was quite widespread. Artisans and workers were routinely paid with checks and had bank accounts. And the whole system worked well with almost no state intervention, at least until the late sixteenth century.
. . .
. . . , the author argues that Florentine society was very upwardly mobile, at least for the standard of the time and that the distribution of wealth by household according to the 1427 Catasto was fairly equal (although inequality increased in the next century).
(p. 177) As a whole, at the end of the book one has the impression of a really vibrant, flexible, and free-market city. The standard of living was undoubtedly high and not only for the wealthy, as witnessed by the art treasures of the city, but also for the working class. Literacy and numeracy was very common, and the majority of children attended a primary school.

For the full review, see:
Federico, Giovanni. “Review of: The Economy of Renaissance Florence.” Journal of Economic Literature 48, no. 1 (2010): 175-77.

Book under review:
Goldthwaite, Richard A. The Economy of Renaissance Florence. Baltimore, MD: The Johns Hopkins University Press, 2009.

People “Enmeshed in Modern Commerce” Are More Generous

(p. C4) A few years ago, Joe Henrich of the University of British Columbia and his colleagues did a series of experiments in small-scale societies in the Amazon, New Guinea and Africa. They asked people to play the “ultimatum game,” in which a player must decide how much of a windfall he needs to share with another player to prevent the other player from exercising his right to veto the whole deal. The more the small-scale society is enmeshed in modern commerce, the more generous the offers people make. This may shock those who believe in Rousseau’s idea of the “noble savage,” but not those who believe in the virtues of what Montesquieu called “sweet commerce.”
. . .
. . . , though human beings do kind things unrewarded for their neighbors, for reward they also do kind things for strangers: They hand more cash to merchants than they do to beggars.

For the full commentary, see:
MATT RIDLEY. “MIND & MATTER; Which Makes Us Nicer, Team Spirit or Trade?” The Wall Street Journal (Sat., August 27, 2011): C4.
(Note: ellipses added.)

Page 76 of the Henrich et al article has the key result that Ridley summarizes:
Henrich, Joseph, Robert Boyd, Samuel Bowles, Colin F. Camerer, Ernst Fehr, Herbert Gintis, and Richard McElreath. “In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies.” American Economic Review 91, no. 2 (May 2001): 73-78.

Behavioral Economics Does Not Undermine Capitalism

Source of book image: http://www.brainpickings.org/wp-content/uploads/2011/10/thinkingfastandslow.jpg

Daniel Kahneman first gained fame in economics through research with Tversky in which they showed that some of economists’ assumptions about human rationality do not always hold true.
Kahneman, whose discipline is psychology, went on to win the Nobel Prize in economics, sharing the prize with Vernon Smith. (Since the Prize is not normally awarded posthumously, Tversky was not a candidate.)
I have always thought that ultimately there should be only one unified science of human behavior—not claims that are “true” in economics and other claims that are “true” in psychology. (I even thought of minoring in psychology in college, before I realized that the price of minoring included taking time-intensive lab courses where you watched rats run through mazes.)
But I don’t think the implications of current work in behavioral economics are as clear as has often been asserted.
Some important results in economics do not depend on strong claims of rationality. For instance, the most important “law” in economics is the law of demand, and that law is due to human constraints more than to human rationality. Gary Becker, early in his career, wrote an interesting paper in which he showed that the law of demand could also be derived from habitual and random behavior. (I remember in conversation, George Stigler saying that he did not like this paper by Becker, because it did not hone closely to the rationality assumption that Stigler and Becker defended in their “De Gustibus” article.)
The latest book by Kahneman is rich and stimulating. It mainly consists of cataloging the names of, and evidence for, a host of biases and errors that humans make in thinking. But that does not mean we cannot choose to be more rational when it matters. Kahneman believes that there is a conscious System 2 that can over-ride the unconscious System 1. In fact, part of his motive for cataloging bias and irrationality is precisely so that we can be aware, and over-ride when it matters.
Sometimes it is claimed, as for instance in a Nova episode on PBS, that bias and irrationality were the main reasons for the financial crisis of 2008. I believe the more important causes were policy mistakes, like Clinton and Congress pressuring Fannie Mae and Freddie Mac to make home loans to those who did not have the resources to repay them; and past government bailouts encouraging finance firms to take greater risks. And the length and depth of the crisis were increased by government stimulus and bailout programs. If instead, long-term cuts had been made in taxes, entrepreneurs would have had more of the resources they need to create start-ups that would have stimulated growth and reduced unemployment.
More broadly, aspects of behavioral economics mentioned, but not emphasized, by Kahneman, can actually strengthen the underpinnings for the case in favor of entrepreneurial capitalism. Entrepreneurs may be more successful when they are allowed to make use of informal knowledge that would not be classified as “rational” in the usual sense. (I discuss this some in my forthcoming paper, “The Epistemology of Entrepreneurship.”)
Still, there are some useful and important examples and discussions in Kahneman’s book. In the next several weeks, I will be quoting some of these.

Book discussed:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

The Becker article mentioned above is:
Becker, Gary S. “Irrational Behavior and Economic Theory.” Journal of Political Economy 70, no. 1 (Feb. 1962): 1-13.

The Stigler-Becker article mentioned above is:
Stigler, George J., and Gary S. Becker. “De Gustibus Non Est Disputandum.” American Economic Review 67, no. 2 (March 1977): 76-90.

If Milken’s Bonds Are “Junk” then Yunis’ Microloans Are “Junk” Too

(p. 167) The world owes a debt of gratitude to Mike Milken and his creative team. Did some people go too far? Yes. Did some of them take advantage of the freer flow of capital and end up doing more damage than good? Sure. But markets are messy. Major shifts in the flow of capital often lead to periods of excess before the pendulum swings back and equilibrium is restored. Mike Milken and his team made a major contribution to today’s market atmosphere of high liquidity, which in turn has also helped lift the world’s poor out of poverty. Today the Grameen Bank in Bangladesh has created microloans for mothers living on $2 a day. And that won Grameen the Nobel Prize. The Nobel Committee didn’t call microloans “junk” debt.

Source:
Wyly, Sam. 1,000 Dollars and an Idea: Entrepreneur to Billionaire. New York: Newmarket Press, 2008.

Michael Milken Provided “Access to Capital for Growing Companies”

(p. 163) Although [high yield] . . . bonds eventually became known as a favored tool for leveraged–buyout specialists in the 1980s, Mike’s original goal was different. He wanted to provide access to capital for growing companies that needed financing to expand and create jobs. Most of these companies lacked the investment grade” bond ratings required before the big financial institutions would back them. Mike knew that non-investment-grade (a k a “junk”) companies create virtually all new jobs, and he believed that helping these companies grow strengthened the American economy and created good jobs for American workers.
It was by studying credit history at Berkeley in the 1960s that Mike developed his first great insight. He found that while there could be significant risk in any one high-yield bond, a carefully constructed portfolio of these assets produced a consistently better return over the long run than supposedly “safe” investment-grade debt. This was proved during the two decades of the 1970s and ’80s when returns on high-yield bonds topped all other asset classes. Mike saw a great opportunity when he realized that the perception of default risk far exceeded the reality. In fact, these bonds had a surprisingly low-risk profile when adjusted for the potential returns.
After twenty years of superior gains, the high-yield bond market finally fell in 1990. Actually, it didn’t fall–it was pushed by unwise government regulation that forced institutions to sell their bonds. The dip only lasted a year, however, with the market roaring back 46 percent in 1991.
Mike’s competitors–Goldman Sachs, Morgan Stanley, and Credit Suisse First Boston, the old oligopolies of the syndication (p. 164) business–labeled them “junk bonds” to disparage Mike’s brainchild. He was not a member of their white-shoe club and they were not going to take his act lying down.

Source:
Wyly, Sam. 1,000 Dollars and an Idea: Entrepreneur to Billionaire. New York: Newmarket Press, 2008.
(Note: bracketed words and ellipsis added.)

Lucasfilm Will Build Somewhere “That Sees Us as a Creative Asset, Not as an Evil Empire”

“Lucas Valley in Marin County, Calif., where residents’ objections led George Lucas to abandon a bid to expand operations at a new site near Skywalker Ranch.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A13) SAN RAFAEL, Calif. — In 1978, a year after “Star Wars” was released, George Lucas began building his movie production company far from Hollywood, in the quiet hills and valley of Marin County here just north of San Francisco. Starting with Skywalker Ranch, the various pieces of Lucasfilm came together over the decades behind the large trees on his 6,100-acre property, invisible from the single two-lane road that snakes through the area.

And even as his fame grew, Mr. Lucas earned his neighbors’ respect through his discretion. Marin, one of America’s richest counties, liked it that way.
But after spending years and millions of dollars, Mr. Lucas abruptly canceled plans recently for the third, and most likely last, major expansion, citing community opposition. An emotional statement posted online said Lucasfilm would build instead in a place “that sees us as a creative asset, not as an evil empire.”
If the announcement took Marin by surprise, it was nothing compared with what came next. Mr. Lucas said he would sell the land to a developer to bring “low income housing” here.
. . .
Whatever Mr. Lucas’s intentions, his announcement has unsettled a county whose famously liberal politics often sits uncomfortably with the issue of low-cost housing and where battles have been fought over such construction before. His proposal has pitted neighbor against neighbor, who, after failed peacemaking efforts over local artisanal cheese and wine, traded accusations in the local newspaper.
The staunchest opponents of Lucasfilm’s expansion are now being accused of driving away the filmmaker and opening the door to a low-income housing development. That has created an atmosphere that one opponent, who asked not to be identified, saying she feared for her safety, described as “sheer terror” and likened to “Syria.”
Carl Fricke, a board member of the Lucas Valley Estates Homeowners Association, which represents houses nearest to the Lucas property, said: “We got letters saying, ‘You guys are going to get what you deserve. You’re going to bring drug dealers, all this crime and lowlife in here.’ “

For the full story, see:
NORIMITSU ONISHI. “A Pyrrhic Victory for Foes of a New Lucasfilm Project; In Lieu of digital Studio, Plan for Low-Income Homes.” The New York Times (Tues., May 22, 2012): A13 & A19.
(Note: ellipsis added.)
(Note: the online version of the story is dated May 21, 2012 and has the title “Lucas and Rich Neighbors Agree to Disagree: Part II.”)

“Mr. Lucas said Marin needs affordable housing. A resident called his plan “class warfare.”” Source of caption and photo: online version of the NYT article quoted and cited above.

Entrepreneur Krupp Was Paternalistically “Benevolent” and Was Skeptical of Capitalism

Source of book image: online version of the WSJ review quoted and cited below.

(p. A13) Harold James, professor of history and international affairs at Princeton University, portrays a vastly different organization in “Krupp,” a painstaking chronicle of a company that traces its roots to a steel foundry in Essen in 1810. Mr. James’s Krupp is a company for which the manufacturing of war matériel was always of secondary interest to that of civilian production. The company might have preferred to concentrate on manufacturing railroad equipment and consumer goods, but in the developing and expansionist German empire of the 19th century, state requirements for the tools of power dovetailed with Krupp’s desire for regular long-term contracts. The result for Krupp was a practical, if not deliberate, focus on armaments.

From the manufacturer’s perspective, the emphasis on war matériel did not consign Krupp to the ranks of belligerent militarists; it was just smart business. “The purpose of work should be the common good,” founder Alfred Krupp once said, or at least that quote graces a statue the company erected after his death in 1887. All through the 19th century, Mr. James says, the pursuit of profit was less central to the Krupp mission than building a solid enterprise within a framework of social responsibility. As early as 1836, Krupp established a voluntary health-insurance program for its workers. By the middle of the century, life-insurance and pension plans had been instituted. Workers’ hostels and company hospitals were constructed. In exchange for this paternalistic benevolence, Krupp expected complete loyalty from its work force and vehemently opposed the slightest hint of union organization or political activity among its employees.
“Alfred Krupp perfectly fits the mold of the heroic entrepreneur,” Mr. James writes. “Profoundly skeptical of joint-stock companies, banks, and capitalism in general, but also of big-scale science and modern research methods, he was a genius at extending to its utmost limits the possibilities of the craft entrepreneur.”

For the full review, see:
JENNIFER SIEGEL. “BOOKSHELF; Heavy Industry, Burdened Past; The company’s 19th-century founder said it was devoted to the “common good.” In World War II, it worked hard for the Third Reich.” The Wall Street Journal (Tues., April 17, 2012): A13.
(Note: the online version of the interview is dated April 16, 2012.)

Capitalism More about Creating New Markets than about Competing to Dominate Old Ones

(p. A21) As a young man, Peter Thiel competed to get into Stanford. Then he competed to get into Stanford Law School. Then he competed to become a clerk for a federal judge. Thiel won all those competitions. But then he competed to get a Supreme Court clerkship.
Thiel lost that one. So instead of being a clerk, he went out and founded PayPal. Then he became an early investor in Facebook and many other celebrated technology firms. Somebody later asked him. “So, aren’t you glad you didn’t get that Supreme Court clerkship?”
The question got Thiel thinking. His thoughts are now incorporated into a course he is teaching in the Stanford Computer Science Department. (A student named Blake Masters posted outstanding notes online, and Thiel has confirmed their accuracy.)
One of his core points is that we tend to confuse capitalism with competition. We tend to think that whoever competes best comes out ahead. In the race to be more competitive, we sometimes confuse what is hard with what is valuable. The intensity of competition becomes a proxy for value.
In fact, Thiel argues, we often shouldn’t seek to be really good competitors. We should seek to be really good monopolists. Instead of being slightly better than everybody else in a crowded and established field, it’s often more valuable to create a new market and totally dominate it. The profit margins are much bigger, and the value to society is often bigger, too.
Now to be clear: When Thiel is talking about a “monopoly,” he isn’t talking about the illegal eliminate-your-rivals kind. He’s talking about doing something so creative that you establish a distinct market, niche and identity. You’ve established a creative monopoly and everybody has to come to you if they want that service, at least for a time.

For the full commentary, see:
DAVID BROOKS. “The Creative Monopoly.” The Wall Street Journal (Tues., April 24, 2012): A21.
(Note: the online version of the article is dated April 23, 2012.)

The online Peter Thiel notes are at:
http://blakemasters.tumblr.com/post/21169325300/peter-thiels-cs183-startup-class-4-notes-essay

Economic Freedom and Growth Depend on Protecting the Right to Rise

(p. A19) Congressman Paul Ryan recently coined a smart phrase to describe the core concept of economic freedom: “The right to rise.”
Think about it. We talk about the right to free speech, the right to bear arms, the right to assembly. The right to rise doesn’t seem like something we should have to protect.
But we do. We have to make it easier for people to do the things that allow them to rise. We have to let them compete. We need to let people fight for business. We need to let people take risks. We need to let people fail. We need to let people suffer the consequences of bad decisions. And we need to let people enjoy the fruits of good decisions, even good luck.
That is what economic freedom looks like. Freedom to succeed as well as to fail, freedom to do something or nothing. . . .
. . .
But when it comes to economic freedom, we are less forgiving of the cycles of growth and loss, of trial and error, and of failure and success that are part of the realities of the marketplace and life itself.
. . .
. . . , we must choose between the straight line promised by the statists and the jagged line of economic freedom. The straight line of gradual and controlled growth is what the statists promise but can never deliver. The jagged line offers no guarantees but has a powerful record of delivering the most prosperity and the most opportunity to the most people. We cannot possibly know in advance what freedom promises for 312 million individuals. But unless we are willing to explore the jagged line of freedom, we will be stuck with the straight line. And the straight line, it turns out, is a flat line.

For the full commentary, see:
JEB BUSH. “OPINION; Capitalism and the Right to Rise; In freedom lies the risk of failure. But in statism lies the certainty of stagnation.” The Wall Street Journal (Mon., December 19, 2011): A19.
(Note: ellipses added.)

A&P Sold Consumers Better and Lower-Priced Food

Source of book image: online version of the WSJ review quoted and cited below.

(p. A15) Mr. Levinson’s history centers on the two Hartford sons who followed their father into the business. They would spend their entire working lives at the company being known simply as “Mr. George” and “Mr. John.” Thoughtful and studious, Mr. George’s idea of excitement was a good jigsaw puzzle; Mr. John, somewhat more outgoing, liked the horses but also a daily lunch of milk and crackers. Together the brothers, neither of whom had finished high school, built what would be, for 40 years, the largest retail outlet in the world.

The brothers’ business philosophy was simple, writes Mr. Levinson: “If the company keeps its costs down and prices low, more shoppers would come through its doors, producing more profits than if it kept prices high.” The more stores they could open, the greater the take.
But the Hartfords had a public-relations problem. Since the nation’s earliest days, small family stores had served as community anchors. There were thousands across the country. Mom and pop knew every customer who came through their door; they extended credit to families down on their luck. If low-priced chains drove out such stores, what would happen to small-town America?
In fact, many mom-and-pop operations were inefficiently and incompetently run. A&P might be coldly corporate by comparison, but it offered consumers far more variety and fresher, better-quality goods at less cost to the family budget.

For the full review, see:
PATRICK COOKE. “BOOKSHELF; How a Grocer Bagged Profits; At its peak, the chain had nearly 16,000 stores. Critics charged it with competing unfairly by offering too-low prices.” The Wall Street Journal (Mon., AUGUST 29, 2011): A15.
(Note: ellipsis added.)

The book under review is:
Levinson, Marc. The Great A&P and the Struggle for Small Business in America. New York: Hill and Wang, 2011.

Arabic Numerals Enabled Better Accounting Systems

Source of book image: online version of the WSJ review quoted and cited below.

(p. A13) Humans have been recording counts for at least 35,000 years, if the notches in a Paleolithic-era baboon’s fibula are an indicator.
. . .
Before the 13th century, European businessmen recorded figures in Roman numerals and computed with their fingers or a counting board. But these creaky accounting systems began to buckle under the growing complexity of regional and international finance. In 1202, Leonardo of Pisa–better known by his family name, Fibonacci–published the “Liber Abbaci,” or “Book of Calculation,” a 600-page tome detailing the rules of Hindu-Arabic arithmetic and algebra. Fibonacci’s volume was directed not to scholars but to merchants, the first work in the West to demonstrate the commercial utility of Eastern mathematics. The book was an instant success and propelled the Pisan maestro d’abbaco to fame.
The “Liber Abbaci” inspired a flood of regionally produced (and lesser) primers on the subject. Arithmetic schools sprang up throughout Italy and would eventually count among their pupils da Vinci and Machiavelli. German merchants flocked to Venice during the 1300s to learn the new accounting practices. In “The Man of Numbers,” mathematician Keith Devlin makes the case that Fibonacci’s book spearheaded the decline and fall of the Roman numeral and transformed scientific, technological and commercial calculation in the West.
At age 15, Fibonacci accompanied his father, a Pisan trade representative, to the North African port of Bugia (now Bejaia, in Algeria). In the preface to “Liber Abbaci,” Fibonacci writes of his early introduction to the “art of the nine Indian figures” and their computational power. After more than a decade of his own studies and tutelage under Arabic mathematicians across North Africa, he returned to Pisa to write his masterwork. Such was the acclaim that Fibonacci appeared before Emperor Frederick II–a colorful intellectual who referred to himself as Stupor mundi or Wonder of the World–and vanquished the emperor’s court mathematician in an arithmetic duel.
. . .
. . . as Mr. Devlin reminds us, even something as prosaic as a sequence of 10 numbers can remake an entire world.

For the full review, see:
ALAN HIRSHFELD. “BOOKSHELF; Counting On Progress; Roman numerals were fine for adding and subtracting. Fibonacci saw that complex math required a better system.” The Wall Street Journal (Thurs., JULY 7, 2011): A13.
(Note: ellipses added; italics in original.)

Book under review:
Devlin, Keith. The Man of Numbers: Fibonacci’s Arithmetic Revolution. New York: Walker & Company, 2011.