Economics – Page 226 – artdiamondblog.com

Medoff Swimming Naked

Bernie Medoff, and friends, swimming naked. Source of caricature: online version of the NYT article quoted and cited below.

The article quoted and cited below, is most notable for the wonderful illustration of the famous Warren Buffett quote on how hard times reveal who has been prudent and who has not been prudent.

(p. 19) Though we may be caring less, we’re hearing a lot more about Ponzi schemes lately, perhaps because the scams tend to fall apart when markets drop. As Warren Buffett so memorably put it, “You only find out who is swimming naked when the tide goes out.”

For the full commentary, see:
JOHN SCHWARTZ. “Lost in Bernie Madoff’s Shadow.” The New York Times, SundayBusiness Section (Sun., April 11, 2009): 19 & 24.

Our “Patently Absurd” Patent System

(p. A15) The Founders might have used quill pens, but they would roll their eyes at how, in this supposedly technology-minded era, we’re undermining their intention to encourage innovation. The U.S. is stumbling in the transition from their Industrial Age to our Information Age, despite the charge in the Constitution that Congress “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”
. . .

Both sides may be right. New empirical research by Boston University law professors James Bessen and Michael Meurer, reported in their book, “Patent Failure,” found that the value of pharmaceutical patents outweighed the costs of pharmaceutical-patent litigation. But for all other industries combined, they estimate that since the mid-1990s, the cost of U.S. patent litigation to alleged infringers ($12 billion in legal and business costs in 1999) is greater than the global profits that companies earn from patents (less than $4 billion in 1999). Since the 1980s, patent litigation has tripled and the probability that a particular patent is litigated within four years has more than doubled. Small inventors feel the brunt of the uncertainty costs, since bigger companies only pay for rights they think the system will protect.
These are shocking findings, but they point to the solution. New drugs require great specificity to earn a patent, whereas patents are often granted to broad, thus vague, innovations in software, communications and other technologies. Ironically, the aggregate value of these technology patents is then wiped out through litigation costs.
Our patent system for most innovations has become patently absurd. It’s a disincentive at a time when we expect software and other technology companies to be the growth engine of the economy. Imagine how much more productive our information-driven economy would be if the patent system lived up to the intention of the Founders, by encouraging progress instead of suppressing it.

For the full commentary, see:
L. GORDON CROVITZ. “OPINION: INFORMATION AGE; Patent Gridlock Suppresses Innovation.” Wall Street Journal (Mon., JULY 14, 2008): A15.
(Note: ellipsis added.)

The Middle Ages Were Poor Ages (and, Yes, Dark Ages Too)

Source of book image: http://images.barnesandnoble.com/images/11610000/11613340.jpg

(p. A19) . . . some excellent books for general readers in the past few years, notably Brian Ward- Perkins’s “The Fall of Rome and the End of Civilization” (2005), have shown how devastating was the economic and human cost paid between 450 and 900. It is still unfashionable to speak of the Dark Ages (there was continuing cultural life), but these were certainly the Poor Ages, in which protection for the weak and vulnerable, from roaming killers and even from the weather, was much more precarious than it had been under Roman rule.

For the full review, see:
SCOTT PATTERSON. “Bookshelf; The Emperor Left Town.” Wall Street Journal (Tues., APRIL 21, 2009): A19.
(Note: ellipsis added.)
(Note: the book mainly under review by Patterson, is NOT the book featured in this blog entry.)

The reference for the Ward-Perkins book, is:
Ward-Perkins, Bryan. The Fall of Rome: And the End of Civilization. Oxford, UK: Oxford University Press, 2005.

Berkshire BYD Technology Bet Based on Munger’s View of BYD Manager

“BOOK VALUE: Berkshire Hathaway’s Charles Munger reads businesses well — and, as a bibliophile, he goes through several books a week.” Source of caricature and caption: online version of the WSJ article quoted and cited below.

At a Berkshire Hathaway annual meeting a few years ago, I remember hearing Warren Buffett say that he stays away from technology stocks because he does not know how to judge which technologies are likely to succeed in the long-run. So I was a bit puzzled by the news that Berkshire Hathaway was investing in BYD, a Chinese company producing an electric car.
The passages quoted below may partially solve the puzzle: the investment in BYD was pushed by Charlie Munger and David Sokol, and was based more on a judgment about the quality of BYD’s management, than the prospects for BYD’s technology.

(p. C1) Mr. Munger’s views have pushed Berkshire into some surprising directions. Several years ago, Mr. Munger learned of an obscure Chinese maker of batteries and automobiles called BYD Inc., which hopes to create a cheap, functional electric car.

A Chinese tech company is nothing like the shoe and underwear makers Berkshire had been buying. But Mr. Munger was enthusiastic, less about the technology than about Wang Chuanfu, who runs BYD. Mr. Wang, Mr. Munger says, is “likely to be one of the most important business people who ever lived.”
Mr. Buffett was skeptical at first. But Mr. Munger persisted. David Sokol, chairman of Berkshire utility MidAmerican Energy Holdings Co., paid a visit to BYD’s factory in China and agreed with Mr. Munger’s assessment. Last year, MidAmerican paid $230 million for a 10% stake in BYD.
“BYD was Charlie’s idea,” Mr. Buffett said. “When he encounters genius and sees it operating in a practical way, he gets blown away.”

For the full story, see:

SCOTT PATTERSON. “Here’s the Story on Berkshire’s Munger.” Wall Street Journal (Fri., MAY 1, 2009): C1 & C3.

“Don’t Kill the Goose”

(p. A11) I think there are two major but not fully formed or fully articulated fears among thinking Americans right now, and the deliberate obscurity of official language only intensifies those fears.

The first is that Mr. Obama’s government, in all its flurry of activism, may kill the goose that laid the golden egg. This is as dreadful and obvious a cliché as they come, but too bad, it’s what people fear. They see the spending plans and tax plans, the regulation and reform hunger, the energy proposals and health-care ambitions, and they–we–wonder if the men and women doing all this, working in their separate and discrete areas, are being overseen by anyone saying, “By the way, don’t kill the goose.”
The goose of course is the big, messy, spirited, inspiring, and sometimes in some respects damaging but on the whole brilliant and productive wealth-generator known as the free-market capitalist system. People do want things cleaned up and needed regulations instituted, and they don’t mind at all if the very wealthy are more heavily taxed, but they greatly fear a goose killing. Economic freedom in all its chaos and disorder has kept us rich for 200 years, and allowed us as a nation to be generous and strong at home and in the world. But the goose can be killed–by carelessness, hostility, incrementalism, paralysis, and by no one saying, “Don’t kill the goose.”

For the full commentary, see:
PEGGY NOONAN. “What’s Elevated, Health-Care Provider? Economy of language would be good for the economy.” Wall Street Journal (Sat., MAY 15, 2009): A11.

There’s Still Space in Diamond’s Fall Seminar on the Economics of Entrepreneurship at the University of Nebraska at Omaha

“Clear Relationship in Rice Farming Between Effort and Reward”

(p. 236) What redeemed the life of a rice farmer, however, was the nature of that work. It was a lot like the garment work done by the Jewish immigrants to New York. It was meaningful. First of all, there is a clear relationship in rice farming between effort and reward. The harder you work a rice field, the more it yields. Second, it’s complex work. The rice farmer isn’t simply planting in the spring and harvesting in the fall. He or she effectively runs a small business, juggling a family workforce, hedging uncertainty through seed selection, building and managing a sophisticated irrigation system, and coordinating the complicated process of harvesting the first crop while simultaneously preparing the second crop.

And, most of all, it’s autonomous. The peasants of Europe worked essentially as low-paid slaves of an aristocratic landlord, with little control over their own destinies. But China and Japan never developed that kind of oppressive feudal system, because feudalism simply can’t work in a rice economy. Growing rice is too complicated and intricate for a system that requires farmers to be coerced and bullied into going out into the fields each morning. By the fourteenth and fifteenth centuries, landlords in central and Southern China had an almost completely hands-off relationship with their tenants: they would collect a fixed rent and let farmers go about their business.
“The thing about wet-rice farming is, not only do you (p. 237) need phenomenal amounts of labor, but it’s very exacting,” says the historian Kenneth Pomerantz. “You have to care. It really matters that the field is perfectly leveled before you flood it. Getting it close to level but not quite right makes a big difference in terms of your yield. It really matters that the water is in the fields for just the right amount of time. There’s a big difference between lining up the seedlings at exactly the right distance and doing it sloppily. It’s not like you put the corn in the ground in mid-March and as long as rain comes by the end of the month, you’re okay. You’re controlling all the inputs in a very direct way. And when you have something that requires that much care, the overlord has to have a system that gives the actual laborer some set of incentives, where if the harvest comes out well, the farmer gets a bigger share. That’s why you get fixed rents, where the landlord says, I get twenty bushels, regardless of the harvest, and if it’s really good, you get the extra. It’s a crop that doesn’t do very well with something like slavery or wage labor. It would just be too easy to leave the gate that controls the irrigation water open a few seconds too long and there goes your field.”

Source:
Gladwell, Malcolm. Outliers: The Story of Success. New York, NY: Little, Brown, and Co., 2008.
(Note: italics in original.)

French People Sleep More Than Those in Other Industrialized Countries

My hypothesis is not that the French are lazier than others, but that their labor policies give them less incentive to work.

(p. A8) PARIS — When he won the presidential election two years ago, Nicolas Sarkozy urged the French to get up early and work more to earn more.

A study released Monday suggests they missed the wake-up call.
France is the industrialized country where people spend the longest periods sleeping, according to a series of surveys on social habits conducted by the Paris-based Organization for Economic Cooperation & Development.
The French sleep a daily average of 530 minutes, compared with 518 for Americans and 469 for Koreans — the OECD’s “most awake” nation, according to the study.

For the full story, see:
DAVID GAUTHIER-VILLARS. “France Wrests Title of Sleeping Giant.” Wall Street Journal (Tues., MAY 5, 2009): A8.

Ukrainian Memorial to the Millions Starved by Stalin’s Communism

“A memorial to the famine, right, opposite a revered cathedral, was dedicated last November in Kiev. A museum is planned there.” Source of photo and caption: online version of the NYT article quoted and cited below.

(p. A6) KIEV, Ukraine — A quarter century ago, a Ukrainian historian named Stanislav Kulchytsky was told by his Soviet overlords to concoct an insidious cover-up. His orders: to depict the famine that killed millions of Ukrainians in the early 1930s as unavoidable, like a natural disaster. Absolve the Communist Party of blame. Uphold the legacy of Stalin.
Professor Kulchytsky, though, would not go along.
The other day, as he stood before a new memorial to the victims of the famine, he recalled his decision as one turning point in a movement lasting decades to unearth the truth about that period. And the memorial itself, shaped like a towering candle with a golden eternal flame, seemed to him in some sense a culmination of this effort.
“It is a sign of our respect for the past,” Professor Kulchytsky said. “Because everyone was silent about the famine for many years. And when it became possible to talk about it, nothing was said. Three generations on.”
. . .
The pro-Western government in Kiev, which came to power after the Orange Revolution of 2004, calls the famine a genocide that Stalin ordered because he wanted to decimate the Ukrainian citizenry and snuff out aspirations for independence from Moscow.
The archives make plain that no other conclusion is possible, said Professor Kulchytsky, who is deputy director of the Institute of Ukrainian History in Kiev.
Professor Kulchytsky is 72, though he looks younger, as if he has somehow withstood the draining effect of so much research into the horrors of that time.
“It is difficult to bear,” he acknowledged. “The documents about cannibalism are especially difficult to read.”
Professor Kulchytsky said it was undeniable that people all over the Soviet Union died from hunger in 1932 and 1933 as the Communists waged war on the peasantry to create farming collectives. But he contended that in Ukraine the authorities went much further, essentially quarantining and starving many villages.
“If in other regions, people were hungry and died from famine, then here people were killed by hunger,” Professor Kulchytsky said. “That is the absolute difference.”

For the full story, see:
CLIFFORD J. LEVY. “Kiev Journal – A New View of a Famine That Killed Millions.” The New York Times (Mon., March 16, 2009): A6.
(Note: ellipsis added.)

Cooking with Cow Shit Adds to Global Warming (and Would Be Ended by Economic Growth)

“Cooking in Kohlua, India. Soot from tens of thousands of villages in developing countries is responsible for 18 percent of the planet’s warming, studies say.” Source of photo and caption: online version of the NYT article quoted and cited below.

Economic growth is sometimes seen as increasing pollution. But the article quoted below shows that primitive cooking methods, which occur in the absence of economic growth, cause one of the most damaging forms of pollution: black carbon.

(p. A1) KOHLUA, India — “It’s hard to believe that this is what’s melting the glaciers,” said Dr. Veerabhadran Ramanathan, one of the world’s leading climate scientists, as he weaved through a warren of mud brick huts, each containing a mud cookstove pouring soot into the atmosphere.
As women in ragged saris of a thousand hues bake bread and stew lentils in the early evening over fires fueled by twigs and dung, children cough from the dense smoke that fills their homes. Black grime coats the undersides of thatched roofs. At dawn, a brown cloud stretches over the landscape like a diaphanous dirty blanket.
In Kohlua, in central India, with no cars and little electricity, emissions of carbon dioxide, the main heat-trapping gas linked to global warming, are near zero. But soot — also known as black carbon — from tens of thousands of villages like this one in developing countries is emerging as a major and previously unappreciated source of global climate change.
While carbon dioxide may be the No. 1 contributor to rising global temperatures, scientists say, black carbon has emerged as an important No. 2, with recent studies estimating that it is responsible for 18 percent of the (p. A12) planet’s warming, compared with 40 percent for carbon dioxide. Decreasing black carbon emissions would be a relatively cheap way to significantly rein in global warming — especially in the short term, climate experts say. Replacing primitive cooking stoves with modern versions that emit far less soot could provide a much-needed stopgap, while nations struggle with the more difficult task of enacting programs and developing technologies to curb carbon dioxide emissions from fossil fuels.
. . .
Better still, decreasing soot could have a rapid effect. Unlike carbon dioxide, which lingers in the atmosphere for years, soot stays there for a few weeks. Converting to low-soot cookstoves would remove the warming effects of black carbon quickly, while shutting a coal plant takes years to substantially reduce global CO2 concentrations.
. . .
Mark Z. Jacobson, professor of environmental engineering at Stanford, said that the fact that black carbon was not included in international climate efforts was “bizarre,” but “partly reflects how new the idea is.”

For the full story, see:
ELISABETH ROSENTHAL. “By Degrees; Black Carbon; Soot From Third-World Stoves Is New Target in Climate Fight.” The New York Times (Thurs., April 16, 2009): A1, A12.
(Note: ellipses added; the title of the online version is “By Degrees – Third-World Stove Soot Is Target in Climate Fight.” )

Source of maps: online version of the NYT article quoted and cited above.

Entrepreneur’s Dresses “Would Save Mothers Endless Work”

Schumpeter would have loved the passage quoted below—it is a wonderful example for his argument that capitalism mainly benefits ordinary people of modest means.

(p. 147) Listen to how Borgenicht describes his decision to expand beyond aprons:

From my study of the market I knew that only three men were making children’s dresses in 1890. One was an East Side tailor near me, who made only to order, while the other two turned out an expensive product with which I had no desire at all to compete. I wanted to make “popular price” stuff–wash dresses, silks, and woolens. It was
my goal to produce dresses that the great mass of the people could afford, dresses that would–from the business angle–sell equally well to both large and small, city and country stores. With Regina’s help–she always had excellent taste, and judgment–I made up a line of samples. Displaying them to all my “old” customers and friends, I hammered home every point–my dresses would save mothers endless work, the materials and sewing were as good and probably better than anything that could be done at home, the price was right for quick disposal.

Source:
Gladwell, Malcolm. Outliers: The Story of Success. New York, NY: Little, Brown, and Co., 2008.