Market-Based Management®

The Undercover Economist

If you liked Freakonomics, you're going to love the latest book out by Tim Harford (Economist and columnist for the Financial Times). 

Dr. James Reese has a very cool podcast service over at RadioEconomics.com, and if you go to this link you will find an interview with Tim Harford in which he talks about his new book as well as his Financial Times columns (clicking on the title starts the audio stream).  You can also find on this site a couple of great interviews with Russ Roberts (who wrote the "Economics Love Story" Invisible Heart available in Hot Commodities as well as Amazon).

If you have a subscription to the Financial Times, you can follow this link to Harford's new Saturday column, the first of which appeared today.

What motivates people to risk their capital in an uncertain world?

The article Backlash Spreads as Profits Surge at Oil Companies in today's Wall Street Journal (online subscription requried), is nicely complemented by Russ Roberts' post, The Fallacy of Affordability, over at Cafe Hayek. 

Can Markets Be Trusted To Protect Consumers During Emergencies?

That's the question asked in a recent study by Professor James Griffin at Texas A&M.  It's timely, given that Congress is considering legislation to punish "price gouging" on gasoline and diesel fuel during periods of national emergency (like Katrina). 

His conclusion?  We can't afford not putting our trust in the price system:

"Curiously, by attempting to treat the symptoms of the disease, we not only make the current problem worse, but also exacerbate future supply shortages in three ways:

(1) Price controls impose hidden costs on consumers in the form of added waiting time and wasted fuel from longer waiting lines at the pump.

(2) Price controls lead to lower supplies in future emergencies as gasoline producers / marketers are denied the incentives from higher prices to build spare capacity and to hold extra inventories for emergency situations.

(3) Foreign refineries, which provide about 10% of U.S. gasoline supplies, are immune from price controls.  They can simply divert their supplies elsewhere, compounding the shortage problem.

[...]

History tells us that a new price-control program is not the answer as some in government might think, but a progenitor to even greater problems... "

It's an interesting read -- hat tip to Rob Bradley for bringing it to my attention.

Innovation AND Critical Thinking

In recent weeks, I've been bombarded with articles, quotes, training classes, tools, and video segments about innovation.  A California-based design firm called Ideo has become famous for their success in the innovation/design business.  They demonstrated their process for an ABC Nightline program a few years ago, and it has been ABC's most-requested/purchased program ever since.  Their task was to improve the shopping cart, and in just a few days, they impressively demonstrated their ability to innovate.

A collegue shared an article from FastCompany that is a book excerpt from Tom Kelley, general manager of Ideo, about the personality types it takes to "keep creativity thriving and the devil's advocate at bay."  Until recently, I always thought playing the devil's advocate was just good business.  Afterall, we can't walk around with our heads in the clouds.  We have to face reality, right?  Right.  However, I believe we all need to understand the need for--and appreciate the importance of-- people who bring wildly innovative ideas to the table.  Secondly, we  need to adopt a practice (or even process) where we allow those innovative (maybe even wacky) ideas to come alive.  Then, at a  later point in the process, there is an appropriate time to bring critical thinking, healthy challenge, etc. to the table.  Innovation AND critical thinking are necessary, but knowing WHEN to pull out the "critical thinking" or "devil's advocate" hat and when to let the "creative/innovative" hat run the show seems an important skill for business people to develop.

Speaking of hats...if this topic interests you, you may want to check out Edward de Bono's, tool/framework called Six Thinking Hats.  This framework separates out the different aspects of thinking--allowing time for each component (new ideas, information, feelings, risks, etc.).  I was recently exposed to this system/tool and I believe it has some practical application for any organization.

APEE Essay Contest

If you have children, or know someone with a child interested in such things, the Association for Private Enterprise Education (APEE) is holding an essay contest for students aged 25 and under. 

First place is $2500, second is $2000, and third is $1500.  There will be several $150 honorable mentions.    The essay needs to be 1000-2000 words (which amounts to about 2-4 pages) on one of the following topics:

• What causes prosperity?
• What is the proper role of regulation in a free economy?
• Can free markets protect the environment?

This is an awesome opportunity for you to engage younger generations about why markets are such a powerful force for good in our lives, creating prosperity and social wellbeing wherever they are harnessed.   If you need help getting started or need resources, please feel welcome to contact our team.

Nothing Fishy Here...

Here's an exellent example of how high gasoline prices have caused people to adapt their habits and living patterns -- either by conserving (as is the case here), finding substitutes, or paying the higher price because they subjectively value it more than their present alternatives...

Quotable Quote from the article (titled, "Fuel Spike Puts Bite on Anglers" in the Virginian-Pilot):

"I lay awake at nights because I'm so aggravated about gas prices," said Rajnys, a retired Navy chief who lives in Norfolk and now works at Newport News Shipbuilding.  "My fishing habits have been cut back, for sure.

I've had to become a lot more conservative about when I go and what I do."

This guy has a boat that has a 150 gallon tank -- at $3 per gallon, that's $450 to fill 'er up.  Ouch.    The article goes on to point out the spillover effects on downstream (no pun intended) products and services.   The entire economy's patterns of production and consumption are changing automagically without any legislation required -- just from the signal provided by the price on gasoline.

Too bad you have to read the sports page to get a good article on economic principles.  (Hat tip to Dennis Gartman for pointing out the article in TGL.)

Creative Destruction in Construction

Creative destruction can be defined as the "destruction" of goods and services in a free market by the creative efforts of entrepreneurs, who provide society with even more valuable goods and services.  We often think of creative destruction as it relates to consumer goods such as televisions, computers and cell phones.  These products are constantly "destroyed"  in the race to become faster, smaller, and more powerful .

But creative destruction plays no favorites and can also be found hard at work in today's road construction industry.  Materials such as asphalt and cement have been used in road and bridge construction for centuries but any comparison to the products and processes used by our earliest builders is merely coincidental.  Today's construction products and processes are much stronger and more durable thanks in part to the ever expanding use of additives such as polymers, plasticizers and synthetic fibers.   

But the story doesn't end here as this entrepreneurial industry has also learned to how to recycle.  Materials that used to be placed in landfills can now be recycled and used again and again.  In fact, construction materials are the most recycled products in the world.  Try to do that with your old PC!  Recycling has become an important method to preserve scarce natural resources as well as a valuable and necessary tool to keep from being creatively destroyed by the competition.

And how about construction methods?  As late as the 1920's, we still placed most materials using rakes and shovels.  A "heavy" truck was about the size of today's pickup truck and had about the same capacity.  In the '20s, crews could hand finish around 10 tons per hour (about the size of your average driveway).  Today, crews can routinely place 300 to 700 tons per hour using state of the art computerized equipment and even GPS technology. 

And what has all this creative destruction done for society?  For starters, the trip to grandma's house that used to take all day can now be done in  a few hours.  And the cost of having dinner at grandma's house has gone down (inflation adjusted) due to the efficiency of transportation.  In this case, time is money!   And what about the quality of the transportation network?  Those orange cones you see on your drive home are the beginnings of smoother, more durable roads that decrease wear and tear on your vehicles which leaves you with more money in your pocket which leads to more trips to grandma's house, which leads to... 

And the cycle continues.