Economics – Page 236 – artdiamondblog.com

I Was Wrong: Apparently the U.S. Auto Industry Does Have a Prayer

“PRAYING FOR A MIRACLE. S.U.V.’s sat on the altar of Greater Grace Temple, a Pentecostal church in Detroit, as congregants prayed to save the auto industry.” Source of the caption and photo: online version of the NYT article quoted and cited below.

The process of creative destruction, requires that failed businesses be allowed to fail, so that the resources (labor and capital) devoted to the failed businesses, can be devoted to more productive uses.
The Danny DeVito character in “Other People’s Money” makes this point in a speech near the end, in which he says that the Gregory Peck character has just delivered a “prayer for the dead” in calling for continued support for a dead business that is technologically obsolete.
On a more personal level, we have always bought cars from Honda and Toyota, because we sincerely believe that they build better cars than Detroit does. By what right does the government force taxpayers to prop up companies whose products have been rejected in the marketplace?
When the economic and moral arguments for bailout fail, all that is left for a failed industry is prayer (and politics)—one more reason to believe that the opportunity cost of prayer, is high.

(p. A19) DETROIT — The Sunday service at Greater Grace Temple began with the Clark Sisters song “I’m Looking for a Miracle” and included a reading of this verse from the Book of Romans: “I consider that our present sufferings are not worth comparing with the glory that will be revealed in us.”

Pentecostal Bishop Charles H. Ellis III, who shared the sanctuary’s wide altar with three gleaming sport utility vehicles, closed his sermon by leading the choir and congregants in a boisterous rendition of the gospel singer Myrna Summers’s “We’re Gonna Make It” as hundreds of worshipers who work in the automotive industry — union assemblers, executives, car salesmen — gathered six deep around the altar to have their foreheads anointed with consecrated oil.

While Congress debated aid to the foundering Detroit automakers Sunday, many here whose future hinges on the decision turned to prayer.

Outside the Corpus Christi Catholic Church, a sign beckoned passers-by inside to hear about “God’s bailout plan.”

For the full story, see:
NICK BUNKLEY. “Detroit Churches Pray for ‘God’s Bailout’.” The New York Times (Mon., December 8, 2008): A19.
(Note: The photo of the top appeared on p. A1 of the print edition of the December 8, 2008 NYT; also, the online version of the article has a date of Dec. 7 instead of the Dec. 8 date of the print version.)

“Worshipers at Greater Grace Temple, a Pentecostal church in Detroit, prayed on Sunday for an automobile industry miracle.” Source of the caption and photo: online version of the NYT article quoted and cited above.

Amateur Leeuwenhoek Made Huge Contribution to Science

(p. 40) Antoni van Leeuwenhoek was a scientific superstar. The greats of Europe traveled from afar to see him and witness his wonders. It was (p. 41) not just the leading minds of the era—Descartes, Spinoza, Leibnitz, and Christopher Wren—but also royalty, the prince of Liechtenstein and Queen Mary, wife of William III of Orange. Peter the great of Russia took van Leeuwenhoek for an afternoon sail on his yacht. Emperor Charles of Spain planned to visit as well but was prevented by a strong eastern storm.

It was nothing that the Dutch businessman had ever expected. He came from an unknown family, had scant education, earned no university degrees, never traveled far from Delft, and knew no language other than Dutch. At age twelve he had been apprenticed to a linen draper, learned the trade, then started his own business as a fabric merchant when he came of age, making ends meet by taking on additional work as a surveyor, wine assayer, and minor city official. He picked up a skill at lens grinding along the way, a sort of hobby he used to make magnifying glasses so he could better see the quality of fabrics he bought and sold. At some point he got hold of a copy of Micrographia, a curious and very popular book by the British scientist Robert Hooke. Filled with illustrations, Micrographia showed what Hooke had sen through a novel instrument made of two properly ground and arranged lenses, called a “microscope.” . . . Micrographia was an international bestseller in its day. Samuel Pepys stayed up until 2:00 A.M. one night poring over it, then told his friends it was “the most ingenious book that I ever read in my life.”

Van Leeuwenhoek, too was fascinated. He tried making his own microscopes and, as it turned out, had talent as a lens grinder. His lens were better than anyone’s in Delft; better than any Hooke had access to; better, it seemed, than any in the world. . . .

(p. 42) Then, in the summer of 1675, he looked deep within a drop of water from a barrel outside and became the first human to see an entirely new world. In that drop he could make out a living menagerie of heretofore invisible animals darting, squirming, and spinning.

Source:
Hager, Thomas. The Demon under the Microscope: From Battlefield Hospitals to Nazi Labs, One Doctor’s Heroic Search for the World’s First Miracle Drug. New York: Three Rivers Press, 2007.
(Note: ellipses added.)

The example above is consistent with Baumol’s hypotheses about formal education mattering less, in the initial stages of great discoveries. (And maybe even being a hindrance).
See:
Baumol, William J. “Education for Innovation: Entrepreneurial Breakthroughs Versus Corporate Incremental Improvements.” In Innovation Policy and the Economy, edited by Adam B. Jaffe, Josh Lerner and Scott Stern, 33-56. Cambridge, Mass.: MIT Press, 2005.

The example is also consistent with Terence Kealey’s claim that important science can often arise as a side-effect of the pursuit of business activity.
See:
Kealey, Terence. The Economic Laws of Scientific Research. New York: St. Martin’s Press, 1996.

Reason for Success of U.S. Economy: “We Let People Fail”

McCain’s chief economic adviser and entrepreneur-expert Hotz-Eakin offered some cogent comments on the trend toward more government bailouts at the taxpayers’ expense:

(p. A6) Mr. Obama is by no means an activist in the Japanese mold, said Douglas Holtz-Eakin, an economic adviser to John McCain’s presidential campaign. But as a whole, policies crafted to address distinct problems in the auto, energy and banking sectors are merging into a broader policy that would pick some winners and losers, preserve entire industries and shape consumer choices.

“We’re backing into industrial policy in an emergency to correct massive market failures,” said Jared Bernstein, an economist at the liberal Economic Policy Institute who has worked with the president-elect’s economic team.
. . .
“The reason the U.S. economy was so successful for so long was not because we did things so well. It was because we let people fail.” Mr. Hotz-Eakin said. “This is dangerous at some very deep level.”

For the full story, see:
JONATHAN WEISMAN. “Wider U.S. Interventions Would Yield Winners, Losers as Industries Realign.” The Wall Street Journal (Thurs., NOVEMBER 20, 2008): A6.
(Note: ellipsis added.)
(Note: the final paragraph was in the print edition, but was deleted from the online version.)

75th Anniversary of End of Prohibition

(p. W8) “Prohibition went into effect on January 16, 1920, and blew up at last on December 5, 1933 — an elapsed time of twelve years, ten months and nineteen days,” H.L. Mencken wrote shortly after ratification of the 21st Amendment to the Constitution eliminated the 18th Amendment. “It seemed almost a geologic epoch while it was going on, and the human suffering that it entailed must have been a fair match for that of the Black Death or the Thirty Years War.”

The demise of Prohibition, 75 years ago . . . , is something of a cause for celebration, and it will be treated as such with Repeal Day parties in Washington, Chicago, New Orleans, San Francisco, New York and elsewhere. . . .
. . .
Temperance advocates had argued Prohibition would usher in an era of sober moral rectitude. When it didn’t quite work out that way, public opinion began to turn against the drys. They joined those who opposed Prohibition because it had handed new and oppressive powers to the federal government. Charles Lindbergh’s father-in-law, Dwight Whitney Morrow, won a Senate seat from New Jersey in 1930 running as a Republican against Prohibition. He argued that it had caused Americans to “conceive of the Federal Government as an alien and even a hostile Power.”
And yet, it was finance that finally did Prohibition in. As the nation sank into the Depression, tax revenues dwindled. The prospect of capturing all the liquor excise taxes that had for a decade been missing (and, in effect, had gone into the pockets of bootlegging mobs) was alluring to Democrats and Republicans alike. Pierre du Pont lobbied his fellow plutocrats to support repeal in the vain hope that liquor taxes would replace income taxes. But the New Dealers saw repeal as creating a vast pile of money with which to fund expansive new government programs. Not only did Prohibition and its enforcement increase the size and scope of the federal government, but so did Prohibition’s repeal.

For the full story, see:
ERIC FELTEN. “HOW’S YOUR DRINK; Celebrating Cinco de Drinko.” The Wall Street Journal (Fri., NOVEMBER 28, 2008): W8.
(Note: ellipses added.)

The Benefits from the Discovery of Sulfa, the First Antibiotic

I quoted a review of The Demon Under the Microscope in an entry from October 12, 2006. I finally managed to read the book, last month.
I don’t always agree with Hager’s interpretation of events, and his policy advice, but he writes well, and he has much to say of interest about how the first anti-bacterial antibiotic, sulfa, was developed.
In the coming weeks, I’ll be highlighting a few key passages of special interest. In today’s entry, below, Hager nicely summarizes the importance of the discovery of antibiotics for his (and my) baby boom generation.

(p. 3) I am part of that great demographic bulge, the World War II “Baby Boom” generation, which was the first in history to benefit from birth from the discovery of antibiotics. The impact of this discovery is difficult to overstate. If my parents came down with an ear infection as babies, they were treated with bed rest, painkillers, and sympathy. If I came down with an ear infection as a baby, I got antibiotics. If a cold turned into bronchitis, my parents got more bed rest and anxious vigilance; I got antibiotics. People in my parents’ generation, as children, could and all too often did die from strep throats, infected cuts, scarlet fever, meningitis, pneumonia, or any number of infectious diseases. I and my classmates survived because of antibiotics. My parents as children, and their parents before them, lost friends and relatives, often at very early ages, to bacterial epidemics that swept through American cities every fall and winter, killing tens of thousands. The suddenness and inevitability of these epidemic deaths, facts of life before the 1930s, were for me historical curiosities, artifacts of another age. Antibiotics virtually eliminated them. In many cases, much-feared diseases of my grandparents’ day—erysipelas, childbed fever, cellulitis—had become so rare they were nearly extinct. I never heard the names.

Consumers Bear Costs of Global Warming Policies

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

(p. A10) Leaders of the Group of Eight major industrialized economies, meeting in Japan, issued their first long-term target for cutting global-warming emissions. But their pronouncement failed to address the two toughest questions: How will the world do it, and who will pay?

The answer to the money question is clear: Consumers will pay — at the gasoline pump, at the car dealership and on the monthly electric bill. If the campaign against global warming gets serious, it will transform today’s esoteric environmental threat into a fundamental pocketbook issue for people from Boston to Beijing.

For the full story, see:
JEFFREY BALL. “As Climate Issue Heats Up, Questions of Cost Loom.” The Wall Street Journal (Fri., July 10, 2008): A10.

More Choice is a Robust Result of The Long Tail

I’ve discussed in a previous entry, why The Long Tail is a worthy read. The article quoted below, praises a Harvard Business Review article that disagrees. I haven’t had a chance to read the HBR article yet.
Yet on a fundamental level, I am confident that The Long Tail is right. New technologies such as Amazon and YouTube, reduce the cost of content diversity. If the supply curve of diversity moves right, then (ceteris paribus) the quantity of diverse content will increase. Hence, we can robustly expect more diverse content.
And for us free market libertarians, more choice is good.

(p. B5) The Long Tail theory, as explained by its creator, Wired magazine editor Chris Anderson, holds that society is “increasingly shifting away from a focus on a relatively small number of ‘hits’ (mainstream products and markets) at the head of the demand curve and toward a huge number of niches in the tail.”
The reason involves the abundance of easy choice that the Web makes possible. A record store has room for only a set number of titles. ITunes, though, can link to all of the millions of songs that its servers can store. Thus, said Mr. Anderson, “narrowly-targeted goods and services can be as economically attractive as mainstream fare.” Managers were urged to adopt their business plans accordingly.
Since appearing two years ago, the book has been something of a sacred text in Silicon Valley. Business plans that foresaw only modest commercial prospects for their products cited the Long Tail to justify themselves, as it had apparently proved that the Web allows a market for items besides super-hits. If you demurred, you were met with a look of pity and contempt, as though you had just admitted to still using a Kaypro.
That might now start to change, thanks to the article (online at tinyurl.com/3rg5gp), by Anita Elberse, a marketing professor at Harvard’s business school who takes the same statistically rigorous approach to entertainment and cultural industries that sabermetricians do to baseball.
Prof. Elberse looked at data for online video rentals and song purchases, and discovered that the patterns by which people shop online are essentially the same as the ones from offline. Not only do hits and blockbusters remain every bit as important online, but the evidence suggests that the Web is actually causing their role to grow, not shrink.
Mr. Anderson responded on his Long Tail blog, thelongtail.com, saying much of the difference between his analysis and hers involved how hits and non-hits, or “head” and “tail” in the book’s lingo, are measured. Aside from that, he was generous in praising the article, and said he welcomed the sort of rigorous scrutiny the theory was getting.

For the full commentary, see:
LEE GOMES. “PORTALS; Study Refutes Niche Theory Spawned by Web.” The Wall Street Journal (Weds., JULY 2, 2008): B5.

The full information on The Long Tail, is:
Anderson, Chris. The Long Tail. New York: Hyperion, 2006.

The HBR article that is critical of the long tail, is:
Elberse, Anita. “Should You Invest in the Long Tail?” Harvard Business Review 86, no. 7/8 (2008): 88-96.

The 10 Million Dollar Bookmark and the 35 Billion Dollar Egg

“A vendor arranges eggs on a new 100 billion Zimbabwean dollar note in Harare July 22, 2008. Zimbabwe’s central bank introduced new higher-value 100 billion Zimbabwe dollar notes on Monday as part of a desperate fight against spiralling hyperinflation, the bank said. An egg now costs $35 billion.” Source of caption and photo: http://www.daylife.com/photo/03ORa153k8bVA

(p. A1) Robert Mugabe has kept his embattled regime in Zimbabwe afloat on a sea of paper money. Now, he’ll have to try to do it without the paper.

The Munich-based company that has supplied Zimbabwe with the special blank sheets to print its increasingly worthless dollar caved in to pressure on Tuesday from the German government for it to stop doing business with the African ruler.

Mr. Mugabe’s regime relies on a steady supply of the paper — fortified with watermarks and other antiforgery features — to print the bank notes that allow it to pay the soldiers and other loyalists who enable him to stay in power. With an annual inflation rate estimated at well over 1 million percent, new notes with ever more zeros need to be printed every few weeks because the older ones lose their worth so quickly.
. . .
Zimbabwe’s central bank stopped posting inflation figures in January, when it stood at a relatively modest 100,580%. A loaf of bread costs 30 billion Zimbabwean dollars.
. . .
Mr. Mangoma uses a 10 million Zimbabwe dollar bank note, worth 0.0008 of a U.S. cent, as a bookmark because he doesn’t “care if I lose it.”

For the full story, see:
MARCUS WALKER and ANDREW HIGGINS. “Zimbabwe Can’t Paper Over Its Million-Percent Inflation Anymore; Under Pressure, German Company Cuts Off Shipments of Blank Bank Notes to Mugabe.” The Wall Street Journal (Weds., JULY 2, 2008): A1 & A10.
(Note: ellipses added.)

“Harare produce seller Chipo Chivanze needs a basket of cash to make change because of Zimbabwe’s battered currency.” Source of caption: print version of the WSJ article quoted and cited above. Source of photo: online version of the WSJ article quoted and cited above.

Science Fiction Writers Provide More Accurate Forecasts Than Economists

Robert Fogel, quoted below, is a Nobel-Prize-winning professor of economics at the University of Chicago:

(p. 13) I think I’ve largely covered how things looked after World War II, highlighting both what now seems to have been an unjustified pessimism and also the difficulties in forecasting the future. I close with an anecdote from Simon Kuznets. He used to give a one-year course in growth economics, both at Johns Hopkins and Harvard. One of the points he made was that if you wanted to find accurate forecasts of what happened in the past, don’t look at what the economists said. The economists in 1850 wrote that the progress of the last decade had been so great that it could not possibly continue. And economists at the end of the nineteenth century wrote that the progress of the last half century had been so great that it could not possibly continue during the twentieth century. Kuznets said you would come closest to an accurate forecast if you read the writers of science fiction. But even the writers of science fiction were too pessimistic. Jules Verne recognized that we might eventually get to the moon, but he couldn’t conceive of the technology that actually made the journey possible.

I was at a 2003 conference at Rockefeller University that brought together about 30 people from different disciplines (economics, biology, chemistry, and physics, as well as some industrial leaders) who put forward their views of what was likely to happen in the new millennium. And I must say that the noneconomists were far more bullish than most of the economists I know. So I suspect if we have another MussaFest in 2024, we’ll all look back at how pessimistic we were in 2004.

Source:
Fogel, Robert W. “Reconsidering Expectations of Economic Growth after World War Ii from the Perspective of 2004.” IMF Staff Papers 52 (Special Issue 2005): 6-14.

Good Laws Protect the Innovator

James Burke writes well, and what he writes is often stimulating, and thought-provoking. On the other hand, some of what he writes is exasperating—he writes in sweeping generalities, and often his ‘connections’ are exaggerations, giving no weight (or even mention) to alternative, equally plausible accounts.
But on balance, I enjoy listening to him. Here is one of the bits I especially liked:

(p. 19) Because the rule of law exists, and above all because it encourages and protects acts of innovation with patent legislation, we in the modern world expect that tomorrow will be better than today. Our view of the universe is essentially optimistic because of the marriage between law and innovation. Law gives an individual the confidence to explore, to risk, to venture into the unknown, in the knowledge that he, as an innovator, will be protected by society.

Source:
Burke, James. The Day the Universe Changed: How Galileo’s Telescope Changed the Truth and Other Events in History That Dramatically Altered Our Understanding of the World. Back Bay Books, 1995.

“The Value Conferred on Mankind by the Unknown Inventor of the Plough”

Who will attempt to calculate the value conferred on mankind by the unknown inventor of the plough?

Source:
Say, Jean-Baptiste. A Treatise on Political Economy. Philadelphia: Lippincott, Grambo & Co., 1855; translator C. R. Prinsep, ed. Clement C. Biddle. Fourth-fifth edition.
First published: 1803, in French.
The quotation is from BOOK I, CHAPTER VI “Of Operations Alike Common To All Branches of Industry.”
Full text is posted at: http://www.econlib.org/library/Say/sayT.html
(Note: Say is one of the earliest economists to recognize the importance of entrepreneurs. Today he is best known for his Say’s Law. He lived from 1767-1832.)