Incentives – Page 15 – artdiamondblog.com

McCain Proposes Prize to “Leapfrog” Battery Technology

“Campaigning Monday in Fresno, Calif., Senator John McCain said, if elected, he would offer $300 million to anyone who could build a more efficient car battery.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A15) FRESNO, Calif. — In the 18th century the British offered a £20,000 prize to anyone who figured out how to calculate longitude. More recently, Netflix offered a million dollars for improving movie recommendations on its Web site. Now Senator John McCain is suggesting a new national prize: He said here Monday that if elected president he would offer $300 million to anyone who could build a better car battery.
. . .
“I further propose we inspire the ingenuity and resolve of the American people,” Mr. McCain said, “by offering a $300 million prize for the development of a battery package that has the size, capacity, cost and power to leapfrog the commercially available plug-in hybrids or electric cars.”
He said the winner should deliver power at 30 percent of current costs. “That’s one dollar, one dollar, for every man, woman and child in the U.S. — a small price to pay for helping to break the back of our oil dependency,” he said.

For the full story, see:

MICHAEL COOPER. “McCain Proposes a $300 Million Prize for a Next-Generation Car Battery.” The New York Times (Tues., June 24, 2008): A15 & A20.
(Note: ellipsis added.)

How to Save a Species by Eating It

Source of book image:
http://ecx.images-amazon.com/images/I/61cDbDl665L._SS500_.jpg

(p. D1) SOME people would just as soon ignore the culinary potential of the Carolina flying squirrel or the Waldoboro green neck rutabaga. To them, the creamy Hutterite soup bean is too obscure and the Tennessee fainting goat, which keels over when startled, sounds more like a sideshow act than the centerpiece of a barbecue.
But not Gary Paul Nabhan. He has spent most of the past four years compiling a list of endangered plants and animals that were once fairly commonplace in American kitchens but are now threatened, endangered or essentially extinct in the marketplace. He has set out to save them, which often involves urging people to eat them.
Mr. Nabhan’s list, 1,080 items and growing, forms the basis of his new book, an engaging journey through the nooks and crannies of American culinary history titled “Renewing America’s Food Traditions: Saving and Savoring the Continent’s Most Endangered Foods” (Chelsea Green Publishing, $35).
. . .
(p. C5) Some of the items on the list, like Ojai pixie tangerines and Sonoma County Gravenstein apples, were well on their way back before Mr. Nabhan came along. But other foods are enjoying a renaissance largely as a result of the coalition’s work.
The Makah ozette potato, a nutty fingerling with such a rich, creamy texture that it needs only a whisper of oil, is one of the success stories. It is named after the Makah Indians, who live at the northwest tip of Washington state and have been growing the potatoes for more than 200 years.
The Seattle chapters of Slow Food and the Chefs Collaborative adopted the rare potato. In 2006, Slow Food passed out seed potatoes to a handful of local farmers and gardeners, and chefs like Seth Caswell at the Stumbling Goat Bistro in Seattle began putting them on the menu.
Mr. Caswell says they are delicious roasted with a little hazelnut oil for salads or cut into wedges to go with burgers made with wagyu beef and Washington State black truffle oil.
There have been other revivals, the moon and stars watermelon and the tepary bean among them. The effort to reintroduce heritage turkeys to the American table was a precursor to the work of Mr. Nabhan and his collaborators.
The meaty Buckeye chicken, with its long legs suitable for ranging around, is considered one of five most endangered chicken breeds. Last year over 1,000 chicks were hatched and delivered to breeders, Mr. Nabhan said.
Justin Pitts, whose family has raised Pineywoods cattle in southern Mississippi for generations, credits the coalition with saving those animals. The small, lean cattle that provide milk, meat and labor spent centuries adapting to the pine barrens of the deep south, raised by families who can trace their herds back as far as anyone can remember. There are less than a dozen of those families left, and at one point the number of pure Pineywoods breeding animals fell to under 200. In the past few years, it has grown to nearly 1,000.
Mr. Pitts, who has “90 head if I can find them all,” sells New York strips and other cuts at the New Orleans farmers’ market and to chefs.
“I can’t raise cattle fast as they eat them,” he said.
He supports the notion that you’ve got to eat something to save it.
“If you’re keeping them for a museum piece,” he said, “you’ve just signed their death warrant.”

For the full story, see:
KIM SEVERSON. “An Unlikely Way to Save a Species: Serve It for Dinner.” The New York Times (Weds., April 30, 2008): D1 & D5.
(Note: ellipses added.)

Reference to book:
Nabhan, Gary Paul. Renewing America’s Food Traditions: Saving and Savoring the Continent’s Most Endangered Foods. White River Junction, VT: Chelsea Green Publishing Company, 2008.

Moon and stars watermelon. Source of image: http://bp0.blogger.com/_Tyq14YRMHCI/SBlWLE9tynI/AAAAAAAAAD8/gphhc3wgK-4/s1600/purplewatermelon266.jpg

High Prices Provide Incentive to Innovate

“A Monsanto researcher, Mohammadreza Ghaffarzadeh, monitored drought-resistant corn technology in Davis, Calif.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 4) CORN prices are at record high levels. Costs for other agricultural essentials, from wheat to coffee to rice, have surged, too. And many people are stunned, even frightened, by all the increases.
But some entrepreneurs and analysts — recognizing that relative price increases in specific goods always encourage innovators to find ways around the problem — say they see an opportunity for creative solutions.
“When something becomes dear, you invent around it as much as you can,” says David Warsh, editor of Economicprincipals.com, a newsletter on trends in economic thinking.
Joel Mokyr, an economic historian at Northwestern University, adds, “All of a sudden, some things that didn’t look profitable now do.”
. . .
A study in the 1950s by the economist Zvi Griliches of American farmers’ adoption of more productive varieties of corn showed how higher prices reduced the cost of adopting new technologies.
. . .
Ultimately, higher food prices give innovators room to cover the cost of protecting human health. But prices are a democratic signal: when all innovators see them, their ability to sneak up on an opportunity, while others nap, vanishes.
“The bigger the prize people are chasing, the more people go after it,” says Paul Romer, a theorist on sources of economic growth. “As people pile into an area, the expected return to any one innovator goes down.”
Yet, fortunately, the return to society goes up.

For the full commentary, see:

G. PASCAL ZACHARY. “Ping; A Brighter Side of High Prices.” The New York Times, SundayBusiness Section (Sun., May 18, 2008): 4.
(Note: ellipses added.)
For more on Zvi Griliches’s contributions to the economics of innovation, see:
Diamond, Arthur M., Jr. “Zvi Griliches’s Contributions to the Economics of Technology and Growth.” Economics of Innovation and New Technology 13, no. 4 (June 2004): 365-397.

Argentine Taxes “Killing Their Incentives”

“Marcelo Marchetti, president of Cigra group.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 6) WENCESLAO ESCALANTE, Argentina — When the government decided in March to raise taxes on farmers’ profits, it set off a rural revolt in Argentina. For three weeks enraged farmers blocked roads nationwide, paralyzing grain and meat sales and causing food shortages.
. . .
The farmers say they are concerned not only about profits, though the steeper taxes have cut into them. They also say Mrs. Kirchner’s policies are threatening to reverse one of the great agricultural booms in Argentina’s history and to snuff out a technological and entrepreneurial revolution that has made the country a leading food source in a world racked by hunger and rising food prices.
“We have an enormous historic opportunity to grow as a country, but the government wants to punish a sector that should continue to be an engine of growth,” said Marcelo Marchetti, 39. “The world has opened its doors to us, and here we are fighting among ourselves.”
. . .
An emergency law passed in 2002, in the midst of an economic crisis, has allowed the Kirchner government to create export taxes and keep the revenues away from governors and mayors. The Kirchners have used the doling out of those revenues to maintain political control over the provinces, which were critical to Mrs. Kirchner’s election.
. . .
In Wenceslao Escalante, the Marchetti brothers, who both studied accounting in college, said the government’s policies were killing their incentives to produce more. A decade ago they formed their company, Cigra, investing in the latest seed technology and farm equipment, and later buying $400,000 grain harvesters with global positioning systems.
Seven years ago the brothers expanded north into Chaco and Santiago del Estero, provinces where the land was thought to be too dry to support corn and soybeans. Today, with more advanced seeds and better crop rotation, it is considered the frontier for Argentine agriculture. But production there is threatened by declining profitability.
As the government has taken more from the farmers, international prices for the supplies to produce their crops, including fertilizers and seeds, have been rising faster than the prices of the commodities, Marcelo Marchetti said. The price of phosphorus, for example, has nearly tripled since last year, he said.
Suddenly the future seems cloudier. The brothers have decided not to make any investments over the next year.
“Everything is on hold,” Mr. Marchetti said.

For the full story, see:
ALEXEI BARRIONUEVO. “In Argentina’s Grain Belt, Farmers Revolt Over Taxes.” The New York Times, Section 1 (Sun., April 27, 2008): 6.
(Note: ellipses added.)

“At a butcher shop in Buenos Aires, supplies were down during strikes by farmers in rural towns like Wenceslao Escalante.” Source of caption and photo: online version of the NYT article quoted and cited above.

The Role of Private Enterprise in Sequencing the Human Genome

Source of book image: http://www.genomenewsnetwork.org/articles/2004/02/20/genome_war.php

The race to decode the genome always seemed like an appealing test case of the relative efficiency of government versus private enterprise. But the results seem muddy because sometimes in the media the outcome has been described as a win for Craig Venter’s private Celera corporation, and other times, as a tie.
For years I have wanted to learn more, and now I have finally done so by reading James Shreeve’s fascinating The Genome War.
It is clear from the book that the entrance of Celera, greatly accelerated the government’s own efforts to sequence the human genome. So one important lesson is that, no matter who “won the race, the consumer benefited from the entrance of a private competitor.
Also clear, is that Venter’s group took advantage of public resources and results. Their primary zeal was for sequencing the genome, rather than for promoting private enterprise.
Regrettably, this is a common case: many entrepreneurs take the institutions of their economy as given, and make use of government when it suits their short-run objectives.
Officially the results were announced as a tie. But the main bone of contention had been over Celera’s advocacy and use of the “whole genome shotgun” technique for sequencing the gene. The government group had attacked the method as impractical and unreliable.
The proof of who “won” in a deeper sense, was that after the contest was over, everyone, including the government, was using the “whole genome shotgun” technique.
Another lesson is that the usual scientific goal of immediately releasing findings, may actually reduce the information available to the public. If, as with the genome, the information is costly to obtain, allowing a period of proprietary ownership of the information, provides private entrepreneurs with the incentive to discover the information in the first place. Another case of unintended consequences: if we fully follow the alleged idealism of academic scientists, we will end up with less scientific knowledge, not more.

Reference to book:
Shreeve, James. The Genome War: How Craig Venter Tried to Capture the Code of Life and Save the World. 1st ed. New York: Alfred A. Knopf, 2004.
(Note: My comments are based on the whole book. A paragraph on pp. 366-367 is especially important.)

The Inefficiency of a Labor Safety Net

“Government milk is sold mostly through curbside milk stalls. Some customers don’t find the milk stands appealing since they can be dingy and the milk sometimes bad.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. A1) MUMBAI — Every workday morning, milkman D.T. Walkar faithfully comes to Worli Dairy to not deliver milk.
Most days, he and his fellow drivers at the government dairy sign in, then move to the rest area. While others read the paper, nap or play rummy, Mr. Walkar likes to do the Sudoku puzzle in the Maharashtra Times, unless someone else has gotten to it first. He then wanders around the complex and talks to friends. The last delivery trucks were sold last year. “The trucks are all gone so we just sit around and talk,” says Mr. Walkar, 50 years old. “We are bored.”
Once respected civil servants, Mr. Walkar and his 300-odd fellow drivers have been left in a strange limbo. Milk sales at their dairy have plummeted as the state government lost its monopoly on milk and consumer tastes changed. But because Indian work rules strictly protect government workers from layoffs, the delivery men show up for work each morning for eight-hour shifts, as they always did, then proceed to do nothing all day. They rarely, if ever, leave the plant.
. . .
(p. A5) In 2001, the Indian government started opening the dairy market in Maharashtra to competition. Private carriers with higher quality milk swiftly won customers by delivering milk to doorsteps. The government milkmen have always been restricted to delivering mostly to curbside milk stalls so they could cover a greater area.
Customers swiftly deserted. Many switched to heat-treated milk in sealed packages that resist spoiling. Some ditched the government’s former best sellers of sweet Pineapple milk and spicy Masala milk for Coca-Cola and Sprite as Indian tastes westernized. Others never found the milk stands appealing — they can be dingy and the milk sometimes bad.

For the full story, see:
ERIC BELLMAN. “Out to Pasture: India’s Milkmen Bide Their Time; No Work, Secure Job Put Them in Limbo; Where’s the Sudoku?” The Wall Street Journal (Sat., March 29, 2008): A1 & A5.
(Note: ellipsis added.)

“Because Indian work rules protect government workers from layoffs, 300-odd former milk truck drivers show up at the Worli Dairy for work each morning just as they always did, then do nothing all day. To pass the time, the men do puzzles, yoga or just sleep off the hours. Once, they tried planting a garden.” Source of caption and photo: online version of the WSJ article quoted and cited above.

Higher Oil Prices Are an Incentive for More Oil Drilling

(p. B5) Even natural-gas companies can’t resist the draw of $100 oil. Though prices for both natural gas and oil have risen steeply, oil fetches nearly twice the price of gas per unit of energy and brings fatter profits.
That is prompting even the most natural-gas-focused companies to step up their oil drilling in the U.S. With the biggest, easiest-to-get deposits of domestic crude oil drained long ago, U.S. energy companies in recent years have concentrated most of their domestic production efforts on natural gas. Some companies, such as Chesapeake Energy Corp. and EOG Resources Inc. devoted nearly their entire production to natural gas.
EOG recently announced it had begun drilling for oil in Colorado and Texas, including in the Barnett Shale, a vast hydrocarbon reserve that had previously been known for gas, not oil. With prices rising faster for oil than natural gas, “you’re probably better off searching for oil,” said EOG Chief Executive Mark Papa.

For the full story, see:
BEN CASSELMAN. “Prices Prompt Natural-Gas Firms To Drill for Oil in U.S.” The Wall Street Journal (Mon., April 7, 2008): B5.

Great Example of Stigler-Kolko Capture Theory of Regulatory Agencies

George Stigler and Gabriel Kolko are associated with the theory that eventually, govenment regulatory agencies come to be captured by the industry that the agency is charged with regulating.
At the time of the exchange documented below, Wendell Willkie was the head of an electric utility, and Lilienthal was one of the heads of the TVA, which was in the process of taking customers away from Willkie’s utility. Willkie’s argument to Lilienthal is consistent with the capture theory. (But that Lilienthal pushed ahead with his plans, might be seen as inconsistent with the theory.)

(p. 182) Lilienthal set up a meeting in early October 1933 at the Cosmos Club in Washington, the club being, in Lilienthal’s words, “about as neutral a ground as we could think of.”
. . .
(p. 183) Willkie tried yet another tack. No one, he argued to Lilienthal, went into government without the intention of going into the private sector later. The private sector, after all, was where the business lived. If Lilienthal was too nasty, then he was not likely to find work at private utilities companies. Lilienthal was, by his own admission, “pretty badly scared” by the time he left the Cosmos.

Source:
Shlaes, Amity. The Forgotten Man: A New History of the Great Depression. New York: HarperCollins, 2007.

Incentives Matter: Capital Punishment Deters Murders

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

(p. A13) Recent high-profile events have reopened the debate about the value of capital punishment in a just society. This is an important discussion, because the taking of a human life is always a serious matter.
Most commentators who oppose capital punishment assert that an execution has no deterrent effect on future crimes. Recent evidence, however, suggests that the death penalty, when carried out, has an enormous deterrent effect on the number of murders. More precisely, our recent research shows that each execution carried out is correlated with about 74 fewer murders the following year.
For any society concerned about human life, that type of evidence is something that should be taken very seriously.
The study examined the relationship between the number of executions and the number of murders in the U.S. for the 26-year period from 1979 to 2004, using data from publicly available FBI sources. The chart nearby shows the number of executions and murders by year.

For the full commentary, see:
ROY D. ADLER and MICHAEL SUMMERS. “Capital Punishment Works.” The Wall Street Journal (Fri., November 2, 2007): A13.

Bill Gates Misreads Adam Smith’s Theory of Moral Sentiments

Bill Gates speaking at the Davos meetings in Switzerland on January 24, 2008. Source of the photo: http://graphics8.nytimes.com/images/blogs/dealbook/davos2008/gates600.jpg

The German scholars used to call it “Das Adam Smith Problem”: how to reconcile the Adam Smith’s Theory of Moral Sentiments with his later Wealth of Nations. One alleged inconsistency is the advocacy of altruism in the former, and the advocacy of self-interest in the latter.

But a closer reading of The Theory of Moral Sentiments solves the problem. Smith thought a case could be made for altruism, but only toward those we know really well, which primarily meant one’s own family, and maybe also others in one’s community who one knows well. The reason is that altruism works only when we know very well the situation and values of those who we propose to help. Otherwise, we may end up doing more harm than good.

So when Gates embarks on global altruism, he should be careful in citing Smith for support.

The passage quoted below discusses Bill Gates’s interpretation of Adam Smith:

(p. A15) Key to Mr. Gates’s plan will be for businesses to dedicate their top people to poor issues — an approach he feels is more powerful than traditional corporate donations and volunteer work. Governments should set policies and disburse funds to create financial incentives for businesses to improve the lives of the poor, he plans to say today. “If we can spend the early decades of the 21st century finding approaches that meet the needs of the poor in ways that generate profits for business, we will have found a sustainable way to reduce poverty in the world,” Mr. Gates plans to say.

In the interview, Mr. Gates was emphatic that he’s not calling for a fundamental change in how capitalism works. He cited Adam Smith, whose treatise, “The Wealth of Nations,” lays out the rationale for the self-interest that drives capitalism and companies like Microsoft. That shouldn’t change, “one iota,” Mr. Gates said.

But there’s more to Adam Smith, he added. “This was written before ‘Wealth of Nations,'” Mr. Gates said, flipping through a copy of Adam Smith’s 1759 book, “The Theory of Moral Sentiments.” It argues that humans gain pleasure from taking an interest in the “fortunes of others.” Mr. Gates will quote from that book in his speech today.

Talk of “moral sentiments” may seem surprising from a man whose competitive drive is so fierce that it drew legal challenges from antitrust authorities. But Mr. Gates said his thinking about capitalism has been evolving for years. He outlined part of his evolution from software titan to philanthropist in a speech last June to Harvard’s graduating class, recounting how when he left Harvard in 1975 he knew little of the inequities in the world. A range of experiences including trips to Africa and India have helped raise that awareness.

In the Harvard speech, Mr. Gates floated the idea of “creative capitalism.” But at the time he had only a “fuzzy” sense of what he meant. To clarify his thinking, he decided to prepare the Davos speech.

For the full story, see:

ROBERT A. GUTH. “Bill Gates Issues Call For Kinder Capitalism; Famously Competitive, Billionaire Now Urges Business to Aid the Poor.” The Wall Street Journal (Thurs., January 24, 2008): A1 & A15.

One good article that discusses some of the issues in my initial commentary is:

Coase, Ronald H. “Adam Smith’s View of Man.” In Essays on Economics and Economists. Chicago: University of Chicago Press, 1995.

Source of the graphic: online version of the WSJ article quoted and cited above.

Raghuram Rajan on the Current Economic Downturn and the Subprime Mortgage Mess

“Traders in the oil futures pit of the New York Mercantile Exchange on Tuesday” (January 22. 2008). Source of caption and photo: online version of the NYT commentary quoted and cited below.

Raghuram Rajan is mentioned in the article quoted below. I first ran across him as the co-author of a book that was billed as applying Schumpeterian ideas of creative destruction to issues of economic growth and development.

Then, at the American Economic Association meetings in New Orleans in early January, I was on my way to a History of Economics Society reception, when I stumbled by chance into a modest reception in which Rajan was giving an informal speech on the subprime mortgage crisis.

It was such an interesting presentation, that I ended up totally missing the History of Economics Society reception. Rajan argued that the main problem was one of misguided incentives. Bonuses at top investment firms like Merrrill Lynch and JPMorgan Chase, are supposed to go to those whose investments produce high returns, with modest risks. The problem with the complicated securities based on the subprime mortgages was that they produced high returns, but the risks were actually also fairly high. The high-flying investors probably had some knowledge of this, but the public did not. In most years the investors could invest in the high return, but high risk, securities, and collect huge bonuses. But now the chickens have come home to roost.

Rajan suggested that the answer would be a change in the way in which the traders are given bonuses. Instead of handing them out annually, let them become vested only after observing the investment’s track record for several years. If the investment goes south before the bonus is vested, the trader does not get the bonus. This would provide an incentive and reward for those who accurately accessed the risk of their investments.

(p. A1) . . . , Wall Street hasn’t yet come clean. Even after last week, when JPMorgan Chase and Wells Fargo announced big losses in their consumer credit businesses, financial service firms have still probably gone public with less than half of their mortgage-related losses, according to Moody’s Economy.com. They’re not being dishonest; they just haven’t untangled all of their complex investments.

“Part of the big uncertainty,” Raghuram G. Rajan, former chief economist at the International Monetary Fund, said, “is where the bodies are buried.”

As Mr. Rajan pointed out, this situation is more severe than the crisis involving Long Term Capital Management in the late 1990s. That was a case in which a limited set of bad investments, largely at one firm, had the potential to drive down the value of other firms’ holdings in the short term. Those firms then might have stopped lending money because they no longer had the capital to do so. But their own balance sheets were largely healthy.

This time, the firms are facing real losses, which will almost certainly curtail lending, and economic growth, this year.

For the full commentary, see:

DAVID LEONHARDT. “ECONOMIC SCENE; Worries That the Good Times Were Mostly a Mirage.” The New York Times (Weds., January 23, 2008): A1 & A23.

(Note: ellipsis added.)

The Schumpeterian book co-authored by Rajan, is:

Rajan, Raghuram G., and Luigi Zingales. Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity. New York: Crown, 2003.