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    Emerging Economies

    Aug 30 • Demand, Supply, and Markets, Developing Economies, Economic History, International Trade and Finance, Macroeconomic Measurement, Thinking Economically • 625 Views

    The world is shifting.

    More than one-half of the world’s car sales, mobile phone subscriptions and oil, copper and steel purchases came from emerging markets during 2010. Here you can see the same story through these export and import, global GDP, and foreign investment charts. Or, you can look at this Forbes slide show to see that half of the world’s self-made female billionaires are Chinese.

    How to remember the emerging economies? Just think BRICs, MIST, and CIVETS. For the developed world, this list includes countries ranging from Australia and Austria to Spain, Sweden, Switzerland and the United States.

    Memorably, in his 20 minute TED talk about the developing world, Hans Rosling asks us to “Let my dataset change your mindset.” 

    The Economic Lesson

    As emerging economies increase their participation in world trade, we can think of Adam Smith (1723-1790) and David Ricardo (1772-1823). In a factory, Adam Smith says specialize through division of labor. When each worker has a specific task, output multiplies. Increasing output requires bigger markets in order to sell what has been produced.  As mass production enables us to move from local markets to regional specialization to free world trade, as David Ricardo explained, the entire world benefits from the efficiencies of comparative advantage.

    An Economic Question: After looking at iPhone component facts here, explain how the global economy has shifted.

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    Aug 29 • Behavioral Economics, Economic Humor, Households, Innovation, Thinking Economically • 527 Views

    Sometimes Tweets travel faster than seismic waves. And then, what happens?

    In this wonderful webcomic from April 2010, an earthquake strikes, people Tweet, and within seconds, the news beats the temblor’s spread. Do people run for safety? No. They send new Tweets!

    For the August 23, 2011 East Coast quake, 2 Harvard bloggers proved that truth does copy a cartoon. Calling it a tweetquake, they demonstrated that the 40,000+ Tweets that were sent within 1 minute of the quake radiated outward faster than the quake itself. You can see the Tweet spread here.

    And here is how people were Tweeting about Hurricane Irene.

    The Economic Lesson

    Described in “Thinking Like an Economist,” (Lecture 6) from the Teaching Company, the economics of ignorance involves deciding how much information is optimal. Only when the benefit of an extra piece of information outweighs the cost of being ignorant should we be willing to add to our store of knowledge. While initially new data can be valuable, eventually, diminishing marginal utility starts to kick in and that extra piece of information is no longer worth our time or thought.

    Even for a Tweet, then, we are always thinking at the margin, choosing a little more or less.

    An Economic Question: When researching a topic, when does diminishing marginal utility set in?

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    Manufacturing Jobs

    Aug 28 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Government, Labor, Macroeconomic Measurement, Thinking Economically • 469 Views

    Our story begins with M.I.T.’s lithium-ion battery research and then takes us to South Korea and China where the batteries are made. Next, in a surprising move, some of the manufacturing returns to the U.S. With $375 million in federal stimulus money and matching state grants, a battery maker, A123, decides to reproduce its Korean facility in Michigan.

    And therein lies the dilemma…

    Is government the solution or the problem?

    Is Government the Solution?

    Predicting a 5% electric car market by 2016 and orders for $14 billion of lithium-ion batteries, many people say domestic manufacture is a natural. It represents a “double pay-off.” You get jobs (about 350 per factory) and green. Government’s $2.5 billion support for advanced battery technology will lead to an industrial commons. Only then can manufacturing springboard further research, new industries, and a battery ecosystem in which scientists, mining companies, contractors, designers, engineers, and machine operators interact.

    Is Government is the Problem?

    Some say we need $7 a gallon gas to make people switch to a plug-in electric hybrid car. Until then, it will be a niche market that exists because of government incentives throughout the supply chain. As we describe in a past post, A123 suppplies Fisker Automotive, a hybrid car-maker that received loans from the Department of Energy. Stimulus dollars and state grants created the incentive to move a lithium-ion battery maker from Korea to Michigan. At the dealership, a Chevy Volt buyer can receive a government subsidy that reduces the price of a car from $41,000 to $33,500. With so much government funding, one industry participant predicts, “a lot of plants, and we will create overcapacity, and a lot of the companies will fail.”

    Your decision?

    The Economic Lesson

    As George Washington’s Secretary of the Treasury, Alexander Hamilton wrote an economic development plan through which he sought a diversified economy with agriculture and manufacturing. For Hamilton, government was central to encouraging industrial development as the U.S. market economy grew. Today again, we are asking whether we need government to encourage manufacturing.

    Here, in a past post, is another example of U.S. innovation becoming Asian manufacturing.

    An Economic Question: Using lithium-ion battery manufacture as your factual example, do you believe government provides the solution for our economic future or creates a problem?

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    Steve Jobs and Joseph Schumpeter

    Aug 27 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Economic Thinkers, Households, Innovation, Thinking Economically • 914 Views

    Henry Ford once said that consumers would have requested “a better horse” if he had asked them what to produce. Similarly, Steve Jobs told a reporter, “It’s not the consumers’ job to know what they want.”

    The result?

    For Henry Ford it was the Model T, the moving assembly line, and a plethora of products and processes that upset the status quo.

    For Steve Jobs, the computer industry, the music industry, mobile phones, all were revolutionized by Apple. Steve Jobs’ name is on 313 patents ranging from the iPod to Apple’s glass staircase. As Andy Kessler says in WSJ, he did it “by figuring out what he wanted and controlling the process until he got it.” He knew how to “give customers what they want before they knew they wanted it.”

    According to a 2008 Wired article, Steve Jobs’ leadership style has been characterized by autocracy and charisma. He is hard to please, inspirational and usually right. Talking about the iPod, during 2004, he said, “We want it to make toast. We’re toying with refrigeration too.” Actually, and secretly, Apple was developing video.

    The Steve Jobs story is about a lot more than Apple. It is about an American entrepreneur. Very different from other visionaries, he is also similar. They destroyed the past as they moved us onward. They took advantage of an economic system that rewarded their talents.

    Here is a past post about Apple’s patents.

    The Economic Lesson

    In Capitalism, Socialism, and Democracy (1942), Joseph Schumpeter (1883-1950) described what propelled capitalism and what would destroy it. Explaining the march of new ideas as creative destruction, Schumpeter said that entrepreneurs fueled capitalism’s ability to grow.

    (In this Teaching Company/History of Economic Thought course from Dr. Timothy Taylor, Lecture 8 on Schumpeter is excellent.)

    An Economic Question: Thinking specifically of Apple and iTunes, how was the music industry transformed?

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    When Are Potato Chips Good For Us?

    Aug 26 • Businesses, Demand, Supply, and Markets, Households, Innovation, Labor, Macroeconomic Measurement, Thinking Economically • 443 Views

    Potato chip manufacture is a technological marvel.

    During one year, in one typical factory, the chips in 80 million bags of Lay’s Potato Chips started as potatoes that were picked and plunked into railroad cars, funneled out for washing and processing at the factory, peeled, sliced, baked and sprinkled with salt as they moved at 15 to 65 mph along an assembly line. After the burnt and malformed chips were identified by a quality control camera and eliminated by a puff of air, the others were bagged, boxed and sent to us.

    According to this wonderful Econtalk podcast, potato chip makers care very much about productivity. They innovate to expedite the assembly line, they trouble shoot for bottlenecks, they care about consistency and quality control. The results are a perfect example of huge economies of scale.

    Lay’s potato chips are good for us because they are good for the GDP

    Here, you can see some of the manufacturing process and here you can read about the division of labor.

    Finally, here, in this very funny I Love Lucy video clip, you can see another kind of assembly line.

    The Economic Lesson

    The private rate of return–the net amount a business gets from an investment–tends to vary considerably and can ultimately be nonexistent because of competition. Moving beyond its origin, as the impact of the innovation ripples through society positively and negatively, it creates a social return. Both are tough to calculate. Edwin Mansfield, a University of Pennsylvania economist (1930-1967) who studied the impact of innovation concluded that smaller innovations such as new industrial thread had a much greater social rate of return than products and processes that sound more dramatic.

    Potato chip technology might have more of an impact than we suspect.

    An Economic Question: Made of potatoes, salt and oil, a potato chip has a supply chain that enables it to reach us at the supermarket. What might that supply chain include?

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