Economics – Page 183 – artdiamondblog.com

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.

Joe Biden’s Dad Told Him to “Get Up” in Face of Job Loss

Innovative entrepreneurs, through the process of creative destruction, provide us with wonderful new products and services. But sometimes the process also results in job loss. One response to the job loss is to shut down innovation. Another is to preach resilience. Joe Biden’s Dad said “get up.” (The clip is from a talk that Joe Biden gave to the National Press Club on August 1, 2007. The full talk is posted to the C-SPAN web site.)

A mainly similar presentation of the “get up” message is on p. xxii of Biden’s autobiography:
Biden, Joe. Promises to Keep: On Life and Politics. New York: Random House, 2007.

Alexander Field Claims 1930s Were “Technologically Progressive”

Source of book image: http://yalepress.yale.edu/images/full13/9780300151091.jpg

(p. 1) UNDERNEATH the misery of the Great Depression, the United States economy was quietly making enormous strides during the 1930s. Television and nylon stockings were invented. Refrigerators and washing machines turned into mass-market products. Railroads became faster and roads smoother and wider. As the economic historian Alexander J. Field has said, the 1930s constituted “the most technologically progressive decade of the century.”
. . .
(p. 6) The closest thing to a unified explanation for these problems is a mirror image of what made the 1930s so important. Then, the United States was vastly increasing its productive capacity, as Mr. Field argued in his recent book, “A Great Leap Forward.” Partly because the Depression was eliminating inefficiencies but mostly because of the emergence of new technologies, the economy was adding muscle and shedding fat. Those changes, combined with the vast industrialization for World War II, made possible the postwar boom.
In recent years, on the other hand, the economy has not done an especially good job of building its productive capacity. Yes, innovations like the iPad and Twitter have altered daily life. And, yes, companies have figured out how to produce just as many goods and services with fewer workers. But the country has not developed any major new industries that employ large and growing numbers of workers.

For the full commentary, see:
DAVID LEONHARDT. “The Depression: If Only Things Were That Good.” The New York Times, SundayReview Section (Sun., October 9, 2011): 1 & 6.
(Note: ellipsis added.)
(Note: online version of the commentary is dated October 8, 2011.)

Book discussed:
Field, Alexander J. A Great Leap Forward: 1930s Depression and U.S. Economic Growth, Yale Series in Economic and Financial History. New Haven, CT: Yale University Press, 2011.

The Illusion that Investment Advisers Have Skill

(p. 215) Some years ago I had an unusual opportunity to examine the illusion of financial skill up close. I had been invited to speak to a group of investment advisers in a firm that provided financial advice and other services to very wealthy clients. I asked for some data to prepare my presentation and was granted a small treasure: a spreadsheet summarizing the investment outcomes of some twenty-five anonymous wealth advisers, for each of eight consecutive years. Each adviser’s score for each year was his (most of them were men) main determinant of his year-end bonus. It was a simple matter to rank the advisers by their performance in each year and to determine whether there were persistent differences in skill among them and whether the same advisers consistently achieved better returns for their clients year after year.
To answer the question, I computed correlation coefficients between the rankings in each pair of years: year 1 with year 2, year 1 with year 3, and so on up through year 7 with year 8. That yielded 28 correlation coefficients, one for each pair of years. I knew the theory and was prepared to find weak evidence of persistence of skill. Still, I was surprised to find that the average of the 28 correlations was .01. In other words, zero. The consistent correlations that would indicate differences in skill were not to be found. The results resembled what you would expect from a dice-rolling contest, not a game of skill.

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

Technology Allows Start-Ups to Launch with Fewer Employees

“Start-up BiteHunter launched with three employees. Above, co-founders Gil Harel, left, and Ido Shilon.” Source of caption and photo: online version of the WSJ article quoted and cited below.

Lower costs to entry means more start-ups and that means more innovation, ceteris paribus. All good. For the labor market, there will be fewer initial jobs per start-up. But there will be more start-ups, and more opportunity for erstwhile laborers to themselves become entrepreneurs. So maybe still all good.

(p. B5) New businesses are getting off the ground with nearly half as many workers as they did a decade ago, as the spread of online tools and other resources enables start-ups to do more with less.

The change, which began before the recession, may be permanent, according to some analysts.
. . .
Rather than purchasing the tools and manpower needed to run their companies, more small firms are renting, sharing or outsourcing resources, typically through online services, according to Steve King, a partner at Emergent Research, a research and consulting firm for small businesses.
. . .
Last year, Gil Harel launched BiteHunter, a search engine for restaurant discounts, with just three employees. Based in New York, the site used shared screens and other communications tools to work with developers in Russia, Uruguay and Israel.
“Just to build the infrastructure to get a business off the ground used to take a lot of money and people. But things that you couldn’t do in the past, you can now do on your own,” Mr. Harel says.

For the full story, see:
ANGUS LOTEN. “With New Technology, Start-Ups Go Lean; Web-Based Services Mean Fewer Workers Needed.” The Wall Street Journal (Thurs., September 15, 2011): B5.
(Note: ellipses added.)