Imperfect business management

Alex Tabarrok writes,

management matters and it matters in systematic and fairly easy to replicate ways. If mis-measurement explained productivity differences, Lemonis would not be able to successfully turn firms around. But he can and does. How?

Mainstream economics starts with the assumption that firms are behaving optimally. This is absurd. Firms are operated by human beings, and human beings are flawed. People always make mistakes, and there are always opportunities to improve.

I am guessing that when badly-run incumbents lack regulatory protection, it has become somewhat easier to drive them out of business. Transportation costs have come down. So have communication costs. This increases the geographic reach of strong competitors. So the worst retailers and the worst companies that need software management skills have a really hard time sticking around.

The requirement to earn a profit is probably the most important check on bad management. Non-profits can be poorly run as long as donors are tolerant. Sectors in which the government is heavily involved can be inefficient, because the government can always be counted on to boost demand and restrict entry. So my guess is that it’s easier to survive as a badly-run “green energy” firm or a badly run college than as a badly-run software company or a badly-run grocery chain. Note that I mean “badly run” in relative terms, because, again, humans are flawed, so that every company is “badly run” in absolute terms. Yes, I know that some of the “green energy” firms that received government subsidies went under, but it seems reasonable to say that they lasted longer than they would have with the same strategy and execution but no government help.

Posted in business economics | 7 Comments

What do we mean by ‘working class’?

William Galston provides highlights from a Pew survey of how party support has shifted over the past twenty years. He writes,

Democrats’ advantage in urban counties has shot up from 18 to 31 points, while Republicans have gone from a tie with Democrats in rural areas to a 16-point lead today.

He gives many other examples. He does not say so, but most of the demographic categories that favor Democrats are growing larger, while those that favor Republicans are shrinking. I recommend the entire column.

But I was most struck by this sentence fragment:

among voters with no more than a high school diploma—the so-called working class

In 1950, if you added together manufacturing production workers and mine workers, you could get a large enough total to constitute a “class.” I would guess close to one-third of adult males, maybe more. They made the AFL-CIO a big deal.

Today, those two groups would be much less than 10 percent of all employment. So, less than 5 percent of adult males? In any case, not enough to really call a class. So Galston has to describe working class as “no more than a high school diploma,” and he has to include the qualifier “so-called.”

My point is not to knock Galston or to deny the significance of differences based on educational attainment. I’m fine talking about a social or political divide that correlates with education. I just want to get rid of the term “working class.” In the 21st century, I don’t see how it can be defined in a useful way.

Posted in labor market, Politics | 13 Comments

Evan Williams on media business models

He writes,

The reason quality — of content and experience — has gone down in publishing, not up, despite the power of competition and technology, is because publishers are competing for advertiser dollars, not audience dollars. Business model is gravity. Once publishers are competing for audience dollars, the product they produce will get dramatically better.

…The average thinking, reading person reads from dozens of sources per month. Even if they were very cheap, there will be subscription fatigue. Cognitively, and economically, people will be able to rationalize a handful of content subscriptions at most (in addition to their 2–3 music/TV subscriptions).

There is not much difference between what Williams is arguing for today and what I wrote in 2001. This is one of my old essays that still holds up pretty well.

Posted in business economics, links to my essays | 6 Comments

Mental Transaction Costs

I have a new essay on mental transaction costs.

Perhaps consumers are ignorant about health care prices for a reason. When it comes to relieving pain and suffering, we do not want to take on the task of deciding between treatments based on price. Imagine having to ask yourself how much pain you would be willing to endure to save an addition $500. Or trying to choose between a high-cost treatment that is certain to work and a lower-cost treatment that has only a 75 percent chance of success.

Allowing our treatment choices to be made for us by doctors, with insurance companies in the background negotiating prices and determining what will be covered, saves us on mental transaction costs. We prefer to obtain health care without having to make cost trade-offs.

Please read the whole essay before commenting.

Posted in business economics | Tagged , , , | 9 Comments

Another rant about blockchain

Kai Stinchcombe writes,

peer-to-peer interaction with no regulations, norms, middlemen, or trusted parties is actually a bad way to empower people.

…A lawless and mistrustful world where self-interest is the only principle and paranoia is the only source of safety is a not a paradise but a crypto-medieval hellhole.

Read the whole thing. Suppose that the population that is eager to adopt blockchain consists mostly of people who are really annoyed by existing laws and business practices. Dealing with such a population on a regular basis is probably not a good way to enjoy low-risk, trouble-free interactions.

On the other side, the blockchain Kool-Aid includes stories like this:

The trend toward blockchain agriculture promises to make each step of growing and distributing food simpler. It will offer all parties involved a single source of truth for the agriculture supply chain. In this article, we’ll cover four key ways that blockchain is changing agriculture.

I take Stinchcombe’s side on this one. Note that I scheduled this post a week ago, before Tyler linked to the same piece.

Posted in Information Goods | 3 Comments

Jordan Greenhall on media and society

He writes,

This is the formal core of the Blue Church: it solves the problem of 20th Century social complexity through the use of mass media to generate manageable social coherence.

He argues that mass media facilitated a form of social management in which an elite communicates to the population at large. What he calls the “Blue Church” thrived within and justified this arrangement.

Read the whole essay. It is hard to choose what to excerpt. Here is one more:

In Blue Church society, to hold and express good opinion means that you are part of the pack, in the tribe, on the team. Holding and expressing good opinion brings social benefit. More importantly, failing to hold and express good opinion can be ruinous.

I’ve been on a Jordan Greenhall kick lately. I like this 18-minute YouTube video also.

Posted in Libertarian Thought | 14 Comments

Kevin Erdmann on U.S. housing supply

He writes,

Just a few cities are at the heart of the housing supply problem, most notably New York City, Los Angeles, Boston, and San Francisco, which I refer to as Closed Access cities. There are two very different housing markets within the United States: the Closed Access market, where new housing is highly constrained, rents rise relentlessly, and households are forced to make difficult choices as housing expenses eat up their budgets; and the rest of the country, where homes can generally be built to meet demand, housing construction is healthy, and housing expenses remain at comfortable levels for the typical household.

Pointer from Tyler Cowen.

This is an important point, which I would like to see stressed over and over. We do not have just one housing market in the U.S.

For the nation as a whole, Erdmann makes two claims.

1. There was no significant widespread overbuilding during the housing boom. This claim is contrary to many people’s impression, but pay attention to his statistical support.

2. There has been under-building since 2007. This claim strikes me as undeniable. But I saw an essay on Medium recently that tried to deny it, using what I thought were inappropriate and misleading indicators.

I strongly recommend reading the entire paper, or at the very least skimming it to get all the main ideas. He is doing important work.

Posted in disaggregating the economy, Housing and housing finance | 9 Comments

Try competing with Facebook

Tyler Cowen writes,

I would instead start with the sentence “Most Americans don’t value their privacy or the security of their personal data very much,” and then discuss all the ways that limits regulation, or lowers the value of regulation, or will lead many well-intended regulations to be circumvented. Next I would consider whether there are reasonable restrictions on social media that won’t just cement in the power of the big incumbents. Then I would ask an economist to estimate the costs of regulatory compliance from the numerous lesser-known web sites around the world. Without those issues front and center, I don’t think you’ve got much to say.

He is commenting on a scheme for regulating Facebook.

I would instead start like this:

You didn’t come up with the idea. You didn’t build the business. Now that it’s here, who the heck do you think you are telling them how to run it?

That is from a brand new essay, in which I offer up my idea for a Facebook competitor. I’m sure that folks at Facebook have thought of my ideas and discarded them, probably for very good reasons. But I would much rather see people thinking like competitors rather than like fantasy-despot regulators.

Posted in business economics, Libertarian Thought, Tyler Cowen is my Favorite Blogger | 15 Comments

The libertarian non-moment (Kevin Williamson)

Kevin Williamson writes,

But “libertarian” often means little more than “a person with right-leaning sensibilities who is embarrassed to be associated with the Republican Party.” (Hardly, these days, an indefensible position.) Libertarian sensibilities are popular because they enable the posture of above-it-all nonpartisanship, but libertarian policies, as [Bryan] Caplan and others have noted at length, are not very popular at all. Americans broadly and strongly support a rising minimum wage and oppose entitlement reform with at least equal commitment, and they are far from reliable supporters of free speech and free association or enforcing limits on police powers.

Pointer from Tyler Cowen.

By the end of the essay, Williamson wonders whether the Democrats might make some overtures to libertarians. But I get the sense that he is stopping short of going full Niskanen Center. That is, he doesn’t seem to be bad-mouthing libertarians as a way of trying to curry status with the left.

OK, so I scheduled this post over a week ago, and subsequently Williamson was fired by the Atlantic. Nothing to do with the column I quoted; he apparently is anti-abortion and does not mince words in expressing his opinion on that, and the severity of the way he expressed his views was the reason given for the decision to let him go. I don’t know anything about the background to his hiring or firing, but my instinct is to assign a very low probability to the official explanation being the full story.

Posted in Politics, Tyler Cowen is my Favorite Blogger | 9 Comments

Complex vs. Complicated

My latest essay.

When I was a graduate student in economics in the late 1970s, we were trained as if the economy is complicated, but not complex. We were told that if we learned enough mathematics and statistics and applied these tools, then eventually we could predict and control economic outcomes.

In fact, economic behavior is complex. There are too many causal factors, feedback loops, non-linear effects, and unprecedented phenomena involved to enable economists to control the economy precisely and reliably.

Please read the whole essay before commenting.

Posted in Economic education and methods, links to my essays | 5 Comments