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Category Archives: Business

Imagine a simulation in which a large of number of actors, defined by a large range of properties, acquire utility based on a set of complicated rules that are applied to their properties and to other actors’ properties.  For instance, a particular actor might accrue utility if it shares three specific properties with a large number of other actors.  A different actor might accrue utility only if other actors share two of those properties but do not share the third.  Actors are able to modify their own properties based on certain constraints, but there is a utility to cost to these modifications.  Further, actors have limited information about other actors’ properties (for instance maybe they are only aware of actors that share a particular property with them, or they only have out-dated information about most actors) and also about the rules that define the simulation (their utility function is not exactly what they think it is).

You could plot a very simple version of this simulation on a grid, with each axis representing a property and dots representing each actor, or imagine a more complicated version in n-dimensional space.  Presumably, the simulation would play out by actors moving from their starting position and arranging themselves in better locations, eventually finding local maxima and remaining there, or at least creating fairly stable sub-optimal equilibria.

Now suppose you modify the simulation such that actors are suddenly able to access all of the information across the entire simulation.  Both rules and all other actors’ properties become immediately accessible to every actor.

With this change to the simulation, presumably two things would happen: drastic reorientation of actors, and vastly higher total utility.

If you haven’t yet guessed, the simulation is meant to describe humanity; the modification to the simulation is the advent on the internet and real-time communications networks; properties are physical location and things like political orientation, job skills, and membership in organizations, etc.  The point of the exercise is to try to illustrate just how significant this technological development is.  Humans have built our social framework premised on communication being expensive, and the entire framework now can be rearranged to exploit the fact that communication is essentially free.

In other words: this internet thing is going to be huge.  We’re only just starting to figure it out.


I’m puzzled by this chart from the Brookings Institution‘s Hamilton Project, which attempts to predict how long it will take the United States to return to pre-recession level employment.  The chart plots three scenarios: a pessimistic option, in which employment grows at 208,000 jobs per month, as it did in 2005; an optimistic option, in which employment grows at 472,000 jobs per month, as it did in the best month in the 200s; and a middle option, in which employment grows at 321,000 jobs, as it did in 1994.  The takeaway from the graph, presumably, is that it will take a very long time to return to full employment.  The problem with the graph, is that its assumptions are entirely arbitrary, to the point that its predictions are largely meaningless.

The function of science, or social science is to use observed data to create theories that make predictions.  In this case, Hamilton is observing the period 1990-2008, a period of time that neither included nor followed a large recession, then theorizing that 2012-2025, a period of time that does follow a large recession, will behave like 1990-2008.  Hamilton is essentially saying that because job growth never exceeded 472,000 jobs per month when unemployment was low, it cannot possibly exceed 472,000 jobs per month when unemployment is high.  It’s just bad science, and it’s exactly the same bad science that failed to predict the recession in the first place.  Any scenario planning based on historical data leading up to 2008 would have deemed it impossible that employment would fall by 12 million from 2008 to 2010.  Why then, does Hamilton continue to use a forecasting method when that method’s limitations have been so clearly exposed?

America is productive enough that it could probably shelter, feed, educate, and even provide health care for its entire population with just a fraction of us actually working.

Phil at Transparency Revolution

It is possible to have an enjoyable life without earning and spending a whole lot of money. If health care and education are the areas where costs are growing, and if their marginal benefits are in doubt, then if you just get your basic needs met and focus on the enjoyment you get from the stuff that is not so expensive, you can do pretty well without a ton of money.

Arnold Kling

I think a lot of us would rather not work for somebody else. It’s not necessarily that we’re burgeoning entrepreneurs eager to start small businesses. It just sucks to have a boss.

Will Wilkinson

A job seeker is looking for something for a well-defined job. But the trend seems to be that if a job can be defined, it can be automated or outsourced.

Arnold Kling again

What many, maybe most, people actually want, it turns out, is the creativity and autonomy of entrepreneurship combined with the stability of a 1950s corporate drone.

Megan McArdle

These ideas are rattling around in my head.  Commentary to follow…

This is a place-holder for a much more detailed series of posts, but reading Will Wilkinson and then Pascal-Emmanuel Gobry writing about Steve Jobs, I find myself hanging onto this thought:

It’s entirely consistent with capitalism to think poorly of Steve Jobs on the basis of a) the vast majority of Apple products being overpriced status symbols that provide little real value and b) his lack of charitable donation.  That is, one can fully support an economic system that allows Steve Jobs to have the career he had, while simultaneously having a system of values that assigns very low esteem to Steve Jobs as a person.  Which is to say, capitalism is very different than consumerism.

There’s a nasty rhetorical trick I’ve been seeing lately, which involves making a (weak) argument, then stating that opposition to the argument will occur for a particular reason, and then attacking that reason.  For instance, here’s Matt Yglesias, after citing a study that alleges wage discrimination based on gender:

Some people are going to be very resistant to this conclusion. They’ll think that in a competitive labor market with many employers and many workers, employers who discriminate against women in their salary offerings will be at a disadvantage. No firm will want to disadvantage itself in this way, thus the discrimination shouldn’t exist. Consequently, this apparently [sic] effect is almost certainly due to some other variable that’s not accounted for. So it’s worth pointing out that by this logic, the gender disparity in employment that existed in 1961 wouldn’t exist either. But obviously it did.

Yglesias is being intellectually lazy here, and by prematurely denouncing his opponents as partisan hacks, he becomes one himself.  In order to have intelligent dialog, thinking liberals–a term I’d normally use to describe Yglesias–need to engage their thinking conservative opponents.  Arguments opposing Matt Yglesias’s position are not constrained by Matt Yglesias’s ability to imagine opposing arguments.  Indeed, it’s possible to resist the study he cites without relying on the neoclassical theory of labor markets in its purest form.  For instance, there’s this study, which pegs gender-based wage discrimination at 5-7%, rather than 17%.

I’m not arguing that gender-based wage discrimination doesn’t exist.  I’m confident it does.  And that’s a bad thing.  But it does a disservice to the cause to cite one study from amongst many and then cut off opponents by accusing them of bad faith.

I tend to think that accelerated communication technologies (the internet and cell phones) have barely begun to reshape the world to their full extent.  We’ve seen highly disruptive business models emerge, and I anticipate further innovation will continue.  The internet has changed the political landscape both in the West and the developing world.  The drastic reduction in the cost and lag-time of communication is probably the most important force affecting the world right now.

A while back, Robin Hanson posted a link about potential ways for humans to co-ordinate behavior.  He makes a strange argument saying that government’s failure to enact certain types of co-ordination he envisions demonstrates that the purpose of government is not to enact co-ordination.

Some of his failed co-ordination examples are strange; he seems to think people would be better off were there fewer genres of music.  But for his non-strange ideas, I see them not as strikes against government, but rather, business opportunities.  If I identified a type of co-ordination that I thought would create gains, I wouldn’t look to government to enact it; I’d think about building a business to facilitate it.

Co-ordination requires aggregation of knowledge and commitment of behaviors.  Government can do both, but the internet can do them better.  If Hanson thinks Americans would benefit from moving to warmer climates, but lack the co-ordination to do so, I have a business idea for him.  If he wants to see greater incentives for innovation, I have another idea for him.  And if Hanson really thinks the path to reduced scarcity of music is to encourage musicians to not diversify or innovative, I could also design that business.

Tyler Cowen is an academic economist, author of books, and prolific blogger.  His blog, Marginal Revolution, sees about 42,000 pageviews per day and has a loyal following.  I have no advanced insight into Cowen’s personal finances, but I suspect that a very small fraction of his income stems directly from the ads on his blog; rather, the blog is essentially a loss leader, which Cowen uses to advance his career in other ways.  This is a perfectly reasonable business model, and I have no doubt Cowen is doing just fine financially.  But I’m not sure it’s the best business model for Cowen.

My intuition is that Cowen’s blog creats more economic surplus than his teaching, lectures and books combined.  Cowen captures almost none of this revenue.  Suppose Cowen were to post the following one day:

I have immensely enjoyed writing this blog these past years and would like to continue to do so.  However, it’s very time-consuming and I’ve decided to devote more time to other activities.  Writing on this blog will cease in two months time.

I am willing to reconsider my decision.  I recognize that this blog probably creates much consumer surplus for loyal readers, and that many readers would probably be willing to pay for its continuation.  However, if I am to continue writing it, I want it to be freely available to everyone.  Thus, I’ll make the following offer: if, within the next two months, readers pledge a combined $200,000, I will continue to write this blog for one year.  If, after two months, that goal has not been met, all pledges will be returned, and this blog will end.

The $200k figure is arbitrary, but I think it’s pretty reasonable it would be hit–10,000 loyal readers times $20 pledge would do it, as would a wide assortment of combinations.  And $200k is a pretty sizable chunk of cheese for an economist, judging by this Scott Sumner post.  The free-rider problem might take effect, but since there’s a real threat of losing something of value, and a lock-in mechanism to prevent people from not getting value from their pledge, it seems like it could work.

I once asked a friend how much he’d be willing to pay to have the (very good) television series Firefly revived and continued for one season.  He said $30, reasoning that this is roughly the price for a TV series on DVD.  It was an interesting response, because the price I thought I’d be willing to pay was at least an order of magnitude higher–I was thinking somewhere between $300-$1000.

I suspect this rather large difference in willingness to pay stemmed neither from me being wealthier nor from my liking the show more.  Rather, we were just thinking about the question differently.  I was trying to assess my reservation price–the point at which I would be indifferent between buying and not buying the product.  My friend was giving the price point that he would expect a store to charge.  The difference between our two prices is consumer surplus.  Like my friend, I expect that were Firefly extended and sold as DVD boxed sets in stores, its price probably would be $30.  That’s what I’d expect to pay.  However, I’d actually be willing to pay a whole lot more.  As would, I suspect, my friend.

Thinking in terms of reservation price has two benefits.  First, it provides a more accurate estimate of wealth.  My Netflix membership might cost $240 per year, but the value I derive from it is significantly higher, since it allows me to discover and view gems like Firefly.  The same applies to my refrigerator (rented), facebook, and other goods–their price does not capture their value.  Second, recognizing that products often have far more value to their customers than the going price would indicate may open up new potential business models.  If Firefly season two can become profitable when X people buy it for $30, it can also become profitable when X/10 people buy it for $300.  At a time when the accelerated communication technologies are disrupting everything, these insights may prove valuable.

Though I’m still somewhat confused as to public-sector unions in Wisconsin, I do have some strong opinions on how policy-makers should tackle the NFL labor dispute.  Step 1 is to repeal the NFL’s anti-trust exemption.  Step 2, use anti-trust law to break the NFL into 8 separate leagues, based on existing divisions.  Allow the 8 leagues to co-ordinate in developing schedules, including play-offs, but don’t allow them to collude on questions of expansion and contraction.  Step 3, use anti-trust law to prevent NFL teams from owning football stadiums.  Step 4, ban public funding of football stadiums.  Step 5, repeat steps 1-4 for the other professional sports leagues.

The result of these changes, I believe, would be thus:  The number of NFL teams would increase from 32, to somewhere between 50 and 100.  Major markets like New York,  LA and Chicago would grow from 3 to ~10 teams between them; many minor markets like Portland and Austin would grow from zero to one team; and middle market teams like Dallas, Washington and Denver would grow from 1 to 2 teams, which would share stadiums.  Individual leagues would relax ownership rules, in order to attract new owners.  Existing team values would drop.  Player salaries would drop.  Ticket prices would drop.  Employment would rise.  Quality of play would initially drop, but most fans wouldn’t notice.  Over time, innovation–both in business management and football strategy–would increase.

This is, of course, a fairly drastic policy change.  It would upset a number of powerful lobbies, including NFL owners, NFL players, the NCAA–which would face increased competitive pressure, and traditionalist sports fans–who want to compare Peyton Manning to Fran Tarkenton, even though they play highly different games.  However, the policy consequences listed above are both fiscally prudent (increasing employment, ending subsidies to sports teams) and highly progressive (transferring wealth from rich players and owners to poorer unemployed athletes and fans).  That is, these policy changes should be broadly supported by the bases of both major political parties.  And while I don’t expect any of these changes to occur soon–any serious threat of Step 1 alone would lead to a quick resolution of the current negotiation–I do expect them to happen eventually.

Since I’m in the habit of bashing (apparently unconvincingly, based on comments), I’d like to criticize Amazon for its response to the state of Illinois’s highly reasonable decision to stop giving it a tax break.  Amazon has many competitive advantages over brick-and-mortar booksellers, which I listed, but one advantage I omitted is that Amazon customers don’t pay sales tax.  I’m a tad vague on the legal rationale, but my understanding is that e-commerce exempts itself from sales tax through manipulation of the commerce clause.  But lacking a reasonable economic rationale for favoring a particular sales channel, states are right to seek sales tax on purchase made from Amazon and other e-commerce firms.  Pay up, Amazon customers.