Tuesday, December 30, 2008

Blog Note: Added 'Interesting (?) Links'

links.gif I've added a widget to this blog to help me keep track of interesting economics- and UT-related articles and blog posts I come across.

If you're reading this on the web, you can find it in the right column with the uninteresting title "Interesting (?) Links" (shown here).

If on the other hand you're reading this in a feed reader (which I personally recommend—it's a much more efficient way to consume news) you'll see a daily summary of links in the feed.

Friday, December 26, 2008

Loosely-Coupled Economies

Yesterday my good friend Mike Curtis and I were talking about the current economic condition and how our shared experience with technology might inform our thinking about it.

Anyone who's been paying attention to (Internet) technology over the last 15 years has a good intuitive sense for the value of loosely-coupled systems. Loose couplings provide a measure of elasticity that can dampen the impact of a shock to any one part of the system. The tradeoff for this increased flexibility is decreased efficiency: tightly-coupled systems are typically more optimized for the specific task at hand and as a result incur less overhead. So by comparison, loosely-coupled systems are less efficient.

My suggestion was that as the global economy becomes more interconnected, it will need to also become more loosely-coupled in order to avoid the kind of cascading failures we're seeing now. But what about the accompanying decrease in efficiency? Well, I'm not so sure there needs to be one.

A more loosely-coupled economy would be one comprised of entities that are smaller and more numerous, and interact with each other at arm's length: ecosystems instead of conglomerates, freelancers instead of employees, many-to-many instead of one-to-one. But this system can only come into being if transaction costs between such entities becomes low enough. Frankly, I think we're getting there.

At my company, we outsource a lot of our non-core work including payment processing, server hosting, and even marketing. Our employees and contractors provide their own computers, phones, and offices. Virtually all of the corporation's connections—both to other companies and to people—are what I would call loose couplings. And technology makes the cost of the company's transactions with those loosely-coupled entities incredibly efficient.

It's simply cheaper for us to use PayPal to accept credit card payments than to process them ourselves. We're satisfied with their service but could switch to Google Checkout or Amazon Payments if we needed to. Our marketing function draws upon the expertise and creativity of tens of thousands of people around the world, but is completely automated and is designed in a such a way that it always pays for itself. And moving our server operations from one supplier to another can be done in a single day. We could move all of these functions in-house but doing so would not only make our business more tightly-coupled (and therefore more susceptible to the failure of any of of them) but also cost us more for every transaction.

I believe the dichotomy between tightly-coupled, highly-efiicient systems and loosely-coupled, less-efficient ones is false. In my experience, loosely-coupled, highly-efficient businesses are absolutely possible. And I believe that model shows the way forward for the broader economy—but there's a hitch.

Charles Fitzgerald, Microsoft's former GM of Platform Strategy, wrote about the difficulty of transitioning a company's business model from low-volume, high-cost to high-volume, low-cost:

The problem is to get to high volume, low cost, there is usually a low volume, low cost waypoint. The radical change in cost structure required is just too painful for most companies to contemplate.

lo-lo-detour.gif I believe there's a similar waypoint in the transition I'm proposing. For companies (or economies) to get to loosely-coupled, highly-efficient, they have to go through a loosely-coupled, less-efficient phase (illustrated here) which isn't an appetizing prospect, especially in times of economic hardship. But a push from government could help.

There are several things government could do to support and accelerate this transformation: make it easier and cheaper to form and dissolve corporations and execute contracts electronically, make it possible for individual small investors to put money into private companies, and maybe most importantly, guarantee people the freedom to create and own their own intellectual property even while employed by another person or corporation. The bizarre and retrograde IP serfdom that is imposed as a matter of course in Silicon Valley is in my opinion this country's greatest hindrance to innovation. I'll be writing much more about that in the future.

So, what are your thoughts about my suggestion of a loosely-coupled economic future?

Wednesday, December 24, 2008

The Economics of Growing Christmas Trees

As I read a University of Minnesota discussion on the Economics of Growing Christmas Trees (linked to from a list of stories about the economics of Christmas) my eye caught one of the costs that should be considered: "fertilizer". My mind read it—no joke—as "marketing".

See? A few years of practical business experience does have an effect.

Merry Christmas!

Tuesday, December 16, 2008

Tyler Cowan Reads Keynes (So You Don't Have To?)

keynes.jpg George Mason University economics professor Tyler Cowan is going through Keynes' General Theory of Employment, Interest, and Money chapter by chapter "with an eye toward a deeper understanding of what Keynes wrote and why it is so important". Here's his analysis so far: Cowan is taking a break for the end of the semester but promises to pick back up in January. I'm nearing the end of my Schumpeter biography and hope to catch up on Keynes and start following along in real time then.

Update: Ryan Romanchuk (@rromanchuk) via Twitter: "Henry Hazlitt also wrote a book called 'The Failure of New Economics' that also does a chap by chap analysis The General Theory". A PDF of the whole book can be found here. Thanks, Ryan!

Monday, December 15, 2008

Inclined to Liberty

Inclined to Liberty True to my word, I've re-subscribed to the Mises Economics Blog, and as a result have added another book to my reading list: Inclined to Liberty by Monex founder Louis E. Carabini.

Hopefully that will appease all you Ron Paul nuts out there.

Just kidding. :-)

Saturday Night's Alright for, uh, Finals?

I just looked up the final exam schedule for the spring semester and discovered that mine will be on Saturday, May 16 from 7:00p-10:00p.

That pretty much blows my plans to drive to Sherman that weekend to see my stepsister Keatan graduate from Austin College. Bummer! Maybe I can get Dr. Hickenbottom to let me take it at another time. Hmm.

Sunday, December 14, 2008

Other (not specific to economics) Reading

Of course I read a bunch of other sources that often have great economics-related material but aren't dedicated solely to economics, including Paul Kedrosky's Infectious Greed.

Paul is an eclectic thinker, prolific blogger, rabid Twitterer, and frequent CNBC contributor. A recent blog post points to a piece n the New York Times by Keynes biographer Robert Skidelsky.

Wednesday, December 10, 2008

Economics Reading

prophet-of-innovation.jpg To get myself in the proper mindset to start my economics studies in the spring I've been doing some reading, including Adam Smith's Wealth of Nations (I've just started my slog through Book IV) and Thomas McCraw's biography of Joseph "Creative Destruction" Schumpeter, Prophet of Innovation, which I'm enjoying quite a bit.

I've also subscribed to a number of economics-related blogs, which, although mostly concerned with either macroeconomics or popular Freakonomics-type topics, are nonetheless interesting: I've tried and then unsubscribed from a few others, including the Mises Economics Blog which I found too strident for my taste.

Suggestions for additional reading are welcome.