Division of Labour: December 2011 Archives
December 26, 2011
Unicorns found?

Paul Gregory's inconvenient arithmetic:

"Millionaire tax filers earn $221 billion – almost a quarter of a trillion — from business and professions, partnerships, and S-corporations. This is puzzling: If Harry Reid’s figure is correct (2,361 millionaire businesses), then the average millionaire-owned business earns almost a hundred million dollars, and [they] do this without hiring anyone. These super heroes do their own typing, selling, drafting. public relations, building, and manufacturing. They do not need employees. Remarkable!"

Posted by Wilson Mixon at 10:27 AM in Politics

Break up the banks

On Huntsman's position on banks:

Jon Huntsman, a candidate for the Republican presidential nomination, is addressing this directly—insisting that we should force the largest banks to break up and to become safer. No other candidate is seriously confronting this issue head-on: Just saying “we’ll let them fail” is no kind of answer when the failure of megabanks would cause so much damage.

We should learn from both Washington Mutual and the Occupy movement. In both cases, the lesson is the same: Concentrated financial power is a gift that keeps on giving—but not to you.

Posted by Wilson Mixon at 10:15 AM in Economics

Channeling Schumpeter via Hayek

The lesson of the Edsel is still not learned, according to this article:

A great quote from technology luminary Alan Kay that every entrepreneur needs to remember: "The best way to predict the future is to invent it."

I'm working with a company that at one point had a product that was not only best in its class, but also technically far ahead of its competition. It created a better way of offering its service, and customers loved it and paid for it.

Then it made a fatal mistake. It asked its customers what features they wanted to see in the product, and they delivered on those features. Unfortunately for this company, its competitors didn't ask customers what they wanted. Instead, they had a vision of ways that business could be done differently and, as a result, better.
Entrepreneurs need to be reminded that it's not the job of their customers to know what they don't. In other words, your customers have a tough enough time doing their jobs.

Posted by Wilson Mixon at 10:09 AM

December 24, 2011
WalMart Defense

Apparently someone has abducted Michael Kinsley, if this article in the L. A. Times is any indicator. Whoever is claiming to be Mr. Kinsley is to be applauded, though I wish he had mentioned the proposition that WalMart has decreased inequality by providing especially low prices for items that lower-income people buy.

Posted by Wilson Mixon at 12:38 PM in Economics

December 20, 2011
Another very nice final exam response

This one more tongue-in-cheek, but nonetheless pretty insightful.

Question: Suppose you were empowered with a magic wand of reform over the legal system. What single reform would you make and why? Bring your understanding of law & economics, as developed over the course of this semester, to bear on your response. For example, explain how your reform would address the main ideas that we have discussed in class this semester (institutions, incentives, efficiency and other values such as equity and justice). (400 words max)

Answer (from an undergraduate student, let's call him "Humming Along")

I would make whatever reform the highest bidder wanted. That’s right, I would sell my wish. If there’s one thing that I’ve learned about the law, it’s that the true, original intent is never fully implemented, and that loop holes will be fiercely sought-after (damn you rent-seekers!), and if my reform choice (or the highest bidders in this case) is controversial, then the government will simply reform my reform, making my magic wand useless, since it only has one use, while the Senate and House have unlimited potential to ruin all the fun. The other reason I would sell off my wish is that reform is a very expensive game. Whole committees and groups with millions of dollars are dedicated to single issues, and it seems that on the most controversial ones (which are the most likely ones to win out for highest bidder as they are seen in the public eye as the most important) have the most money on both sides. Since I have little interest in trying to solve the problems of everybody else, I’ll pull an Adam Smith and let the market decide which is the best issue to reform. With all the money I will make from selling my magic wish I will be able to be one of the privileged few that have become so rich that minding the law is low-priority. The selling of the wish doesn’t even have to be a bad thing, because as the seller I can just decide not to give it to anyone that wants me to wish for something against my own interests (such as a reform on the sale of magic). Does this reasoning make me jaded? Likely. Is the reasoning outside the realm of reality? Much less likely. While all the other students will be playing white-knight to America, beating their brow and sweating in their seats, I will be chilling on a white-sand Caribbean beach, and the only sweating will happen in the sauna. Suck it, the game of law. I’m gonna go buy a wife and some gin.

Context for question: Justice Sandra Day O'Connor on November 7, 2007, told a conference of lawyers: "If I could wave a magic wand ... I would wave it to secure some kind of merit selection of judges across the country."

Posted by Edward J. Lopez at 01:07 PM in Economics

A very nice final exam response

Question: 1. Explain why state ownership and private property is a false dichotomy for certain types of resources, and what type of rights can emerge, and by what type of process, to manage more efficiently those types of resources. Obviously your answer should detail the characteristics of those “certain types” of resources and offer examples. (400 words or less)

Answer: (from my undergraduate student, let's call her "Ann," who concisely channels and nicely colorizes Elinor Ostrom's thesis in Governing the Commons):

State ownership is the optimal institution for public goods and “free market” is the optimal institutions for private goods. However, none of them is the optimal institution for common pool resources (CPRs). The reason is because CPRs are really rivalrous, but they are non-excludable. CPRs such as water or fish in a river are hard to draw the line and assigned who owns which parts. Moreover, since they are non-excludable, people will always have the incentive to overuse them. A fish in a river means nothing to the fisher man if he does not catch it today since it may not be there tomorrow. This gives him the incentive to catch the fish whenever he has a chance (low marginal cost) creating inefficiency since the fisherman who values it more will not get it. This is a kind of “prisoners’ dilemma” with the dominant strategy is non-cooperate (catching as many fish as possible). What happens if the state comes into the game and forces the fishermen to cooperate? If it has the perfect information and is able to punish the right “prisoner,” it will be able to change the outcome of the game. However, it is impossible to obtain perfect information; hence the result will be the same, non-cooperative players. Since state ownership and private property is a false dichotomy, communal rights can emerge to manage more efficiently those types of resources. There are several reasons for this. The first reason is that people who have tasted the “pie” have better and more correct information about it. They will know which part of it is good, which part has coated sugar, how big it is, etc. Therefore, they will know best how to manage it and divide it fairly among the community. The second reason is that because they have daily and close interactions with the resource, they can police and prevent each other from gaming with the system and overusing the resource.

Posted by Edward J. Lopez at 11:14 AM in Economics

December 19, 2011
DoL Holiday Gift Guide

Some suggestions to help with your last minute shopping needs:

1. Love those Keynes Hayek rap vids? Consider a t-shirt or a mug from the econstories store.

2. My former student John Coleman is the co-author of a new book Passion and Purpose: Stories from the Best and Brightest Young Business Leaders.

3. My current student Lisa Anders has a new album out.

4. Tired of looking at the velvet Elvis or the dogs playing poker piece hanging on your walls? Check out this Ben and the Fat Cat Bankers art.

Thinking of charitable donations? IJ, IHS, and FEE are all worthy causes.

Posted by E. Frank Stephenson at 02:37 PM

December 16, 2011
Incentives Matter: Food Stamps and Labor Supply Edition

The abstract of a new paper by Hilary Williamson Hoynes and Diane Whitmore Schanzenbach:

Labor supply theory makes strong predictions about how the introduction or expansion of a social welfare program impacts work effort. Although there is a large literature on the work incentive effects of AFDC and the EITC, relatively little is known about the work incentive effects of the Food Stamp Program and none of the existing literature is based on quasi-experimental methods. We use the cross-county introduction of the program in the 1960s and 1970s to estimate the impact of the program on the extensive and intensive margins of labor supply, earnings, and family cash income. Consistent with theory, we find reductions in employment and hours worked when food stamps are introduced. The reductions are concentrated among families headed by single women.

A couple of observations--The paper's findings combined with the recent expansion of food stamps may explain some of the sluggishness in the labor market.

This paper also brings to mind the Mr. EBT rap and the EBT receipt that a friend found outside an Atlanta grocery store.

Posted by E. Frank Stephenson at 12:30 PM

December 14, 2011
Health Insurance and Third Party Payment

A friend took this picture on a recent visit to get fitted for a knee brace (the price chart was taped inside a cabinet door). At face value it looks like people with insurance are billed more for devices than are uninsured patients--if this is correct then the photo provides a nice illustration of how insurance increases medical costs. However, my wife suggests some caution in interpreting the photo--she suggests that insurers often negotiate discounts with medical providers and that the chart is akin to hiking prices just before running a sale.

Health Insurance Price Chart Photo.JPG

Posted by E. Frank Stephenson at 01:25 PM

December 10, 2011
Video Contest--Natural Disasters: The Economics of Aid and Recovery

Hey kids want to win some cash? Just enter a cool vido about the economics of aid and recovery in the Fraser Institute's video contest. The deadline is Dec. 31--a perfect thing to have some fun with while on Christmas break. Details here.

Posted by E. Frank Stephenson at 10:57 AM

December 01, 2011
Public Sector Millionaires

From an article by Manhattan Institute's Lawrence Mone:

[M]ost dictionaries define a millionaire as someone with wealth (i.e., assets) of $1 million. By that definition, many New York teachers and the vast majority of police and firefighters are millionaires, because the “net present value” of their retirement benefits is well in excess of $1 million.

That is, if they had to fund their retirements from their own savings, they’d have to set aside seven figures today.

Posted by Wilson Mixon at 09:13 AM in Politics

NPR on Land Titling in India

Property rights matter--who knew?

Posted by E. Frank Stephenson at 08:23 AM

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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