Tuesday, July 31, 2018

CORRECTLY DRAWING THE ZERO ECONOMIC PROFIT GRAPH FOR A MONOPOLISTICALLY COMPETITIVE FIRM

This was a paper I presented at a conference about 10 years ago. Click here to open the MS Word file. Here is he abstract.

Many principles of economics texts do not correctly draw the graph showing zero economic profit for a monopolistically competitive firm. The average total cost curve and the marginal cost curve are not consistent with each other. That is, they are not derived from the same total cost curve (as shown by numerical inspection of these curves). Also, the marginal revenue line is often not twice as steep as the demand line.
Using a total cost curve of the form TC = fixed cost + aQ3 – bQ2 + cQ and a linear demand line, I find the general form equation for calculating the slope and intercept of both demand and marginal revenue for a chosen quantity. That quantity is such that P = ATC, MR = MC, the slope of marginal revenue is twice as steep as the demand line and both the ATC and MC lines are derived from the same total cost curve. These equations are used to generate the correct graph in a spreadsheet program.

Monday, July 30, 2018

Fed Looks for Goldilocks Path as Jobless Rate Drops

Central-bank researchers study metro-areas data for clues on inflation when unemployment is low

By Nick Timiraos of The WSJ.

I wish he had been a bit more careful in phrasing certain passages. For example, he says inflation rose 2% in the last year. Prices rose 2%. If inflation rose 2% it would mean that this year's inflation rate is 2% higher than last year. So if, for example, the inflation rate was 2% one year then the next hear it would be 2.04%.

The relationship between unemployment rates and how much prices change might depend on the short run aggregate supply (SRAS) line. It might get steeper the higher GDP gets. Some of my links below to earlier posts will show this. We want aggregate demand (AD) to be at the point where SRAS just starts getting steep (where prices will rise significantly). That would give us a certain GDP and unemployment usually falls when GDP rises. When they talk about the neutral interest rate, that might be the rate that gives us this optimal amount of AD.

When it talks about marginal workers re-joining the labor force (people who had previously given up looking for work), that could cause SRAS to increase or shift to the right, lowering prices (or keeping them from rising too much if AD is also shifting to the right).

When it mentions that "expectations of future inflation can be self-fulfilling" it means that workers demand higher wages since they expect prices to go up. But that causes SRAS to shift to the left (since that is what happens to supply when the price of resources go up). But that itself will raise prices of all the goods that are sold. This will not be a problem if expectations of future inflation rates are pretty low, as they have been in recent years.

When it mentions that the natural rate of unemployment is between 4.1% and 4.7%, that is the rate we would get if we had the neutral interest rate.

Excerpts:
"The studies suggest prices might climb faster, but not too much, if unemployment falls a bit more. And inflation might become worrisome if joblessness falls a lot more."

"In one scenario, inflation accelerates once unemployment falls to very low levels, requiring more-aggressive rate increases to keep price pressures in check.

In the other, a period of sustained low unemployment draws more workers into the labor force while inflation pressures stay under control."

"Fed officials want to raise rates enough to prevent the rapidly expanding economy from overheating, but not so much that they choke off healthy growth prematurely."

"Excluding volatile food and energy categories, inflation rose 2% in May from one year earlier."

"Fed researchers recently examined the possibilities of the two inflation scenarios.

One study analyzed data for U.S. metropolitan areas to see what happens to inflation when unemployment is very low.

Economists have long held that inflation rises as unemployment falls, and vice versa. But the relationship, called the Phillips curve, has appeared very weak in recent decades. Inflation has remained tame even as the jobless rate fell to 4% in June from 10% in 2009. The Fed economists found, however, that inflation picked up more quickly once the jobless rate fell below 3.75%."

"In the late 1960s, the last time unemployment fell below 4% for a sustained period, inflation steadily accelerated. By the 1970s, if inflation rose one year, consumers expected it to rise at least as much the following year—and it did. Fed officials believe expectations of future inflation can be self-fulfilling as workers demand pay increases and businesses raise prices in anticipation.

Separate Fed research published in 2016 used data from the 1960s to measure the level at which inflation pressures begin to harm the economy. The researchers concluded this happens when core consumer prices rise by 3% on a sustained basis, according to the Fed’s preferred gauge.

Economists say that inflation accelerates when unemployment falls below a so-called natural level, which Fed officials estimate at 4.1% to 4.7%.

The “point at which you can get a large inflation overshoot” approaching 3% is when the jobless rate falls 1.5 percentage points below the natural level"

"Fed officials are also eager to know how much workers might benefit when unemployment is very low. The policy makers wonder whether people at the margins of the labor market might more easily find jobs, gain skills and become more productive—permanently improving their chances of employment. This would lower the natural unemployment rate and reduce the prospect of the economy overheating."

"“It’s difficult to forecast the economy and these concepts that we have,” Mr. Powell said in a radio interview in July. “It’s not like the fact that water boils at 212 degrees. The economy doesn’t boil at 4% unemployment.”"
Related posts:

Powell Says Fed Should Keep Gradually Raising Interest Rates.

Unemployment Has Bottomed Out. So Where's the Wage Growth?

E-Commerce Might Help Solve the Mystery of Low Inflation

U.S. Inflation Rate Hit 6-Year High in May

Fed officials disagree on how much inflation the current low unemployment rate might cause

Is There A Neutral Interest Rate? If So, How Much Is it?

Is The Phillips Curve Dead In Japan? Maybe not

Is The Phillips Curve Not Holding Up Well Because The Service And Goods Sectors Are Behaving Differently?

Has the Fed Flattened the Phillips Curve?

Nobody knows what the natural rate of unemployment is today

More on the natural rate of unemployment

How Central Banks Differ In Their Methods Of Calculating Inflation.

Fed Officials Disagree On Threat Of Inflation (from 2009)

Fed Chair Janet Yellen: "there remains considerable slack in the economy" (from 2014)

Sunday, July 29, 2018

Pre-market societies could sometimes have alot of violence

Non-capitalist or pre-capitalist societies can have quite a bit of violence. The first quote comes from The Making of Economic Society, 13e by Robert L. Heilbroner and William Milberg.

"It is difficult for us to reconstruct the violent tenor of much of feudal life, but one investigator has provided a statistic that may serve to make the point: Among the sons of English dukes, 46 percent of those born between 1330 and 1479 died violent deaths. Their life expectancy when violent death was excluded was 31 years; when violent death was included, it was but 24 years."
That came from T. H. Hollingsworth, “A Demographic Study of the British Ducal Families,” Population Studies, XI (1957–58). Imagine if someone told you that 46% of the sons of senators or Fortune 500 CEOs were going to die violently over the next 150 years.

Now there is a study out called "The Better Angels of Their Nature: Declining Violence through Time among Prehispanic Farmers of the Pueblo Southwest", American Antiquity, Volume 79, Number 3 / July 2014. See The Most Violent Era In America Was Before Europeans Arrived. It discusses some periods when native American life was quite violent. Here are some excerpts:
"Writing in the journal American Antiquity, Washington State University archaeologist Tim Kohler and colleagues document how nearly 90 percent of human remains from that period had trauma from blows to either their heads or parts of their arms.

"If we're identifying that much trauma, many were dying a violent death," said Kohler. The study also offers new clues to the mysterious depopulation of the northern Southwest, from a population of about 40,000 people in the mid-1200s to 0 in 30 years."
"It wasn't just violent deaths that poke holes in the harmony with the land and each other myth. A paper in June in the Proceedings of the National Academy of Sciences found that the Southwest also had a baby boom between 500 and 1300 that likely exceeded any population spurt on earth today. The northern Rio Grande also experienced population booms but the central Mesa Verde got more violent while the northern Rio Grande was less so.

Kohler has conjectures on why. Social structures among people in the northern Rio Grande changed so that they identified less with their kin and more with the larger pueblo and specific organizations that span many pueblos, such as medicine societies. The Rio Grande also had more commercial exchanges where craft specialists provided people both in the pueblo, and outsiders, specific things they needed, such as obsidian arrow points.

But in the central Mesa Verde, there was less specialization.

"When you don't have specialization in societies, there's a sense in which everybody is a competitor because everybody is doing the same thing," said Kohler. But with specialization, people are more dependent on each other and more reluctant to do harm."

Saturday, July 28, 2018

Regulating a Natural Monopoly

I show that in one model (although it is not the only plausible model), marginal cost price regulation and a subsidy is the best policy using the concept of social welfare).

Friday, July 27, 2018

U.S. Economy Grew at 4.1% Rate in Second Quarter

Consumer spending, exports and business investment power strongest growth pace in nearly four years

By Harriet Torry of The WSJ. Excerpt:
"The U.S. economy grew at the strongest pace in nearly four years during the second quarter, powered by a rebound in consumer spending, strong exports and firm business investment.

Gross domestic product—the value of all goods and services produced across the economy—rose at a seasonally and inflation-adjusted annual rate of 4.1% from April through June, the Commerce Department said Friday. That was a pickup from the first quarter’s revised growth rate of 2.2%.

The bounce back in consumer spending “was more powerful than anticipated and speaks to the impact of an increasingly tight labor market and strong job growth on consumer income and households’ confidence,” Brian Coulton, chief economist at Fitch Ratings, said in a note to clients, adding the “numbers really bring the possibility of 3% growth for 2018 as a whole into the frame.” Compared with the second quarter a year ago, output grew 2.8%.

President Donald Trump said Friday that the U.S. economy is growing at a “very sustainable” pace and predicted that it will expand at least 3% for the year.

The president touted his own track record since taking office, saying that the economy is growing at a pace 10 times faster than during the presidencies of George W. Bush or Barack Obama.

Actually, the U.S. economy grew faster than a 4.1% annual rate in four quarters of Mr. Obama’s presidency and four quarters of Mr. Bush’s. In the second quarter of 2014, GDP rose at an annual rate of 5.1%—the peak quarterly growth rate of the current expansion so far.

Messrs. Bush and Obama were in office for eight years each, and the economy experienced both expansions and recessions during their tenures."

Thursday, July 26, 2018

Package inserts, new form of advertising

See Now for Sale: The Empty Space Inside Retailers’ Packages: Saks, Zulily and other businesses are looking to offset rising shipping costs by selling package inserts to advertisers. Maybe it is not surprising that retailers' profit margins have been falling with increased competition from e-commerce. So they are looking for new revenue sources.
"In the sliver of room between a new pair of shoes and the books you ordered online, retailers have found a different way to monetize the empty space in your packages.

Saks Fifth Avenue, Zulily and Barnes & Noble College are among several businesses that have joined a new marketplace allowing advertisers to buy and insert paper ads in customers’ boxes. More than 25 retailers have listed slots for sale in their packages in the weeks since the website, called UnDigital, went live.

The rise of online shopping has taken a toll on retailers as shipping costs and investments in e-commerce capabilities have cut into profits. Retail margins on average fell to 8% last year from 10.2% in 2012, according to consulting firm AlixPartners. Over that period, e-commerce sales expanded to 17.6% of total sales from 10.5%.

Retailers hope they have a remedy: Wring more money out of the space inside the box.

For years, companies have been adding product samples or targeted coupons in their packages in hopes of encouraging shoppers to place another order at their stores. Some retailers brokered occasional deals with existing vendors or advertisers. With UnDigital, retailers are offering their packages to a broader range of potential advertisers.

On the UnDigital platform, retailers post monthly listings with a number of packages and the maximum number of inserts per package. Advertisers can specify the number of packages in which they want inserts at a price set by the retailer. The average price per insert is between 10 and 12 cents, and the average number of inserts per box is two to three."

"Though the cost of an insert ad is much higher than a digital ad, an insert can be a more efficient way to reach a shopper, said Ian Yung, senior director of business development at Touch of Modern. “It’s rare that someone will order something online and not open the package.”

Some shoppers say they open packages but don’t bother looking at the inserts."

Wednesday, July 25, 2018

Does Everyone Have Two Jobs?

By Andy Puzder in The WSJ. Excerpts:
"But Bureau of Labor Statistics data show only a small minority of Americans work multiple jobs. That percentage has been around 5% of working Americans since 2010, though it was higher before then. Last month 7.6 million, or 4.9%, of the 155.5 million working Americans had multiple jobs.

Are people working “60, 70, 80 hours a week”? Rarely. But for a brief dip during the recession, private-sector employees have worked an average of 34.2 to 34.6 hours a week since BLS began tracking the data in 2006. The average stood at 34.5 hours in June.

BLS considers 35 hours a week “full time,” so working 70 or 80 hours would be equivalent to two full-time jobs. Only 360,000 people worked two full time jobs in June—0.2% of the workforce. There may well be people working 60 hours a week or more on one job—but if that were common, the overall average for hours worked would be well above 34.5."

"In June, wages increased 3.8% year over year for retail-sector employees. It was their highest percentage increase since 2001 using June as the base year. Wages in the hospitality-and-leisure sector, including restaurants, rose 3.3% year over year—on top of a 4.3% increase in 2017. In a fast-growing economy, the demand for labor increases, and more employers have to pay above the applicable minimum wages to get employees."

Monday, July 23, 2018

Historical trends in manufacturing

See Despite getting no respect, US manufacturing is alive and well with record output at falling prices by Mark Perry. Excerpt:
"The BEA’s report last week on GDP-by-Industry showed that real manufacturing output (value added) in the US reached an all-time record high of more than \$2 trillion (in 2009 dollars) in the first quarter of this year. See related CD post “De-industrialization? Well, America’s thriving manufacturing sector just produced a record level of output in Q1.” That was actually the third quarter in a row starting in 2017:Q3 that US manufacturing reached record high levels, surpassing the previous record high level of US factory output established back in 2007:3 before America’s and other countries’ manufacturing sectors were devastated by the Great Recession."

"As the top chart above shows, manufacturing output as a share of US GDP has been in steady decline since the early 1950s, falling from a high of 28% in 1953 to a low of 11.6% last year."

Sunday, July 22, 2018

Worthless 2 years ago, Texas sand now brings in billions

By David Wethe of Bloomberg. This article has some good points about how perfect competition works (more firms quickly entered when profits were seen), how labor markets work (high wages brought people into the labor force) and how substitute goods work (Texas sand is different from Wisconsin sand but cheaper). Excerpts:
"Standing high on top of a windswept dune in the West Texas plains, Greg Edwards stares out into a vast ocean of sand. It stretches in every direction, interrupted only by an occasional strip of asphalt or clusters of silos that rise high into the sky.

Edwards runs a frack-sand mine. And those silos mark the presence of his rivals, who suddenly seem to be popping up everywhere. As he turns 360 degrees under the blistering midday sun, he calls out their names one by one: “Badger ... Atlas ... High Roller ... Alpine ... Black Mountain ... Covia.”
Twelve months ago, none of them existed -- not even the mine owned by Edwards’s employer, Hi-Crush Partners. It was the first of its kind here in West Texas. Day one was July 31, 2017. Ten others immediately followed. And another 10 or so are now hustling to get started.

Together, they will mine and ship some 22 million tons of sand this year to shale drillers all around them in the Permian Basin, the hottest oil patch on Earth. It is a staggering sum of sand, equal to almost a quarter of total U.S. supply. And within a couple years, industry experts say, the figure could climb to over 50 million tons."

"And the price of sand was, well, zero. Today, it fetches \$80 a ton, making this year’s haul alone worth about \$2 billion."

"There is perhaps no industry that better captures the money-multiplying effect of the Permian boom than the out-of-nowhere emergence of West Texas as a rival to the original capital of U.S. frack-sand mining in northwestern Wisconsin. With such explosive growth, of course, comes the risk of over-expansion. The local miners are unmoved by such talk -- Hi-Crush CFO Laura Fulton actually laughed at the notion -- but to the more dispassionate set of analysts and investors who watch the industry from afar, it is a major risk even if the oil market continues to go strong."

"All of these miners, with the exception of Emerge, now have operations in West Texas. And they all have quarries back in Wisconsin too. That state had quickly emerged as the epicenter of the sand market when fracking took off a decade ago. Large, rugged and round as marbles, the granules found there are ideally shaped to prop open crevices in shale rock so that the oil can seep out freely.

The West Texas sand isn’t nearly as big or as sturdy. And it’s oddly shaped too -- more like a jelly bean than a marble.

So for years, it was ignored. (No one was even interested in it for use in other industries, like cement or microchips.) But then, in the summer of 2014, the price of oil plunged. Suddenly, cost-cutting was all the rage. And there was no cheaper place to pump shale oil than in the Permian.

As drillers piled into the region, they began to wonder if they really needed to have sand shipped some 1,300 miles by rail from Wisconsin when they had this inferior, but serviceable, stuff lying all around them. Shipping costs from Wisconsin come to about \$90 per ton of sand. That’s triple the \$25 or so it costs to truck in the Texas sand.

“The business plan is simple,” says Peter Allen, senior project manager at Black Mountain Sand. “We cut out the cost of railing it here.”"

"Like most everyone else here, [Sergo] Pando was lured to the sand mines by the prospect of big pay. Even unskilled newbies can pull down \$19 an hour, almost triple the state’s \$7.25-per-hour minimum wage. A student at Texas Tech University, Pando took off the spring semester to start working at Black Mountain. Six months into the job, he’s making \$28 an hour."

Saturday, July 21, 2018

Google Is Fined \$5 Billion by EU in Android Antitrust Case

Decision marks the European Union’s biggest-ever antitrust fine and sharpest rebuke to Silicon Valley

By Sam Schechner And Douglas MacMillan. Excerpts:
"the bloc’s antitrust regulator found Wednesday that Google had abused the dominance of its Android operating system, which runs more than 80% of the world’s smartphones, to promote and entrench the company’s cash-cow search engine."

"For cash-rich Alphabet, however, the financial penalty is potentially less onerous than the business changes Brussels has demanded, which could give players including smartphone makers and mobile carriers more leverage to extract payments from Google and its rivals.

The EU ordered Google to stop making phone manufacturers pre-install its search app and the Chrome web browser if they want to pre-install Google’s Play store, which is the dominant way to download Android apps. The bloc also ordered Google to end restrictions that discourage manufacturers from selling devices that run unofficial versions of Android."

"Google said Android, which is free for manufacturers to use, has increased competition among smartphone makers, lowering prices for consumers."

"Google also said the allegation that it stymied competing apps is false because manufacturers typically install many rival apps on Android devices—and consumers can download others."

"The two apps targeted in the EU decision, Google’s search and its Chrome browser, are extremely popular in their own right. Consumers are likely to seek them out from an app store even if they weren’t preinstalled on the phone."

"while the EU ruling may have opened the door for device makers that want to charge Google to pre-install its search and browser apps, Google has its own leverage over manufacturers. The internet giant could counter by demanding payment for Android."

"there aren’t many competing options."

"In exchange for providing Android to smartphone makers free of charge, Google encourages them to offer devices loaded with Google services such as search, YouTube, Gmail and Google Maps. That allows Google to gather vast amounts of data on consumers based on their use of those popular apps and then devise and target ads.

Now, Google may be forced to offer new terms that give handset makers and phone carriers more freedom to feature their own apps, strike deals with Google’s rivals or even charge Google for pre-installing its apps."

[The EU is] "requiring Google to permit phone makers to offer their own tailored operating systems based on Android’s open-source version. That requirement could make it harder for Google to offer a single, standardized version of its mobile software on which all Android apps can be used."

"The EU ruling could ultimately benefit smartphone users by helping mobile app makers compete with Google services by offering better features and lower prices"

"Supporters of Google, however, contend that the company may have less incentive to develop innovative Android products if it ends up making less money from mobile phones."

Friday, July 20, 2018

Doonesbury And Evasive Entrepreneurs

See Evasive Entrepreneurialism and Technological Civil Disobedience: Basic Definitions  by Adam Thierer of the Mercatus Center at George Mason University. He is writing a book on this. This concept reminded me of a Doonesbury strip from 1986. Excerpt:
"The book documents how evasive entrepreneurs are using new technological capabilities to circumvent traditional regulatory systems, or at least put pressure on public policymakers to reform or selectively enforce laws and regulation that are outmoded, inefficient, or illogical. Evasive entrepreneurs pursue a strategy of “permissionless innovation” in both the business world and the political arena.  In essence, they live out the adage that, “it is easier to ask forgiveness than it is to get permission” by creating new products and services without necessarily receiving the blessing of public officials before doing so."
Link to the 1986 Doonesbury strip.

Thursday, July 19, 2018

Powell Says Fed Should Keep Gradually Raising Interest Rates

Fed chief delivers an upbeat economic assessment to Congress, but opens door to potential policy shift

By Nick Timiraos of The WSJ.

In addition to the usual macro issues, the article also mentions international trade. Of particular importance to me was the statement about tariffs causing higher inflation. If tariffs are like excise taxes, they cause supply lines to shift to the left. Not only does that raise prices but output falls and firms might layoff workers. It will depend on how high the tariffs are and how many products are affected.

Excerpts from the article:
[there is] "less certainty about the rate path as the Fed raises its benchmark rate toward a so-called neutral level that neither spurs nor slows growth."

"The Fed tries to set rates with an eye toward the economy’s performance a year ahead because monetary policy operates with a lag."

"Trade disputes have mixed implications for Fed policy. On one hand, they could slow economic growth, causing officials to hold off on rate rises. Or tariffs could push up inflation, requiring a steeper path of increases."

"Mr. Powell, in a radio interview last week, said the Fed could ignore the price increases from tariffs if officials conclude they represent a one-time rise that won’t be incorporated into businesses’ and consumers’ expectations of future inflation.

Interpreting the price data could grow more complicated because many Fed officials believe inflation should accelerate as unemployment falls, and vice versa. While that relationship was been very weak over the past decade, officials expect that as labor market slack disappears, wages and prices should rise more quickly.

If a tight labor market appears to be pushing wages higher at the same time tariffs are driving up prices, “it’s going to be a little bit harder to disentangle,” said Mr. Rosengren.

Central bankers like to maintain inflation around 2%, seeing it as a sign of a healthy economy.

Inflation is close to the Fed’s 2% target after undershooting it for many years. Consumer prices in May rose 2.3% from a year earlier. Excluding volatile food and energy categories, they rose 2%, according to the Fed’s preferred inflation gauge."

Tuesday, July 17, 2018

The Problem With Innovation: The Biggest Companies Are Hogging All the Gains

Economists trying to explain a long-term slowdown in productivity increasingly believe gains are not spreading through the economy, as they once did

By Jason Douglas, Jon Sindreu and Georgi Kantchev of The WSJ. Excerpts:
"Lately, economists have discovered an unsettling phenomenon: While top companies are getting more productive, gains are stalling for everyone else. And the gap between the two is widening, with globalization and new technology delivering outsize rewards to the titans of the global economy."

"big firms can exploit economies of scale offered by new technology and global markets. Companies with more orders can better shoulder upfront investments because each new unit produced will be less expensive."

"Since the 2008 financial crisis, U.S. productivity has grown by about 1.2% a year. That is half the rate it clocked in the 1970s and around one-third of what it was in the decades after World War II, once adjusted to strip out the temporary effects of economic booms and busts. Japan and Europe—especially the U.K. and Italy—have fared even worse.

Researchers have blamed the productivity slowdown on a range of factors including ultralow interest rates, mismeasurement of output in a digital world and a decline in humanity’s innovative prowess. Most theories don’t seem to explain the whole puzzle.

Researchers now are zeroing in on diffusion. According to data on advanced economies from the Organization for Economic Cooperation and Development, the most productive 5% of manufacturers increased their productivity by 33% between 2001 and 2013, while productivity leaders in services boosted theirs by 44%.

Over the same period, all other manufacturers managed to improve productivity by only 7%, while other service providers recorded only a 5% increase."

"nearly all of the increase in wage inequality in the U.S. since 1978 stems from pay disparity between workers at different companies. Pay gaps within companies remained mostly unchanged."

"one-quarter of U.S. productivity growth between 1995 and 2000 was driven by retailers, with almost one-sixth of that by a single company, Walmart Inc. Smaller rivals were left in its wake, if they survived at all."

Data show the most productive companies are usually the biggest. Globalization allowed them to grow bigger, while giving some specialized niche firms a big enough market to succeed.

For digital titans such as Amazon, Google parent Alphabet Inc. and Facebook Inc., the benefits of scale are substantial. Not only are their customers not limited by geography, but whenever more sellers sign up in Amazon’s platform or more users join Facebook’s social network, the service they offer gets more valuable for everyone else.

Another advantage: Researchers have found that bigger firms are better at protecting their technological advantages by patenting them. Only 25 companies accounted for half of all tech-related patents filed with the European Patents Office between 2011 and 2016, official data show.

Scale makes it possible to experiment with advanced technology that is out of reach for many companies. A separate McKinsey Global Institute report, published in April, found early adopters of artificial intelligence may already have gained “an insurmountable advantage” in earnings over competitors who have yet to take the plunge.

Gains at the top have been the key driver of productivity since the days of the industrial revolution, and the whole economy benefited. What is different now?

Some economists say it could be that good managers have flocked to top firms—enticed by the larger pay offered by multinationals—and the laggards need to catch up. According to the World Management Survey, smaller firms are consistently worse run and are responsible for most differences in management across countries."

"Globalization made it easier to automate sectors that produce goods and services that can be traded around the world, but this means those sectors now employ far fewer people than they did 40 years ago. Recent research finds that the result may be a shift in employment toward lower-productivity jobs such as delivering fast food by bike or cleaning offices—much harder tasks to automate."

"JÃ¼rgen Maier, chief executive of the U.K. arm of Siemens AG , says reviving diffusion is in the interests of the biggest, most productive companies, because many laggards are their suppliers. “If we get our supply chains more productive, more agile, delivering in time, that’s good for everybody in the ecosystem,” Mr. Maier says."
Here is something from Nobel prize winning economist Paul Krugman that is related. See The Accidental Theorist. Excerpts:
"Imagine an economy that produces only two things: hot dogs and buns. Consumers in this economy insist that every hot dog come with a bun, and vice versa. And labor is the only input to production."

"It so happens that I am about to use my hot-dog-and-bun example to talk about technology, jobs, and the future of capitalism. Readers who feel that big subjects can only be properly addressed in big books--which present big ideas, using big words--will find my intellectual style offensive. Such people imagine that when they write or quote such books, they are being profound. But more often than not, they're being profoundly foolish. And the best way to avoid such foolishness is to play around with a thought experiment or two.

So let's continue. Suppose that our economy initially employs 120 million workers, which corresponds more or less to full employment. It takes two person-days to produce either a hot dog or a bun. (Hey, realism is not the point here.) Assuming that the economy produces what consumers want, it must be producing 30 million hot dogs and 30 million buns each day; 60 million workers will be employed in each sector.

Now, suppose that improved technology allows a worker to produce a hot dog in one day rather than two. And suppose that the economy makes use of this increased productivity to increase consumption to 40 million hot dogs with buns a day. This requires some reallocation of labor, with only 40 million workers now producing hot dogs, 80 million producing buns."

"Yes, technological change has led to a shift in the industrial structure of employment. But there has been no net job loss; and there is no reason to expect such a loss in the future. After all, suppose that productivity were to double in buns as well as hot dogs. Why couldn't the economy simply take advantage of that higher productivity to raise consumption to 60 million hot dogs with buns, employing 60 million workers in each sector?

Or, to put it a different way: Productivity growth in one sector can very easily reduce employment in that sector. But to suppose that productivity growth reduces employment in the economy as a whole is a very different matter. In our hypothetical economy it is--or should be--obvious that reducing the number of workers it takes to make a hot dog reduces the number of jobs in the hot-dog sector but creates an equal number in the bun sector, and vice versa. Of course, you would never learn that from talking to hot-dog producers, no matter how many countries you visit; you might not even learn it from talking to bun manufacturers. It is an insight that you can gain only by playing with hypothetical economies--by engaging in thought experiments."

Monday, July 16, 2018

The best age for entrepreneurship

By Michael Taylor of The San Antonio Express News. Excerpts:
"A new research paper co-authored by researchers from MIT, Northwestern University, and the U.S. Census Bureau shows the surprising relationship between business startup success and the age of the founders."

"The researchers first discovered the average age of startup founders, which is a surprisingly non-youthful 41.9 years old."

"Their study zeroed-in on unusually “high-growth” companies, the type of company that creates an extraordinarily big economic impact. They calculated the average age of the founder of the top 0.1 percent of startups in terms of employment growth — in other words the best successes compared to 999 of its startup peers. Before I give the answer, want to guess the average age of founder for these companies?

"Beyond that average age for top performers, the researchers found that the probability of entrepreneurial success in general increased steadily with age.

Founders who were 50-something were almost twice as likely to succeed at the highest level than 30-something founders. Not only that, but business founders in their 20s were the least likely to succeed. All of this flies in the face of the popular image we get from financial media of Silicon Valley prodigies disrupting everything around them before they’ve been kicked off their parents’ health care plan."

"age and experience bring even more important advantages to bear. The three most important of these appear to be deep experience in a particular industry, access to financial resources, and harder-to-measure factors like managerial experience and social capital."

"young founders often seem to believe that their youth is an advantage, despite the data to the contrary. They self-perceive as “the next Mark Zuckerberg.” For better or worse, they have absorbed the media narrative around young disrupters, especially in technology."

Here is a short article by me called "Aging and Entrepreneurship." Article in the Encyclopedia of Financial Gerontology, Lois A. Vitt and Jurg K. Siegenthaler, Editors-in-Chief, Greenwood Press, 1996.
"ENTREPRENEURSHIP, the initiation and assumption of the financial risks of a business and its management. The decision to start a business is often complex.  Many factors, including the need for achievement, the need for control over one's destiny, the willingness to take risks, the loss of one's job, and other forms of displacement may prompt a person to start his or her own business. While some writers see no link between age and the decision to start a new business, others have found close links. When age is a significant factor, it is often for psychological reasons.

Entrepreneurial opportunities are most likely to be pursued by people with a college education who are in their late thirties and have established careers. Age is relevant to entrepreneurship, and entrepreneurship is important for the aged. Of those who are employed at age 65 or older, 27% are self-employed (Maddox 1985). It is useful to examine the relationship between entrepreneurship and aging through the internal or psychological aspects of a person's decision to become an entrepreneur.

The Entrepreneur and Hero Compared

Joseph Campbell believed that the entrepreneur was the real hero in our society. Although he never systematically compared the entrepreneur and the hero, it is interesting to do so. Heroes and entrepreneurs are called to take part in an adventure that is a simultaneous journey of self-discovery, spiritual growth, and the personal creativity they make possible. An entrepreneur's journey closely resembles the journey of the hero in mythology as outlined in Campbell's book, The Hero 'With a Thousand Faces (1968). There is a strong similarity between the journey that entrepreneurs take and the adventure of heroes. Entrepreneurs and heroes also have similar personality traits. Myths describe the universal human desires and conflicts we see played out in the lives of entrepreneurs. Ian MacMillan and Rita Gunther McGrath (Wall Street Journal 1992) of the Wharton School's entrepreneurial center found that entrepreneurs, no matter what country they call home, think alike. Campbell found that the basic pattern in the hero's journey is the same in every culture.

Heroes bring change. Campbell (1968) refers to the constant change in the universe as "The Cosmogonic Cycle" that "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero." This recalls Joseph Schumpeter's theory of entrepreneurship as creative destruction. A successful entrepreneur simultaneously destroys and creates a new world, a new way of life. Henry Ford destroyed the horse and buggy age while creating the world of the automobile. Campbell's hero finds that the world "suffers from a symbolical deficiency" and "appears on the scene in various forms according to the changing needs of the race." Changing needs and deficiencies correspond to the changing market conditions or the changing desires for products. The entrepreneur is the first person to perceive changing needs. Campbell believed that people become creative when they engage in an activity, pursue a career or entrepreneurial venture, because it is what one loves to do and because it bestows on one a sense of personal importance and fulfillment. It is not the social system that dictates that it be done; rather, the drive comes from within. It is this courageous action that opens up doors and creative possibilities that did not previously exist.

Relationship of the Hero's Journey to Aging

The hero's goal is now to find a purpose in life. Campbell's and Erik Erikson's (1963) heroes are similar, because the hero's journey is a quest for personal identity that can be found in service to others or to society, or in finding and delivering a boon. During the generativity versus stagnation stage, which comes in the second half of life, in Erikson's eight ages of man, people become willing to take risks in order to be creative or make their mark upon society. Generativity involves establishing and guiding the next generation, but it also includes productivity and creativity, which, along with the willingness to take risks, are essential to entrepreneurship. For Campbell, the act of creating involves the willingness to take a risk and cross a boundary into a new domain of ideas. To be unwilling or afraid to do so is to be controlled by what he calls "the elder psychology," or the unwillingness to strike out on one's own and take risks.

The paradox, then, is that although entrepreneurship may be an important path for people to discover themselves and "do something meaningful for society" as they become older, they must resist this "elder psychology," which Campbell believes blocks risk taking, creativity, and entrepreneurship. When a person is able to champion things becoming, he or she can achieve generativity by making a significant and unique contribution to society. If one is able only to maintain the status quo, he or she will stagnate and will remain self-centered and unable to contribute to society. Almost by definition, entrepreneurs are champions of things becoming.

In counseling and advising the elderly in the area of entrepreneurial activity, it is useful to keep these insights from mythology and psychology in mind. They deal with the deepest of needs and forces in the human psyche. For an older person contemplating a new business venture, it will be helpful to recognize that it is not just the potential financial gains or losses involved that are important. The entrepreneurial act may be a life-defining and self-defining act, one with deep personal and perhaps even spiritual implications for the individual and his or her relationship with society. Entrepreneurs are often seen as having different attitudes toward risk: what a nonentrepreneur might view as a great financial risk, the entrepreneur may see as a cost of learning and adventuring. The venture is an end in itself, more than the profit. People who start new businesses in the second half of life may view risk in this way, because they feel such a strong need to define themselves and contribute to society.

References

Campbell, Joseph. 1968. The Hero With a Thousand Faces. Princeton. NJ: Princeton
University Press.

Erikson, Erik H. 1963. Childhood and Society. New York: W. W. Norton.

Jung, Carl G. 1956. Symbols of Transformation. New York: Harper TorchbookslBollingen Library.

Maddox, George L., et al. 1985. The Encyclopedia of Aging. New York: Springer.
Wall Street Journal. 1992. 6 February; A1."

Sunday, July 15, 2018

Can the right story increase your income or help the poor?

See Think Positive, Climb Out of Poverty? It Just Might Work by Seema Jayachandran in The NY Times. I have a blog that sometimes touches on issues like this called Dollars and Dragons A look at the intersection of economics and mythology. Even if these programs work, they raise an important question: if everyone gets the "right" story told to them, would we all become richer?

Excerpts:
"In Kampala, Uganda, students who watched a feel-good movie about a chess prodigy improved their academic results. In Oaxaca, Mexico, clients of a microcredit organization were successfully trained to have greater aspirations for the future. And in Kolkata, India, sex workers in brothels were imbued with a sense of empowerment that helped them to take concrete steps to improve their lives."

"In Kampala, Uganda, for example, a study by Emma Riley, a graduate student at the University of Oxford in Britain, examined the effects on students of watching a movie, “Queen of Katwe,” starring Lupita Nyong’o and David Oyelowo. The Disney movie is based on the life of Phiona Mutesi, a girl from a poor township in Kampala, whose father died of AIDS when she was young.

Ms. Mutesi went on to become a champion chess player, representing Uganda in international competitions, an achievement that exceeded what many students in Uganda had expected for themselves or even thought possible.

To encourage them to aim higher, students preparing for their national exams were shown the movie. When they took the exams, they performed better than a control group that instead watched a Hollywood fantasy movie, “Miss Peregrine’s Home for Peculiar Children,” that did not feature an appropriate role model. Significantly more of the “Queen of Katwe” movie watchers had scores high enough to gain admission to a public university."

"The Kolkata, India, experiment, conducted by five scholars based in the United Kingdom and India, ran a short course on personal growth for 264 sex workers, who had often felt stigmatized and powerless. After participating, the women had measurably greater self-esteem and a stronger belief that they could determine the course of their lives. More concretely, they began saving more money and getting more frequent health checkups.

These successes suggest that even traditional anti-poverty programs work partly because they lift people up psychologically. For example, a program designed by a nonprofit in Bangladesh that has also been used in India, Ethiopia, Peru and other countries has given poor people livestock plus training on how to care for the animals.

This aid package has raised participants’ incomes more than might have been expected, based on the direct monetary value of the animals and the education. What helps to explain the outsize impact is that participants started working more hours."

Critics of anti-poverty aid have charged that it encourages laziness, but in this case, the opposite happened. The assistance motivated people to work harder. The extra work was partly a rational calculation: Productive assets like cows or goats magnified the payoff from labor. But it’s also true that participants’ mental health improved, which likely made them able to work more.

Better mental health is also one of the striking benefits of the cash grants that the American nonprofit, GiveDirectly, has given to poor households in Kenya."
"Hope isn’t a cure-all. In none of these examples can we be certain that it actually explains the gains in people’s income or education. And instilling hope without skills or financial resources is unlikely to be enough to lift people out of poverty."
"unrealistically high aspirations can be so discouraging that they are harmful. Repeatedly falling short can deplete motivation.

Still, it is welcome news that poverty-alleviation programs can amplify the good they do just by making a better life seem — and actually be — within reach."