Market-Based Management®

Quote of the Day

"We often discover what will do, by finding out what will not do; and probably he who never made a mistake never made a discovery."

                                                                   -- Samuel Smiles (1812-1904)

Bastiat's Birthday Today

If you don't know who Frederic Bastiat (1801 - 1850) is, you should.  This link is an excellent place to start getting to know him -- or for those who are familiar with him, getting to know him better.  His famous "broken window fallacy" and "what is seen and unseen" writings vaulted him to the pantheon of free market greats...  He was the Walter Williams of his times.  Highly recommended.

Competition in Microprocessors

Last week I blogged about Pespi Co "leveling the playing field" in the European cola wars. Well, this week it is the microprocessor industry in the U.S.

Advance Micro Devices Inc. (AMD) is suing Intel because they believe Intel is behaving "like a cocaine dealer who gets customers hooked on its financial incentives".  What is Intel guilty of? Building exclusivity into their customer relationships.  Of course it has nothing to do with the fact that AMD lost over $17 million in the first quarter of this year, and nothing to do with the relative superiority of the Intel product.

Intel is a great example of a company trying to practice creative destruction - constantly trying to make their previous products obsolete. So if competitiors can't stand the heat then perhaps its time for them to "get out of the kitchen".

You can read the full article here.

Gasoline Prices... What to do...

The problem with high, outside fastballs is that you swing at them...  you can't help yourself.

In a Wichita Eagle letter to the editor this weekend, a Wichitan writes:

"Gasoline should be selling for somewhere between 75 cents to $1.15 per gallon.  Instead, people are paying more than $2 a gallon.  Prices are climbing with no end in sight.  High gasoline prices are the result of a failure by our government.  Those Republicans and Democrats in power who make decisions have provided poor, weak and, in some cases, no leadership to solve this problem."

Astonishing. 

This individual clearly believes that prices for things like gasoline are set by the government, and that government has been sleeping on the job. 

In a market economy (even the approximation of one we live in), prices are not set, they are discovered, through a constant cooperative negotiation between buyers and sellers.   If prices are high and rising, it suggests that buyers are competing with each other to bid product away from sellers.

The writer (somewhat incredulously given his lack of faith in government stewardship to date) concludes with:

"The time is now for our government decision makers to act to solve the high-gas-price problem."

I assume they must act now before prices fall back again all on their own...

Perhaps government should decree that gasoline can only sell for $1.15 per gallon or less.   If prices are capped at $1.15 a gallon, what might happen?   I suggest to you the following:

• Since the market presently values gasoline at a higher price right now, setting it arbitrarily lower will increase demand.  It will discourage conservation of gasoline and encourage its use.  People will want more than they would have at $2.00 per gallon. 
• Although they won't pay the full price at the pump, they will pay in other ways... since suppliers will be losing money at the mandated price, availability of gasoline will start evaporating just as demand for it starts increasing. 
• Lines will get longer (what's your time worth?).  Some will use their savings on gasoline to pay others to wait in line for them.  Black markets will arise as friends who know friends suggest they can get access to a gasoline dealer without a waiting line at a higher, illegal price.

In other words, the price cap will have created an artificial shortage of gasoline.

Prices are just messengers of reality -- shooting them doesn't get rid of the reality.  Just the connection to it.  You can't cool off the world by plunging your thermometer into an ice bucket.  You can't solve high gasoline prices by mandating price ceilings.

What Explains the Wage Gap?

John Stossel has a provocative "Give me a Break" article over at Townhall.com that addresses the wage gap between men and women in corporate America. 

Some interesting quotes:

"... if a woman does equal work for 25 percent less money, businesses would get rich just by hiring women.  Why would they ever hire a man?"

And:

"But the market isn't hostile.  The market is just.  It rewards you for the work you do, not for the work you choose not to do."

It's a good read.

Global Economy

We live and do business in a global economy; to think otherwise is hypocritical.  After reading many newspapers one would think that China is in the process of hijacking the United States economy.  Today, CNOOC, China's largest offshore oil company formally bid $18.5 billion for Unocal.

Where were the outcries against globalization on June 16, 2005 when Bank of America announced it was buying a 9% stake in China Construction Bank for $3 billion?  China has recently welcomed foreign competition in the banking sector which has an estimated $1.3 trillion in deposits.

Unocal and Bank of America will make decisions that create value for their shareholders.  Admittedly, there are still many reforms that need to take place in China.  However, shareholders of companies that are doing or plan to do business in China can make the decision on whether they believe that the reward is greater than the risk.

For "Public Good" or "Government Good"?

You've probably heard by now that the US Supreme Court ruled by a 5-4 vote that the city of New London, Connecticut may take the private property of seven homeowners through eminent domain to make way for a hotel and convention center. This ruling is a news story in virtually every news source today. Here is a smattering of excerpts:

In his majority opinion, Justice John Paul Stevens said New London could pursue private development under the Fifth Amendment, which allows governments to take private property if the land is for public use. He said the project the city has in mind promises to bring more jobs and revenue.

"Promoting economic development is a traditional and long accepted function of government," Stevens wrote. He added that local officials are better positioned than federal judges to decide what's best for a community.  He was joined in his opinion by other members of the court's liberal wing — David H. Souter, Ruth Bader Ginsburg and Stephen G. Breyer, as well as Reagan appointee Justice Anthony Kennedy, in noting that states are free to pass additional protections if they see fit.

The Constitution says government may take private property "for public use" if it pays the owners "just compensation." Originally, public use meant the land was used for roads, canals or military bases. In the 19th century, railroads were permitted to take private lands because they served the public. In 1954, the court said officials could condemn homes and stores in "blighted" areas as part of a redevelopment plan. Now, as long as officials hope to create jobs or raise tax collections, they can seize the homes of unwilling sellers, the court said. This "public purpose" is a "public use" of the land, the court said.

Whether the Supreme Court was correct in ruling that it's really up to the state to make determinations of eminent domain is one side of the issue. My deeper concern is the attitude and deep belief by many city governments that they have the right to confiscate your private property if "it promises to bring more jobs and revenue." So I have a few parting thoughts:

• How many of the city officials would be in favor of this if they ever thought their homes or small businesses could be taken?
• Do city officials in this case really care about the citizens and their rights or do they mainly care about increasing the city government's pocketbook?
• Why don't city officials understand the vital role that private property (protected by law) plays in prosperity? Will citizens of their great cities stop working hard to buy homes and start their own businesses if they can be taken away at any time by government?

The case is Kelo et al v. City of New London.

Competition in Cola War?

Imagine playing a game and you're just getting killed by your opponent. Everything you try doesn't work because your opponent is simply too fast, too strong. What options do you have? You can find an new game to play - facing a different opponent, rethink your strategy, and retool your game.

Of course there is another way. Why don't you appeal to the referee or umpire to 'level the playing field'? Imagine Michael Jordan's opponents appealing to the referee to disallow some of Jordan's jump-shots because of his ability to leap and seemingly hang in the air.  This is in effect what Pepsi-Co has successfully done in the Europe with the EU removing the Coca-Cola Co.'s ability to establish exclusive relationships with retailers.

While EU regulators argue they are promoting competition they are in reality weakening the ability of individuals to enter into voluntary agreements.  No one is forcing retailers to enter into exclusive relationships with Coca-Cola. Sure retailers give up some freedom by signing exclusively with Coca-Cola but they gain access to all of the company's products.  If they don't like the exclusivity - don't sign the deal.

Pepsi recognizes that it can't compete on a level playing field and so it was time to call in the referee.  Sounds like profit through the political means to me.

You can read the full article here.   

Steve Jobs' Message to College Grads

Steve Jobs (CEO and founder of Apple Computer) addressed the graduating class at Stanford University this week.  Some graduation speeches are tired and worn out, but I found this one entertaining and inspiring. 

A few ties to MBM: 

• Fulfillment -don't settle or live someone else's dream.  Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is truly great work.
• Life (like the market) is a discovery process.  Failures can often lead to or link to success.
• Comparative advantage, creative destruction, and vision can also be found in the speech.

Click here to view the speech in its entirety.  Enjoy!

High tech shopping carts - Grocery store as price-seeker

Some of you will remember seeing the design team from IDEO building a futuristic shopping cart when you did MBM Academy. (If you have forgotten, or would like to see their design just follow this link)

It seems a store in Boston, Stop and Shop, (CBS News) is bringing the shopping experience into the 21st Century. The Shopping Buddy, attached to each shopping cart in the store, knows exactly where you are in the store, keeps track of everything you have bought so far, and displays a running total of how much it all costs. Stuck for dinner ideas - Shopping Buddy provides a selection of recipes and then email you if you see something you would like to try.

From the article, "Everything's changed in the grocery game since Wal-Mart muscled in and quickly became the biggest in the business. Supermarkets quickly learned that, since it's almost impossible to compete on price, they better have something else to sell. And surveys have shown almost half of us are willing to pay more for a more pleasant trip down the aisles."

This is a great example of businesses competing on things besides price in an area (groceries) traditionally thought of as a commodity industry.