David Gerard

Author: David Gerard

Capitalism and Friedman

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.”

LU Symphony Responds to Incentives

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

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?

Via the Faculty & Grants Newsletter

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.

Some Interest in Inequality

Although we economists tend to be a “size of the pie” crowd, the subject of the causes and consequences of income and wealth inequality does not completely escape our notice.  Certainly, this has large political and policy implications, especially as inequality and political polarization seem to be proceeding in lockstep.

With that said, I’ve been sitting on these links for a while, waiting to read and digest them so I can say something pithy about them.  But, alas, with Capitalism, Socialism, & Democracy in my lap and Where Good Ideas Come From next in my queue, I don’t see that happening anytime soon.

So, here it goes:

Cowen presents a very provocative thesis, one that we should perhaps discuss over tea?

My favorite political science blog, The Monkey Cage, had an interesting symposium on Larry Bartel’s Unequal Democracy.  Worth a look if this is something that interests you.

Father of Deregulation Movement, Alfred Kahn

The deregulation of network industries in the 1970s is a puzzle for many political economists, as consumers generally benefited at the expense of entrenched, well-connected producers.  How did that happen?

One widely acknowledged answer is that economist Alfred Kahn, head of the Civil Aeronautics Board, played an influential role. Professor Kahn died this past week, and Thomas Hazlett has a brilliant piece in the Financial Times on Kahn’s influential role.

Those interested a more formal look at the benefits of deregulation might check out Clifford Winston’s 1993 JEL piece that scopes out the movement nicely.

And Kahn’s Ph.D. advisor was none other than Joseph Schumpeter.  How do you like that?

Center for Teaching & Learning Workshops

If you think a Cartesian coordinate is a what you wear to go with your favorite sweater, it might be time for you to bone up on your quantitative skills.  And, right on cue, the CTL if offering a series of quantitative workshops — 90 minutes to a better, more quantitatively adept you.   The topics are basic algebra, graphs, and word problems, and there are two chances for each.

All the workshops are in Briggs 420.  Good luck!

Algebra (and Trigonometry)

7:30 PM on Wednesday, January 12th and 6:00 PM on Monday, January 17t

  • Algebraic operations and the law of exponents
  • Binomial multiplication and factorization
  • Algebraic identities
  • Techniques for solving quadratic and fractional systems of linear equations
  • Basic concepts and identities of trigonometry

Graphing

7:30 PM on Thursday, January 13th and 6:00 PM Tuesday, January 18th

  • Graphs of linear equations, quadratic equations, exponential functions, trigonometric functions and more…
  • Significance of slope in various applications
  • Displacement of graphs

Word Problems

7:30 PM on Friday, January 14th and 6:00 PM on Wednesday, January 19th

  • Problem solving strategies useful in working with quantitative concepts
  • How to extract useful information from a problem and how to relate similar problems
  • Hands-on experience working on interesting and challenging word problems

Capitalism, Socialism, & Democracy Read

For those of you interested in an extra unit or two, this term we are offering an independent study / tutorial reading Joseph Schumpeter’s classic, Capitalism, Socialism, and Democracy. For those of you unfamiliar with the book, here is a review by Schumpeter biographer, Thomas McCraw.

This is a thick book, so you might think about your time commitments before you complete the registration.  The likely trajectory for this is for us to set up a weekly discussion time beginning the week of January 10 or 17.  Right now I have three hands raised that want to participate.

I am thinking about requirements right now.   The bulk of the effort will be focused on the reading, and there will be an attendant writing assignment as well.

Chair in Economics

Transaction Costs

Speaking of property rights, what do “shovel-earned parking dibs and intellectual property law” have in common? One answer is that in each case the producer may not be able to capture the full value of its efforts.  Without some sort of protection (a chair, a patent) someone else can come along and “appropriate” the value of your efforts. As Professor Coase would say, the “externality” comes from the high transaction costs of enforcing property rights.

The Cheap Talk blog contemplates this issue and even poses this puzzler:

I wonder how many people who save parking spaces with chairs are also software/music pirates?

See also our post on Pittsburgh last year, where failure to observe the law of the chair met with met with swift justice.  Indeed, back in Pittsburgh, people tend to respect the chair whether one shoveled or just woke up early.

Happy Birthday Professor Coase

The intellectual founder of transaction cost economics, Ronald Coase, turns 100 today.  Coase is best known for two papers: “The Nature of the Firm” in 1937 and “The Problem of Social Cost” in 1960.  Both are about the importance of transaction costs.  The former shows that without transaction costs the firm doesn’t matter, and this serves as the starting point for Econ 450.  As The Economist‘s Schumpeter blog points out:

Today most people live in a market economy, and central planning is remembered as the greatest economic disaster of the 20th century. Yet most people also spend their working lives in centrally planned bureaucracies called firms.

Certainly, this has had a profound impact on organizational theory and industrial organization.

The latter paper shows that without transaction costs the law doesn’t matter, the foundation of the so-called Coase Theorem. , and this idea figures prominently in Econ 280. Indeed, the latter is one of the most heavily cited papers in all of social sciences, and is the centerpiece of the law & economics movement.

Coase also wrote the very provocative“The Market for Goods and the Market for Ideas,” arguing that the case for product regulation is no stronger than the case for regulating ideas — a good discussion starter to say the least.

For a pretty good portrait of Coasian ideas, check out his interview with Reason Magazine from back in the day.

Our Annual Scrooge Endorsement

From last year: an oldie, but goodie.:

Before The Accidental Theorist, before Freakonomics, there was The Armchair Economist, and that’s Steven Landsburg.

In this Slate piece, Landsburg makes the case that Scrooge wasn’t such a bad guy, and that savings, in fact, might just be more virtuous than spending. To wit:

In this whole world, there is nobody more generous than the miser–the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer–because you produced a dollar’s worth of goods and didn’t consume them.

You will know you’ve arrived as an economist when you can annoy your brethren by expounding on the virtues of Scrooge over the holiday season. For more pithy advice from Landsburg, we’ll be using his text in Economics 300 next fall.

See you there.

You might also want to check out the links at the O&M blog, including the fabulous Santa on leadership.

Growth in Words and Pictures

The Economic History Blog refreshes our memories on the various types of growth:

Recently I was reminded of the distinction made by Joel Mokyr, in the Lever of Riches, between the four types of growth:

  1. The Solovian growth, after Robert Solow, which is driven by an increase of the saving rate leading to more investment and thus a jump of the production per unit of labor.
  2. The Smithian growth, after you know who, which is driven by the positive feedback between the gain from trade and division of labor (specialization).
  3. The Boserupian growth, after Ester Bosrup, when demographic expansion leads to positive size effects once some thresholds have been reach.
  4. The Schumpeterian growth, after Joseph Schumpeter, where an increase in the stock of knowledge applied to economic production leads to to the increase of the said production.

And the Visualizing Economics blog provides the visuals.

Now, this is a pretty good illustration of the taking the natural log of an exponential, I’d say.

What, Me Worry?

For those of you without enough to worry about this holiday season, Calculated Risk has the top 10 economic questions for 2011.  Most of these seem to be macro issues, and 4 and 6 seem to be pretty boilerplate — is economic growth ever not an issue?  Nonetheless, worth your perusal.

With any luck, we’ll be getting the rest of those Schumptoberfest essays up for the holidays.

Always Check the Second-Order Conditions

Here’s something to consider as Wall Street gets set to report record profits — a  Sunday New York Times piece on the machinations of the derivatives market.   As it turns out, the new banking regulations tend to restrict entry and favor incumbent firms.

“When you limit participation in the governance of an entity to a few like-minded institutions or individuals who have an interest in keeping competitors out, you have the potential for bad things to happen. It’s antitrust 101,” said Robert E. Litan, who helped oversee the Justice Department’s Nasdaq investigation as deputy assistant attorney general and is now a fellow at the Kauffman Foundation. “The history of derivatives trading is it has grown up as a very concentrated industry, and old habits are hard to break.”

Sometimes known as “capture,” of course. When I learned this back in the day, my professor emphasized that capture does not mean that firms necessarily want regulation, but given that there are regulations, firms will bend them to their own advantage — especially politically connected ones.

And shouldn’t be all that surprising, even to the most optimistic of you.

Well worth reading.

UPDATE: For rather convincing rejoinders, see here and here.

Another Puzzelah

Here’s another question for you — is Wall Street worthless?  I think I’ve asked this before, but I came across two items this week that take this head on.  On the pro-market side, we have Russ Roberts over at Cafe Hayek wondering why he never noticed the rampant cronyism between Wall Street and Capitol Hill:

I am increasingly pessimistic about the fake nature of Wall Street as part of the capitalist system. It is part of the crony capitalist system. I am ashamed at how long it has taken me to notice this. But once you start paying just a bit of attention, it’s hard not to notice.

He then adds fuel to the fire by wondering whether the Bootleggers and Baptists apply to Wall Street generally.  Don’t know the Bootleggers and Baptists story?  Check it out here.

So while Roberts gnashes his teeth, John Cassidy at The New Yorker spills out 10,000 words on the general worthlessness of Wall Street, concluding that most of what it does is socially worthless.

This shouldn’t come as too much of a surprise to you:  Professor Finkler cites it here and I posted something about it here.  We have also seen John Cassidy in the thick of the economics profession here.

Schumpeter and the Fashion Industry

Today we are treated to a discussion of the fashion industry from Ms. Richter & Ms. Li.   The first from the Schumptoberfest collection.  Enjoy!

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“The evolution of the capitalist style of life could be easily – and perhaps most tellingly – described in terms of the genesis of the modern Lounge Suit.” -Joseph Schumpeter

Creative destruction saturates the fashion industry; you must be the trend-setter otherwise the “foundation of your very life” will be in jeopardy. Large firms enjoy an advantage in spreading risk over many projects (e.g. inventions that never “catch” as a trend) and have the resources and brand power to set trends, thus helping their inventions turn into successful innovations, driving the fashion cycle forward through induced obsolescence. Due to lack of IP laws, large firms do not enjoy the monopolistic protectionism that IP rights provide, but they have other means justifying their investments. Schumpeter’s hypothesis suggests that large firms foment innovation for factors other than scale economies, and in the fashion industry, and the fashion cycle is a key example of this phenomenon.

The fashion industry, a $200 billion industry in the United States alone, is comprised of nearly 150,000 establishments, ranging in size from large fashion houses to smaller start-ups. Although there are a large number of firms competing in the industry, according to the 2002 Census, five percent of firms in the clothing industry accounted for twenty percent of total revenue and sales. These large firms, , also play an important role in the diffusion of new design trends and the continuation of induced obsolescence, the dynamic force driving the fashion cycle forward; the influence of large firms contributes to the top-down structure of the industry.

Consumers are not strictly motivated by price, but also pay attention to  brand, quality, design differentiation, or trendiness (flocking). Because of complex consumer decision-making, product differentiation and new designs are essential to driving the industry forward Raustiala and Sprigman (2009) argue that  induced obsolescence is the process by which designs, through copying and diffusion into mainstream fashion, become obsolete and therefore undesirable to fashion-forward consumers. These fashion-forward people then demand new designs, which are invented by top firms and diffused downward through trends, again, through copying. This process is called the fashion cycle. This cycle is very rapid and is completed each season.

Continue reading Schumpeter and the Fashion Industry

New Ideas: The Good, The Bad, and The Uggos

As I prepare to pick up Steven Johnson’s Where Good Ideas Come From for a piece of holiday reading, I got a couple of emails talking about where some good ideas came from.  The first was YouTube, which most of you have probably encountered at some point, which was originally conceived as a video version of Hot or Not?

What’s Hot or Not? you say?  PC World calls it like it sees it:

YouTube’s original goal, its founders have said, was to build a video version of HOTorNOT.com — you know, the site where you look at a bunch of uggos and rate just how repulsive they actually are.

According to the Wikipedia page, the early incarnation of Facebook had similarly lofty ambitions.

It’s not clear what type of sharp conclusions to draw from those episodes, so moving on to our second example, today we have a 64% discount on a platinum detail package at Tender Car, courtesy of your friendly neighborhood Milwaukee GroupOn.  For those of you not familiar with the GroupOn concept, here’s the gist:

Groupon negotiates huge discounts—usually 50-90% off—with popular businesses. We send the deals to thousands of subscribers in our free daily email, and we send the businesses a ton of new customers. That’s the Groupon magic.

So where did this idea come from?  Well, according to this bit by David Lowery (of Camper Van Beethoven fame) the basic idea germinated with a couple of indie rock bands looking to limit their financial risks.

Cracker and Camper Van Beethoven have a festival,  The Campout.  It’s rather remote and since we produce the small festival ourselves we take considerable financial risk.  While the previous years had been marginally successful we were worried about the rapidly deteriorating economy (I believe Bear Stearns had just gone bankrupt).  So I started a campaign to get a “break even” amount of CVB and Cracker fans to commit to attend the festival. In this way our fan’s promises to attend would become a sort of promissory note. no pun intended. While you couldn’t exactly peg it’s value,  these collective promises to attend at some point seemed to be worth enough to go ahead and book the flights, PA, lights, and port-o-potties.

Other successful “campaigns” on The Point also involved similar commitments for  group purchasing.  It wasn’t long before The Point became Groupon.

That’s right, the brainchild behind my bargain-basement car detailing deal germinated long ago with the same geniuses that brought us “Pictures of Matchstick Men” and “Take the Skinheads Bowling.” And the idea is simple enough, over some range, marginal costs are pretty low, but you still have to cover your average costs:

[I]it had not gone unnoticed that most concerts have a lot of empty seats.   And Groupon works best when the “incremental” cost of adding clients/patrons is very low.  Adding concertgoers to a half full arena is a perfect example of low incremental costs. So concerts were seen as a natural fit for Groupon.

My editing of that clip does a bit of violence to the spirit of the post, so I suggest you go check it out for yourself. The lesson here might be that those punk rockers might be a bit sharper than they look.  Or, perhaps this fits into Johnson’s hypothesis about innovation environments.

More on this one later.

Streaming Econ 400

Many students have asked me about the types of things covered in Industrial Organization (Econ 400), and I typically respond with blah blah blah price theory blah blah blah structure-conduct-performance until the student leaves my office.  Perhaps a better response would simply be to give students a list of interesting topics that would come under an IO umbrella, such as Comcast’s dispute with Netflix. There’s many issues embedded there, including this tasty one:

A recent study found that at peak times, Netflix represented 20 percent of Internet download traffic in the United States. That makes it a de facto competitor for incumbent distributors like Comcast and Time Warner Cable, which are eager to protect both the subscription television business and the emerging video-on-demand business.

I wonder how soon cable and satellite television will be relegated to economic history courses, a la the video rental business.

Perhaps you can write a paper on that next term.

IHRTUCFHC… or Not.

In this remarkable video, a professor at tells his students that he has used a statistical analysis and has determined rampant cheating in his class. I’m pretty sure what he did wasn’t a statistical analysis, but he did offer the offending students a chance to redeem themselves.

Jeff Ely from Northwestern offers some thought-provoking discussion:

So he is offering a deal to his students.  They can individually confess to cheating, attend a 4 hour ethics course and receive amnesty, or they can take the risk that they will not be caught.  What would you do?

  1. Professor Quinn’s speech reveals that the only evidence for cheating is an anonymous tip plus a suspicious grade distribution.  Based only on this the only signal that you cheated was that your score was high. But it’s not credible to punish people just for having a high score.
  2. If Professor Quinn expects his gambit to work and for cheaters to turn themselves in, then he should believe that everyone who doesn’t turn himself in is innocent.  So you should not turn yourself in.
  3. The biggest fear is that someone who you collaborated with turns himself in and he is induced to rat you out.  Then as long as you are not sure who knows you were in on the scam you should turn yourself in.
  4. It’s surprising that this possibility was never mentioned in Professor Quinn’s rant because without it, his threat loses much of its force.
  5. The fact that he didn’t raise this possibility reveals that he is not so interested in rounding up every last cheater but simply to get a large enough number to confess.  That way he can say that a lesson was learned.  This suggests that you should confess only if you think that your confession will just push the total number of confessions over that threshold.  Unlikely (unless everyone is thinking like you.)

What would you do, indeed?

Well, as it turns out, about a third of the class (200 students) threw themselves on the mercy of the court.  The sheer magnitude propelled the story into the headlines in the first place, making Professor Quinn something of a YouTube icon.

But the plot thickens.

As it turns out, the “cheating” involved was for students to get access to a test bank and studying from that.  The folks over at techdirt (techdirt?) think this sounds kind of fishy.

But watching Quinn’s video, it became clear that in accusing his students of “cheating” he was really admitting that he wasn’t actually writing his own tests, but merely pulling questions from a testbank. That struck me as odd — and I wasn’t really sure that what the students did should count as cheating. Taking “sample tests” is a very good way to learn material, and going through a testbank is a good way to practice “sample” questions. It seemed like the bigger issue wasn’t what the students did… but what the professor did.

The question seems pertinent given that Professor Quinn claimed that he wrote his own questions (video here).

Now, my guess is that the students knew that Professor Quinn used a test bank, and so their faux innocence seems kind of ridiculous.  On the other hand, I spend a lot of time writing my own tests.  Indeed, even when I taught large sections of intro (150+), I wrote my own multiple choice questions, so I’m not so sure how much sympathy is due for Professor Quinn here. And it’s not clear whether the ground he is on is all that high.

I’m not sure what the moral of the story here is, but it certainly is a remarkable case.