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).]

LECTURE:

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.

SHORT ANSWER QUESTION:

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

Answer:

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.

SHORT ANSWER QUESTION:

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

Answer:

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.

BLOG POST:

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.

Advice to the New FTC Leadership

Here is the most important part (link): 

 II. Promote Innovation 

Since 2010, the U.S. economy has grown at a real rate of 1.74% per capita. At this rate, per capita income doubles every 40 years.4 When our kids turn 40, they will earn twice as much as we did.

Public policy—especially antitrust policy—should recognize that innovation drives growth, much of which comes from Big Tech and startups. Big Tech has provided consumers with more everyday value than any other small group of firms in history. And most startups “exit” via acquisition, not by going public. If the FTC prevents these exits due to concerns about lost potential competition, funding becomes harder to come by, which deters startups. The FTC should recognize these innovation incentives when setting enforcement priorities.

Here is press on the new Antitrust chief on "Taking on Big Tech and Beyond"

Slater will inherit a docket packed with blockbuster cases that aim to challenge the dominance of some of the world’s largest companies. These cases, many initiated during Trump’s first term, focus on allegations of monopolistic practices that harm consumers and stifle innovation.

Trump emphasized that Slater’s leadership will prioritize fair and vigorous enforcement of competition laws. “She will ensure that our competition laws are enforced, both vigorously and FAIRLY, with clear rules that facilitate, rather than stifle, the ingenuity of our greatest companies,” he stated.

The decision to place Slater in charge signals a continuation of the administration’s efforts to curb corporate concentration and promote competition across key sectors of the economy. With both Trump and Vance championing a tough stance on monopolistic practices, Slater’s tenure is expected to mark a pivotal chapter in the U.S. government’s approach to antitrust enforcement.

New Unicorns suggest fast pace of innovation!

Two popular innovation metrics are total factor productivity the difference between output (like GDP) and the inputs (like capital and labor) used to produce it, or the number of unicorns, startups that reach a $1B valuation.  While total factor productivity seems rather flat, 

the number of unicorns seems to be accelerating.

The US seems to account for about half of them, maybe due to its tolerance for inequality, and light-handed regulation.  

Unicorns are concentrating in several US cities, sometimes called "innovation clusters."

 More posts about unicorns and innovation. 

HT:  Elad Blog

Does venture capital still contribute to growth?

The New Yorker has a harsh critique of some Venture Capital firms, like the ones that funded WeWork: 

 A widely read summary by a Harvard Business School professor, Nori Gerardo Lietz ... exposed WeWork’s “byzantine corporate structure, the continuing projected losses, the plethora of conflicts, the complete absence of any substantive corporate governance, and the uncommon ‘New Age’ parlance.” At the same time, she wrote, the S-1 (Disclosures to the regulators about the company's financial health ) failed to provide many conventional financial details. ...S-1 laid bare a basic truth: WeWork’s dominant position in the co-working industry wasn’t a result of operational prowess or a superior product. Instead, WeWork had beaten its rivals because it had access to a near-limitless supply of funds, much of which it had squandered on expensive furniture, flamboyant perks, and promotions luring customers with below-market rents.

Anyone who reads this blog knows three things:

1.  Innovation drives growth, and growth is almost everything.  

As Novel laureate Robert Solow said, “Adding a couple of tenths of a percentage point to the growth rate is an achievement that eventually dwarfs in welfare significance any of the standard goals of economic policy.

2.  Total Factor Productivity (the output measured relative to the inputs required to produce it) has grown much faster in the US than elsewhere.  This is one of the best aggregate measures of innovation.  

3.  The US has birthed more Unicorns (startups with a $1B valuation) than any other country else:

BOTTOM LINE:  Innovation is hard to measure, but it looks like the US has it, so the Venture Capitalists who fund it must be doing something right.  One cannot condemn an entire industry using a few anecdotes about how some startups fail--no matter how spectacularly.

Why the US leads China, EU in economic dynamism

QUESTION TO CLAUDE 3:  The EU and China lag behind the US in economic dynamism, measured by start-up activity, number of unicorns, age of unicorns (younger indicates more rapid innovation), and in productivity growth. Can you document this and tell me why?

ANSWER:  Here is the data to document the economic dynamism gap between the US, EU, and China, along with some key reasons behind it:

Start-up Activity:

• The US had over 63,000 startups in 2020, compared to around 37,000 in the EU and 25,000 in China. The US accounted for over 50% of global venture capital investment.

Unicorns (private companies valued at $1B+):

• As of 2023, the US has 704 unicorns, China has 258, and the EU has 139. The total value of US unicorns is $2.4 trillion vs. $862 billion for China and $449 billion for the EU.
• The US represents 51% of the world's unicorns by number and 65% by valuation. China and the EU lag significantly behind.

Age of Unicorns:

• The median age of US unicorns is 7 years vs. 9 years for Chinese unicorns, indicating more recent startup success in the US. [Claude 3 unable to find data on EU unicorns]

Productivity Growth (average annual labor productivity growth 2010-2019):

• US: 1.0%
• EU: 0.7%
• China: 7.1% (but from a much lower base)

Key Reasons for the US Lead:

1. Larger, more developed venture capital and private equity industry in the US fueling more startup investment. US VC deal value was 5-7X higher than China and the EU in recent years.
2. US equity markets provide better exit opportunities for startups via IPOs. US represented over 60% of global IPO proceeds in 2021.
3. Huge US domestic market enables startups to scale quickly. EU is fragmented across countries and China's market is difficult for foreign firms.
4. Top US universities and companies attract global talent. Over 50% of US unicorn founders are immigrants.
5. Historically strong intellectual property protections, rule of law, and business-friendly regulations in the US encourage innovation and risk-taking.
6. Deeply rooted culture of entrepreneurship and risk-taking in the US compared to more risk-averse cultures in the EU and China's state-led system.

While China leads on productivity growth, this is largely due to catch-up growth from a low base. On most measures of economic dynamism, especially in the innovation economy, the US maintains a substantial lead over the EU and China as of 2023. But the gap has been narrowing over time.

Economist: America is in the midst of an extraordinary startup boom

The Dark Side of Incentive Pay?

The Financial Times recently published a thoughtful commentary by Jonathan Ford arguing that performance pay in the financial sector has been bad for financial market consumers. He extolls the virtues of the post-war, pre-liberalization banking system where a particularly industrious bank manager might get rewarded with a letter of commendation from the bank president. Ford notes that there were flaws.

The system was not perfect: it could entrench snooty managers and make credit hard to come by.

In contrast to these halcyon days, today's financial managers face constant competitive pressure and are constantly rewarded for increasing profits. We hope that profits are generated by delivering ever increasing value to customers. But, especially during the financial crisis, there were many examples of bankers fleecing customers. He notes that the bad acts are a result of bad incentives and suggests a remedy for these bad acts.

But there is of course a simpler way to avoid offering bad incentives. That is simply to pay employees a salary based on what the job is worth.

On net, was the move to market liberalization, and incentive pay as a consequence, worth it?

I will note that, over the past four decades, the financial sector has seen nearly as much innovation as the IT sector. Spreads between interest rates to borrowers and savers and in stock market transactions have shrunk dramatically. More consumers have access to more financial instruments than ever before in part because more financial instruments are available at cheaper rates than ever before. Ask your grandparents if they diversified their retirement fund into international equity funds when they were your age and you will probably get a blank stare. This innovation is also a result of market liberalization. Would de-liberalization and a reduction in banker incentive pay also put a halt to further financial market innovation?

Why do innovative "clusters" form?

Interview with Economist Enrico Moretti suggest three factors that lead to manufacturing agglomeration are much stronger for firms engaged in innovation:

The first one is the existence of knowledge spillovers, also known as human capital spillovers: the fact that our human capital depends not only on where we go to school and how much schooling we get, but also on the people who surround us and from whom we learn. 

The second one is the matching advantage offered by thick labor markets. ... For example, if you are a biotech engineer specialized in, say, biofuel and you work in Silicon Valley, where at any moment in time there are a thousand biotech firms looking for biotech engineers, you are more likely to find the one that studies biofuels ... A better match ... results in higher productivity. 

The third channel is the thickness of the market for specialized services. Again, if you are in an area where there are many other firms like yours and they all need a very specialized type of vendor, you are more likely to find it in an area where there's a big agglomeration of firms in the same sector. 

All three factors exist in manufacturing, of course. But they are much stronger for firms and workers that engage in innovation.
...
In computer science, the top 10 cities account for 70 percent of all the innovation, as measured by patents. For semiconductors, it's 79 percent. For biology and chemistry, it's 59 percent.

HT:  MarginalRevolution.com

Volcker Disses Financial Innovation

Paul Volcker, former chairman of the Federal Reserve and current chairman of the President's Economic Recovery Advisory Board, took a shot at the banking and finance industry yesterday during the Future of Finance Initiative sponsored by the Wall Street Journal: “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence.”

He wasn't totally critical of the industry, however: "The most important financial innovation I've seen in the last 25 years is the automatic teller machine." Ouch!

----------------------------
Euro dollars, dollar-denominated savings accounts from European banks not subject to US regulation, have allowed lenders and borrowers to by pass usury ceilings on interest rates.   Surely that counts as an unambiguous contributor to economic well being.  --Luke

Innovation and the F/X cycle

 

WSJ:  Why is the US Dollar so Strong?  Innovation.

...the U.S.’s leading position in academic research, and the close links of universities and business, gave the country a head start in computerization in the 1970s and early 1980s, in the internet in the 1990s and in newer internet applications and artificial intelligence more recently.  

Each innovation sparked a wave of investment to take advantage of it. This improved profitability and attracted foreign capital—pushing up the dollar. <Note, USD is the price of a dollar measured in foreign currencies>

Then... 

Inventions don’t stay in one country for long. But in each case America’s head start gave it a few years’ lead before investments elsewhere looked as profitable. 

Which lead to capital outflows and more consumption (imports), pushing down the USD, causing the cycle.  

WARNING:  This kind of after-the-fact theorizing is good for developing theories, but is not a substitute for testing them, i.e., correlation does not imply causality. 

Remove barriers to progress!

Open Philanthropy's Progress and Growth Fund

• ...scientific and technological progress that creates ideas is the main driver of long-run growth...But ideas don’t automatically raise living standards; economic growth requires turning them into technologies that can disseminate throughout society. 
• Burdensome government regulations and institutional constraints are increasingly slowing the pace of this progress and creating artificial scarcity. 
• Restrictive zoning and land use regulations have created housing shortages in many major cities, driving up rents and preventing people from [moving to] to centers of economic growth and innovation. 
• Similar constraints hinder scientific and technological innovation — key institutional funders ...burden researchers with excessive paperwork and overly lengthy grant review processes, [leading to] low-risk, incremental research over higher-risk but potentially transformative ideas. 
• ...environmental review laws slow a wide variety of infrastructure projects, including green energy. [Irony is my favorite kind of humor.]

HT:  MarginalRevolution

Why is Europe lagging the US and China?

Since 2000, the EU's share of world income has fallen has fallen from 33% to 25%; and the its companies share of world value has fallen from 31% to 16%.

The Economist mistakenly attributes the difference to several factors:

• Europe's firms seem to have been out-managed 
• Its biggest firms are in the wrong industries
• Entrepreneurial deficiency

All of these seem like symptoms of the EU's decline, not causes. My best guesses about what caused EU's decline are:

• EU regulations stifle innovation and growth 
• The EU cannot tolerate the inequality that comes from incentive pay required for profitable innovation.

This shows up in the graph below, showing that "...in the past decade venture capitalists have backed 661 companies that went on to be worth over $1bn. Only 78 of these “unicorns” are in Europe, worth 8% of the 661 firms’ over-$2.5trn total."

How PBM's and Government bargain

When the US government buys drugs, they penalize drug companies with huge taxes if they don't reach agreement.  From Marginal Revolution:  

The “negotiation,” if you want to call it that, is “your money or your life” and fairness has little to do with it. The IRA also requires very costly inflation rebates, i.e. a price control/tax.

This reduces the gains to innovation, equivalent to weakening patent protections at a time when the gains to innovation in pharma are big.

In contrast, the private sector uses PBM's to create bargaining competition to reduce drug prices (Froeb and Shor, 2023) 

For 181 million Americans not on Medicare or Medicaid but insured through their employer, labor union, or private insurance health plan, the primary restraints on pharmaceutical prices are pharmaceutical benefit managers (PBMs) who administer health plan drug benefits. PBMs use the aggregate demand of their constituent plan sponsor clients — employers, unions, government agencies, health insurers, and others — to negotiate lower prices

These PBM's create competition between drugs within a therapeutic class by setting up formularies (lists of covered drugs) for Health Plans. Drug manufacturers compete by offering lower prices to get onto the preferred tiers of formulary, those with lower co-pays.

... Consider Lipitor and Crestor, two leading statins, or lipid-lowering cholesterol medications. The placement of one drug on a more favorable tier than the other can considerably shift sales volume in favor of the preferred drug. Economists at MIT and Wharton estimate that the statin manufacturers are willing to offer rebates of up to 54% in return for favorable placement.

Declining fertility rates

Overcoming Bias:

Fertility usually falls more rapidly from 4-7 down to ~2, then falls more slowly below 2. Rich nations now average ~1.4, with some as low as 0.8. If world fertility averaged 1.4 for 25-year generations after a peak of 10B, humanity would go extinct in 1660 years. If fertility instead averaged 1.0, that would take only 830 years. Most think extinction unlikely, and I agree with them, but such a risk shouldn’t be taken lightly.

...it seems that a shrinking world population would robustly lead to a shrinking world economy, and then innovation rapidly coming to a halt, which seems pretty scary. Given how naturally people resist change, it might be hard to restart a culture of innovation once it’s been long lost.

Less than 2.1 births/woman leads to a shrinking population.  As a result, pay-as-you-go pensions (like Social Security and Medicare), will run out of money

PowerPoint Gone Wild

Peter Klein at Organizations and Markets discusses the University of Chicago's requirement that all business school applicants submit four PowerPoint slides as part of their application (Washington Post story here).

Supposedly, this will give students a chance to show their creativity and innovation. I guess we can all now confidently set aside any concerns that business schools don't know how to properly educate managers. PowerPoint=outlet for creativity and innovation.

Innovation in sailboat racing driven by contest

This is such a cool video that I needed to find a link to managerial economics so I could post it.  Here it is:  a "prize" is a better way of encouraging innovation than subsidies.  See our earlier post, Prizes (McCain, battery) vs. subsidies (Obama, ethanol)

Why does China win at individual but not team sports?

Spectator:

...China uses an intensive and disciplined bureaucratic system modelled on the Soviet Union, scouting for children at an early age and plucking them out for full-time training at elite government-run sports schools. It’s a method which relies on rigid routine and repetition, meaning it excels in individual, not team-based, sport. In essence it is a machine with the single purpose of turning out other machines to win medals.

But, 

Football doesn’t work like that. As a team sport, it requires creativity and innovation; authoritarianism seems almost guaranteed to destroy it. Football is an open and free-flowing game of countless permutations, relying on the brain as much as, if not more than, physique.  

BOTTOM LINE:  interesting link between a top-down, authoritarian regime and creativity/innovation.  

Business Week's Best Business Books

The latest issue of Business Week includes one view of the best business books of the year. The list includes

• In Spite of the Gods: The Strange Rise of Modern India (by Edward Luce)
• Asian Godfathers: Money and Power in Hong Kong and Southeast Asia (by Joe Studwell)
• The Age of Turbulence: Adventures in a New World (by Alan Greenspan)
• The Black Swan: The Impact of the Highly Improbable (by Nassim Nicholas Taleb)
• The Strategy Paradox: Why Committing to Success Leads to Failure (And What to Do About It) (by Michael E. Raynor)
• Boeing Versus Airbus: The Inside Story of the Greatest International Competition in Business (by John Newhouse)
• The Oil and the Glory: The Pursuit of Empire and Fortune on the Caspian Sea (by Steve LeVine)
• The House of Mondavi: The Rise and Fall of an American Wine Dynasty (by Julia Flynn Siler)
• The Billionaire Who Wasn't: How Chuck Feeney Secretly Made and Gave Away a Fortune (by Conor O'Clery)
• Innovation Nation: How America Is Losing Its Innovation Edge, Why It Matters, and What We Can Do to Get It Back (by John Kao)

How about you? What's the best business book you've read this year? Count one vote for The Halo Effect, discussed in this post.

We need more loan sharks

In 2010, new financial regulations passed by Congress reduce the fees that banks can charge for credit cards.  This caused lenders to cut off credit to low income consumers:

Jamie Dimon of J.P. Morgan Chase reported that, "In the future, we no longer will be offering credit cards to approximately 15% of the customers to whom we currently offer them. This is mostly because we deem them too risky in light of new regulations restricting our ability to make adjustments over time as the client's risk profile changes."

Todd Zywicki predicts that these consumers will turn to other sources of credit, like loan sharks.

The least surprising event of 2010 was that, in the wake of new federal limits on how credit-card issuers can price risk and adjust interest rates, more Americans had to go to payday lenders, pawn shops and local loan sharks in order to get credit. It's simply the latest installment in the old story of regulators thinking they can wish away the unintended consequences of consumer credit regulation.

This seems like a nice example of Merton Miller's hypothesis that most financial innovation (although it is hard to think of loan sharking as an innovation) is driven by ill-conceived regulation.

In our textbook, the main theme of chapter 2 is that "inefficiency implies opportunity."  Every wealth creating transaction deterred by regulation also represents opportunity for someone resourceful enough to figure out how to circumvent the regulation.

President Trump's deregulation

President Trump must have read Chapter Two: 

• Voluntary Transactions create wealth by moving assets to higher-valued uses; 
• Taxes, price controls, subsidies, and regualtion destroy wealth by preventing assets from moving to higher-valued uses.

Or Kimberly Strassel of the WSJ suggests as much:

[The deregulatory] plank of the Trump agenda has been eclipsed by drama over tariffs and the Republican tax bill, though it is economically as important and moving far faster. ...

Alaska has become the symbol of the effort, in part because, as ... Mr. Biden infamously directed more than 70 orders and actions at killing development in the state ...

Whereas it normally takes an agency years to repeal a few rules, the Energy Department had taken 47 deregulatory actions by mid-May, axing rules governing appliances, motors and heating and power equipment—saving consumers and business $11 billion. ...

Mr. Biden is estimated to have added more than $2 trillion in regulatory burdens to the economy over his four years. ... the Trump deregulation effort is going to be as central to any economic revival. Inside Alaska, and out.

I hope that Ms. Strassel writes about the President's deregulatory moves in other areas:

• Making it easier to develop nuclear power (link)
• Deregulating supersonic flight (we should be flying to London in two hours) (link)
• Deregulating Financial Technology (Fin Tech) that will increase innovation in banking services. (link)

BOTTOM LINE:  Deregulation increases innovation which drives growth: real per capita income has doubled in the last 40 years.  

Which organizational forms can best adapt to change?

One of the themes in this blog is that it is not necessarily the strongest firms that survive, but the most adaptable.  Kodak once dominated the film industry but now it is bankrupt.  How did this happen?

Part of the fault lies with Kodak's centralized structure which was slow to react to the expiration of its patents, and the advent of digital photography.  Colby Chandler, former CEO of Kodak, admitted as much at the 1984 annual meeting:

Like many companies, we are not used to working in an environment where there is rapid technological transfer from laboratory to the marketplace. But we know that will be important in our future.

In 1984, in the hopes of encouraging innovation, Kodak decentralized decision making to 17 different business units with profit and loss responsibility.  However, the decentralized decision making was not accompanied by incentive pay.  Instead, small bonuses were doled out by officious bureaucrats, according to office politics. 

As a result, Kodak continued its slow decline, and in 1993 the board of directors fired its CEO for not holding its managers accountable for failure.  This year, Kodak entered bankruptcy.

The moral of the story seems clear to me:   decentralized decision making is better for adapting to technological change, but only if accompanied by strong incentive pay.  This may be the reason that much of certain types of innovation is done by small firms:  owner/operators have the strongest incentives to perform.