Economics – Page 178 – artdiamondblog.com

Coase: “Firms Never Calculate Marginal Costs”

Source of YouTube video:
http://www.youtube.com/watch?feature=player_embedded&v=ZAq06n79QIs#!

(p. 257) You can watch a 99 year-old Ronald Coase speaking in December 2009 for 25 minutes on the subjects of “Markets, Firms and Property Rights.” “One of the things that people don’t understand is that markets are creations. . . . In fact, it’s very difficult to imagine that firms act in the way that is described in the textbooks, where you maximize profits by equating marginal costs and marginal revenues. One of the reasons one can feel doubtful about this particular way of looking at things is that firms never calculate marginal costs . . . I think we ought to study directly how firms operate and develop our theory accordingly.” From the conference “Markets, Firms and Property Rights: A Celebration of the Research of Ronald Coase,” held at the University of Chicago Law School by the Information Economy Project at George Mason University School of Law. The webpage also includes video of seven panels of prominent speakers, along with PDF files of a dozen or so papers given at the conference. Available at 〈http://iep.gmu.edu/CoaseConference.php〉.

Source:
Taylor, Timothy. “Recommendations for Further Reading.” Journal of Economic Perspectives 24, no. 3 (Summer 2010): 251-58.
(Note: ellipses in original.)

Health Inefficiencies Free-Ride on “Home Run Innovations”

The article quoted below is a useful antidote to those economists who sometimes seem to argue that health gains fully justify the rise in health costs.

(p. 645) In the United States, health care technology has contributed to rising survival rates, yet health care spending relative to GDP has also grown more rapidly than in any other country. We develop a model of patient demand and supplier behavior to explain these parallel trends in technology growth and cost growth. We show that health care productivity depends on the heterogeneity of treatment effects across patients, the shape of the health production function, and the cost structure of procedures such as MRIs with high fixed costs and low marginal costs. The model implies a typology of medical technology productivity: (I) highly cost-effective “home run” innovations with little chance of overuse, such as anti-retroviral therapy for HIV, (II) treatments highly effective for some but not for all (e.g., stents), and (III) “gray area” treatments with uncertain clinical value such as ICU days among chronically ill patients. Not surprisingly, countries adopting Category I and effective Category II treatments gain the greatest health improvements, while countries adopting ineffective Category II and Category III treatments experience the most rapid cost growth. Ultimately, economic and political resistance in the United States to ever-rising tax rates will likely slow cost growth, with uncertain effects on technology growth.

Source of abstract:
Chandra, Amitabh, and Jonathan Skinner. “Technology Growth and Expenditure Growth in Health Care.” Journal of Economic Literature 50, no. 3 (Sept. 2012): 645-80.

When Trade Is a Matter of Life and Death (and the Progress of Knowledge)

Source of book image: http://www.mikedash.com/assets/images/Batavia-l.jpg

(p. 236) In Mike Dash’s book, Batavia’s Graveyard, the mutineers on the ship Batavia get stranded on a parched sand bar with the liquor and foodstuffs, but no fresh water. A few hundred watery yards away are the remnants of the loyal crew, stuck on another islet without liquor or provisions, but with plentiful fresh water. Trade proves impossible. The analog of this breakdown is the current relationship between history and the social sciences.

Source:
Clark, Gregory. “The Ends of Life: Roads to Fulfillment in Early Modern England.” Journal of Economic History 71, no. 1 (March 2011): 236-37.
(Note: italics in original.)

Dash’s book that Clark mentions:
Dash, Mike. Batavia’s Graveyard: The True Story of the Mad Heretic Who Led History’s Bloodiest Mutiny. New York: Crown, 2002.

“Richly Researched” Study of “Ironies of Antitrust Policy” in Retailing

(p. 819) Levinson’s book opens up a crucial discussion on the role of integrated retailer-distributors in shaping the twentieth-century U.S. economy. As he rightly notes in the book’s conclusion, A&P was in many ways the Walmart of its day: it used its buying power to squeeze inefficiencies out of supply chains, it was widely reviled for upending small-town business patterns and bitterly fighting union organizers, and yet it drew waves of customers who appreciated its low prices. While we have many business histories of mass-production industries, we have only a handful of richly researched studies of the mass retailers that have, in the words of historian Nelson Lichtenstein (2009), “become the key players in the worldwide marketplace of our time.” Levinson has produced a valuable book for business and economic historians interested in retailing, supply chains, and the ironies of antitrust policy. As a former editor for The Economist, furthermore, Levinson is particularly effective at translating challenging economic concepts into language that lay audiences and undergraduate students can grasp.

For the full review, see:
Hamilton, Shane. “The Great A&P and the Struggle for Small Business in America.” Journal of Economic Literature 50, no. 3 (Sept. 2012): 818-19.
(Note: italics in original.)

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.

The Lichtenstein book mentioned is:
Lichtenstein, Nelson. The Retail Revolution: How Wal-Mart Created a Brave New World of Business. hb ed. New York: Metropolitan Books, 2009.

Thiel Fellows Avoid Formal Education to Pursue Entrepreneurial Projects

“Eden Full, 20, tested her rotating solar panel in Kenya in 2010.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p.1) EDEN FULL should be back at Princeton by now. She should be hustling to class, hitting the books, acing tests. In short, she should be climbing that old-school ladder toward a coveted spot among America’s future elite.

She isn’t doing any of that. Instead, Ms. Full, as bright and poised and ambitious as the next Ivy Leaguer, has done something extraordinary for a Princetonian: she has dropped out.
It wasn’t the exorbitant cost of college. (Princeton, all told, runs nearly $55,000 a year.) She says she simply received a better offer — and, perhaps, a shot at a better education.
Ms. Full, 20, is part of one of the most unusual experiments in higher education today. It rewards smart young people for not going to college and, instead, diving into the real world of science, technology and business.
The idea isn’t nuts. After all, Bill Gates and Steve Jobs dropped out, and they did O.K.
Of course, their kind of success is rare, degree or no degree. Mr. Gates and Mr. Jobs changed the world. Ms. Full wants to, as well, and she’s in a hurry. She has built a low-cost solar panel and is starting to test it in Africa.
“I was antsy to get out into the world and execute on my ideas,” she says.
At a time when the value of a college degree is being called into question, and when job prospects for many new graduates are grimmer than they’ve been in years, perhaps it’s no surprise to see a not-back-to-school movement spring up. What is surprising is where it’s springing up, and who’s behind it.
The push, which is luring a handful of select students away from the likes of Princeton, Harvard and M.I.T., is the brainchild of Peter A. Thiel, 44, a billionaire and freethinker with a remarkable record in Sil-(p. 7)icon Valley. Back in 1998, during the dot-com boom, Mr. Thiel gambled on a company that eventually became PayPal, the giant of online payments. More recently, he got in early on a little start-up called Facebook.
Since 2010, he has been bankrolling people under the age of 20 who want to find the next big thing — provided that they don’t look for it in a college classroom. His offer is this: $50,000 a year for two years, few questions asked. Just no college, unless a class is helpful for their Thiel projects.
. . .
Ms. Full is friends with another Thiel fellow, Laura Deming, 18. Ms. Deming is clearly brilliant. When she was 12, her family moved to San Francisco from New Zealand so she could work with Cynthia Kenyon, a molecular biologist who studies aging. When Ms. Deming was 14, the family moved again, this time to the Boston area, so she could study at M.I.T.
“Families of Olympic-caliber athletes make these kinds of sacrifices all the time,” says Tabitha Deming, Laura’s mother. “When we lived nearby in Boston, we were lucky to see her once a month. She never came home for weekends.”
John Deming, Laura’s father, graduated from Brandeis University at the age of 35 but says he disdains formal education at every level. His daughter was home-schooled.
“I can’t think of a worse environment than school if you want your kids to learn how to make decisions, manage risk and take responsibility for their choices,” Mr. Deming, an investor, wrote in an e-mail. “Rather than sending them to school, turn your kids loose on the world. Introduce them to the rigors of reality, the most important of which is earning your own way.” He added, “I detest American so-called ‘education.’ ”
His daughter’s quest to slow aging was spurred by her maternal grandmother, Bertie Deming, 85, who began having neuromuscular problems a decade ago. Laura, a first-year fellow, now spends her days combing medical journals, seeking a handful of researchers worth venture capital funding, which is a continuation of her earlier work.
“I’m looking for therapies that target aging damage and slow or reverse it,” she says. “I’ve already spent six years on this stuff. So far I’ve found only a few companies, two or three I’m really bullish on.”

For the full story, see:
CAITLIN KELLY. “Drop Out, Dive In, Start Up..” The New York Times, SundayBusiness (Sun., September 16, 2012): 1 & 7.
(Note: ellipsis added.)
(Note: the online version of the article is dated September 15, 2012, and had he title “Forgoing College to Pursue Dreams.”)

“Laura Deming, left, at age 6 with her grandmother, whose neuromuscular problems have now inspired Laura to work on anti-aging technology.” Source of caption and photo: online version of the NYT article quoted and cited above.

Preindustrial Icelanders Adapted to Adverse Global Cooling

(p. 254) We investigate the effect of climate on population levels in preindustrial Iceland. We find that short-term temperature changes affect the population growth rate. In particular, a 1ºC decrease in temperature causes about 0.57 percent decrease in the population growth rate for the two subsequent years, for a total effect of 1.14 percent. This effect appears to attenuate as the growth rate returns to trend in subsequent years. We also quantify the extent to which eighteenth- and nineteenth-century Icelanders adapt to long-run climate change. In particular, the data suggest that long-run adaptation to climate takes about 20 years and reduces the effect of cold shocks by about 60 percent. Our results also allow us to approximate the effect of permanent climate change on steady-state population levels. This approximation suggests that steady state population levels decrease by 10 percent to 26 percent for each 1ºC of sustained adverse temperature change.
(p. 255) . . .
If contemporary poor agricultural populations behave like their eighteenth- and nineteenth century Icelandic counterparts, then our results suggest that adverse climate change (which now refers to warming, not cooling) will have three effects. First, in the short run it will lead to a significant decrease in population growth rates. Second, over the course of a generation, adaptation will offset about 60 percent of the short run effects. Finally, in the long run, we expect a decrease in steady-state populations.

For the full article, from which the above conclusion is quoted, see:
Turner, Matthew A., Jeffrey S. Rosenthal, Jian Chen, and Chunyan Hao. “Adaptation to Climate Change in Preindustrial Iceland.” American Economic Review 102, no. 3 (May 2012): 250-55.
(Note: underlining added; the underlined words appeared on p. 254 of the print issue, and on p. 255 of the online issue, of the article.)

China’s State-Owned Enterprises Lose Money and Slow Growth

Source of book image: http://s.wsj.net/public/resources/images/OB-UU147_mcgreg_DV_20121001022644.jpg

In the passages quoted below “SOE” means “state-owned enterprise.”

(p. B1) If the U.S. needs another wake-up call, it will get one this week with the publication of a bracing account of the danger that China’s state capitalism poses to global business–and to China itself. James McGregor’s new book, “No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism,” dissects the complex policies and state structures that produced China’s novel system. And it describes the limited recourse the U.S. and other nations have. (Full disclosure: Mr. McGregor is a friend and former colleague at the Journal.)

“The Communist Party of China has two unwavering objectives: Make China rich and powerful and guarantee the Party’s political monopoly,” Mr. McGregor writes. “At the center of this are behemoth state-owned enterprises that dominate all key sectors and have been instrumental to the country’s current success.
“As China’s global reach expands, this one-of-a-kind system is challenging the rules and organizations that govern global trade as well as the business plans and strategies of multinationals around the globe. At the same time, the limits of authoritarian capital-(p.B2)ism are increasingly evident at home, where corruption is endemic, the SOEs are consuming the fruits of reform, and the economic engine is running out of gas.”
Born in the 1950s when 10,000 Soviet advisers helped China organize central planning, the state-owned enterprises quickly became bloated extensions of the Party’s patronage and power.
. . .
The enterprises themselves, meanwhile, crowded out private competition. SOEs account for about 96% of China’s telecom industry, 92% of power and 74% of autos. The combined profit of China Petroleum & Chemical and China Mobile in 2009 alone was greater than all the profit of China’s 500 largest private firms, Mr. McGregor writes.
An independent Chinese study, he adds, says that if you subtract government subsidies from the biggest SOEs they actually lose money.
Mr. McGregor believes pressures are building within China for change–the result of SOEs that don’t innovate enough, slowing growth, an angry private sector, and a pending leadership change, among other factors. Even some top leaders say reform is needed.

For the full commentary, see:
JOHN BUSSEY. “THE BUSINESS; Tackling the Many Dangers of China’s State Capitalism.” The New York Times (Fri., September 28, 2012): B1 & B2.
(Note: ellipsis added.)
(Note: the online version of the article has the date September 27, 2012.)

Book under discussion:
McGregor, James. No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism. Westport, CT: Prospecta Press, 2012.

Government Disaster Relief Crowds Out Private Self-Protection

(p. 242) This paper has investigated the role of natural disaster shocks in determining gross migration flows, controlling for other place-based features. Using two micro datasets, we documented that in the 1920s and 1930s population was repelled from tornado-prone areas, with a larger effect on potential in-migrants than on existing residents, while flood events were associated with net inmigration. The differential migration responses by disaster type raises the question of whether public efforts at disaster mitigation counteract individual migration decisions. The nascent investment in rebuilding and protecting flood-prone areas could provide one example of public investment crowding out private self-protection (i.e., migration).
(p. 243) In future work, we plan to explore the role of New Deal disaster management more directly by exploiting variation across SEAs in federal expenditures and representation on key congressional committees. We predict that residents of areas that received federal largesse after a disaster in the 1930s will be less likely to move out and that new arrivals may be more likely to move in, while residents of areas that benefited less from New Deal spending will continue to use migration as a means of self-protection.

For the full article, from which the above conclusion is quoted, see:
Boustan, Leah Platt, Matthew E. Kahn, and Paul W. Rhode. “Moving to Higher Ground: Migration Response to Natural Disasters in the Early Twentieth Century.” American Economic Review 102, no. 3 (May 2012): 238-44.

Abigail Fisher “Devastated” by “Holistic Review”

“Abigail Fisher, 22, at the Supreme Court last month. “I probably would have gotten a better job offer had I gone to U.T.,” Ms. Fisher said.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A1) WASHINGTON — Abigail Fisher is a slight young woman with strawberry blond hair, a smile that needs little prompting, a determined manner and a good academic record. She played soccer in high school, and she is an accomplished cellist.

But the university she had her heart set on, the one her father and sister had attended, rejected her. “I was devastated,” she said, in her first news interview since she was turned down by the University of Texas at Austin four years ago.
Ms. Fisher, 22, who is white and recently graduated from Louisiana State University, says that her race was held against her, and the Supreme Court is to hear her case on Wednesday, bringing new attention to the combustible issue of the constitutionality of racial preferences in admissions decisions by public universities.
“I’m hoping,” she said, “that they’ll completely take race out of the issue in terms of admissions and that everyone will be able to get into any school that they want no matter what race they are but solely based on their merit and if they work hard for it.”
. . .
(p. A17) The majority opinion in the Grutter case, written by Justice Sandra Day O’Connor, rejected the use of racial quotas in admissions decisions but said that race could be used as one factor among many, as part of a “holistic review.” Justice O’Connor retired in 2006, and her replacement by Justice Samuel A. Alito Jr. may open the way for a ruling cutting back on such race-conscious admissions policies, or eliminating them.
. . .
She said she was trying to come to terms with her role in a case that could reshape American higher education. Asked if she found it interesting or exciting or scary, she said, “All of the above.”
But she did not hesitate to say how she would run an admission system. “I don’t think,” she said, “that we even need to have a race box on the application.”

For the full story, see:
ADAM LIPTAK. “Race and College Admissions, Facing a New Test by Justices.” The New York Times (Tues., October 9, 2012): A1 & A17.
(Note: ellipses added.)
(Note: the online version of the review has the date October 8, 2012.)

Paul Samuelson, in 2009 Interview, Says Economists Should Study Economic History

Clarke Conor interviewed Paul Samuelson in the summer of 2009. Since Samuelson died in October 2009, the interview was one of his last.
Samuelson was a student of Joseph Schumpeter at Harvard, and Schumpeter worked to get Samuelson financial support and a job. Near the end of his life, Schumpeter was ridiculed when he warned National Bureau of Economic Research (NBER) economists that they should not neglect economic history.
It took Paul Samuelson a long time to appreciate Schumpeter’s truth.

Very last thing. What would you say to someone starting graduate study in economics? Where do you think the big developments in modern macro are going to be, or in the micro foundations of modern macro? Where does it go from here and how does the current crisis change it?

Well, I’d say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that’s the raw material out of which any of your conjectures or testings will come. And I think the recent period has illustrated that. The governor of the Bank of England seems to have forgotten or not known that there was no bank insurance in England, so when Northern Rock got a run, he was surprised. Well, he shouldn’t have been.
But history doesn’t tell its own story. You’ve got to bring to it all the statistical testings that are possible. And we have a lot more information now than we used to.

For the full interview, see:
Clarke, Conor. “An Interview with Paul Samuelson, Part Two.” The Atlantic (2009), http://www.theatlantic.com/politics/archive/2009/06/an-interview-with-paul-samuelson-part-two/19627/.
(Note: bold indicates Conor question, and is bolded in original.)
(Note: the interview was posted on The Atlantic online website, but I do not believe that it ever appeared in the print version of the magazine.)

Chamber Blitz Clip for Tort Reform

“Blitz gasoline cans, at Ace Hardware in Miami, Okla., will soon disappear from stores. The company closed because of the costs of lawsuits contending that the cans were unsafe.” Source of caption and photo: online version of the NYT article quoted and cited below.

The “Mr. Flick” quoted below is Rocky Flick, the former CEO of Blitz.

(p. B1) Crusading against what it considers frivolous lawsuits, the United States Chamber of Commerce has had no shortage of cases to highlight, like the man suing a cruise line after burning his feet on a sunny deck or the mother claiming hearing loss from the screaming at a Justin Bieber concert.

Now, the lobbying group’s Institute for Legal Reform is showing a 30-second commercial that uses Blitz USA, a bankrupt Oklahoma gasoline can manufacturer, to illustrate the consequences of abusive lawsuits. The ad shows tearful workers losing their jobs and the lights going out at the 46-year-old company as a result of steep legal costs from lawsuits targeting the red plastic containers, according to the company and the institute.
The closing of the 117-employee operation this summer became a rallying point for proponents of tort reform. . . .
. . .
(p. B2) Blitz executives note that the company, which was the nation’s leading gas can producer, sold more than 14 million cans a year over the last decade, with fewer than two reported incidents per million cans sold. The company said the most serious incidents usually involved obvious misuse of the cans, like pouring gasoline on an open fire.
. . .
A decade ago, Mr. Flick said, the company would face one or two lawsuits a year. The number grew to six or seven a year, and finally to 25 or so last year when Blitz filed for bankruptcy.

For the full story, see:
CLIFFORD KRAUSS. “Two Sides of Product Liability: A Factory’s Closing Focuses Attention on Tort Reform.” The New York Times (Fri., October 4, 2012): B1.
(Note: ellipses added.)
(Note: the online version of the article is dated October 5, 2012 and has the shorter title “A Factory’s Closing Focuses Attention on Tort Reform.”)

View the Chamber video clip on the Blitz example: