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    Everest Economics

    Jan 30 • Demand, Supply, and Markets, Developing Economies, Environment, Thinking Economically • 655 Views

    Having no inclination to climb Mount Everest, I have always been fascinated by its economic connection. Now, hearing that Prince Harry was considering the ascent as a part of his “Walking for the Wounded,” it reminded me that Everest is all about cost, benefit and decisions at the margin.

    The money: Sherpas are your biggest expense. Costing as much as $100,000, they guide, carry and cook. With $500 a typical tip, one Time journalist added 2 yaks. In addition, gear could run close to $10,000 ($1,000 for a down suit and $300 for gloves are just the beginning). Add the permits ($10,000 minimum and more, depending on how many people), cell phone expense, airfare to Nepal ($1500 coach).

    The Time: A daily workout regime is long and demanding. From squats to stairs to extreme procedures, getting in shape for Everest will cost many hours. For the climb itself, the acclimation process is gradual. Instead of a steady upward trek to the peak at 29,029 feet, climbers go up and down and up through a series of base camps that gradually accustom their lungs to the sparser air. I have read that it takes 6 weeks for the acclimation process and then 5 days to the summit.

    Our bottom line? Defined as sacrifice, cost refers to more than money.

    Into Thin Air by Jon Krakauer is a fascinating account of a disastrous expedition.

    The Economic Lesson

    Whenever climbers make health and weather decisions, they are weighing cost and benefit at the margin. Beset by lightheadedness, raging headaches, nausea, frostbite, and other maladies, they have to decide whether to proceed with the next stage. With questionable weather, to abort or not becomes the key issue.

    Each decision either expands or contracts climbers’ margin of safety. Too large a margin and they don’t reach the peak. Too small and the danger is life-threatening.

    An Economic Question: Defining cost as sacrifice, describe the “expense” of a recent decision.

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    Encouraging Innovation

    Jan 29 • Behavioral Economics, Businesses, Innovation, Labor • 911 Views

    “Steve had this firm belief that the right kind of building can do great things for a culture.” The Steve is Steve Jobs and the building is Pixar’s headquarters. (The quote came from Walter Isaacson’s Steve Jobs)

    The usual Hollywood studio with a network of buildings used for different tasks? Jobs said no. Instead the philosophy shaping Pixar’s architecture would be “random encounters.” Offices, the cafe, mailboxes, all took people to the central atrium. Even going the rest room, design would ensure that people bumped into each other for spontaneous collaboration.

    Discussing how we generate new ideas, in the New Yorker, science writer Jonah Lehrer refers to the Jobs approach. Whereas the conventional wisdom said brainstorming in supportive groups worked best, scientific research concluded otherwise. A kind, affirming brainstorming meeting produced less than one that had some tension, some opposition. And, the Jobs concept worked optimally.

    Our bottom line? For business and for government, it is tough to orchestrate innovation. Instead, by creating the appropriate incentives, we can depend on “the power of surprise.”

    The Economic Lesson

    During 1939, in a garage, Bill Hewlett and Dave Packard started a new firm. Also in a garage, several decades later Steve Wozniak and Steve Jobs started Apple. Yes, Walt Disney worked in his uncle’s garage and Mattel, the toy company that makes Barbie dolls began in a garage. Google did not begin in a garage but they did use one.

    Explaining “creative destruction,” economist Joseph Schumpeter said that economic growth depends on the pain of old industries dying and new ones taking their place. Maybe, because they are undefined and unconstrained, garages are ideal for the innovation that leads to new industries.

    An Economic Question: In which types of classes and classrooms do students seem to be most innovative?

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    A Fair Shot?

    Jan 28 • Economic Debates, Gender Issues, Government, Households, Innovation, Labor, Macroeconomic Measurement • 506 Views

    In its breakdown of this week’s State of the Union, the Washington Post looked at time, topics and the Congress.

    Time: The President devoted almost half of his speech to the economy, and more than half if you include the deficit.

    The Congress: Republicans and Democrats together gave the President a standing ovation for saying that, “…women should earn equal pay for equal work.” For the other 9 standing ovations, Democrats stood and clapped alone during 8.

    Topics: Discussing the economy, the President referred to jobs the most (27 times), energy next (20 times).

    The breakdown does not mention, though, that “fair” appeared 8 times (my count) in the President’s speech:

    • has a fair shot (1)
    • does their fair share (1)
    • affluent Americans and multinationals pay their fair share of taxes (3)
    • foreign subsidies are not fair (1)
    • unfair trading practices from nations like China (1)
    • fair play (1)

    The Economic Lesson

    Nobel laureate Milton Friedman was concerned about”fair.”

    We have free speech, a free press, freedom of religion. The Declaration of Independence, the Constitution and the Bill of Rights refer to “free” but never “fair.” Explaining that our founding fathers perceived government as an umpire and a policeman, Milton Friedman (1912-2006) concludes that they wanted us freely to pursue our individual lives.

    Being “fair” to one group, according to Friedman, means less fairness to others. If government is more equitable to consumers, then it is less fair to businesses. Require a fair and balanced press to all political candidates and you limit the freedom of the press.

    I wonder, though, what is “fair?” Does a fair society have health care for all? If fair is the key criteria, then who should be taxed and how much? Does a fair society mandate maximum earnings?  Fair trade? Fair prices? Affirmative action?

    An Economic Question: What is your opinion of the balance between fair and free in a society with a market economy? You might want to look at Arthur Okun’s Equality and Efficiency: The Big Tradeoff.

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    Let Them Eat McDonald’s

    Jan 27 • Behavioral Economics, Businesses, Demand, Supply, and Markets, International Trade and Finance • 816 Views

    By Elizabeth Chrystal, guest blogger.

    France has long been known as a country of gourmets; it’s famous for its 2-hour lunches, picture-perfect pastries, and dizzying variety of cheeses. But the country that gave us succulent dishes like coq au vin and boeuf bourguignon has a new gastronomic passion, and one that might surprise you: McDonald’s. As a recent NPR story points out, France is McDonald’s second largest market, and the chain is poised to open even more restaurants in the country this year. France is already home to more than 1,200 of the franchises, many clustered around urban centers like Paris and Strasbourg.

    Why is there so much enthusiasm for eating “chez MacDo,” as it’s called in France? The most obvious reason is the food. McDonald’s has been very clever in adapting to French tastes and creating their own versions of traditional French dishes. This means that the menu of a McDonald’s in Paris, France will be strikingly different from one in Paris, Texas. In France, diners can buy such items as “Le Croque McDo,” a riff on the classic French ham-and-cheese sandwich. “Le Charolais,” which is made up of a celebrated kind of French beef, and even a “Mouseee aux Trois Chocolats,” McDonald’s version of a classic French chocolate mousse. During the time I was studying in Paris last fall, they introduced “Le McWrap Chevre” to great fanfare-think larger-than-life billboards and ads in every metro station. This sandwich features small rounds of fried goat cheese, one of France’s most popular cheeses, with vegetables and cheese sauce in a wrap. Last summer, the “McBaguette” was introduced, as reported by the French newspaper, LeFigaro. The item appeared on the chain’s breakfast menu in September, and has been such a success that a baguette sandwich is set to be added to the lunch and dinner menu this summer.

    McDonald’s has also taken steps to adapt to French eating habits. Since French consumers generally spend much more time lingering over meals than their Anglo-Saxon counterparts, McDonald’s has worked hard to make their stores inviting and tastefully decorated. Like the neighborhood cafes that surround them, many McDonald’s restaurants in France feature plush chairs, wood flooring, and subdued lighting. Some outlets even have fireplaces, flat-screen TVs and stone accents. These “luxe” restaurants stand in sharp contrast to the majority of McDonald’s U.S. restaurants, which seek to maximize customer turnover and minimize the amount of time customers are inside.

    McDonald’s has also taken steps to silence French critics who complain that the chain’s food is too unhealthy. Not only has McDonald’s France added new packets of fresh fruit and vegetables to its menu and begun offering whole-wheat buns for its Big Macs, it has also introduced a whole new restaurant concept: the McSalad. Located in the massive French office park, La Defense, on the outskirts of Paris, visitors to this restaurant won’t find any of McDonald’s traditional burgers or fries. Instead, as the name suggests, the McSalad is an all-salad restaurant targeting health-conscious business people and office workers who eat their lunch in the area. This allows them to reach a new consumer demographic without changing the traditional menu.

    The Economic Lesson

    We might expect a well-known chain like McDonald’s to offer nothing more than a “slice of America” abroad, serving up the same fare in India as it does in Indiana. This would significantly simplify production and distribution challenges, not to mention avoiding the difficulty of creating new menu items that please local palates. However, as we’ve just seen, McDonald’s has achieved success not by following the same business strategies that it uses in the U.S., but by significantly adapting to local tastes. In a recent paper about McDonald’s in France, written by graduates of the Wharton School of Business, the authors even raise the question, “Can McDonald’s still be considered an American company? The golden arches remain a worldwide symbol of the U.S., but the food–and even the restaurants themselves–have come a long way.

    An Economic Question: Which other American companies have achieved global success by rebranding themselves overseas?

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    Greek (Debt) Myths

    Jan 26 • Behavioral Economics, Demand, Supply, and Markets, International Trade and Finance, Money and Monetary Policy, Thinking Economically • 733 Views

    Maybe sell some islands and an ancient ruin or two?

    In Boomerang, Blind Side author Michael Lewis repeats what German politicians were suggesting in 2009 when they heard that the Greek debt was much larger than previous estimates. How much bigger? No one was really sure.

    In a wonderful podcast, NPR’s This American Life explains that once Greece joined the European Monetary Union, it enjoyed a new world of credit. With fellow euro zone member Germany perceived as “the rich uncle” to (theoretically) back all loans, Greece’s interest rates plunged. Borrowing more cheaply meant the Greek government could borrow much more. Consumers who never had car loans or home mortgages suddenly found bankers welcoming them with rates that declined from 18% to 4%.

    Lewis explains that Greek statisticians had to eliminate the high-priced tomatoes from their CPI to take their inflation rate within euro zone parameters. NPR’s reporters tell how Germany, hoping to expand the market for their goods, initially supported Greece’s euro zone entry. Getting what they wished for, more Greeks were buying Mercedes.

    Our bottom line? Incentives. Isn’t everyone responding predictably? You might want to read This Times It’s Different for an academic explanation.

    The Economic Lesson

    In his America and the New Global Economy Teaching Company course, Professor Timothy Taylor explains why the Europeans wanted a common market. Assume for a moment that you own a factory and start exporting goods to a nearby country. You have to wait at the border and have your trucks approved by customs. You have to be sure that you comply with their product safety laws. You need to use their currency. 

    Dr. Taylor says that with a common market you could enjoy the benefits of the 4 freedoms: 1) People, 2) Goods and services, 3) Labor, 4) Capital. The benefits of a European common market included one set of regulations instead of 15, labor that could move more freely, and capital that was more accessible.

    An Econmic Question: How does the United States enjoy the common market benefits  listed by Dr. Taylor?

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