Economics – Page 181 – artdiamondblog.com

Macaulay Argues that a Limited Government that Protects Property Will Promote Economic Growth

Our rulers will best promote the improvement of the nation by strictly confining themselves to their own legitimate duties, by leaving capital to find its most lucrative course, commodities their fair price, industry and intelligence their natural reward, idleness and folly their natural punishment, by maintaining peace, by defending property, by diminishing the price of law, and by observing strict economy in every department of the state. Let the Government do this: the People will assuredly do the rest.

Source:
Macaulay, Thomas Babington, Lord. “Review of: Robert Southey’s “Sir Thomas More; or, Colloquies on the Progress and Prospects of Society”.” In Critical and Historical Essays Contributed to the Edinburgh Review. London: Longman, Green, Longman, and Roberts, 1830.
(Note: the quote above appeared on the back cover of The Cato Journal 30, no. 1 (Winter 2010); Macaulay’s full review, including the quote, can be viewed online at: http://www.econlib.org/library/Essays/macS1.html )
(Note: the online version does not give page numbers, but gives what I think are “screen” numbers. The passage quoted is all of “SC.96” which appears at the very end of the essay.)

Information Technology Enables Massive Process Creative Destruction

(p. 2) . . . I want to argue that something deep is going on with information technology, something that goes well beyond the use of computers, social media, and commerce on the Internet. Business processes that once took place among human beings are now being executed electronically. They are taking place in an unseen domain that is strictly digital. On the surface, this shift doesn’t seem particularly consequential — it’s almost something we take for granted. But I believe it is causing a revolution no less important and dramatic than that of the railroads. It is quietly creating a second economy, a digital one.
. . .
(p. 5) Now this second, digital economy isn’t producing anything tangible. It’s not making my bed in a hotel, or bringing me orange juice in the morning. But it is running an awful lot of the economy. It’s helping architects design buildings, it’s tracking sales and inventory, getting goods from here to there, executing trades and banking operations, controlling manufacturing equipment, making design calculations, billing clients, navigating aircraft, helping diagnose patients, and guiding laparoscopic surgeries. Such operations grow slowly and take time to form.
. . .
(p. 6) Is this the biggest change since the Industrial Revolution? Well, without sticking my neck out too much, I believe so. In fact, I think it may well be the biggest change ever in the economy. It is a deep qualitative change that is bringing intelligent, automatic response to the economy. There’s no upper limit to this, no place where it has to end.
. . .
I think that for the rest of this century, barring wars and pestilence, a lot of the story will be the building out of this second economy, an unseen underground economy that basically is giving us intelligent reactions to what we do above the ground.

Source:
Arthur, W. Brian. “The Second Economy.” McKinsey Quarterly, no. 4 (Oct. 2011): 90-99.
(Note: ellipses added.)
(Note: I first saw the passages quoted above on pages 243-244 of Timothy Taylor’s “Recommendations for Further Reading” feature in The Journal of Economic Perspectives 26, no. 1 (Winter 2012).)

Mitt Romney on Innovation and Creative Destruction

Source of book image: http://mittromneycentral.com/uploads/No-Apology1.jpg

(p. 108) Innovation and Creative Destruction

The key to increasing national prosperity is to promote good ideas and create the conditions that can lead them to be fully exploited–in existing businesses as well as new ones. Government is generally not the source of new ideas, although innovations from NASA and the military have provided frequent exceptions. Nor is government where innovation is commercially developed. But government policies do, in fact, have a major impact on the implementation of innovative ideas. The degree to which a nation makes itself productive, and thus how prosperous its citizens become, is determined in large measure by whether government adopts policies that stimulate innovation or that stifle it.
The government policy that has the greatest effect on innovation is simply whether or not the government will allow it. It’s sad but true: Government can and often does purposefully prevent innovation and the resulting improvement in productivity. Recall my hypothetical example of a society in which half the farming jobs were lost due to innovation in the use of a plow? Some nations accept and encourage such “creative destruction,” recognizing that in the long run it leads to greater productivity and wealth for its citizens. But other nations succumb to the objections of those in danger of becoming unemployed and prevent innovation that may reduce short-term employment.
Two centuries ago, more than three-quarters of our workforce actually did labor on farms. Over the succeeding decades, innovations like irrigation, fertilizer, and tractors were welcomed, and eventually large farming corporations were allowed to prosper, despite protests from family farmers and the often heart-wrenching dislocations that accompanied consolidation of farmlands. The result was the disappearance of millions of agricultural jobs and the large-scale migration of Americans from rural regions to our cities. Once there, they provided the labor that powered America’s new industrial age. And at the same time, because farming innovation and productivity were allowed to flourish, America became the leader in agriculture education, research, and industry. Innovations from these sources have enabled us to produce sufficient food to feed not only our growing population but other parts of the world as well.

Source:
Romney, Mitt. No Apology: The Case for American Greatness. New York: St. Martin’s Press, 2010.
(Note: bold in original.)

Failed Entrepreneurial Firms that Signal New Markets Are “Optimistic Martyrs”

(p. 260) Colin Camerer and Dan Lovallo, who coined the concept of competition neglect, illustrated it with a quote from the then chairman of Disney Studios. Asked why so many expensive big-budget movies are released on the same days (such as Memorial Day and Independence Day), he replied: Hubris. Hubris. If you only think about your own business, you think, “I’ve got a good story department, I’ve got a good marketing department, we’re (p. 261) going to go out and do this.” And you don’t think that everybody else is thinking the same way. In a given weekend in a year you’ll have five movies open, and there’s certainly not enough people to go around.
The candid answer refers to hubris, but it displays no arrogance, no conceit of superiority to competing studios. The competition is simply not part of the decision, in which a difficult question has again been replaced by an easier one. The question that needs an answer is this: Considering what others will do, how many people will see our film? The question the studio executives considered is simpler and refers to knowledge that is most easily available to them: Do we have a good film and a good organization to market it? The familiar System 1 processes of WYSIATI and substitution produce both competition neglect and the above-average effect. The consequence of competition neglect is excess entry: more competitors enter the market than the market can profitably sustain, so their average outcome is a loss. The outcome is disappointing for the typical entrant in the market, but the effect on the economy as a whole could well be positive. In fact, Giovanni Dosi and Dan Lovallo call entrepreneurial firms that fail but signal new markets to more qualified competitors “optimistic martyrs”– good for the economy but bad for their investors.

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

Overly Optimistic Entrepreneurs Seek Government Support for Projects that Will Usually Fail

People have a right to be overly-optimistic when they invest their own money in entrepreneurial projects. But governments should be prudent caretakers of the money they have taken from taxpayers. The overly-optimistic bias of subsidy-seeking entrepreneurs weakens the case for government support of entrepreneurial projects.

(p. 259) The optimistic risk taking of entrepreneurs surely contributes to the economic dynamism of a capitalistic society, even if most risk takers end up disappointed. However, Marta Coelho of the London School of Economics has pointed out the difficult policy issues that arise when founders of small businesses ask the government to support them in decisions that are most likely to end badly. Should the government provide loans to would-be entrepreneurs who probably will bankrupt themselves in a few years? Many behavioral economists are comfortable with the “libertarian paternalistic” procedures that help people increase their savings rate beyond what they would do on their own. The question of whether and how government should support small business does not have an equally satisfying answer.

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

Decouple Learning from Credentialing

“JOHN HENNESSY: ‘There’s a tsunami coming.’ [At left] . . . , John Hennessy & Salman Khan.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. R8) Is there anything to be done about the rising price of higher education? That was the question posed to John Hennessy, president of Stanford University, and Salman Khan, founder of Khan Academy, a nonprofit online-learning organization. They sat down with The Wall Street Journal’s Walt Mossberg to discuss how technology might be part of the solution.

Here are edited excerpts of their conversation.
. . .
MR. MOSSBERG: You have a lot of money at Stanford. I’ve been, until recently, a trustee of Brandeis University. It’s a very good university. It charges about what you do. But it doesn’t have your money, and there are a lot of colleges like that.
MR. HENNESSY: Agreed, and if you look at the vast majority of colleges in the U.S., there are way too many that are [dependent on tuition to fund their budgets]. That is not sustainable. We have to do something to bend the cost curve, and this is where technology comes in.
MR. KHAN: On the sustainability question, I agree. I think the elites will probably do just fine, but for the bulk of universities, nothing can grow 5% faster than inflation forever. It will just take over the world, and that’s what’s happening now.
There is a fundamental disconnect happening between the providers of education and the consumers of education. If you ask universities what they are charging the $60,000 for, they’ll say, “Look at our research facilities. Look at our faculty. Look at the labs and everything else.” And then if you ask the parents and the students why they are taking on $60,000 of debt, they’ll say, “Well, I need the credential. I need a job.”
So one party thinks they’re selling a very kind of an enriching experience, and the other one thinks that they’re buying a credential. And if you ask the universities what percentages of your costs are “credentialing,” they say oh, maybe 5% to 10%. And so I think there’s an opportunity if we could decouple those things–if the credentialing part could happen for significantly less.
MR. MOSSBERG: What do you mean by the credentialing part?
MR. KHAN: If you think about what education is, it’s a combination. There’s a learning part. You learn accounting, you learn to write better, to think, whatever. Then there is a credentialing part, where I’m going to hand you something that you can go take into the market and signal to people that you know what you’re doing.
Right now they’re very muddled, but this whole online debate or what’s happening now is actually starting to clarify things. At Khan Academy we’re 100% focused on the learning side of things. And I think it would be interesting [if credentials could be earned based on what you know and not on where you acquired that knowledge].

For the full interview, see:
Walt Mossberg, interviewer. “Changing the Economics of Education; John Hennessy and Salman Khan on how technology can make the college numbers add up.” The Wall Street Journal (Mon., June 4, 2012): R8.
(Note: bracketed words in caption, and ellipses, added; bold and italics in original.)

Revolutionary Entrepreneurs Need “Unbridled Confidence and Arrogance”

(p. B1) Will there be another?
It’s a bit absurd to try to identify “the next Steve Jobs.” Two decades ago, Mr. Jobs himself wouldn’t even have qualified. Exiled from Apple Inc., . . . Mr. Jobs was then hoping to revive his struggling computer maker, NeXT Inc. . . .
But just as Mr. Jobs followed Henry Ford and Thomas Edison, there will some day be another innovator with the vision, drive and disdain of the status quo to spark, and then direct, big changes in how we live.
. . .
“You have to try the unreasonable,” says Vinod Khosla, a co-founder of Sun Microsystems Inc., who, as a longtime venture capitalist, has seen thousands of would-be revolutionaries. Two key characteristics, Mr. Khosla says: “unbridled confidence and arrogance.”

For the full story, see:
SCOTT THURM and STU WOO. “Who Will Be the ‘Next Steve Jobs’?” The Wall Street Journal (Sat., October 8, 2011): B1 & B3.
(Note: ellipses added.)

Romney Right that Culture Matters for Economic Success

Source of book image: http://photo.goodreads.com/books/1172699090l/209176.jpg

In the piece quoted below, and in much of the TV media coverage, the story is spun as being that Romney offended the Palestinians. But that is not the story. The story is that Romney courageously highlighted an important, but politically incorrect, truth—culture, generally, does matter for economic performance; and Israeli culture, specifically, has encouraged economic growth.
Romney referred to an important book by the distinguished economic historian David Landes. Last school year, one of the students in my Economics of Technology seminar gave a presentation on a related Landes book. That presentation can be viewed at: http://www.amazon.com/review/R2GLBAMFCS5PXH/ref=cm_cr_pr_perm?ie=UTF8&ASIN=0521094186&linkCode=&nodeID=&tag=
I recently read another relevant book, Start-Up Nation, that directly supports Romney’s specific claim, by making the case that Israeli culture is especially congenial to entrepreneurial initiative and success.

(p. A1) JERUSALEM — Mitt Romney offended Palestinian leaders on Monday by suggesting that cultural differences explain why the Israelis are so much more economically successful than Palestinians, thrusting himself again into a volatile issue while on his high-profile overseas trip.
. . .
In the speech, Mr. Romney mentioned books that had influenced his thinking about nations — particularly “The Wealth and Poverty of Nations,” by David S. Landes, which, he said, argues that culture is the defining factor in determining the success of a society.
“Culture makes all the (p. A14) difference,” Mr. Romney said. “And as I come here and I look out over this city and consider the accomplishments of the people of this nation, I recognize the power of at least culture and a few other things.”
He added, “As you come here and you see the G.D.P. per capita, for instance, in Israel, which is about $21,000, and compare that with the G.D.P. per capita just across the areas managed by the Palestinian Authority, which is more like $10,000 per capita, you notice such a dramatically stark difference in economic vitality. And that is also between other countries that are near or next to each other. Chile and Ecuador, Mexico and the United States.”
The remarks, which vastly understated the disparities between the societies, drew a swift rejoinder from Palestinian leaders.

For the full story, see:
ASHLEY PARKER and RICHARD A. OPPEL Jr. “Romney Trip Raises Sparks at a 2nd Stop.” The New York Times (Tues., July 31, 2012): A1 & A14.
(Note: ellipsis added.)
(Note: the online version of the story has the date July 30, 2012.)

The Landes book discussed by Romney is:
Landes, David S. The Wealth and Poverty of Nations. New York: W.W. Norton & Company, 1998.

The book on Israeli entrepreneurship, that I mention in my comments, is:
Senor, Dan, and Saul Singer. Start-Up Nation: The Story of Israel’s Economic Miracle. hb ed. New York: Twelve, 2009.

Richard Posner Seeks to Limit and Reform the Patent System

“Judge Richard Posner.” Source of caption and photo: online version of the WSJ article quoted and cited below.

I am deeply conflicted about patents. On the one hand, property rights are important, both ethically and in terms of economic incentives. On the other hand, patents seem to restrict innovation.
The views of Posner are worth serious consideration. My own current view is that the patent rules need to be reformed and their implementation made more efficient. But I do not think the patent system should be abolished.

(p. B1) While technology companies continue to fight over smartphone patents, one judge has fought his way into the ring.

He is 73-year-old Richard Posner, among the most potent forces on the federal bench and an outspoken critic of the patent system.
Presiding over a lawsuit between Apple Inc. . . . and Google Inc.’s . . . Motorola Mobility in June, he dropped a bombshell, scrapping the entire case and preventing the companies from refiling their claims. The ruling startled the litigants in the case and fueled a national discussion about whether the patent system (p. B5) is broken.
. . .
In the June ruling, explaining why he wouldn’t ban Motorola products from the shelves, Judge Posner said: “An injunction that imposes greater costs on the defendant than it confers benefits on the plaintiff reduces net social welfare.”
Judge Posner, who declined to be interviewed for this article, has continued to press the issue.
This month, he wrote an essay in the Atlantic headlined, “Why There Are Too Many Patents In America.” He said “most industries could get along fine without patent protection” and that the U.S. Patent and Trademark Office has done a woeful job, calling it “understaffed,” and “many patent examinations…perfunctory.”
He saved ammunition for juries and fellow jurists. “Judges have difficulty understanding modern technology and jurors have even greater difficulty,” he wrote. He suggested several reforms to the patent system, including shortening the patent term for inventors in some industries and expanding the authority of the Patent and Trademark Office to try patents cases.
. . .
Judge Posner’s intellectual curiosity is well-known and “people assume he has no political ax to grind because he’s not trying to advance the fortunes of any particular segment of the economy,” said Arthur D. Hellman, a law professor at University of Pittsburgh who studies the judiciary.
Yet his ruling poses a difficult question for the Federal Circuit Court of Appeals, the specialized one that handles intellectual property cases, about whether infringement matters without damages.
Peter Menell, a law professor at UC Berkeley, likened it to the old thought experiment that begins “If a tree falls in the woods.” He said: “If there are no damages, do you need to have a trial?”
Juge Posner also rejected Google’s bid to block the sale of iPhones that allegedly infringed a so-called “standards-essential patent” owned by Google. Standards-essential patents protect innovations used in technologies that industries collectively agree to use, like Wi-Fi or 3G. A company that holds one of these patents stands to profit enormously, because its competitors have to pay it for licenses to use the technology.
But Judge Posner ruled that holders of such patents aren’t entitled to injunctions. Michael Carrier, a law professor at Rutgers University, Camden, said the opinion on standards-essential patents came amid a groundswell of opposition to injunctions for such patents and could put an end to the practice among U.S. federal judges.

For the full story, see:
JOE PALAZZOLO and ASHBY JONES. “Also on Trial: A Judge’s Worldview.” The Wall Street Journal (Tues., July 24, 2012): B1 & B5.
(Note: all ellipses were added except for the one internal to the quote from Judge Posner’s Atlantic blog posting.)
(Note: the online version of the article has the date July 23, 2012 and has the title “Apple and Samsung Patent Suit Puts Judge Posner’s Worldview on Trial.” The print version of the title could be interpreted as a sub-title of the main title to the accompanying adjacent article. The title of the main article was “Apple v. Samsung; In Silicon Valley, Patents Go on Trial.” The last two paragraphs above appear only in the online, but not in the print, version of the article.)

The Atlantic blog posting by Posner can be found at:
Posner, Richard A. “Why There Are Too Many Patents in America.” In The Atlantic blog, posted on July 12, 2012 at: http://www.theatlantic.com/business/archive/2012/07/why-there-are-too-many-patents-in-america/259725/.
(Note: the WSJ article above implies that the Posner essay was published in the print version of The Atlantic, but I can only find it in Posner’s blog on The Atlantic web site.)

Edison Was Great Inventor; “Jobs Was the Far Shrewder Businessman”

“Thomas Alva Edison.” Source of caption and photo: online version of the NYT article quoted and cited below.

I have not read Stross’ books on Jobs and Edison. According to some of the Amazon reviews of the Jobs book, back in 1993 Stross was much more critical of Jobs than he is in the piece below:

(p. 4) I wrote a book about Mr. Jobs in 1993.
. . .
Years later, I wrote a biography of Edison, a person whom Mr. Jobs admired. When you compare the two personalities and their careers, a few similarities emerge immediately. Both had less formal schooling than most of their respective peers. Both possessed the ability to visualize projects on a grand scale. Both followed an inner voice when making decisions. And both had terrific tempers that could make their employees quake.
. . .
Mr. Jobs was the far shrewder businessman, even if he never talked about wealth as a matter of personal interest. When Edison died, he left behind an estate valued at about $12 million, or about $180 million in today’s dollars. His friend Henry Ford had once joked that Edison was “the world’s greatest inventor and the world’s worst businessman.” Mr. Jobs was worth a commanding $6.5 billion.
Mr. Jobs was perhaps the most beloved billionaire the world has ever known. Richard Branson’s tribute captures the way people felt they could identify with Mr. Jobs’s life narrative: “So many people drew courage from Steve and related to his life story: adoptees, college dropouts, struggling entrepreneurs, ousted business leaders figuring out how to make a difference in the world, and people fighting debilitating illness. We have all been there in some way and can see a bit of ourselves in his personal and professional successes and struggles.”

For the full commentary, see:
RANDALL STROSS. “The Power of Taking the Big Chance.” The New York Times, SundayBusiness Section (Sun., October 9, 2011): 4.
(Note: online version of the commentary is dated October 8, 2011, and has the title “The Wizard and the Mortal: Two Sides of Genius.”)
(Note: in the print version, the same title, on the same page, was used as heading for two different articles on Steve Jobs–Lohr’s on the left side, and Stross’ on the right side.)

Stross’ books on Jobs and Edison are:
Stross, Randall E. Steve Jobs & the Next Big Thing. New York: Scribner Publishers, 1993.
Stross, Randall E. The Wizard of Menlo Park: How Thomas Alva Edison Invented the Modern World. New York: Crown Publishers, 2007.

Experts “Produce Poorer Predictions than Dart-Throwing Monkeys”

(p. 219) Tetlock interviewed 284 people who made their living “commenting or offering advice on political and economic trends.” He asked them to assess the probabilities that certain events would occur in the not too distant future, both in areas of the world in which they specialized and in regions about which they had less knowledge. Would Gorbachev be ousted in a coup? Would the United States go to war in the Persian Gulf? Which country would become the next big emerging market? In all, Tetlock gathered more than 80,000 predictions. He also asked the experts how they reached their conclusions, how they reacted when proved wrong, and how they evaluated evidence that did not support their positions. Respondents were asked to rate the probabilities of three alternative outcomes in every case: the persistence of the status quo, more of something such as political freedom or economic growth, or less of that thing.
The results were devastating. The experts performed worse than they would have if they had simply assigned equal probabilities to each of the three potential outcomes. In other words, people who spend their time, and earn their living, studying a particular topic produce poorer predictions than dart-throwing monkeys who would have distributed their choices evenly over the options. Even in the region they knew best, experts were not significantly better than nonspecialists.

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

Tetlock’s book is:
Tetlock, Philip E. Expert Political Judgment: How Good Is It? How Can We Know? Princeton, NJ: Princeton University Press, 2005.