Labor Economics – Page 96 – artdiamondblog.com

We Will Always Want More Income

Karl Marx, John Maynard Keynes, and many others, have suggested that there is some level of income at which we will have enough, and want no more.

David Friedman, in his price theory text, and others, have doubted this. I am with the doubters. I suspect that we sometimes think a certain amount of money would satiate us, because at some level way beyond our current income, it does not reward us to think too much about how we might spend so much money.

But if you are Rockefeller, and you see what good comes with founding universities, curing diseases, and the like, then you can easily imagine what good would come from even more money, even if, like Rockefeller, you are the richest person on the face of the earth.

In the discussion excerpted below, Robert Frank gives another argument for joining the doubters: that as our income rises, so do our standards for quality. (I think this argument is sound, but less important than the one sketched above.)

When my wife and I were living in Paris a few years ago, we went out to dinner with well-to-do friends who were visiting from the United States. The restaurant we chose had a good reputation and, by our standards, was not cheap. But although my wife and I enjoyed our meals enormously, our friends found theirs disappointing. I’m confident they were not trying to impress us or make us feel inferior. By virtue of their substantially higher income, they had simply grown accustomed to a higher standard of cuisine.

. . .

By placing the desire to outdo others at the heart of his description of insatiable demands, Keynes relegated such demands to the periphery. But the desire for higher quality has no natural limits. Keynes and others were wrong to have imagined that a two-hour work week might someday enable us to buy everything we want. That hasn’t happened and never will.

For the full commentary, see:

ROBERT H. FRANK. "ECONOMIC SCENE; The More We Make, the Better We Want." The New York Times (Thurs., September 28, 2006): C3.

(Note: ellipsis added.)

Without Incentives, the Energetic become Lazy

Wise words from Frederick W. Taylor, who is known as the father of scientific management:

(p. B1) "When a naturally energetic man works for a few days beside a lazy one," Mr. Taylor wrote, "the logic of the situation is unanswerable. ‘Why should I work hard when that lazy fellow gets the same pay I do and does only half the work?’ "

As quoted in:

CYNTHIA CROSSEN. "DEJA VU; Early Industry Expert Soon Realized a Staff Has Its Own Efficiency." Wall Street Journal (Mon., November 6, 2006): B1.

Rosen’s Superstars Versus the Long Tail

One of Sherwin Rosen’s most important articles is "The Economics of Superstars" in which he argues that if a superstar’s performance is even slightly better than the next best performer’s, if the performance can be cheaply reproduced (as with radio, CDs, etc.) then a small premium multiplied thousands of times, might result in huge differences in earnings.

This argument works, so long as most of us are interested in the same sort of performance, and are willing to pay some small premium for the best performer of it. But what if we care as much about the content of the performance as the quality of the performance? (In other words, we care as much about what is done, as we care about how well it is done.)

The new book The Long Tail can be taken to imply that there are many niches, and that the days of the "superstar" are over (or at least that in the future, the compensation of the superstars will not be quite so super). If this argument works, and I think it does, then it implies that the new technologies will serve consumers by better matching consumer preferences with the services provided, and also implies that a more diverse group of suppliers (performers) will be able to sustain themselves.

More speculatively, it seems as though it might imply greater equality in the labor market. If this last is true, it goes against most accounts of the effects of recent high technology on the labor market.

The reference to the Rosen article is:

Rosen, Sherwin. "The Economics of Superstars." American Economic Review 71, no. 5 (Dec. 1981): 845-58.

The reference to The Long Tail is:

Anderson, Chris. The Long Tail. New York: Hyperion, 2006.

Gerstner’s Insights on Business

Source of book image: http://ec1.images-amazon.com/images/P/0060523794.01._SS500_SCLZZZZZZZ_V1122531345_.jpg

Gerstner is known for turning around IBM, when many business experts thought it was headed down the tubes. His book is useful as a report on what happened at IBM during his time as CEO, and also has some more broadly applicable observations. I’ll mention a few of these in this and a few other postings in the next couple of weeks.

It is interesting how many successful and important business leaders and experts have spent some time associated with the McKinsey consulting group, where Gerstner started his career. One major McKinsey figure, Richard Foster, is a strong advocate and elaborator of Schumpeter’s process of creative destruction.

I wonder if perhaps some of the success of McKinsey is due to the firm’s embracing and applying Schumpeter’s ideas?

Those who oppose creative destruction emphasize the destructive effect that the process has on some workers. In fact the effects on labor are seen by many (e.g., Thomas Friedman) who are otherwise sympathetic, to be the major drawback of the process. As a result some of them (e.g., Thomas Friedman) propose paternalistic ‘safety net’ labor policies.

We usually think of government as the main implementer of such policies, but among firms, IBM’s labor policies were among the most paternalistic. This is usually viewed as one of the positives about IBM. But one of Gerstner’s insights is to suggest that some of those in the IBM work force were hurt by IBM’s paternalistic policies:

(p. 186) . . . I came to feel that the real problem was not that employees felt they were entitled. They had just become accustomed to immunity from things like recessions, price wars, and technology changes. And for the most part, they didn’t even realize that this self-contained, insulated system also worked against them. I was shocked, for instance, to discover the pay disparities—particularly in very important technical and sales professions—of IBM comployess when comapred to the competition and the industry in general. Our best people weren’t getting what they deserved.

Maybe I should mention that I don’t endorse everything in the book. For example, Gerstner seems to think that a desire to "win" is crucial to success in business. But I think the analogy between business and competitive sports is usually taken too far. Can’t one also succeed in business from a desire to innovate and to improve the world?

The reference on the book is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

(Note: in the quote, the ellipsis was added, but the italics was in the original.)

300,000,000 Strong, and Free

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

The Census Bureau tells us that some time in the weeks ahead the U.S. population will reach 300 million. . . .

This demographic milestone is not cause for alarm — as some prophets of doom would have it. Rather, it is cause for celebration. We 300 million Americans are on balance healthier and wealthier and freer than any population ever: We breathe cleaner air, drink cleaner water, earn higher incomes, have more leisure time, and live in less crowded housing. Every natural resource we depend on — water, food, copper and, yes, even oil — is far more abundant today measured by affordability than when our population was 100 million or even 30 million.

Thanks to the rapid pace of technological progress, there’s every reason to believe these resources will be still more abundant when our population reaches 400 million — which should happen about 40 years from now. As the late economist Julian Simon reminded us, thanks to our free market capitalist system, the history of America is one of leaving the storehouse for every successive generation more endowed with wealth, knowledge and natural resources.

For the full commentary, see:

STEPHEN MOORE. "Supply Side; 300,000,000." Wall Street Journal (Tues., October 3, 2006): A26.

(Note: ellipsis added.)

United States Cardiologists Fail to Prescribe Fish Oil, Despite Low Cost, Safety, and Evidence of Efficacy

Source of graphic: online verison of the NYT article quoted and cited below.

United States cardiologists are reluctant to prescribe fish oil, wanting more definitive data on efficacy. But a lack of definitive data on efficacy doesn’t stop them from performing costly and risky procedures such as the application of stents. Possibly relevant: installing stents is much more lucrative for cardiologists, than prescribing fish oil. Doctors are not bad people, but like most of us, they respond to financial incentives.

(p. D5) ROME — Every patient in the cardiac care unit at the San Filippo Neri Hospital who survives a heart attack goes home with a prescription for purified fish oil, or omega-3 fatty acids.

“It is clearly recommended in international guidelines,” said Dr. Massimo Santini, the hospital’s chief of cardiology, who added that it would be considered tantamount to malpractice in Italy to omit the drug.

In a large number of studies, prescription fish oil has been shown to improve survival after heart attacks and to reduce fatal heart rhythms. The American College of Cardiology recently strengthened its position on the medical benefit of fish oil, although some critics say that studies have not defined the magnitude of the effect.

But in the United States, heart attack victims are not generally given omega-3 fatty acids, even as they are routinely offered more expensive and invasive treatments, like pills to lower cholesterol or implantable defibrillators. Prescription fish oil, sold under the brand name Omacor, is not even approved by the Food and Drug Administration for use in heart patients.

“Most cardiologists here are not giving omega-3’s even though the data supports it — there’s a real disconnect,” said Dr. Terry Jacobson, a preventive cardiologist at Emory University in Atlanta. “They have been very slow to incorporate the therapy.”

For the full story, see:

ELISABETH ROSENTHAL "In Europe It’ s Fish Oil After Heart Attacks, but Not in U.S." The New York Times (Tues., October 3, 2006): D5.

Maybe Fewer Women Engineers Because Fewer Women Want to Be Engineers?

I’ve slogged through enough reports from the National Academy of Sciences to know they’re often not shining examples of the scientific method. But — call me naïve — I never thought the academy was cynical enough to publish a political tract like “Beyond Bias and Barriers,” the new report on discrimination against female scientists and engineers.

. . .

I consulted half a dozen of these experts about the report, and they all dismissed it as a triumph of politics over science. It’s classic rent-seeking by a special-interest group that stands to get more money and jobs if the recommendations are adopted.

“I am embarrassed,” said Linda Gottfredson of the University of Delaware, “that this female-dominated panel of scientists would ignore decades of scientific evidence to justify an already disproved conclusion, namely, that the sexes do not differ in career-relevant interests and abilities.”

. . .

After decades of schools pushing girls into science and universities desperately looking for gender diversity on their faculties, it’s insulting to pretend that most female students are too intimidated to know their best interests. As Science magazine reported in 2000, the social scientist Patti Hausman offered a simple explanation for why women don’t go into engineering: they don’t want to.

“Wherever you go, you will find females far less likely than males to see what is so fascinating about ohms, carburetors or quarks,” Hausman said. “Reinventing the curriculum will not make me more interested in learning how my dishwasher works.”

For the full commentary, see:

JOHN TIERNEY. "Academy of P.C. Science." The New York Times (Tues., September 26, 2006): A23.

(Note: the title of the online version was "Academy of P.C. Sciences.")

(Note: ellipses added.)

“Work Alone”

Source of book image: http://www.mactime.ru/Environ/WebObjects/mactime.woa/2/wa/Main?textid=6114&level1=mactimes&wosid=b2qk07iEkIh6GoutH7IbVg

Many scholars interpret Schumpeter as believing that large firms would increasingly become the main source of innovation. Scherer, Christensen, and many others, have provided plenty of reason to doubt this belief. Here is another reason, from one of the innovators who helpted bring us the personal computer:

What emerges in "iWoz" is a chatty memoir full of surprises. Yes, Mr. Wozniak cherishes workbench minutiae, such as his tips for connecting circuitry wires. But he also sees this book as a chance to cut through cliché and explain himself to a larger audience. He reveals a technology pioneer who is more charming and annoying — and whose life is more poignant — than we expected.

. . .

As Apple roared ahead, going public in 1980 and then becoming one of the 500 largest U.S. companies, Mr. Wozniak’s golden moment came to an end. New products weren’t developed anymore by a brilliant prankster working with barely any sleep. There were now teams, committees and market studies.

Mr. Wozniak by his own account didn’t like these changes, and he didn’t want to rise into senior management. He hung on at Apple as a lone engineer — and he says he still collects a tiny paycheck from the company — but from the mid-1980s onward turned his attention to other things.

. . .

Fortunately, Mr. Wozniak finishes strong. In his final chapter, he offers a bit of advice to gifted engineers: "Work alone." Big companies tend to stifle innovation, he explains. It’s lonely and risky to work solo. No matter. "Man, it will be worth it in the end," he writes. His life bears out the truth of that simple claim.

For the full review, see:

GEORGE ANDERS. "BOOKS; Technostalgia; Steve Wozniak looks back on the computer revolution and his role as Apple’s co-founder." Wall Street Journal (Sat., September 30, 2006): P8.

(Note: ellipses added.)

The reference to the book by Wozniak:

Steve Wozniak, with Gina Smith. iWoz Norton, 2006. 313 pages, $25.95.

Steve Jobs at left, and Steve Wozniak at right, in San Francisco in 1977. Source of photo: online version of the WSJ article cited above.

Intel Chairman Says Health Care Inefficient

WASHINGTON (AP) – Intel Corp. Chairman Craig Barrett said Tuesday that U.S. jobs will continue to move offshore at a rapid pace unless corporate America forces the health care industry to adopt systems that will cut costs and improve efficiency.

"Every job that can be moved out of the United States will be moved out . . . because of health care costs," which averaged more than $6,000 per person in 2004, Barrett said at a conference sponsored by eHealth Initiative, a nonprofit coalition of health information technology interest groups.

. . .

Barrett was joined on-stage by Wal-Mart Stores Inc. Executive VP Linda Dillman. Barrett said the health care industry could learn from the efficiency of the retail giant, which tracks every item in inventory.

For the full story, see:

"Health care waste costs jobs, says Intel chief." Omaha World-Herald (Wednesday, September 27, 2006): 3D.

(Note: ellipsis in the Barrett quote, in original; ellipsis between paragraphs, added.)

Tech Bubble Caused Much of 1990s Inequality Increase

Source of graphic: online version of the NYT article cited below.

It is widely recognized that income inequality increased in the 1990’s, but nobody knows quite why. Despite the lack of hard evidence, there are plenty of theories.

. . .

Two University of Texas researchers, James K. Galbraith and Travis Hale, added an interesting twist to this debate in a paper, “Income Distribution and the Information Technology Bubble” (utip.gov.utexas.edu/abstract.html#UTIP27).

According to Mr. Galbraith and Mr. Hale, much of the increase in income inequality in the late 1990’s resulted from large income changes in just a handful of locations around the country — precisely those areas that were heavily involved in the information technology boom.

. . .

A big advantage of looking at county data is that it is possible to identify counties that contributed the most to the increase in income inequality from 1994 to 2000. It turns out that the five biggest winners in this period were New York; King County, Wash. (with both Seattle and Redmond); and Santa Clara, San Mateo and San Francisco, Calif., the counties that make up Silicon Valley. The five biggest losers were Los Angeles; Queens; Honolulu; Broward, Fla.; and Cuyahoga, Ohio.

What do the counties in the first list have in common? Their economies were all heavily driven by information technology in the late 90’s. This is true for the rest of the list of winners as well. Harris, Tex. (home to Houston and Enron); Middlesex, Mass. (home to Harvard and M.I.T.); Fairfield, Conn.; Alameda, Calif.; and Westchester, N.Y., were also among the top 10 income gainers in this period.

The authors point out that half the 80 American companies in the CNET Tech Index are in those top 10 counties. Furthermore, when income inequality decreased after 2000, the income drop in the high-tech counties contributed most to the decline.

For the full commentary, see:

HAL R. VARIAN. "ECONOMIC SCENE; Many Theories on Income Inequality, but One Answer Lies in Just a Few Places." The New York Times (Thurs., September 21, 2006): C3.

On Turning 60, Michael Milken Asks “Why Retire?”

More baby boomers are asking themselves, Why retire? It’s a cliché to say that 60 is the new 40, but it has some biological and psychological validity. Advanced biomedical research is leading to continued progress against cancer, heart disease, arthritis, dementia and other conditions that forced people out of the workforce before they wanted to quit. In the future, aging workers will be healthier and will use broadband technology to live and work from anywhere at the increasing proportion of jobs that involve knowledge rather than physical labor. They’ll spend more years earning income, often in multiple careers, instead of selling assets.

Fewer people will retire in their 60s simply because they know that average life expectancy at birth is increasing at an astounding rate. Americans, who could expect to live an average of 47 years in 1900, now enjoy life spans approaching 80 years. (It already exceeds 80 for women.) An American who makes it to age 65 can look forward to living almost two decades more. Worldwide, the increase has been even more dramatic. In a single century — despite wars, AIDS and other scourges — the global average more than doubled to 66 years. Nobel laureate Robert Fogel believes it will exceed 100 years within this century.

More than just the length of life, the number of healthy years will also increase. When people are vibrant into their 80s and 90s, 65 will evolve from the traditional retirement age to a mid-career milestone for those who choose to keep working. Who wants to retire when you have fulfilling work, when you earn a good income, and when you feel great? According to a Yahoo! poll, 70% of people over 55 say it’s never too late to start a new business.

For the full commentary, see:

MICHAEL MILKEN. "The Boom Generation Seventh Decade." Wall Street Journal (Tues., September 19, 2006): A20.