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    Netflix and Buggy Whips

    Aug 14 • Businesses, Economic Thinkers, Innovation, Tech • 306 Views

    After reading this NY Times article about Netflix, you might begin to think about buggy whips. I know it sounds distant but here is the connection.

    Entrepreneurs make an existing product or process obsolete. Netflix and Blockbuster. Amazon and Barnes & Noble. The Model-T Ford and buggy whips.

    Aware that someone else’s innovation could lead to their own demise, Netflix is creating its own DVD obsolescence by encouraging us to stream movies from them. Also though, through innovation, they have guaranteed their survival.

    Any other examples of this type of “creative destruction”?

    The Economic Lesson

    According to Joseph Schumpeter, economists should focus more on entrepreneurs and less on demand and supply.To Schumpeter, the entrepreneur, as an innovator, is the source of progress, change, and creative destruction. But also, by upsetting the status quo, entrepreneurs create conflict between the new and the old.

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    More About Lines

    Aug 13 • Businesses, Thinking Economically • 298 Views

    Next time you are in Starbucks, check how long you stood in line. They care. To save 14 seconds, for example, Starbucks designed a larger ice scoop which baristas could use for one dip instead of 2. Still though, in a “mystery shopper” survey of “limited service restaurant brands,” Starbucks was #6 in wait time, behind Dunkin’ Donuts (4 minutes 3 seconds) during 2008. Also concerned about line time, the NYC Columbus Circle Whole Foods uses a line manager, a single line system, and an unusually high number of check-out registers.

    The science of line movement is called queue management. One researcher says that we respond favorably to a wait time of up to 3 minutes. Then, though it starts to feel longer than the actual time. Also, our response can depend on what we are waiting for. People might not want to wait at a gas station but will accept long lines for new iPhones and concert tickets.

    The Economic Lesson

    Firms that compete in a market with many consumers and many firms are 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. With Starbucks and Dunkin Donuts in a monopolistically competitive market, they can use their coffee, their product assortment, their image, and their wait time to compete.

     

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    Waiting In Line

    Aug 12 • Businesses, Developing Economies, Households, Thinking Economically • 239 Views

    During August evenings in Nantucket, the lines are long at the Juice Bar. Outside each of two doors is a line stretching along the sidewalk. Once you enter the doors into the shop, you can select among (sort of) 6 lines to get to the counter and order your ice cream.

    Analyzing the experience, journalist Anand Giridharas says that forming orderly lines had been equated with “middle class behavior”. In India, traditional lines looked like trees with branches as mini lines sprouted next to the trunk and others cut in. Then, though, with the emergence of a middle class, the acceptance of branches and those who cut in was replaced with orderly single file lines. Similarly, when McDonald’s arrived in Hong Kong, they “introduced queue monitors” to replace the traditional chaos around registers.

    Perhaps we can view lines as reflections of democracy and the market. Democracy dictates that we are all equal with the same opportunity cost for our time. The market, instead, implies that those who can pay deserve to go first. I guess whenever we fly, we are choosing between a democratic experience (coach) and the market (first class).  

    The Economic Lesson

    A line represents a transaction cost. Defined economically, cost means sacrifice. Standing in line, we are sacrificing what we otherwise might have been doing. During the business day, the transaction cost of a line can be high. During a summer vacation, the cost of standing in line at Nantucket’s Juice Bar is minimal.

    With lines reflecting the dysfunction of the former Soviet Union, the huge transaction costs helped to speed its demise.

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    How Are We Spending Our Money?

    Aug 11 • Businesses, Demand, Supply, and Markets, Economic Thinkers, Households, Macroeconomic Measurement • 235 Views

    Has the recession changed how we spend? Here are the numbers that give some answers according to a summary from Michael Mandel, former BusinessWeek chief economist.:

    Since the 4th quarter of 2007, we have spent more on: 1) telephone equipment/up by 16.6% 2) pets/up by 14.4% 3) education/up by 13.4% 4) childcare/up by 12.8% 4) healthcare (including drugs/up by 10.8% 5) housing (owner-occupoed and rental/up by 6.4% 6) food and drink for off-premises consumption/up by 5.3% (Please note that the percent change can indicate very different dollar amounts. For #1 16.6% refers to $1.5 billion while for #5, 6.4% represents $95.4 billion.)

    During the same 2 1/2 (or so) years we have spent less on: 1) Moving, storage and freight services/down by 19.6% 2) Motor vehicles and parts/down by 16.0% 3) gasoline and other energy sources/down by 15.3% 4) sports and recreational vehicles/down by 12.8% 5) video and audio equipment/down by 8.4%

    What does all of this mean? It appears actually that we are not spending very much more because the healthcare increase, by far the largest in billions of dollars, is from government. Also the housing total is what owners would have spent n rental if they had rented–an “imputed” number. So, accelerating this sluggish U.S. recovery will ultimately mean more private sector spending from you and me or from businesses. This returns us to the importance of stimulating innovation and entrepreneurs.

    The Economic Lesson

    Called National Income Accounting, a system for knowing the value of what we produce, how much we pay ourselves, and what we spend was developed by Simon Kuznets during the 1930s. Knowing the value of production, incomes, and spending enabled economists to recommend government economic policy more knowledgeably. 

     

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    Start-up stories

    Aug 10 • Businesses, Economic History, Innovation, Labor • 253 Views

    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.

    The Economic Lesson

    For most of these garage stories the key actually was funding. In some way, they needed to secure the money to proceed. And that takes us to today.

    With current unemployment high and growth sluggish, economists who disagree with a new Keynesian demand side stimulus are increasingly focusing on the entrepreneurs that have energized our economy. Nobel Prize winner Edmund Phelps suggests a First National Bank of Innovation that lends to entrepreneurs. Journalist Thomas Friedman quotes innovation experts when he recommends tax breaks for start-ups and a cabinet position that focussed on encouraging innovation. In a second column he says we need “More (Steve) Job, Jobs, Jobs, Jobs”.

    These ideas remind me of Alexander Hamilton’s development program. Through a “Report on Manufactures” and a First Bank of the United States, in 1791, he too suggested a plan that would fund business development in order to stimulate and diversify U.S. economic growth.

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