Category Archives: business economics

Self-driving Cars and Car Ownership

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Joshua Gans writes,

It seems that the sharing economy was a transitional state from private ownership to corporate ownership. The point is that if the technology that allows sharing is good enough, the incentive to own a car — even to rent it out — goes down. And it goes down potentially all the way to zero.

Here is how I look at it:

1. What you want is car rides on demand. A few years ago, you needed to own a car in order to get that, because taxis can take a long time to show up and they are expensive.

2. If Uber and Lyft are reliable and affordable, then you do not need to own a car. The drivers own the cars. But in theory Uber and Lyft could own the cars–if they want to put up with the hassle of figuring out how to make sure drivers do not abuse the vehicles.

3. If autonomous vehicles are possible, then Uber and Lyft do not have to worry about what the driver might do to abuse the car, so it makes sense for the corporation to own the cars.

Price Discrimination Explains Everything

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A commenter writes,

Standard economics that is taught in intro economics says that higher prices induces greater supply. Under certain restrictive assumptions that is generally true.

But there are exceptions. One is when the bulk of the firms costs are fixed and variable costs are a minor cost of bring the product to market

I tend to think of this as the rule rather than the exception, and I agree that introductory economics classes should give it more attention. I would say to my high school econ students that price discrimination explains everything. By that, I mean that in real-world business, the challenge is often recovering fixed cost. Marginal cost is often low, so you want to charge a low price for use on the margin. But you want to try to extract a high price from people willing to pay.

For one example among money, if you are a cell phone service provider, rather than charge the same price per unit of data for all customers, you try pricing tiers. $X per month for 0-2 gigs, $Y a month for 2-4 gigs, etc. You are trying to recover more of your fixed costs from the big users, and at the same time your users feel that the marginal cost is zero, at least until they bump up against the next tier of usage.

Cable company bundling is another classic example of price discrimination explains everything. So are store coupons. So is the price of popcorn at movies.

Evidenced-Based Policy

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Robert Doar writes,

Momentum for evidence-based policymaking is building at all levels of government, from federal legislation funding rigorous evaluations to the bipartisan Commission on Evidence-Based Policymaking to counties looking to make funding decisions based on results.

I am afraid that my reaction is to be cynical. When you make funding decisions for programs based on evidence, what will change will be the reported evidence, not the programs.

During the Vietnam War, Secretary of Defense Robert McNamara was famous for demanding statistical evidence that strategies were working. He got what he was asking for, but the statistical evidence did not capture what was really happening.

To cite another example, the Stiglitz-Orszag paper on Fannie Mae and Freddie Mac appeared to be evidence-based. Recall that they wrote,

This analysis shows that, based on historical data, the probability of a shock as severe as embodied in the risk-based capital standard is substantially less than one in 500,000 – and may be smaller than one in three million. Given the low probability of the stress test shock occurring, and assuming that Fannie Mae and Freddie Mac hold sufficient capital to withstand that shock, the exposure of the government to the risk that the GSEs will become insolvent appears quite low.

Within any organization, including a profit-seeking business, one has to be cynical about “evidence.” Show me a CEO who always believes every report he or she receives from middle management, and I will show you a company that is at high risk for going bankrupt very soon. I have never been a large-company CEO, but if I were I would make a point of setting up internal checks and balances so that I did not have to rely on any one set of carefully crafted reports.

You are entitled to ask, “How can you be against evidence? Evidence is bound to make policies better than if evidence is ignored.”

My response is that I am afraid that evidence will be distorted to make spending programs and regulations appear better than they really are. I will take public choice theory over misleading evidence, any day.

Two Random Thoughts on Artificial Intelligence

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I attended a talk and two panels, one of which was moderated by Alex Tabarrok.

1. Susan Athey said that companies like Facebook and Google are learning rapidly by doing many large randomized controlled trials. This gives them a way to lever their leadership positions. It suggests that “deep learning” might boost economies of scale.

2. Colin Allen suggested that if self-driving cars are programmed to stop for pedestrians, and pedestrians know this, pedestrians could become more reckless and aggressive. Hmmm.

My Early Prediction of I-Phone’s Latest Innovation

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When I saw this story,

Now it’s headsets: spending on wireless headsets overtook wired ones last year, says Steven LeBoeuf, founder of Valencell, a developer of biometric sensor technology for wearable devices.

I was reminded that back in 2001 I wrote,

I can imagine a world in which everyone spends several hours a day wearing a headset. There will be a software industry devoted to building applications for the headset platform, which consists of earphones, a microphone, and something that I call a “tuner.”

It is an amusing essay to read–wrong in many respects, but actually quite prescient in others.

Timothy Taylor on the Tech Sector

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He writes,

My own guess is that the applications for IT in the US economy will continue to be on the rise, probably in a dramatic fashion, and that many of those applications will turn out to be even more important for society than Twitter or Pokémon Go. The biggest gains in jobs won’t be the computer science researchers, but instead will be the people installing, applying, updating, and using IT in a enormously wide range of contexts. If your talents and inclinations lead this way, it remains a good area to work on picking up some additional skills.

This sounds right to me. The technological advances have been rapid, but the process of deploying applications goes more slowly.

The Privatization Opportunity

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Chris Edwards writes,

Congress imposes a rigid monopoly on the nation so that we can continue to receive mainly “junk mail” in our mailboxes six days a week — while 205 billion emails blast around the planet every day. Retaining special protections for the government’s old-fashioned paper delivery system makes little sense.

He suggests privatizing the post office, as well as Amtrak, the TVA, government buildings, and many other government “businesses.” He does not even mention communications spectrum, much of which is restricted to government use and is wasted.

I found the paper depressing to read, because the case he makes is so compelling and the likelihood that privatization will take place appears to be so close to nil.

Daniel Yergin on The Great Regulation

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He writes,

Voters under 30 were either very small or not yet born when the Berlin Wall came tumbling down in 1989. They have no memory of communism—what it meant in terms of poverty, thwarted opportunity and political repression. Closer to home, few Americans recall the likes of the now-defunct Civil Aeronautics Board, which not only set the price of an airline ticket but regulated the size of the in-flight sandwiches. What millennials do know is what happened in 2008—and for many it serves as an indictment of the market system.

The people want regulation and they are getting it–good and hard, as Mencken would say. The result?

if you want lifetime employment, go into compliance.

Thanks to a reader for the pointer. I used to say that if you want to start an automobile company in this country you need a handful of engineers–and at least 1000 lawyers. Starting an independent medical practice is getting to that point.

There may be natural forces at work that cause industries to become dominated by a few large players. But there is also the unnatural force of regulation.

The Great Regulation

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Guy Rolnik writes,

Looking at both intangible investments and political activities to explain the 20% rise in Tobin’s q in the U.S. since 1970, a new working paper by James Bessen from Boston University concludes that activity associated with increased Federal regulation is the most important explanatory factor, especially after 2000. In fact, spending on R&D and other intangibles has fallen relative to conventional assets since 2000.

Noting that operating margins for these firms have also risen since 1990 by over 2% in aggregate, Bessen’s study also found that variables associated with regulation and corporate campaign contributions account for about half of this increase.

Pointer from Mark Thoma. The article is a long interview with Bessen, interesting throughout. For example,

In 2011 a new patent law passed, the Leahy-Smith America Invents Act. This patent law was essentially negotiated between a small number of large pharma companies and a small number of large tech companies.

…all of a sudden you have a whole lot of small businesses in every state in the country who are now upset about getting sued for patent infringement over these very ridiculous claims.

Once again, I wonder how much of the trend toward industry consolidation and loss of dynamism in the past twenty years is due to regulation and rent-seeking.

Eli Lehrer on Trends in Job Mobility

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He writes,

Overall, employment patterns have shifted — in the direction of increased employment by big firms and a declining role for small businesses and the self-employed. Since 1993, the earliest year for which there is comparable data, the percentage of workers employed by small firms (one to four employees) has fallen slowly, but fairly consistently, from 5.6% to a bit under 5%. Meanwhile, the percentage of the workforce employed by firms with 1,000 or more workers has risen from 35.6% to 39.2%. Average tenure with the same employer has also risen in recent years, going from 4.9 years in 2004 to 5.5 years in 2014. The percentage of workers over 25 who have been with their current employer for more than a decade has also risen consistently, from 30.6% in 2004 to 33.3% in 2014. The percentage of people who are self-employed has steadily and consistently declined over the past several decades, falling from a high of about 7.3% in 1991 to 5.3% in 2015.

I wonder how this breaks down by industry. I would bet that the market share of small businesses has been declining in medical care, restaurants, and general retail. I assume that small farms have continued a downward trend.