• The History of the Elevator is About Innovation and Economic Growth

    Profit Matters

    Dec 15 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Innovation, Labor, Macroeconomic Measurement, Thinking Economically • 606 Views

    During the dot.com bubble, investors gave Boo.com $188 million, Geocities was purchased for 3.57 billion, and pets.com introduced us to sock puppet. None exist today.

    Startup.com is an excellent documentary about the rise and demise of a similar dot.com. 

    GovWorks.com was supposed to let you pay your parking tickets online. Convincing some investors that it was a good idea, the firm raised and lost close to $60 million. 

    The story of govWorks.com illustrates perfectly the “air” that inflated the dot.com bubble.

    The Economic Lesson

    In this econtalk podcast, as Duke’s Mike Munger and George Mason’s Russell Roberts discuss profits, they also look at the role of entrepreneurs. Munger explains that being a successful entrepreneur is all about earning profits because you are able to allocate resources more effectively. As a result, an entrepreneur’s profits are ethical.

    GovWorks.com never figured out how to implement their concept successfully.

    An economic question: When are profits ethical? Unethical? 

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    A Cashless Payoff

    Dec 14 • Demand, Supply, and Markets, Economic Debates, Financial Markets, Households, Innovation, Money and Monetary Policy, Thinking Economically • 790 Views

    Paying with a phone swipe makes Starbucks lines move faster. Less time in line means more productivity and society benefits.

    So, should we accelerate our movement toward a cashless society?

    Imagine having no currency. No wallets necessary? A useless U.S. Mint? No seignorage to be earned by the Federal Reserve when it provides financial institutions with currency? 

    Hoping to curtail tax fraud, Italy has banned cash transactions above 5000 euros and now is dropping the number to 1000.

    Using a cost benefit approach, this academic study concluded that  society will benefit from cashlessness. One Slate columnist even hypothesizes that a cashless society can avoid recessions (but I am not so sure about that).

    I wonder, though, if there are no dollar bills in several generations, what will come to mind when we picture a dollar.

    The Economic Lesson

    To be called money, a commodity needs 3 characteristics:

    1. It should be a medium of exchange. (People willingly use the commodity for exchange.)
    2. It should be a store of value. (In the future, it still will have relatively comparable purchasing power.)
    3. It should be a measure of value. (When someone says one dollar, you know what that means.) 

    Today, in the U.S., the basic money supply includes cash, currency, travelers checks and demand deposits (checks). Thinking of ATM payments and the phone swiper at Starbucks, the traditional examples of the money supply are not quite working anymore.

    An Economic Question: How might using cash affect a transaction?

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    Alexander Hamilton, George Washington and the Euro Zone

    Dec 13 • Economic Debates, Economic History, Economic Thinkers, Financial Markets, Government, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 711 Views

    How to decide euro zone policy today? Just look at the U.S. between 1780 and 1840.

    Saturday, in his Nobel Prize lecture, economist Thomas J. Sargent compared the past U.S. to the current euro zone. He based his talk on 4 questions:

    1. Should governments default on their debt?
    2. Should a central government bail out a subordinate state?
    3. Should monetary union precede fiscal union?
    4. Should fiscal union precede monetary union?

    First setting the scene, Dr. Sargent reminded us that after winning the War of Independence, U.S. debt was massive, the Congress was weak, and we had 13 different trade and fiscal policies. What to do? Write a new Constitution. The results? A bailout of state war debt, fiscal union, and national trade policy.

    But, during the 1840s when states needed another bailout for excessive borrowing, the federal government refused. The results? Lenders avoided federal and state debt but states added balanced budget provisions to their constitutions.

    A 1790s bailout and an 1840s refusal took Dr. Sargent back to his initial questions:

    1. Default: The cost of a default is reputation and elevated lending expense. But it also means higher current consumption because taxes can be lower.
    2. Bailout: The cost of a bailout is moral hazard and perhaps, excessive federal control but creditors benefit and are likely to lend again.
    3. Monetary Union: Should monetary union come before fiscal union? Saying, “No,” Dr. Sargent concluded his talk.

    The Economic Lesson

    U.S. fiscal authority–the power to spend, tax, and borrow–was established when the U.S. Constitution was ratified. By contrast, the U.S. had no central monetary policy and therefore no control over the nation’s supply of money and credit until after the Civil War.  (More from econlife here on Alexander Hamilton’s economic policy.)

    Using the U.S. as his prototype, Dr. Sargent conveyed the importance of a central fiscal authority and implied that euro zone success will depend on it.

    His 33 minute talk was excellent. You might want to look separately at his slides.

    An Economic Question: How do monetary and fiscal policy interrelate?

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    Irrational and Rational Expectations

    Dec 12 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Thinkers • 699 Views

    Sometimes, expectations can determine outcomes.

    In articles on the placebo effect, Wired and the New Yorker tell us that people tend to believe that green pills are best at diminishing anxiety, brand names are better, and medication taken 4 times daily will generate more relief than a twice a day dose.

    And then, because of the color, the name, or the dose, what we expect happens because we expect it.

    In How We Decide, Jonah Lehrer describes what happens when we presume that a pricier product is better. For one experiment, researchers asked tasters to compare glasses of wine with price labels. Sipping while inside an MRI machine, taste-wise and neurologically, participants reacted more positively to the “expensive” wines–even though the glasses with $5 and $45 were from the same bottle.

    The Economic Lesson

    In economics, the study of the impact of people’s expectations on outcomes is called rational expectations theory. If a retailer says a sale will start next week, customers buy less now and create the retailer’s need for a sale. Anticipating inflation, workers seek higher wages and thereby create inflation.

    Rational expectations theorists suggest that policy makers recognize that forecasts can become self-fulfilling prophecies.

    An Economic Question: In your life, how has an expectation affected an outcome?

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    Holiday Dilemmas

    Dec 11 • Behavioral Economics, Demand, Supply, and Markets, Households, Thinking Economically • 601 Views

    Can doing good be bad?

    1. At food banks, the holiday season brings an avalanche of food from donors when the charity could purchase the food more cheaply and use volunteer time more wisely. As a result, charitable food donations misallocate resources.
    2. According to research from economist Joel Waldfogel, we tend to undervalue the price of a gift we dislike while giving much greater value to what we buy for ourselves. As a result, gift giving destroys value.

    However, this Economist article suggests remembering that 1) a gift we dislike may be good for us, 2) a gift can be an extravagance we otherwise would not purchase, and, perhaps most importantly, 3) the process of giving adds intangible value to the gift.

    The Economic Lesson

    Wasted giving could be called “deadweight loss.” Described by Freakonomics, it represents the difference between the cost of an item and how much the recipient values it. So, if you are a Yankee fan and someone gives you a Boston Red Sox hat, the deadweight loss would be 100% of the price. The amount by which pleasure falls is the deadweight loss.

    But, is the deadweight loss of gift giving to friends and charities offset by its intangible benefits?

    An Economic Question: How might you estimate the deadweight loss of gifts you have received?

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