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    Blockbuster’s Sunk Costs

    Oct 20 • Businesses • 264 Views

    When is it bad to be good at something? Blockbuster has the answer.

    As described by New Yorker columnist James Surowiecki, Toys ‘R Us, Barnes & Noble, and Blockbuster were known as “category killers” because they decimated their competition. They became so large and so successful that they made the rules. For Blockbuster, the “rules” were good and bad. They were the prime source of video rentals. Their stores were everywhere. Good? Yes, until the existence of the stores became the reason for keeping them. Bad? A delayed response to the internet. The success of Blockbuster’s business model stopped its creators from seeing its weaknesses. “Blockbuster just kept on throwing good money after bad.”

    The Economic Lesson

    The key idea here is “sunk costs”. When you have devoted 10 minutes to waiting in one position for a free parking spot, you have “sunk costs”. Having “spent” 10 minutes already, you are less likely to leave and look elsewhere.

    Similarly, businesses have sunk costs when they invest in physical and human capital. Having put considerable dollars into a venture, they are less likely to abandon the idea. For Blockbuster, the sunk cost was “bricks and mortar”. They had thousands of stores with employees from the “top” in management to the “bottom” as part time store workers. It would have been very difficult to abandon so huge an investment.

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    Random Notes From Recent News

    Oct 19 • Demand, Supply, and Markets, Government, Households • 217 Views

    1. Among the U.N.’s 8 millennium goals for 2015, sustaining aging populations was not included. Why?

    2. You might want to decide with whom you agree: WSJ‘s Daniel Henninger saying that “Capitalism Saved the Miners” or The Huffington Post with “Capitalism Would Have Killed the Chilean Miners“.

    3. Perhaps like people, some dogs are pessimists and others are optimists according to a recent study described in Current Biology. You can see the economic connection here.

     

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    Macroeconomics and Mandelbrot

    Oct 18 • Government • 274 Views

    How are macroeconomics and the British coastline similar? Mathematician Benoit Mandelbrot could tell us.

    Dr. Mandelbrot was the father of fractal geometry and the idea that the closer you look, the more you see. From a distance, the British coastline will appear straight. However, looking closer and closer increasingly reveals indents and zigzags. Consequently, Dr. Mandelbrot believed that it was actually much longer and even infinite. The significance? Something we might think is simple is really complex.

    Similarly, in the economic world, most policy decisions sound so logical. When people earn more, they spend and they save the extra income. If government taxes more, then it gets extra revenue.

    However, as with the British coastline, looking closer reveals increasing complexity. In “The X Factor of Economics,” referring to the recent stimulus spending, Nobel Prize winner Robert Solow says, “One thousand other things were happening that had an effect on employment and the G.D.P.” With taxes, from a “distance” we see the rich, the middle class, and the poor. Looking closely, though, are countless variables that distinguish workers’ incomes.

    Responding, Duke professor Dan Ariely comments, “…So we either simplify the problem and offer a solution, or embrace the complexity and do nothing.” 

    The Economic Lesson

    In a Teaching Company lecture from his 20th Century economic history course, Macalester Professor Timothy Taylor explains why he thinks that the beginning of the 20th century was a turning point for macroeconomic policy. Citing the inception of the income tax, creation of the Federal Reserve, and new federal regulation, he discusses the changing role of government.

     

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    Closed Professions

    Oct 17 • Businesses, Demand, Supply, and Markets, Regulation • 215 Views

    If you are a Greek pharmacist, you are guaranteed a 35% profit on the drugs that you sell, your store can be no closer than 820 feet from another pharmacy, and you probably paid close to $400,000 for a business license. Called “closed professions” because Greek regulations dominate their character, they include taxi drivers, lawyers, and 70 other livelihoods. 

    At the World Bank’s Doing Business Index, which ranks the “ease of doing business” in a country, Greece is #109 out of 183 countries. To start a business in Greece, for example, requires 15 procedures. In the U.S.(ranked #4), the number is 8 and for New Zealand (ranked #2), only 1.

    The Economic Lesson 

    Easily doing business takes us straight to the GDP. As the yardstick that measures the value of the annual production of goods and services in a country, the GDP depends on entrepreneurs, business owners and managers for its sustenance.  

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    Powerful Women

    Oct 16 • Behavioral Economics, Businesses, Gender Issues, Labor • 197 Views

    Lady Gaga is #7. Yes, according to a 2010 Forbes list of the most powerful women in the world, Lady Gaga’s power is surpassed by just 6 other women: Michelle Obama, Irene Rosenfeld (Kraft Foods CEO), Oprah, Angela Merkel (Germany’s Chancellor), Hillary Clinton, and Indra Nooyi (CEO of PepsiCo). Why? As Forbes expressed it, their criteria include a “buzz” and a business component.

    This took me to a WSJ Jonah Lehrer article. Citing studies about how people achieve power, Lehrer challenges the traditional assumption that ruthless individuals are more likely to reach the top. Instead he says that “people give authority to people they genuinely like” and ostracize those who are malicious. Even among chimpanzees, males who were best at socially connecting ascended to dominance.  

    However, Lehrer also tells us that once people achieve power, their behavior changes. Those with authority tend to become less empathic and to behave inappropriately. Also though, they acquire a toughness that can come in handy.  

    The Economic Lesson

    Controlling power is basic to the success of a market economy. To some extent, the invisible hand uses competition, demand, and supply to harness self-interest. Still though, in the Wealth of Nations, Adam Smith alluded to the “wretched spirit of monopoly” (p. 461) as a threat to economic health. Smith also points out that, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.  

     

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