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    Recycling Matters

    Aug 21 • Businesses, Demand, Supply, and Markets, Developing Economies, Environment, International Trade and Finance • 458 Views

    Coca-Cola has a recycling problem. Last year, it had hoped to process 100 million pounds of recycled PET (bottle grade) plastic in its Spartanburg, S.C. plant and is not even close. Here is why:

    Less supply of recycled plastic:

    • It is tough to get enough PET plastic because many of us do not recycle plastic bottles. Maybe bottle deposit programs would make a difference. However, Coke and Pepsi say that paying 5 to 10 cents for a returned bottle is inefficient, pricey and unfairly targets them.
    • Coke and Pepsi prefer using municipal recycled plastic. Mixed with other plastics, though, the plastic from curbside programs tends to be less than bottle grade.


    More demand for recycled plastic:

    • Increased demand from China for used plastic in clothing and furniture manufacturing is nudging the price upward. As a result, “virgin PET” is cheaper.


    The Economic Lesson

    Is it ethical for a profit-seeking business to be ethical? Believing that profits are the responsibility of the business firm, Milton Friedman (1912-2006) said that it is not appropriate for corporate management to pursue social responsibility. Agreeing, former Harvard president and Secretary of the Treasury Lawrence Summers cited Fannie Mae and Freddie Mac to display the cataclysmic results of combining doing good with seeking profits.

    In this economix blog, Harvard economist Edward Glaeser discusses the debate surrounding corporate responsbility. Reminding us that it need not be “black and white,” he encourages us to ponder different levels of corporate social responsibility

    An Economic Question: Implying that we cannot put a price on environmental responsibility, a a U.S. senator from Maine, Edmund Muskie, once said, “Can we afford clean water? Can we afford rivers and lakes…which continue to make life possible…?…These questions answer themselves.” Your opinion?

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    Song Rights

    Aug 20 • Businesses, Innovation, Labor, Regulation, Thinking Economically • 493 Views

    When do we own what we create? It depends.

    For Bruce Springsteen and Billy Joel, hit albums controlled by record companies might soon become theirs again. During the mid-1970s, the Congress decided that after 35 years, a musician could regain the copyright held by a record company by following a specified procedure. Called termination rights, the copyright switch can begin in 2013 for Billy Joel’s “52nd Street” and Bruce Springsteen’s “Darkness on the Edge of Town.” The NY Times provides a list of some of the performers who might benefit and also reminds us that record companies will probably contest the artists’ claims.

    In this Econtalk discussion, you can decide whether you agree with an author who complains that his family cannot inherit an unending copyright for his work.

    The Economic Lesson

    Trademarks, copyrights and patents protect intellectual property. With Article 1, Section 8, Clause 8 saying, “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries,” the US Constitution established the right to protect innovation.

    Interestingly, although Hamilton and Jefferson did not entirely agree, both were involved with the first Patent Act in 1790.

    An Economic Question: Being able to restrict use of someone’s ideas can hinder and fuel progress. Explain.


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    Stock Market Crashes

    Aug 19 • Behavioral Economics, Demand, Supply, and Markets, Economic History, Financial Markets, Households, International Trade and Finance, Thinking Economically • 414 Views

    How to define a stock market crash? One economic paper has 2 suggestions:

    • “When you see it you know it.”
    • Look at depth and duration: A 20% drop is a crash while length can vary. Several possibilities: 1 day, 5 days, 1 month, 3 months, 1 year.

    Suggesting we have undergone 15 major stock market crashes during the 20th century, Professors Mishkin and White say the most drastic 2-day losses were during 1929 and 1987:

    • On October 28, 1929 the Dow fell 12.8% and then, the next day, took another 11.7% slide.
    • For October 19, 1987, the drop was 22.6%.

    More recently, the Dow plunged from 11,616 to 6,547 between August 14, 2008 and March 9, 2009.

    And that takes us to today. The Dow has tumbled 14% since its April 29 high of 12,810.54 while the S&P has declined 16%.

    Perhaps most crucially, Professors Mishkin and White ask whether crashes are consequential. Their answer? For a correct diagnosis of our economic ailments we need to focus on financial instability rather than stock market volatility.

    An Economic Lesson

    The key difference between 1929 and 1987 was the economy. 1929 marked the beginning of the Great Depression with industrial production plummeting each year from 1930 to 1932 (-8.6%, -6.5%, -13.1%). By contrast, during 1987, the GDP increased 3.2%.

    An Economic Question: How might the impact of a stock market crash ripple through the economy?

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    Abercrombie’s “Terrible, Terrible News”

    Aug 18 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Humor, Households, Thinking Economically • 477 Views

    Sometimes the wrong people wear the right products. It just happened to Abercrombie & Fitch.

    Here is the story:

    According to the NY Times, it all began when an employee conveyed to A & F’s CEO the “terrible, terrible news” that Mike “The Situation” Sorrentino had been wearing bright green A & F sweat pants on the previous night’s MTV Jersey Shore episode. A & F’s response?

    This press release:

    “We are deeply concerned that Mr. Sorrentino’s association with our brand could cause significant damage to our image. We understand that the show is for entertainment purposes, but believe this association is contrary to the aspirational nature of our brand, and may be distressing to many of our fans. We have therefore offered a substantial payment to Michael “The Situation” Sorrentino and the producers of MTV’s The Jersey Shore to have the character wear an alternate brand. We have also extended this offer to other members of the cast, and are urgently waiting a response.”

    So funny. Great PR.

    The Economic Lesson

    Abercrombie & Fitch competes in a monopolistically competitive market. The characteristics of monopolistic competition include many sellers with a similar product, sellers creating an individual, unique identity, and sellers having some control over price. The competitive behavior of beauty salons, supermarkets, and clothing manufacturers is also shaped by a monopolistically competitive market structure. With many sellers having a similar product, Abercrombie can make itself unique through its aspirational identity.

    From most competitive to least competitive, the four basic competitive market structures are: perfect competition, monopolistic competition, oligopoly, monopoly.

    An Economic Question: Thinking of Abercrombie & Fitch and identifying its competitors, large and small, state how each firm tries to make itself unique.

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    Patent Troll Protection

    Aug 17 • Businesses, Demand, Supply, and Markets, Innovation, Labor, Regulation, Thinking Economically • 512 Views

    We spray “OFF!” for insect protection, divers use shark repellent, and now, Google has purchased Motorola to resist patent trolls.

    Described in an NPR This American Life podcast, patent trolls purchase multiple patents with the intent of suing any firm that ventures close to its tech rights. Because the way to fight patent trolls is to amass your own trove, the NY Times explains that Google sought Motorola for its (more than) 17,000 patents. Discussing the acquisition, a Wired blogger, uses the wonderful title: “Google + Motorola=Android Patent Troll Repellent.”

    In this previous post, you can see Apple’s approach to patents.

    The Economic Lesson

    According to retired Harvard scholar David Landes, individual ambition, entrepreneurship, intelligence, luck, and an ongoing stream of new tools and technology fuel economic growth through technological progress.  Our patent system usually nurtures the development of new technology. It is dysfunctional, though, when used for patent trolling.

    I recommend Dr. Landes’s book, The Wealth and Poverty of Nations: Why Are Some Nations Rich and Others So Poor?

    An Economic Question: Citing the 4 GDP components that follow, explain how new technology fuels economic growth.

    1. business investment
    2. consumer spending
    3. government spending
    4. net exports

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