Economics – Page 185 – artdiamondblog.com

Some Irrationality Occurs Because Not Much Is at Stake, and Rationality Takes Time and Effort

(p. 164) The laziness of System 2 is part of the story. If their next vacation had depended on it, and if they had been given indefinite time and told to follow logic and not to answer until they were sure of their answer, I believe that most of our subjects would have avoided the conjunction fallacy. However, their vacation did not depend on a correct answer; they spent very little time on it, and were content to answer as if they had only been “asked for their opinion.” The laziness of System 2 is an important fact of life, and the observation that representativeness can block the application of an obvious logical rule is also of some interest.

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

A Firm’s Social Responsibility Is to Make a Profit

(p. B1) Milton Friedman, the Nobel laureate economist, blasted the very idea of corporate social responsibility four decades ago, calling it a “fundamentally subversive doctrine.” Speaking for many capitalists then and now, he said, “there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”
Companies shouldn’t spend profits on unrelated job creation or social causes, he said. That money should go to shareholders–the owners of the companies. Pronouncements about corporate social responsibility, he added, are the indulgence of “pontificating executives” who are “incredibly shortsighted and muddleheaded in matters that are outside their businesses.” And that indulgence can lead to inefficient markets.
. . .
(p. B2) “Jobs are an input, not an output; they’re a cost of doing business, not a goal of doing business,” says William Frezza, a Boston-based venture capitalist and fellow at the Competitive Enterprise Institute.
“From the perspective of defending capitalism, if you accept the premise of your opponent that business has to give back to society, you’ve already lost,” he says. “To put sack cloth and ashes on–you’ve delegitimized capitalism, which is the goal of the protesters. Businesses give back to society every day by pleasing their customers and employing their employees. There’s nothing business owes other than selling the best product at the best price.”

For the full commentary, see:
JOHN BUSSEY. “THE BUSINESS; Are Companies Responsible for Creating Jobs?.” The Wall Street Journal (Fri., October 28, 2011): B1-B2.
(Note: ellipsis added.)

Steve Jobs Showed that Art and Commerce Could Be “Happy Bedfellows”

Gary Oldman. Source of photo: online version of the NYT article quoted and cited below.

(p. 2) Gary Oldman is an English actor . . . widely known for his roles as Sirius Black in the “Harry Potter” film series and Jim Gordon in the Batman movies.
. . .
READING Right now I’m reading the Steve Jobs biography by Walter Isaacson. I love when people have a singleness of purpose and don’t get dissuaded. I can connect with that. I can recognize it. I think a lot of artists have that. Art and commerce are not particularly happy bedfellows, but he was the exception.
I read quite a lot of biographies. I like nonfiction. The other book I’m carrying around with me at the moment is “River of Shadows: Eadweard Muybridge and the Technological Wild West” by Rebecca Solnit. It deals with the 19th century and the arrival of speed with the coming of the industrial age. We were very much governed by nature before; we were at the mercy of our own speed and horses and the like. It’s interesting to think of living at that pace.

For the full interview, see:
KATE MURPHY. “DOWNLOAD; Gary Oldman.” The New York Times, SundayReview Section (Sun., February 5, 2012): 2.
(Note: ellipses added; bold in original.)
(Note: online version of the interview is dated February 4, 2012.)

Our Cups Will Runneth Over If We Choose Entrepreneurship, Imagination, Will and Optimism

Source of book image: http://www.abundancethebook.com/wp-content/uploads/2012/01/cover-NYTimes-3d-500.jpg?139d23

(p. 18) in Silicon Valley, where the locals tend to be too busy starting companies to wallow in gloom, Peter Diamandis has stood out as one of the more striking optimists. Several years ago, Diamandis founded the X Prize Foundation, which rewards entrepreneurs with cash for achieving difficult goals, like putting a reusable spaceship into flight on a limited budget. More recently he helped start Singularity University, an academic program that convenes several weeks a year in the Valley and educates business leaders about the “disruptive” — i.e., phenomenally innovative — technological changes Diamandis is anticipating. To be sure, Diamandis is both very bright (he studied molecular biology and aerospace engineering at M.I.T. before getting an M.D. at Harvard) and well informed. Moreover, he’s not the kind of optimist who will merely see the glass as half full. He’ll give you dozens of reasons, some highly technical, why it’s half full. Then he’ll explain that your cognitive biases are tricking you into seeing the glass of water in a negative light, and cart out the research of acclaimed psychologists like Daniel Kahneman to prove his point. Finally he may suggest you stop fretting: new technologies will soon fill the glass up anyway. Indeed, they are likely to overfill it.
. . .
(p. 19) Throughout the book Diamandis . . . offers small groups of driven entrepreneurs as a kind of Leatherman solution to the world’s problems. It’s true that plenty of insurgents are doing impressive things out there — Elon Musk’s Tesla Motors, which helped jump-start the world’s electric car industry, is a good example.
. . .
. . . , there’s a significant idea embedded within “Abundance”: We should remain aware, as writers like Jared Diamond have likewise told us, that societies can choose their own future, and thus their own fate. In that spirit Diamandis and Kotler put forth a range of possible goals we may achieve if we have the imagination and the will. A little optimism wouldn’t hurt, either.

For the full review, see:
JON GERTNER. “Plenty to Go Around.” The New York Times Book Review (Sun., April 1, 2012): 18 & 19.
(Note: ellipses added.)
(Note: the online version of the review has the date March 30, 2012.)

The book under review is:
Diamandis, Peter H., and Steven Kotler. Abundance: The Future Is Better Than You Think. New York: Free Press, 2012.

Even with Subsidies and High Gas Prices, Electric Cars Cost More

(p. 12) The Ford Focus Electric has a base price of $39,995 — minus a $7,500 federal tax credit and a $2,500 rebate in California. That puts its tab at $30,000, some $7,000 above the upscale Focus Titanium. I can hear the electric naysayers exclaiming “Aha! You won’t make back the savings at the pumps.” That’s despite $4 gasoline, and the Focus Electric’s 110 m.p.g. equivalent rating.
But when buying any new car, especially an innovative model of any kind, emotions, aesthetics and externalities eclipse economics.

For the full story, see:
BRADLEY BERMAN. “BEHIND THE WHEEL; 2012 FORD FOCUS ELECTRIC; The Battery-Driven Car Just Got a Lot More Normal.” The New York Times, SportsSunday (Sun., May 6, 2012): 12.
(Note: online version of the story is dated May 4, 2012.)

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.

A Renting Labor Force Is More Dynamically Mobil

Source of graph: online version of the WSJ article quoted and cited below.

(p. C2) The U.S. economy needs the dynamism that renting enables as much as–if not more than–it needs the stability that ownership engenders. In the current economy, there are vast gulfs between the employment pictures in different regions and states, from 12% unemployment in Nevada to 3% unemployment in North Dakota. But a steelworker in Buffalo, or an underemployed construction worker in Las Vegas, can’t easily take his skills to where they are needed in North Dakota or Wyoming if he’s underwater on his mortgage. Economists, in fact, have found that there is frequently a correlation between persistently high local unemployment rates and high levels of homeownership.

For the full essay, see:
DANIEL GROSS. “Renting Prosperity; Americans are getting used to the idea of renting the good life, from cars to couture to homes. Daniel Gross explores our shift from a nation of owners to an economy permanently on the move–and how it will lead to the next boom..” The Wall Street Journal (Sat., May 5, 2012): C1 & C2.
(Note: the online version of the essay has the date May 4, 2012.)

Feds Subsidize First Solar’s Losing Technology

(p. B2) First Solar’s solar-panel business, which is focused on large solar installations that feed electricity to power companies, is dependent on government subsidies awarded to such developments.
. . .
But some worry that First Solar isn’t well positioned for industry trends. The global solar-power market is moving toward rooftop solar-power systems, rather than the large-scale utility power plants where First Solar’s products are most effective, said Jesse Pichel, an analyst at Jefferies Group Inc.
“This was a market leader, but its technology is being usurped or surpassed by the Chinese,” said Mr. Pichel. “Their product is not competitive in the most economic and sustainable solar market, which is rooftop.”

For the full story, see:
CASSANDRA SWEET And RUSSELL GOLD. “First Solar Cuts 2,000 Jobs; Panel Maker Laying Off 30% of Workers, Slashing Production Amid Supply Glut.” The Wall Street Journal (Weds., April 18, 2012): B2.
(Note: ellipsis added.)
(Note: online version of the story is dated April 17, 2012.)

“A123 Systems” Battery Company Is Another Example of Failed Industrial Policy

The YouTube video embedded above was from a CBS Evening News broadcast in June 2012. It illustrates the difficulty of the government successfully selecting the technologies, and companies, that will eventually prove successful. (The doctrine that government can and should do such selection is often called “industrial policy.”)

The Obama administration has bet billions of tax dollars on lithium ion batteries for electric vehicles that A123 Systems won $249 million of. But as Sharyl Attkisson reports, expensive recalls and other setbacks have put substantial doubt in the company’s ability to continue.

The text above, and the embedded video clip were published on YouTube on Jun 17, 2012 by CBSNewsOnline at http://www.youtube.com/watch?v=k4Ugklc0rIo

Electric Car “Hype is Gone” and Challenges Remain

(p. 7) . . . is this what an emergent technology looks like before it crosses the valley of death?
“Face it, this is not an easy task,” said Brett Smith, assistant research director at the Center for Automotive Research in Ann Arbor, Mich. “You still have an energy storage device that’s not ready for prime time. You still have the chicken and egg problem with the charging infrastructure. That’s not to say it’s not viable over the long run. But the hype is gone and the challenges are still there.”
The market for all-electric and plug-in electric cars in the United States is tiny, amounting to fewer than 20,000 sales last year out of total light-vehicle sales of 12.8 million. Even in optimistic forecasts, plug-in vehicles will account for less than 5 percent of the global market by 2025.

For the full commentary, see:
JOHN BRODER. “NEWS ANALYSIS; The Electric Car, Unplugged.” The New York Times, SundayReview Section (Sun., March 25, 2012): A8.
(Note: ellipsis added.)
(Note: online version of the commentary is dated March 24, 2012.)

Ben Franklin Stores as Incubators of Retail Success

(p. 192) The chain was called Michaels. I’d never heard of it but, as George related its ancestry, I became more and more intrigued. You see, once upon a time it had been a Ben Franklin store, and therein lies a story.
Back in 1877, Edward and George Butler, brothers from Boston, came up with a new concept for retailing. Instead of setting up a specialty shop to sell one line of items–like shoes or dresses or kitchen supplies–they set up a store where they could sell all sorts of stuff. This was the very beginning of department stores, except that they weren’t yet called that. They were called variety stores, and they carried a large assortment of low-cost goods. Then the Butlers set up a “five-cent counter,” where everything cost a nickel. It worked in Boston, so they expanded westward and called it Ben Franklin Stores.
Three-quarters of a century later, in the days when America was just starting to move westward with the automobile, there were no shopping malls or big national retail chains. What you found in every town, especially in small-town America, was a variety store, like Ben Franklin’s. In Lake Providence, we had Morgan and Lindsey’s, where you could buy everything from paper napkins to thimbles, birthday cards, curtain hooks, and boxes of chocolates. The Butlers’ idea of a nickel counter became so popular and widespread that these places came to be nicknamed “five-and-dimes” or “five-and ten-cent” stores.
(p. 193) While some of them became the heart of Main Street America, others grew to become legendary department stores, like Macy’s in New York, Wanamaker’s in Philadelphia, and Lehman’s in Chicago. Still others merged into chains to compete with Ben Franklin Stores. That’s how JC Penney’s was born.

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