Monday, February 6, 2023

GEEK ALERT: Froeb endorses a product!

Scientific American Ad from 1997, here is the link.  I wonder how many people bought the product based on the Ad?

Is ChatGPT a good substitute for Professor Froeb?

RA Jack Underwood trained ChatGPT using the first three chapters of Managerial Economics, and the blog, tests, and lectures.  

The lecture was boring, too general, and the Amazon example misses the real story of the company, e.g., see post Why was Bezos such an extraordinary manager.  

Some test questions were good, but others "borrowed" jargon I don't use, like "deadweight loss." 

The blog post used jargon and ideas from standard textbooks, but not from ours. [ours: Costs are defined by decisions:  when making a decision, consider all benefits and costs that vary with the consequence of a decision (if you miss some that is the hidden cost fallacy), but only benefits and costs that vary with the consequence of a decision (if you include those that don't, that is the fixed or sunk cost fallacy).]


Good morning everyone, and welcome to today's lecture on capitalism, business, and wealth creation. This lecture is designed for MBA students who want to gain a deeper understanding of the principles and practices that drive the modern business world. So, let's dive in.

Capitalism is an economic system characterized by private ownership of the means of production and the creation of goods and services for profit. The system is based on the principles of supply and demand, competition, and the pursuit of profit. Businesses play a key role in this system, as they drive economic growth and provide goods and services that meet the needs and wants of consumers.

In a capitalist economy, businesses must compete with one another to succeed and generate profits. Competition forces companies to be innovative, efficient, and responsive to customer needs and wants. This, in turn, drives economic growth and improves the standard of living for consumers.

Wealth creation is the process of generating financial resources that can be used to meet personal or business goals. It involves increasing income, reducing expenses, and making wise investments. Businesses play a critical role in wealth creation by providing employment opportunities and generating profits that can be reinvested in the company or used to support personal financial goals.

To succeed in business, companies must understand the importance of effective strategic planning, efficient operations, and sound financial management. They must also understand the needs and wants of their customers, as well as the competitive landscape in which they operate.

Let's take a look at three real-world examples that illustrate the principles of capitalism, business, and wealth creation.

Example 1: Amazon. Amazon is a leading e-commerce company that has disrupted traditional retail businesses. The company's success is due to its focus on customer needs and wants, its innovative business model, and its ability to leverage technology to increase efficiency and reduce costs. Through its commitment to customer satisfaction, Amazon has become one of the most valuable companies in the world and has created wealth for its shareholders.

Example 2: Tesla. Tesla is a leading producer of electric vehicles and clean energy products. The company's success is due to its focus on innovation, sustainability, and customer experience. Tesla's mission to transition the world to sustainable energy has attracted customers who value environmental responsibility. The company's focus on customer needs and wants, as well as its commitment to innovation, has made it one of the most valuable automotive companies in the world and has created wealth for its shareholders.

Example 3: Airbnb. Airbnb is a leading provider of short-term rental accommodations. The company's success is due to its innovative business model, which leverages technology to connect travelers with home and apartment owners who have extra space to rent. Airbnb's commitment to customer satisfaction, combined with its efficient operations, has made it one of the most valuable travel companies in the world and has created wealth for its shareholders.

In conclusion, capitalism and business are closely intertwined, with businesses playing a key role in driving economic growth, creating wealth, and providing goods and services that meet the needs of consumers. To succeed in the modern business world, companies must have a deep understanding of their customers, be innovative and efficient, and have sound financial management practices.

As aspiring business leaders, it is essential that you have a solid understanding of these concepts, as well as the skills and knowledge needed to succeed in the modern business world. The examples we've discussed today illustrate the importance of understanding customer needs and wants, leveraging technology and innovation, and having a focus on wealth creation.

I hope this lecture has provided you with valuable insights into the principles and practices of capitalism, business, and wealth creation. Thank you for your attention, and I look forward to answering any questions you may have.

MULTIPLE CHOICE QUESTION: What is the key difference between capitalism and socialism as economic systems?

A. Capitalism values private property and free markets, while socialism values collective ownership and central planning.

B. Socialism values private property and free markets, while capitalism values collective ownership and central planning.

C. Capitalism values individualism, while socialism values collectivism.

D. Socialism values individualism, while capitalism values collectivism.

Correct answer: A. Capitalism values private property and free markets, while socialism values collective ownership and central planning.


Describe how wealth was created in the case of Amazon's growth as a company. Be sure to include specific examples and economic concepts.


Amazon's growth as a company is a prime example of wealth creation through business. The company started as an online bookstore and has since become one of the largest e-commerce companies in the world.

Wealth creation at Amazon can be attributed to several factors, including its focus on customer satisfaction, innovation, and efficient operations. By understanding the needs and wants of its customers, Amazon was able to offer a unique and convenient shopping experience. Additionally, the company invested in technology and innovation, allowing it to streamline its operations and reduce costs.

Another key factor in Amazon's wealth creation is its focus on financial management. The company has a strong commitment to profitability, which has allowed it to reinvest in the business and grow over time. For example, Amazon has used its profits to develop new product categories, such as groceries and home goods, which have contributed to its continued growth.

In summary, wealth creation at Amazon can be attributed to its focus on customer satisfaction, innovation, efficient operations, and sound financial management. These factors have allowed the company to generate profits, grow its business, and create wealth for its shareholders.


Explain how taxes can destroy wealth by using the economic concept of deadweight loss.


Taxes can destroy wealth by causing deadweight loss. Deadweight loss is a loss of economic efficiency that occurs when an action, such as taxation, distorts the market and leads to reduced economic activity.

In the case of taxes, the deadweight loss occurs because taxes reduce the incentive for individuals and businesses to produce and invest. This reduction in economic activity leads to lower output and fewer opportunities for wealth creation. Additionally, taxes can also discourage entrepreneurship and innovation, further reducing opportunities for wealth creation.

In summary, taxes can destroy wealth by causing deadweight loss. This loss of economic efficiency results from a reduction in the incentive for individuals and businesses to produce and invest, leading to lower output and fewer opportunities for wealth creation.


Benefits, Costs, and Decisions in Economics: An Overview for Business Leaders

In economics, decision-making is driven by a careful evaluation of benefits and costs. Whether you are an entrepreneur starting a new business, a CEO making strategic investments, or a consumer choosing between different products, understanding the relationship between benefits and costs is essential for making informed decisions.

Benefits are the positive outcomes or gains that result from an action. For example, if a business decides to invest in new technology, the benefits might include increased efficiency, lower costs, and improved customer satisfaction. Understanding the benefits of a decision is critical because they provide insight into the potential rewards of taking a particular action.

Costs, on the other hand, are the negative outcomes or losses that result from an action. In the example of the business investing in new technology, the costs might include the initial investment in the technology, any associated training costs, and the potential for temporary disruptions in operations. Understanding the costs of a decision is equally important because they provide insight into the potential risks and challenges of taking a particular action.

In making decisions, it is essential to consider both benefits and costs. For example, a business might weigh the potential benefits of investing in new technology against the associated costs to determine whether the investment is a good decision. A consumer might weigh the benefits of purchasing a premium product against the associated costs to determine whether the product is worth the investment.

One important concept in economics is the idea of opportunity cost. Opportunity cost is the value of the next best alternative that must be given up in order to pursue a particular action. For example, if a business decides to invest in new technology, the opportunity cost might be the potential benefits that could have been gained from investing in other opportunities, such as marketing or research and development. Understanding opportunity cost is critical because it helps to ensure that decisions are made based on a comprehensive evaluation of all potential outcomes.

In conclusion, benefits, costs, and decisions are central to the study of economics and are critical for business leaders. Understanding the relationship between benefits and costs is essential for making informed decisions, and considering opportunity cost is critical for ensuring that decisions are based on a comprehensive evaluation of all potential outcomes. By carefully evaluating benefits, costs, and opportunity costs, business leaders can make informed decisions that drive growth and success.

Department of occupational licensing run amok: TN Eyelash Specialists

From Reason Magazine: Free minds and Free markets 
 A proposal in Tennessee would regulate "eyelash services"—defined as "applying and removing a semi-permanent, thread-like, natural or synthetic single fiber to an eyelash," requiring 300 hours of training. 
The economics of its effects are simple:  barriers to entry reduce supply, raise prices, raise profits of incumbent eyelash specialists, and harm consumers.

This proposal has all the elements of a newsworthy scandal: special-interest groups (incumbents typically get grandfathered in, so the regulation will apply only to entrants), politics (how did eyelash specialists get this much much clout?  Enquiring minds want to know), all wrapped up in a worthy cause, domestic violence (we have to do something).

Sunday, February 5, 2023

I am taking credit for this

Economist:  The correlation between a high management score and productivity is so strong that management seems to account for more of the difference between the most and least productive firms within countries than factors like research and development spending or use of it. Mr Van Reenen and Mr Bloom reckon that more than half of the productivity gap between Britain and America can be attributed to poor management.
 Chapter 1:  incentive alignment!

Which discount rate should you use? (HINT: not the one you have been taught to use)

 Via Marginal Revolution:  

The key purpose of corporate finance is to provide methods to compute the value of projects. The baseline textbook recommendation is to use the Present Value (PV) formula of expected cash flows, with a discount rate based on the CAPM.
We find that discounting based on expected returns (such as variants on the CAPM or multi-factor model), performs very poorly. Discounting with an Implied Cost of Capital (ICC), imputed from comparable firms, obtains much better results.

Saturday, February 4, 2023

ESG investing is a "normal good," i.e., demand falls when income falls


When an economic shock causes our incomes to shrink, we become more risk-averse. And, in the authors’ words, we start to view the emotional or nonfinancial appeal of ESG investing as “costly” and “unsustainable” if it means forfeiting returns.

How much better are ETF's than Mutual Funds?


On average, our findings show, an ETF gives an extra 0.20 percentage point a year in posttax performance compared with mutual funds, and international-equity ETFs even more—upward of 0.33 percentage point on average.

Tuesday, January 31, 2023

2m Baby boomers more likely to stay retired if their house price increases


A working paper from the National Bureau of Economic Research finds that ageing is the main cause: nearly 2m baby-boomers who tried early retirement over the past three years have taken a liking to it and arenot coming back.

UPDATE:  MSAs with stronger house price growth tend to have lower [labor] participation rates, but only for home owners around retirement age — a 65 year old home owner’s unconditional participation rate of 44.8% falls to 43.9% if he experiences a 10% excess house price growth. A counterfactual shows that if housing returns in 2021 would have been equal to 2019 returns, there would have been no decline in the labor force participation of older Americans.

Interpetation: working is unpleasant and if your wealth (measured by house price) increases enough, older workers would rather not.

Friday, January 27, 2023

Housing Market Activity and Prices


Curiously, the price series (below) is much more slowly moving than the Activity series.  And for the last three pricing cycles since 1968, it appears that the cycles are lengthening.  

Estimating the costs of pollution with natural experiments

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Thursday, January 26, 2023

Price of acquiring a company has just fallen

 Global M&A Report:

  • Buyers took advantage of cheaper prices, with median deal multiples declining to 8.8x from a 14-year high of 11.1x.

What this means is that in 2022, you can acquire a company for 8.8 times its earnings (instead of 11.1).  These multiples can be thought of as break-even calculations:  it takes 8.8 years (instead of 11.1) of earnings to break-even on an investment in a company.  

Wednesday, January 25, 2023

Should we re-regulate Airlines or stop reading the NY Times?

After the NY Times called for more airline regulation following the FAA's software glitch and Southwest's cancelled flights Clifford Winston reminds that Airline Deregulation:  
Turns out that inflation-adjusted airfares were 60 percent lower in 2020 than in 1980. Indeed, flying is no longer a luxury. It’s cheap enough to allow most Americans to fly — by 2020, 87 percent of the U.S. population had taken a commercial airline trip. And low fares have cost us nothing in terms of safety: no major airline has been involved in an accident in the United States since 2009.   ... 

What about service reliability? Suppose policymakers force an airline that cancels a flight to immediately provide a cash reimbursement to all affected passengers – as the European Union requires in many circumstances. All airlines, not just Southwest, scratch thousands of flights every year, sometimes due to human or equipment error — but mostly because of bad weather. If airlines are forced to incur all the financial risks of delayed flights, something else must give — back to amenities and/or fares.
It's almost as if the NY Times editors have never read Chapter 3: the opportunity cost of regulation that imposes costs on an airline is increased prices or reduced service.  


Friday, January 20, 2023

First cousin marriage bans lead to higher incomes

 The theory is right out of chapter 1: voluntary transactions create wealth because they move goods and services to higher-valued uses.  In a kinship society (no first-cousin marriage bans), there are fewer people with whom to transact, and this means that income is lower.  


Sunday, January 15, 2023

Incomes are growing, and inequality is falling

Real incomes are growing and progressive taxes (which tax the rich at higher rates) and transfer payments (from richer to poorer) are responsible.  (From The Economist)

Monday, January 9, 2023

How do we create incentives for firms to train employees?

...with noncompete clauses. For example, if a firm trains an employee to code using Salesforce, the employee gains a valuable skill that they can take to another firm. Employers anticipate such opportunism and use a variety of contractual provisions, like noncompetes, to guard against it. 

Unfortunately the FTC just voted to ban noncompetes.  

As Commissioner Wilson notes in her dissent, though FTC pays lip service to the diminished incentive to train employees:
“there is evidence that non-compete clauses increase employee training and other forms of investment,”
they dismiss its importance.  

This is a time-honored political tactic--when banning a practice, ignore its benefits and tout its costs--but it sets a bad precedent and undermines Agency credibility. 

Sunday, January 8, 2023

Pay transparency laws shrink the Gender Gap by reducing male wages

The Economist reports:
...[Pay Transparency law] shrank the gender pay gap by 13%, but only because it curbed the wages of male employees. Studies of Britain’s gender-pay-gap law, which was implemented in 2018, have reached similar conclusions.
Of course, the term "gender-pay-gap" refers to a statistical difference betweden what men and women are paid. It does not mean that men are paid more for the same work as women. See earlier post When are between group differences evidence of discrimination?