• Everyday economics and Joseph Schumpeter's entrepreneurs

    Joseph Schumpeter: Economic Models and Eileen Ford

    Jul 18 • Businesses, Demand, Supply, and Markets, Economic Growth, Economic History, Economic Thinkers, Fashion, Gender Issues, Innovation, Labor, Lifestyle, Macroeconomic Measurement • 93 Views

    Eileen Ford died this week. An entrepreneur who transformed the business of beauty, Eileen Ford’s talent was pairing a face with a camera. During its earlier years, the women her modeling agency represented included Martha Stewart, Ali MacGraw, Suzy Parker, Candice Bergen, and Jane Fonda.

    This is Martha Stewart. She says that she modeled to help pay for tuition at Barnard College.

    Entrepreneur Eileen Ford represented Martha Stewart when she was a model.

    From: Businessinsider

    Candice Bergen, in 1967, soon after she left the University of Pennsylvania.

    Entrepreneur Eileen Ford has Candice Bergen as a model.

    From: mylusciouslife

     

    Eileen Ford and her husband Jerry changed what it meant to be a model. Upending the prevailing standard, their agency insisted on a fee structure and moral standards. Initiating the 5-day workweek and organized scheduling, they based a model’s pay scale on how her picture was used. To be sure that a cancelled shoot would not mean a cancelled check, they implemented a pay-in-advance system. By 1978, top models were earning $3500 a week (equal to $13,740 today) and the supermodel market evolved. Put it all together and you get a business that, by generating respect for beauty, started an industry.

    Eileen Ford reminded me of Joseph Schumpeter.

    An academic superstar, an Austrian finance minister, and a Harvard professor, economist Joseph Schumpeter once proclaimed that he aspired to become the world’s greatest economist, horseman and lover. His biographer said he then said, “Things are not going well with the horses.”

    In 1883, Joseph Schumpeter was born in Austria. After working in government, business and academia, he went to Harvard in 1932–a perfectly timed departure from Europe. Explaining the evolution of capitalism, he attributed its growth to entrepreneurs and its eventual demise to the resentment that would build against its elite.

    Schumpeter tells us that entrepreneurs are the source of “creative destruction” because their businesses render others obsolete. With their new products and processes, entrepreneurs create jobs, progress and productivity. They change consumer habits, develop new means of production and new forms of economic organization. Not necessarily concerned with risk, they are unusually focused on making a difference in the world.

    Our bottom line: As the person who brought a new form of economic organization to the modeling industry, who had a passionate single-minded focus, and who built a massive enterprise with her husband, Eileen Ford was indeed a Schumpeter entrepreneur.

     

     

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  • Econlife Starbucks College Achievement Plan

    Starbucks College Achievement Plan

    Jul 17 • The Pulse • 96 Views

    Starbucks has partnered with Arizona State University to offer its U.S. employees the opportunity to complete their bachelor’s degree with tuition reimbursements. Vote and comment!

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  • JS Mill's support of redistribution from taxation in the AFA

    John Stuart Mill on Affordable Health Care

    Jul 17 • Demand, Supply, and Markets, Economic Debates, Economic Thinkers, Government, Health Care, Households, Labor, Regulation • 85 Views

    A child prodigy, 19th century economist John Stuart Mill said in his Autobiography that, “I have no remembrance of the time when I began Greek; I have been told that it was when I was three years old. My earliest recollection on the subject…being lists of common Greek words…and I faintly remember going through Aesop’s Fables, the first Greek book which I read. I learnt no Latin until my eighth year…I also read, in 1813,…the first six dialogues…of Plato.” Mill tells readers that he did not understand Plato’s Sixth Dialogue, “But my father, in all his teaching, demanded of me not only the utmost that I could do, but much that I could by no possibility have done.”

    Mill became an economist who was torn between the merits of the market system and the precepts of utilitarianism. He believed demand, supply and unfettered markets generated efficiency. Also though, he sought a society in which happiness for every individual was maximized.

    And that takes us to Mill’s (probable) ideas about taxation and the Affordable Care Act.

    John Stuart Mill was the first economist to separate production and distribution. A society’s production, he believed, was subject to certain immutable laws which we could not change and the market would manage. Distribution, though, was a different story. Hearkening back to his utilitarian predilections, he said that you and I could decide who got what by redistributing incomes through taxes. All society needs to do is collect taxes from those who have more and then let those with less benefit from someone else’s earnings through a government provided good or service.

    Separating production and distribution, JS Mill said redistribution from taxation was okay.

    John Stuart Mill (1806-1873)

    Hearing that the Affordable Care Act was a step toward making health care accessible to everyone, Mill no doubt would have been comfortable with the new taxes it created. On January 1, 2013, a new 3.8% Net Investment Income Tax went into effect. Applying primarily to the more affluent, the tax targeted investment income over a certain threshold. At the same time, an additional Medicare tax of .9% again impacted those with higher incomes because of its minimum income level of $250,000 for married couples who file jointly and slightly lower threshold for others.

    Our bottom line: Taxation is redistribution. Its basic dilemma is deciding when the size of redistribution starts to adversely affect production incentives.

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  • Thomas Sargent and Cutting the deficit

    John Maynard Keynes and the Generational Impact of Entitlements

    Jul 16 • Economic Debates, Economic History, Economic Thinkers, Government, Health Care, Labor, Macroeconomic Measurement • 91 Views

    Before seeing how we are benefiting unequally from entitlement programs like Social Security and Medicare, let’s start with some history.

    During 1934, with unemployment high and production low, British economist John Maynard Keynes was reported to have crumpled up a pile of towels rather than just one after washing his hands in a U.S. restaurant. His goal he said (if this really happened and no one is sure) was to create more jobs.

    More than businesses though, Keynes (1883-1946) believed that a contracting economy needed the job creation that government could provide through deficit financing. Government spending would then multiply as it passed from hand to hand. Just pay a worker, he or she spends that income, the recipient then spends it, businesses have to expand and an inflated total (called the multiplier) of spending enters the GDP.

    Implementing a Keynesian approach during the 1930s Great Depression, government passed Social Security and unemployment legislation. Called a government safety net, they were supposed to provide income minimums to the jobless and people over 65 who qualified.

    30 years later, Lyndon Johnson said to Wilbur Mills, the Chairman of the House Ways and Means Committee, “I’ve just been looking through the polls here, and I’ve got only a few weaknesses, and the worst of them is that I’m not doing anything for the old folks. I need some help from you, Wilbur. How about letting Medicare get to the House floor?” Mills said yes and, in 1965, federally subsidized medical care for people 65 and over became the law of the land.

    Then, during the Great Recession (December 2007 to June 2009), President Obama perpetuated a Keynesian approach and an increase in entitlement spending through the American Recovery and Reinvestment Act of 2009, the $787 billion bailout program that ballooned to $840 billion in 2011.

    Today, almost 80 years since entitlements began with Social Security, we can look at their potential impact on the following generational groups:

     

    Fiscal Policy and Generations

    The Greatest Generation, the Silent Generation and the Baby Boomers could benefit most from entitlement legislation:

    Fiscal Policy and the Generations

     

    Our bottom line: A Keynesian philosophy that employs massive government spending to end a recession has also helped entitlement programs to grow and unequally impact generations.

     

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  • David Ricardo Comparative Advantage

    What Would David Ricardo Say About Your Sneakers?

    Jul 15 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Economic Thinkers, Fashion, Government, Innovation, Labor, Thinking Economically • 82 Views

    While the uniforms, boots and other items worn by the military are supposed to be 100% “Made in the USA,” exceptions are okay if we cannot make what they need. Athletic shoes became one of those exceptions when the Defense Department said it was okay to buy sneakers from foreign manufacturers, .

    Reading about imported sneakers, I started thinking about David Ricardo. But first some background.

    Shoe manufacturing is a textbook example of a shrinking industry. During the 1940s, the industry provided 260,000 domestic jobs, in 1997, 40,000, and now, 14,000. Meanwhile, imported shoes compose 98% of the US market.

    The reasons? It is not worth it for shoelace and eyelet makers to locate here if they do not have a large enough market. As for cost, making shoeboxes is 5 times more expensive here than in China. Ultimately though (below), making sneakers in the USA costs 25% to 35% more than in Asia because it is a labor-intensive task.

    Comparative advantage and sneaker manufacture

    From: WSJ

     

    As you might expect, manufacturers of US made sneakers claim a host of benefits. They start with the flexibility and turnaround time that proximity creates. The New Balance CEO claims that his US plants are twice as productive as his Asian plants. A Tennessee shoe entrepreneur questions the wisdom of shipping $1 billion in US cow and horse hides to China that will return here as $12 billion in leather goods.

    Our story ends, though, with the Defense Department having reconsidered. Just this April, after years of protests from shoemakers in Maine, Massachusetts and Michigan, the Defense Department said they would permit service men and women to purchase US made sneakers. The shoes just have to meet the military’s standards for “cost and durability.”

    Our bottom line: The economist who first explained comparative advantage, David Ricardo (1772-1823) said each nation should make whatever involves the lower opportunity cost. Because we are all doing what we do best, productivity is optimized through specialization and trade. Paying less, consumers (including the Department of Defense) have more money to allocate elsewhere.

    I wonder if it is possible for the US to have a comparative advantage in sneaker manufacture.

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