• Cocktail and Dinner Party Economics
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  • Dinner Party Economics

Everything you always wanted to know about Prosperity (but were afraid to ask)

It is precisely because there is so much poverty, hunger and illness that the world must be very careful not to get in the way of the things that have bettered so many lives already– the tools of trade, technology and trust, of specialization and exchange.  It is precisely because there is still so much further to go that those who offer counsels of despair or calls to slow down in the face of looming environmental disaster may be not only factually but morally wrong.   Matt Ridley in The Rational Optimist on page 354 This book had me at ‘feeding the nine billion’! I am a naturally optimistic person and The Rational Optimist: How Properity Evolves gives credence to my inclinations.  I have always thought that humans were capable of solving problems and this book hammers that nail  firmly in place. His basic thesis is as follows.  Humans have the ability to specialize and trade.  This allows more bang for an economic buck and we are never going back to pre-barter days.  Furthermore, since the advent of fast communication, ideas now have sex with one another resulting in an explosion of new technologies.  No DNA to slow things down. This fecundity is the reason so much of the world is better off than it was fifty years ago never mind one hundred years ago.  Except for a few cases of governmental disasters (for example the policies of (Mao,  Stalin, and Mugabe) the average human being would never trade places with their ancestors, even if that ancestor was very wealthy.  For the poor, things have gotten even better. This book is a must read for any leftwing person just so they know the arguments of free market types.

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The Work of Jobs

I figured that it was always my job to make sure that the team was excellent, and if I didn’t do it, nobody was going to do it.   Steve Jobs by Walter Isaacson pg 570 If this biography is to be believed then it is clear that the love of Steve Jobs’ life was not his family, his friends, his Zen-god, his wealth or even himself.  The love of his life  was his creations, the work of his mind.  He was passionate about Macs, NeXT,  Pixar, iPods, iPhones, iTunes, iPads and all of those  iNventions.  He paid whatever price it  took for his creations  to be excellent–even his health. I will let you decide for yourself  what you think of the man as portrayed by Walter Isaacson.  Here I will give a few comments from the armchair of an economist. 1) Apple demonstrated in a few short years the Schumpeterian concept of creative destruction. Schumpeter said that innovation often created temporary monopolies but eventually they would be destroyed by competitors to create new wealth.  Not only did Apple monopolisticly compete with other high-tech firms, it also cannibalized its own products in favour of new and better ones. 2)  Profits matter even  if people say that they are creating something for the love of it , In order for Apple to do everything that it did, Apple  mastered the art of making big profits. For example, in 2010  Apple captured 35% of the profits with only 7% if the revenue in the market.  This also demonstrates the difference between sales and profits—-Sales only matter as they relate to profits. 3) Options are only worth something if the market price of the share is higher than the strike price on the option.  Unfortunately for Jobs, his options were priced just before a stock market crash rendering them useless because he would have to buy shares at prices far above what the market was charging.  Thus, you can’t always believe the salaries quoted in the news if options are part of the package. 4) Productivity matters and CEO’s have to figure out how to increase it.  Steve Jobs seems over-the-top tough but somehow the employees who survived thrived in this environment.  Team A types like to work with other A types and find B types annoying.  Jobs kept Apple filled with A type people who accomplished more than they thought possible.  Their efforts never seemed to surprise Steve however. 5) Sometimes supply creates its own demand.  When asked if Apple had done any market studies for its products, Jobs said that if Ford had done a market survey customers would have just asked for a faster horse. Customers don’t always know that they will love a new product.  It seems that many times the initial assessment of a new Apple product was lukewarm by the pundits until it hit record sales in the marketplace.

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Dotting the i’s: Invention, Innovation and the Industrial Revolution

(See Cocktail Party Economics Chapter 4 p 48)

Invention is the mother of necessity ~Thorstein Veblen (1857-1929) American economist and sociologist
  The implications of A Dozen Facts about Innovation by Michael Greenstone and Adam Looney published as part of the Hamilton Project by The Brookings Institution worries me. A lot actually.  You can find the article here or here in PDF format.)

Major Themes

Let me give you an overview of the policy memo’s major themes.
  1. Innovation and inventions (as measured by total factor productivity) are a major source of growth for the United States which is a good thing. It leads to a higher standard of living, a longer life span and more leisure. (No worries yet.)
  2. Since 1973 total factor productivity (TFP) has slowed down in the USA.  The annual growth rate fell from 1.9% to 0.7%.  In other words, if the growth rate hadn’t fallen, worker’s conpensation would be 51% higher than it is now. (Some anxiety now.)
  3. Prospects don’t look good for the future if things don’t change.  Why you ask?  First, not enough students choose Science, Technology, Engineering and Math (STEM) majors that feed innovation.    Furthermore, women who have increased their participation in undergraduate education, tend to drop out of these innovation inducing majors.  Lastly, close to half of the folks who do choose STEM PhD’s are foreign students and are not allowed to stay in the USA once they are done their degree. Therefore, the US doesn’t get to keep the fruit of their educational investments.  (Brooding fears.)
  4. Change is possible but politically difficult. This requires significant changes in US immigration, education and R & D policies.  (Ominous feelings of gloom.)

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