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    Creative Destruction

    Apr 24 • Businesses, Economic Thinkers • 291 Views

    Reading Ken Auletta’s recent New Yorker article on the iPad and the Kindle, I first thought of “the razor or the blade.” While Amazon loses money on books in order to sell Kindles, razors were precisely the opposite. Get a cheap razor, buy blades for a lifetime, and Gillette has an unending stream of revenue. Doing the opposite, Amazon has dominated e-book sales. 

    Amazon also broke other rules:

    Price taker or price maker? Six publishers control 60% of the business. These classic oligopoly stats mean that they should have control over price and yet Amazon was able to charge $9.99.

    A New Pie? According to Auletta, for a $26 hardcover book, the publisher gets 50% of each sale, pays the author 15% of its revenue, covers publishing expenses, and also accepts returned unsold copies. Now, with e-books selling for $9.99, the revenue pie has changed. 

    Which market? Instead of competing against other publishers, maybe now all media based activities have a toe in the same market with everyone vying for a piece of the consumer’s time.

    Perhaps the one rule that has not been broken relates to innovation. As entrepreneurs implement new ideas, existing firms will be forced to change or disappear.

    The Economic Life

    Joseph Schumpeter best explained the march of new ideas as creative destruction.  

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    The Ties That Bind Us

    Apr 23 • Economic Thinkers, International Trade and Finance • 158 Views

    Although Nairobi and London are 4228 miles apart, they actually are closely connected. The NY Times described the tie that was cut by volcanic ash.

    Kenyans supply gourmet vegetables and cut flowers to European supermarkets. When planes were grounded, so too were sugar snap peas, onions, and corn. Roses began to wilt and corn started to spoil. Daily shipments of two million pounds of produce were affected as were unneeded Kenyan packers and washers.

    Other trade connections we might not know? Please comment.

    The Economic Life

    Perhaps here we have a connection between Adam Smith, David Ricardo, the U.K. and Kenya. In his Wealth of Nations, Adam Smith explains the virtues of mass production and the need for “distant sale” which can only be achieved through a transport infrastructure and many buyers. Kenya developed so large a horticultural export sector because cargo planes could connect it with large affluent markets. And here is where Ricardo enters the picture. Markets that interconnect nations facilitate even more efficiencies through economies of scale and comparative advantage. 

     

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    Another Unregulated Market

    Apr 22 • Environment, Regulation, Thinking Economically • 220 Views

    Carbon offset markets are about thinking at the margin. Hoping to become the first carbon neutral state in the world, the Vatican bought carbon offsets. The U.S. House of Representatives funded an $89,000 purchase of carbon offsets. Before boarding, you can buy a carbon offset to compensate for emissions during a plane flight. In each example, someone was paying to create an “extra” environmental benefit (a forest that “inhales carbon dioxide”) in order to compensate for the marginal cost of environmental harm (airplane emissions). 

    Yes?

    Maybe.

    The market in which carbon offsets are sold is unregulated. Consequently, government is not directly checking whether sellers are actually creating the offsets that are purchased nor whether cost and benefit are connected. For example, in a recent Christian Science Monitor article, investigative reporter Phillip Martin found major deficiencies in the carbon offset market. Essentially he discovered that certain offsets never were created. 

    The Economic Life

    A market is a process through which demand and supply determine price and quantity of a good or a service. A recent paper from the Pew Center on Global Climate Change suggests that oversight of carbon markets should accompany current financial reform.

     

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    A (Mind Boggling) Entitlement

    Apr 21 • Government • 200 Views

    I guess we can all agree that citizens have basic rights. But vacations? “Traveling for tourism today is a right. The way we spend our holidays is a formidable indicator of our quality of life,” according to Antonio Tajani, the European Union commissioner for enterprise and industry. 

    During a recent meeting in Brussels, the EU proclaimed that government should subsidize tourism and travel for those who cannot afford it. Available “to pensioners and anyone over 65, young people between 18 and 25, families facing ‘difficult social, financial or personal’ circumstances and disabled people,” the program will be piloted until 2013.

    You might want to look at this WSJ.com article for a reality check about the tough fiscal choices facing EU members.

    Your opinion? Please comment.

    The Economic Life

    An entitlement is a government program that citizens believe government should provide.  In the U.S. Medicare and Social Security are our largest entitlement programs. If we return to our government involvement scale, with more government to the left and less to the right, where do you believe the U.S. should be? With a travel subsidy mandate, where have the EU nations moved? 

     

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    (Fictitious) Billionaire Facts

    Apr 20 • Macroeconomic Measurement • 230 Views

    Did you ever wonder how rich Jed Clampett (the Beverly Billbillies) would be? According to Forbes Fictional 15, because of oil, gas, and banking investments, Clampett, worth $7.2 billion, is #5 on the list.

    C. Montgomery Burns, hometown Springfield, U.S.A., and graduate of Yale, is #12 because of the money he made as owner of the Springfield Power Plant and Jay Gatsby is #14 with $1 billion. #1 was Carlisle Cullen from Twilight’s Billionaire Vampire.

    The Economic Life

    A very real issue that concerns economists is income distribution.  In the U.S., our national income comes from wages and salaries, rent, interest, dividends and profits from businesses that are not incorporated. To picture our income distribution, please think of a pie as the total national income and then individual slices as the proportion that different groups receive. That would mean that if total national income were $1,000 and a society had only five households (people living together), then if every household earned $200, distribution was equal. By contrast, if one family earned $800, then, because $200 remained for everyone else, there would be considerable inequality. Recently, the top quintile of households in the U.S. earned close to 50% of all income. This quintile approach for representing income distribution was developed by statistician Max Lorenz. 

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