Market-Based Management®

Integrity for sale

Over the weekend CBS ran a story about a self described "academic prostitute" who for $40/hour writes college admission essays for high school students and term papers for college seniors.  And it seems to be a growing cottage industry.

The reporter, Byron Pitts, asks, "who's to blame? Can you spell Enron and Major League Baseball?" The reporter also complains the "message is becoming increasingly clear: Don't just win, win at any cost".  Its easy to blame Enron, after all didn't Ken Lay get someone to do up the books for him so he could get the 'financial' grade he wanted?

Unfortunately in the case of these 'student cheating services' the reporter found that many of the student's parents are putting up the money.  Maybe parents would rethink their actions if they thought they were actually encouraging their child to be the next Ken Lay. 

Student papers are obviously cheap but the cost, in terms of integrity might be impossible to measure.   

Blogging Becomes a Corporate Job

From today's Wall Street Journal: "In its short lifespan, blogging has largely been a freewheeling exercise in online self-expression. Now it is also becoming a corporate job."

A digital tip-of-the-hat to Ben for being ahead of the curve.

Regulation and the Natural Progress of Opulence

Does the highway safety act promote reckless driving?  Does the disabilities act disemploy the disabled?  Does the endangered species act promote clear cutting and encourage suburban sprawl?  Over the last few decades Sam Peltzman, University of Chicago economist, has answered or helped to answer questions like these in the field of regulation.  In this paper, given for the 2004 AEI-Brookings Joint Center Distinguished Lecture Award, Peltzman provides a review of the evidence for the above questions—showing that people adjust their behavior to a regulation in ways that counteract the intended effect of the regulation.  That is, “regulation creates incentives for behavior that offsets some or all of the intended effect of the regulation.”

But Peltzman does not end the analysis there.  He further inquires about how such counterproductive regulation can survive politically.  His answer is that “progress can often hide the bad effects for a long time and thereby immunize the regulation politically.”  Or, as Adam Smith may have put it, the natural progress of opulence protects counterproductive regulation.

Freakonomics Info

The Freakonomics book we've recently read (see the "What We're Reading" list on the left of this blog) has hit the number 2 spot on the NY Times Nonfiction Bestseller list.  I find that highly encouraging. 

For those who've enjoyed the book, or are currently reading it, here is a document that contains the reactions of several economists to the book in general, as well as to specific analysis of arguments within.  It's a good read -- about 18 pages in all, but you can pick and choose among the entries that look most interesting.

1st Q GDP and Profits

In the "general awareness of current events" category, the Bureau of Economic Analysis announced today that US first quarter GDP increased an inflation-adjusted 3.5%, while first quarter profits were up 13.8%.  Follow this link for the highlights and some cool bar charts showing year-on-year growth for both items.

The War of Ideas

The Stanford Social Innovation Review has an interesting article about who is winning and who is losing in the war of ideas in American politics.  Although “liberal” foundations out-spent their “conservative” counterparts by a factor of almost 5 to 1, the article asserts that conservative foundations are winning.  Given the funding differential, the article then offers two reasons why conservative foundations are more effective than their liberal counterparts in winning the war of ideas: 1. Conservative foundations make “general operations” grants, which allow grantees to be more responsive to changing circumstances; and 2. Conservative foundations “will only fund you if you toe the ideological line,” a rigidity that keeps potentially wayward factions in line.  In my mind neither reason—nor the evidence provided in support of each—provides a particularly robust explanation of outcomes, and ample counter-evidence could be gathered if one were so inclined.

Rather than analyzing these explanations and challenging the evidence, I’ll offer a third hypothesis, one that can and should be tested.  Conservative foundations are winning the war of ideas because they’re relatively more knowledgeable and practical about market processes than their liberal counterparts.  A testable hypothesis might be: although far from the market ideal, conservative foundations implement a higher degree of market discipline on themselves than do their counterparts on themselves.  For example, of the liberal and conservative foundations listed in the article, which ones quickly discard failed projects (or conversely hold on to underperformers) and which ones quickly adopt or copy successful projects?  On a relative scale, which foundations demand performance measures—not just measures of outputs like op-eds or media appearances but something akin to an ROI for real advancement of social progress?

All that said, the first assumption of the article ought to be examined, too (as the author suggests): Are conservative foundations really winning the war of ideas?  Commentary magazine recently ran an article that provided a good history of philanthropic investment in “conservative” ideas.  Both the Stanford and Commentary articles are a good start to better understanding the current war of ideas landscape and (possibly) what drives outcomes.

Productivity Drives Prosperity

Here's an interesting graph comparing several countries' annual average 1995-2004 percent change in output per hour of labor from this week's Economist (p112).

Clicking on the image will give you the fullsize to view detail. 

Quote accompanying graph:

"Since 1995, labour productivity in America has grown by 2.5% per year.  This is a striking improvement on previous performance, and owes much to advances in Information Technology (IT).  Most big European economies have failed, so far, to match America's record in using IT to boost efficiency.  Far from accelerating, productivity growth in the EU-15 has decelerated to 1.5% a year over the same period."

The source is The Conference Board.

Arrogance, Humility, and the Law of Proportionate Belief

Arnold Kling has a nice post over at Tech Central Station on "The Law of Proportionate Belief" as a guide to navigating away from arrogance:

"The Law of Proportionate Belief states that one should believe in a certain proposition or policy prescription in proportion to the arguments for that position.  The Law is a core ideological principle with me.  I have problems with anyone -- liberal, conservative, libertarian, or otherwise -- who violates the Law...  Another term for violating the Law of Proportionate Belief is 'arrogance.'  Conversely, following the Law can be viewed as 'humility.' "

Check it out and post your thoughts in the comment section -- do you agree with Kling's point of view?

Speaking of Rich and Poor...

If you can get ahold of a copy of yesterday's WSJ, there's a nice op-ed on page A14 by Alan Reynolds titled, "For the Record: The American Dream is Alive and Well" that addresses the recent series appearing in the WSJ and NYTimes regarding income inequality in the US and the fading of the American Dream for younger generations...  basically calling it all bunk.  The online version is here if you have an online subscription to the WSJ.

Reynolds says that loads of empirical evidence and studies from all sides explain quite clearly why some earn more than others:  they work harder,  have more experience, more schooling, etc.  He emphasizes that there is no evidence that it has become harder to get ahead through hard work at school and on the job.  Claims that income levels are better explained by chance of birth rather than personal effort requires both a denial of widespread progress and an exaggeration of income differences through easily discredited statistical ploys.

Capitalism isn't Perfect!?

Sometimes, when we're in the heat of passion, frothing over the wonders of the free market economy and the evils of socialism in MBM Academy, some brave soul raises a hand and says, "but Capitalism isn't perfect."

It's a wonderful point -- one that most don't fully appreciate, because the response to that statement allows a telling of why capitalism is not a solution, just the best tool / technology available to us in the ongoing pursuit of reality and improved living. 

First, let's remember that the term "capitalism" was itself coined by its opponents.  It's a vague term that gets applied to any number of notions, so let's be specific.  We're talking about a system of private property, individual liberty, individual responsibility, freedom to exchange / contract, and rule of law.  That's what I mean when I say, "capitalism." 

Let's also reveal the assumption that underlies our thinking: Reality is infinite and thus we, as finite beings, are not able to know it completely.  We can only get better incrementally at approximating it.  That means there are no "solutions" that we as humans can know ahead of time, out of the box.  We must experiment, act, fail, adjust.  Figuring things out -- how to increase our living standards, etc., is a discovery process.

Capitalism is a tool that facilitates discovery.  The collectivist approach (e.g. Socialism), by limiting freedom, emphasising equality of outcomes over private property and the profit incentive, and boasting "solutions" to how society's progress is best planned by its "experts," dampens discovery.  That is why everywhere -- everywhere -- collectivist experiments have occurred, they have utterly failed. 

To say that capitalism is or isn't perfect lacks meaning for me.  It is the only tool I know of that facilitates discovery and thereby increases the wealth of an entire society.  Consider that even those considered “poor” in the U.S. eat and live better than the Kings of England did in the 16th century.  (See Cox and Alm’s Myths of Rich and Poor for outstanding data in this regard).   

Every society (that I am aware of) that has fostered and closely guarded the institutions of private property, individual liberty, and so on, has flourished. Those that haven't are either impoverished or have perished.