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    Kidney Markets?

    Sep 8 • Demand, Supply, and Markets, Regulation, Thinking Economically • 927 Views

    What should we be able to buy and sell? Alcohol? Land? People? Body Parts?

    In a Teaching Company lecture on organ transplants, Wake Forest economist Robert Whaples says that the answers depend on the market’s boundaries. And, he soon adds, those boundaries change. Prohibition, for example, transformed the price, demand, and supply of alcohol between 1918 and 1933.

    Dr. Whaples asks whether a similar change should happen for organ transplants. Describing current shortages, he says that the demand side of the market, with insurance covering the expense, is considerable. By contrast, on the supply side, with altruism the key incentive since selling body parts is illegal, the hearts, lungs, kidneys, intestines that certain people need, are insufficiently available.

    That returns us to the market. Whether looking at human transplants or the viability of the housing market, we seem to keep on returning to how much we want to permit unfettered supply and demand.

    Should we be able to buy and sell kidneys if it will diminish massive shortages?

    The Economic Lesson

    When demand and supply interact, they allocate resources. If they are interacting successfully, then resources are allocated efficiently. Sometimes, though, markets fail. For example, when a factory pollutes, we can say we have market failure because the cost of pollution has been ignored by the price. We also have market failure when government partially affects the market’s boundaries through subsidized housing or a minimum wage. Finally, as with organ transplants, those boundaries can completely eliminate the market.



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    Vacation Daze

    Sep 7 • Behavioral Economics, Businesses, Economic History, Economic Thinkers, Innovation, Labor • 731 Views

    In a column about Netflix, author Daniel Pink described their vacation policy for salaried employees. They have none. All who are salaried can take off as many or as few days as they want. Their rationale? Because many people do a lot of work away from the workplace, time at the workplace is increasingly irrelevent.

    Netflix vacation policy is what Pink means what he says autonomy at work motivates us.  In an econtalk discussion, he said that once we are sufficiently paid, autonomy (directing our own lives), mastery (desire to get better and better at a task), and purpose (“yearning to do what we do in a service larger than ourselves”) propel our performance. Discussing the same ideas in a TED talk, he quotes a Federal Reserve paper that suggests high compensation can even detract from job performance.

    Should we care about Pink’s ideas? Do big changes have to happen at work? Can they?

    The Economic Lesson

    During the past several centuries, management styles have changed. We could start with Adam Smith’s description of small businesses and the division of labor in a market system and conclude with Alfred Chandler and Peter Drucker’s discussions of the structure and strategy of management and the worker in the modern corporation. 

    But then, as suggested by journalist Alan Murray in an excellent WSJ article about the demise of old management models, the 21st century might require that we begin all over again.


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    Bendy Buses and Health Care

    Sep 6 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Thinkers, Government, Regulation, Thinking Economically • 453 Views

    Have you heard of a bendy bus? The bendy bus was supposed to solve Santiago, Chile’s public transit problems. But the story relates to each of us.

    It all began during 2007 when Santiago decided to replace its private bus system with public transit. Previously, with 3,000 different bus companies, the competition had been fierce and problematic. 1) Seeing a crowded bus stop, drivers would rev up their engines and race each other to get there first. Because of the accidents, injuries and conjestion, we could say competition was destructive. 2) Pollution was uncontrolled because buses were not licensed. 3) Although bus fares were quite low, the profitability ($60 million US dollars) made certain people question the ethics of making money by satisfying a basic municipal need.

    To solve the three problems, the city took over the system. Here is where bendy buses enter the picture. Big and attractive, they safely navigated city streets.

    Each of the problems was solved (but not really). 1) Drivers were told that on time service was crucial. Result? Buses were on time but empty as drivers skipped busy stops that might have delayed them. 2) Pollution was no longer a problem with the new buses. 3) Profits were no longer a concern because the system was losing lots of money ($600 million US dollars).

    The Economic Lesson

    In many ways, Santiago’s bus issues are our health issues.

    1) Incentive: Which incentives will optimize service?

    2) Pubic or private: How can we best provide the services we require?

    3) Affordability: How can the cost of necessities be minimized?

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    A Bow Tie Patent

    Sep 5 • Businesses, Innovation, Regulation • 503 Views

    Having said that jackets and dresses cannot be patented or copyrighted, I was fascinated to learn that a bow tie once had one.

    During the 1950s, the clothing retailer Brooks Brothers had patented their bow tie technology. A recent WSJ article referred to the patent because an attorney who saw a Brooks Brothers bow tie with an expired patent number is suing them. It is illegal to display an out-of-date patent on an item.

    You might want to look at patents which attorneys say have expired on Etch-a-sketch, turkey pop-up timers, the original Wooly Willy, and some covers from Solo Cup Co. on Starbucks coffee cups. According to the article, business firms that have forgotten to check when their patent protection has ended and still note it on the product, are breaking the law.

    The Economic Lesson

    This returns us to the general issue of intellectual property rights. A copyright refers to the expression of ideas and lasts for 70 years beyond its creator’s life. By contrast, a patent applies to an invention and can be enforced for 20 years.

    In this interesting econtalk interview, believing they should be longer, author Mark Helprin challenges the duration of literary copyrights.



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  • A Price Ceiling Has Unintended Consequences

    The Minimum Wage Debate

    Sep 4 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Labor, Macroeconomic Measurement • 614 Views

    Should we like a higher minimum wage? With the release of 9.6% as the August, 2010 unemployment number, I thought about the minimum wage debate. The teenage unemployment rate is 26.3%.

    In 2007, Congress increased a $5.15 minimum wage in three stages. On July 24, 2009, the final 11% raise, from $6.55 to $7.25 was implemented in the 31 states with a lower minimum wage.

    If you owned a fast food restaurant and were told that you had to pay workers a higher minimum wage of $7.25 an hour, what would you do? Give everyone raises and pay the increased hourly rate to new hires?  Only give raises to current employees but decide not to do the hiring it had planned? Terminate certain positions? Other alternatives? You might want to look at a good discussion here.

    The Economic Lesson

    Originating in Australia and New Zealand during the 1890s, minimum wage legislation was first passed federally (it had existed in individual states) in the U.S. through the 1938 Fair Labor Standards Act. Believing that employers were paying “substandard wages” and perpetuating sweatshops, Congress sought to ensure a “fair wage”. Their rationale was the need to tilt the balance of power toward workers.

    Graphically, economists illustrate the minimum wage through a “floor”. Please imagine for a moment a supply and demand graph. Price is the y-axis and quantity is the x-axis. Thinking of wages, the supply curve represents labor and the demand curve is the business side of the market. The point at which demand and supply meet, called equilibrium, is the wage (the price of labor) determined by the market.

    Government, however, can say that it believes the market determined wage is too low. It then mandates a higher wage that can be depicted as a horizontal line placed above equilibrium. Economists call this horizontal line a “floor” because it stops wages from moving lower to their natural market price. 

    And therein lies the dilemma. A higher wage or more jobs? Floors create surpluses. At the new, higher wage, the number of jobs laborers want is more than the number of jobs businesses are willing and able to offer. So, we have a higher wage but fewer jobs. Perhaps 26.3% fewer jobs for teenagers and other unskilled workers?

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