Archive for January, 2011

Pro-Market v. Pro-Business

Monday, January 31st, 2011

George Mason economist, and letter-to-the-editor writer extraordinaire, Don Boudreaux, has an opinion-editorial in the Christian Science Monitor explaining his distinction between public policies that are pro-business and those that are pro-market.

Economists (especially the free-market variety) – concerned always to keep outputs of goods and services as high as possible – typically defend business against counter-productive government interference. We economists do so, however, not because we have special fondness for business. We do so because we understand that government interference in business often results in fewer goods and services for ordinary men and women – as consumers – to enjoy.

In short, an economy’s success is best measured by how well it pleases consumers, not by how well it pleases businesses…

“Competition” sounds good. But businesses don’t like competition; they like protection from competition – along with subsidies, special tax breaks, and other government favors that relieve them from the need to cater energetically to consumer demands. So a pro-business president is prone to curry favor with businesses by shielding them from competition…

The irony is that such policies – which really should be labeled “crony capitalist” – are often labeled “competitiveness” policies. Because these policies increase the profits of some domestic businesses, they are mistakenly believed to make the domestic economy more “competitive” when, in fact, they make it less so.

This seems to me to be an important distinction.  I try to convey to you all that no one hates competition more than business does.  If you set up a profitable business, say, selling hot dogs on a street corner, the absolute last thing you want is a competitor to park her cart next to yours.

And, while we’re on the subject, don’t forget to join us for tea at 4:21 for Econ TeaBA.

The Intellectual and the Marketplace — Schumpeter & Stigler

Sunday, January 30th, 2011

Having dispensed with the ever-dynamic Marx, the Schumpeter Roundtable continues through Capitalism, Socialism, and Democracy this week with a close read of Part II — Can Capitalism Survive?  After some wonderful writing on Creative Destruction in Chapter VII, we move on to the projected demise of capitalism, oh, sometime in the next 100 years or so. (Of course, this was published in 1942, so we could still be on schedule).  In Chapter XIII we are faced with “Growing Hostility,” and Schumpeter provides us with some rather inflammatory views of the “The Sociology of the Intellectual.” To wit, Schumpeter contends that “unlike any other type of society, capitalism inevitably and by virtue of the very logic of its civilization creates, educates, and subsidizes a vested interest in social unrest.”

That vested interest, of course, is the intellectual.  It is not my purpose here to endorse or to attack Schumpeter’s views (is he analyzing or just venting?), but rather to point to George Stigler’s concise “The Intellectual and the Market Place” as another giant of the profession trying to come to terms with why intellectuals seem — at least to these authors — to be be hostile to market economies. (more…)

Book on Inequality Makes The Economist Sick

Saturday, January 29th, 2011

In response to my post on The Spirit Level, Oscar Koberling pointed out in an email that the most recent issue (pronounce that with an “s”, not “ishue”) of The Economist includes a Special Report on “The Few” (not the proud, but the rich). One article in that Report beats up pretty effectively on The Spirit Level. Thanks for the tip!

Several articles in the Report are interesting. One of them is on higher education, and it points out that “[i]n some of the hardest disciplines most postgrads at American universities are foreign: 65% in computing and economics, 56% in physics and 55% in maths…”

You Can’t Cut the Internet ‘Signal’

Friday, January 28th, 2011

There seems to be a very tumultuous situation in Egypt. In the face of mass protests being labeled “Angry Friday,” Jeff at the Cheap Talk blog and Tyler Cowen at Marginal Revolution assess the strategic implications for both protesters and for the government.

Here’s Jeff:

The decision to get out and protest is a strategic one.  It’s privately costly and it pays off only if there is a critical mass of others who make the same commitment.  It can be very costly if that critical mass doesn’t materialize.

Communications networks affect coordination.  Before committing yourself you can talk to others, check Facebook and Twitter, and try to gauge the momentum of the protest.  These media aggregate private information about the rewards to a protest but its important to remember that this cuts two ways.

If it looks underwhelming you stay home, go to work, etc.  And therefore so does everybody who gets similar information as you.  All of you benefit from avoiding protesting when the protest is likely to be unsuccessful.  What’s more, in these cases even the regime benefits from enabling private communication, because the protest loses steam. (more…)

Inequality makes everyone sick

Thursday, January 27th, 2011

Last time we met for the Schumpeter Roundtable tutorial, we discussed Schumpeter’s point that perhaps the greatest strength of capitalism is that it provides precise, prompt, exact and effective incentives in the promise of great riches and the threat of great destitution. He would know, having been on both ends of that spectrum (well, almost). That sort of system has inequality built into it—inequality that serves an important purpose, some would say. A discussion on inequality and progress ensued, with spiritual, moral, economic, and technological dimensions, eventually leading one participant to remark that “going to Best Buy is a spiritual journey!” But there is, of course, a serious question: Is inequality good for a society (in the long run)? Or, to put it in terms of a trade-off, how much inequality is best? Tonight Tom Ashbrook on NPR spoke with UK Professors Pickett and Wilkinson, authors of The Spirit Level: Why Greater Equality Makes Societies Stronger. The book is based on research that shows, the authors claim, that more equal societies always do better in a number of ways, including overall population health. They argue that more equal societies are even more innovative, contrary to what Schumpeter might say about the importance of incentives in driving progress. As Professor Gerard has pointed out, economists do think about inequality and its consequences, and this book may add evidence to one or both sides. One member of the Schumpeter Roundtable argued that there is so much inequality in the US today, that most people are too discouraged to try hard to reach the top. This book seems to support that argument. Contrast that with Adam Smith’s view that the great driving force of economic development is the extraordinary effort of “[t]he poor man’s son, whom heaven in its anger has visited with ambition,” struggling to attain riches in the (erroneous) belief that money can buy happiness.

Bilateral Trade Numbers Are Misleading At Best

Tuesday, January 25th, 2011

On January 13, 2011, The Bureau of Economic Analysis in the the U.S. Department of Commerce reported that as of November 2010, the U.S.  trade deficit with China for 2010 amounted to $252  billion.  This number tells very little about the character of trade between the two countries.  It just captures the difference in final sales value of exports minus imports.   Pascal Lamy, director-general of the World Trade Organization, argues in today’s Financial Times that manufacturing products developed through a global supply chain of steps should be labeled “made globally.”  His comments include the notion that the Apple iPhone contributed $1.9 billion to the recorded US trade deficit with China, but that the value added in China from this product would come to only $73 million.  Other analysts have shown that the value added in China comes to less than half of the trade balance number published.

Furthermore, the Bureau of Economic Analysis published a report indicating that 55% of our imports are used in the U.S. to produce domestic goods and services.  Stated differently, these imports enable our companies and workers to be both productive and profitable.

Discussion of trade deficits without these detailed clarifications at best misinforms the public as to the economics of globalization; at worst, it encourages us to close our borders to (some) imports which would lead to both higher domestic prices and lower domestic output.  The effects on employment would be complicated but not positive in the aggregate.

The Principals are Your Pals

Tuesday, January 25th, 2011

I’m a bit behind on both my reading and on updating this blog, so I wanted to point to a series of fascinating articles at David Warsh’s Economic Principals blog.  The first resulted from his trip to Denver for the American Economic Association meetings in early January, where he sensed a possible resurgence of interest in the history of economic ideas.  This possibly rings true for those of us plodding through Capitalism, Socialism, and Democracy this term.

Warsh followed up this dispatch from the AEA meetings with a most interesting piece on how the big brains of the profession are thinking about technological innovation and climate change. The piece starts with another dispatch from Denver, and traces its way back through the cold war to the RAND Corporation (and one of my heroes, Armen Alchian) and beyond.  The piece touches on the contributions of Kenneth Arrow and Richard Nelson, now are both familiar names to anyone interested in the economics of innovation.

And if that’s not enough, this week’s column looks at Paul Samuelson and hedge funds, another hat tip to the history of thought that includes David Ricardo’s Waterloo.  If nothing else, the blog seems to get its principals right.

I also continue to recommend Warsh’s Knowledge and the Wealth of Nations: A Story of Economic Discovery — an excellent pick for the summer reading list.

The New New Regulatory State

Monday, January 24th, 2011

Earlier this week, President Obama penned an op-ed in the Wall Street Journal about his Administration’s plans for the regulatory state.  The executive branch, as its title suggests, is in charge of executing and administering the laws of the land, and the President expresses his desire to balance the free-market innovation machine while protecting public health and safety:

[C]reating a 21st-century regulatory system is about more than which rules to add and which rules to subtract. As the executive order I am signing makes clear, we are seeking more affordable, less intrusive means to achieve the same ends—giving careful consideration to benefits and costs. This means writing rules with more input from experts, businesses and ordinary citizens. It means using disclosure as a tool to inform consumers of their choices, rather than restricting those choices. And it means making sure the government does more of its work online, just like companies are doing.

As my students learn in 240, 280, and 271, the executive branch, through the Office of Management and Budget, (potentially) plays a central role in shaping regulations as they make their way through the rulemaking process.  Indeed, President Reagan issued the seminal executive order concerning benefit-cost analysis, and each President since has attempted to put his stamp on the process.

Of course, there is often a disconnect between what politicians say and what regulators actually do, here are a couple of other takes from a pair of scholars who spend more than their fair share of time thinking about administrative regulation: Stuart Shapiro and Lynne Kiesling.

Capitalism and Friedman

Friday, January 21st, 2011

Yesterday was the 50th anniversary of John F. Kennedy’s inaugural address that exhorted Americans to “Ask not what your country can do for you — ask what you can do for your country.” Although the expression is iconic and emblematic of the selfless nature of public service, not everyone was impressed.  Indeed, free-market champion Milton Friedman opens his libertarian polemic, Capitalism and Freedom, with this:

IN A MUCH QUOTED PASSAGE in his inaugural address, President Kennedy said, “Ask not what your country can do for you — ask what you can do for your country.” It is a striking sign of the temper of our times that the controversy about this passage centered on its origin and not on its content. Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic “what your country can do for you” implies that government is the patron, the citizen the ward, a view that is at odds with the free man’s belief in his own responsibility for his own destiny. The organismic, “what you can do for your country” implies that government is the master or the deity, the citizen, the servant or the votary. To the free man, the country is the collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, an instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served. He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve. He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.

The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather “What can I and my compatriots do through government” to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect? Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.

Well, that’s a take I didn’t hear in my civics classes.

I was reminded of this in a recent discussion of theory of advocacy revolving around Schumpeter and Marx, where Friedman’s name came up.  Schumpeter fleshes out the implications of science and ideology in his brilliant 1948 address to the American Economics Association, “Science and Ideology.”

The Messy Path to Creating New Jobs

Thursday, January 20th, 2011

Carl Schramm, in a current blog entry in Forbes magazine, argues that job growth comes from the creation of new firms. Schramm is the president of the Kauffman Foundation and a strong advocate for the education of as well as the creation of an economy that encourages entrepreneurs.  We have many politicians arguing for job creation but few who understand where jobs come from.

LU Symphony Responds to Incentives

Wednesday, January 19th, 2011

Our resident (American) football fan, Professor Galambos, has alerted me to this important change in the demand schedule for Sunday’s orchestral performance:

Players Exchange Views of the Rossini Selection

To accommodate both music lovers and Packer Backers, (Lawrence University Symphony Orchestra Director, David Becker), has moved up the time of the Sunday, Jan. 23 Lawrence Symphony Orchestra concert to 12:30 p.m. in the Lawrence Memorial Chapel.  The concert was originally scheduled for 3 p.m.  The Green Bay Packers play the Chicago Bears in the NFC championship game at 2 p.m. on Sunday.

In keeping with the spirit of the day, people attending the concert are encouraged to wear their green and gold Packers gear.

Click the image for a taste of symphonic goodness.

Jimmy John Responds to Incentives

Wednesday, January 19th, 2011

The founder and big pickle behind the Jimmy John’s enterprise is threatening to take his fixins and go elsewhere, this according to the Champaign News-Gazette. Mr. Jimmy John (Jimmy John Liautaud) is upset about the steep tax hikes enacted this past week by the Illinois state legislature — raising the personal income tax from 3 to 5 percent (67% increase) and corporate taxes from 7.3 to 9.5 percent (30% increase).

“My family and I are out of here.”

This story has some personal interest to me, as I was in Champaign when he opened up one of his first shops back in the late 1980s.  I still recall one of my (more obnoxious) friends — impressed by the deliciousness of the Jimmy John’s sandwich — on the phone trying to bribe providing cash incentives for the workers to bring him an order outside of their regular delivery area.  Not too many years later, Jimmy John’s has gone from a couple of sandwich shops in east central Illinois to a big corporate supporter of everything from NASCAR to University of Illinois athletics.

Friend, that’s a lot of sandwiches.

If he indeed packs up corporate shop and heads elsewhere, it will certainly impact the local economy in some fashion.

Here’s his take:

Some people may not realize how many travel to Champaign-Urbana as a result of Jimmy John’s being here – many of them for training.

(Jimmy John) said his business accounts for “350 motel nights a week in Champaign, 1,400 motel nights a month.”

“They eat at Cheddars,” get automotive service at Sullivan-Parkhill and “drink at Carlos (Nieto’s) bars.”

Jimmy John’s offices occupy 23,000 square feet on Fox Drive, and Liautaud said he had considered buying a 20,000-square-foot building just north of those offices. Those plans went out the window with the tax increase, he said.

As far as the national economy goes, it probably doesn’t matter where Jimmy John sets up shop, if Champaign doesn’t enjoy the benefits, someone else will.  But, I wonder what sort of elasticity the legislative analysis used to estimate business leaving the state when they put these tax increases together?

Don’t miss the LSB panel this weekend

Monday, January 17th, 2011

No Tea Today

Monday, January 17th, 2011

The departure of Professor Azzi leaves me the only economist on Briggs 2nd, and I will be departing shortly for the hills.  Hence, contrary to what it says on the campus calendar, there will be no Econ Tea today.

We will see you next Monday at 4:21 p.m. sharp.

Via the Faculty & Grants Newsletter

Thursday, January 13th, 2011

Brandenberger and Galambos strike again.  This via the Faculty & Grants Fellowships Newsletter:

This summer, the In Pursuit of Innovation course — co-taught by Professors John Brandenberger (Physics) and Adam Galambos (Economics) — received a two-year $23,000 grant from the National Collegiate Inventors and Innovators Alliance substantially to enhance the support for student projects and to fund guest speakers. Team projects play a central role in the course, and the NCIIA grant will allow students to dream bigger and to go further in pursuing their chosen innovations. It is expected that some teams will go beyond producing a prototype and will bring their idea close to being commercialized. The Innovation course, to be offered for the third time in Winter 2011, is one of the core courses of the Innovation & Entrepreneurship program, which is Lawrence University‘s model for integrating innovation and entrepreneurship into liberal arts education.

The program currently features three core courses that are to be complemented by additional topical courses dealing with environmental issues, politics, economic development, and other subjects that reflect interests of participating faculty. As a result of the program, several courses in economics as well as several courses in the arts will have newly added entrepreneurial components for the first time this year.

Invited experts also play critical roles in the program‘s core courses, including Innovation. These experts also help the program grow, expanding opportunities for students to engage in real-world entrepreneurship and innovation, through structured practical opportunities to take their course-based projects to commercialization, or internships in businesses or nonprofits that foster entrepreneurship or innovation. The NCIIA grant will help pay for travel expenses of several highly regarded experts who will contribute to the next offering of the Innovation course. The expectation is that students who take I&E courses will gain knowledge and cognitive skills that will equip them to be “change agents.” Combined with LU‘s emphasis on critical thought and information synthesis, the conceptual and practical knowledge gained through these courses will prepare students to undertake imaginative and ambitious innovative and entrepreneurial activities.