Thomas Sowell on Scarcity

" The first lesson of economics is scarcity: There never is enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics." Thomas Sowell

Ethics and Economic Progress

I make no resolutions upon the turn of a calendar year partly because time change is a very arbitrary factor but I resolve every now and again to read some more of a type of literature or improve on a set of skills that I consider important. Among the resolutions that I made is to read at least one book per month written by a scholar who won the Nobel Prize in Economic Sciences. 

In the last week, I started and read an extremely perceptive book that provides the title for this blog post. Its author is James Buchanan, to whom the Nobel prize in Economic Sciences was deservedly awarded in 1986, "..for his development of the contractual and constitutional bases for the theory of economic and political decision-making."

Needless to state, the book is very well written and reads well notwithstanding the fact that its author avoided complicated notations in the text. Without spoiling it for readers of this blog, he provides a justification based on Adam Smith's thinking for the reason to encourage saving and work. He correlates these easily by starting with the observed truth that division of labour and exchange are significant factors for raising productivity. Growth in division of labour in turn affects the extent of the markets with the result that more labour and saving affect this increase.  Taking these two together, it is clear that the value to society is increased by the choice of an individual to work some more or save some more. On the other hand, idleness exerts a cost on the rest of society because it constrains its growth. 

Essays in the second portion of the book connect these three thoughts by addressing the effects of these ethical considerations on tax responses, idleness and "unproductive" labour. In all, the essays clarify many issues and are written in a very lucid and engaging manner. This is indeed a five start book written by a colossus of the discipline and leader in the Public Choice School of economics.

Is Gil Meche Magnanimous?

I consider myself a sport buff to a minor degree but admittedly not as knowledgeable about all sportsmen in all sports disciplines. It is still noteworthy for me to read here that Gil Meche, a pitcher with the Kansas City Royals has retired from the game and left US$ 12 million on the table. This payment was almost guaranteed because in spite of his age and discomfort on the shoulder, he could have plodded along and ensured that the contractual sum was paid. According to the story, Gil has opted for retirement and foregone the substantial sum with full knowledge that he could have shown up to work and earned that income regardless of his performance.

In my view, this is a curious state of affairs because few athletes in a similar situation would have reasoned like that but also because it shows the risks that teams and professional players build into long term contracts. Players at the start of their careers tend to earn far below what they are worth and many players well past their peak earn much more than their performance would warrant. Many pundits accept this as one way of ensuring that future income compensates for the poor rewards but I am less convinced of this. I consider that it is still possible to structure contracts that can be varied with performance and with a fixed sum to ensure that players are properly motivated. As it is, Gil has given his club a real financial boost and perhaps subsidized the pay of other players.

Green Bay Packers: Different Business Model

At the risk of blogging too much about sports franchises, I have to make reference to this blog post by Dave Zirin in the New Yorker Magazine. It is especially pertinent because soccer fans and administrators in Europe have expressed the worry that there's a need to limit the ability of wealthy individuals from providing support to teams because it distorts the playing field. The story shows that the Green Bay Packers are a different outfit from other franchises in the NFL because they are owned by their fans. As a result, they operate entirely as a non profit entity and have had an decent record in  reaching the Super Bowl finals.


My view is that like other businesses, running a sports franchise is just as difficult and perhaps more so because there's an emotionally engaged fan base. Still, as a couple of top soccer clubs in Germany have proved, it is possible to operate a successful sports franchise through a business model that is different from what is conventional. It is also clear that a Franchise whose ownership is dispersed among 200,000 fans can still be run professionally and the choice of not taking in profits is one that many fans could take. Equally important that for the Green Bay Packers, the business model has proved stable for more than seven decades.

Logo from: http://www.packers.com/  

Sports Franchises in Big Cities

One of the memorable points from reading this very perceptive expose of modern soccer was the observation that the three most populous cities in Europe have never produced a team that won the continental event. And this is in spite of the obvious fact that franchises in these cities would have some of the largest fan bases and access to quality personnel. The authors highlight a number of smaller cities in France, England and Germany that have won the championship more than once.

Reading a NYT article by Richard Sandomir leads to the understanding that a similar fate has met some of sports franchises in the US too. To my mind, it seems that the mere size and diversity of a city may not be sufficient for arranging a winning sports franchise. It is unclear to me whether this is a highly selected sample of poor performers or whether there is a reason why metropolises seem to struggle when it comes to creating winning teams. A data based review of this is necessary to settle this point because the Los Angeles Lakers have been quite successful as a sports franchise. Is there empirical proof that mid-size cities  really have better sports franchises?

Quoting Todd Buchholz

"Some would say that the most important deficit in Washington is located along the spines and between the ears of the politicians". Todd G. Bucholz in New Ideas From Dead Economists. p. 262.

When Journals Retract Articles

Many scholars take the ability to publish in an academic journal as the clear mark of their professional capability. Indeed, the most prestigious journals in both physical and social sciences (economics included) proudly report that their first article rejection rate is upwards of 90%. What this high rejection figure shows is that it is difficult to publish articles within these journals owing to the intense competition and high rejection rates. I am inclined to the belief that very new ideas are difficult to come by and even more difficult to properly reason through and prepare for publication in a manner that would be appreciated by other professionals.

With all my due respect to academic journals and the rigorous peer review that they undertake, the main test of their integrity comes when a retraction is made. Ben Goldacre writes here about the completely opaque manner in which journals respond to retracted articles. Examples given in the piece suggest that most of these journals do not care sufficiently to clarify the reasons for retraction of an article and its purge from the record. To my mind, this is not only an illustration that editors may not care much for their audience but also that they fail to bring the refereeing role to full cycle. I would expect that in the pursuit of truth, these institutions should be interested in correcting the record through full disclosure as that too helps in ascertaining the truth and helping to avoid the perpetration of error.

Two Bungling Mobile Phone Companies

I have not been to business school but I think that there are keen lessons to be learned from focused case studies of leading businesses in order to understand how enterprises are managed and how they respond to the market conditions of their time.  The GSM Association's mobile briefing here addresses an instance in which two mobile phone corporations reversed certain business decisions that they made. The author uses the article to illustrate how poor consultation or testing of ideas prior to full-scale roll did leave the strategy managers of these firms with some egg on their faces. 

One must agree that the situation is ironical for a number of reasons. The first one is that mobile phone corporations would be expected to understand clearly the needs of their customers and the strategy teams are probably meant to watch closely trends to ensure that they are in touch with changing client needs. As Richard Handford states in the piece, the two corporations based in the UK seemed to have "failed to read their clients mood" and with disastrous consequences. 

Secondly, while humility in a fast changing industry is necessary, I am really surprised that these corporations which trade on the ability of people to exchange information seem not to have a method for testing and filtering views among their large client base. I would think that with such a large client base, it would occur to strategy managers to test such an initiative among a small but significant portion before its roll out throughout the network. The big lesson for me is that mistakes do happen in business environments but that even corporations that are data rich have not found ways to make sense of that data that they receive, store and transmit for their clients. Perhaps I should correct myself because if internal strategy teams could easily do this, then the high end business consultants would have to find other work.  

Statistics Meets the Decline Effect

A week ago, I went through this extremely perceptive piece by Josh Lerner in the New Yorker Magazine addresses the "Declining Effect" in scientific studies. The claims are quite strange because among the things one learns about the validity of a scientific study is the fact that the results would hold if a well-designed study was replicated. And yet the author makes the claim that almost all scientific studies that make one claim often find that the power of the effect being measured erodes with time. To my mind, this must concern scholars of all kinds because recent policy debates are increasingly reliant on the power of replicable and scientifically sound studies in both the social and physical sciences.

The author of the piece explores a number of reasons to explain this equally strong phenomenon but reaches no firm conclusion save that there is a discernible bias towards positive results in scientific journals and the tendency to chase results that meet the significance test. The first thing that came to my mind was the possibility that the systematic weakening in results that are initially robust is itself a form of reversion towards the mean but this too is discounted.  So what it leaves is the fact that there is a lot of randomness and that proving an idea one way or another is at some level a matter that has no certainty. 

Why Optimism Rules

In this earlier post, I mentioned a book that was purchased through some careful price checking across the several platforms for purchasing books on Amazon. I just managed to read through that book through the holiday and was quite impressed with it save for the monotony suffered on account of author's inability to avoid making cheap jabs at Obama's science advisor. The author's foibles aside, one has to say that it would be one of the few books to buy and circulate to the cult of the pessimists.

In short, the book adopts the ideas of Adam Smith in terms of the value of exchange on the one side and the tendency for evolution on the other to lead to betterment in human life over centuries without fail. In it one finds a clear text hat is largely free of an ideological bias in arguing that human progress is bound to continue provided the simple freedom to exchange is maintained. Among the impressive chapters within the text is the demolition job on neo-Malthusians who continue to find new reasons to argue that humanity is doomed on account of population growth.

John Tierney, writing in the NYT here reminds me of the same argument that in spite of the evidence, many people remain pessimistic. In John's case, he takes the opportunity to state that he and Julian Simon's wife won a wager against an academic who argued that the price of petroleum would triple in the five year period ending in January 2011. Were it not an act of shameless lack of originality, I would form the club of Incorrigible Optimists.

Casting Spells on Taxes

As a person with libertarian orientation, I maintain the view that every person is entitled to keep the vast majority of the money that he generates for his own use. Taking forward this argument, I am therefore in favor of reasonably sized government maintained on low debt and equally low taxation. Having come thus far, I still understand that political choices on fiscal policy are often difficult even if their results are sometimes completely predictable. 

I also understand that sometimes government faces the policy choice that requires raising taxation on an activity of one kind or another. All that notwithstanding, I am completely intrigued by this article in the Huffington Post reporting that witches in Romania are so livid due to the government's quest to tax their income that they have responded by casting (evil) spells against that government. One would say that absent a tax revolt, any response from the witches is excusable except that government officials seem to be adopting some defensive action to ensure that spells are warded off. 

To my mind, I suspect that given the low levels of income that a majority of the witches earn, the government of Romania will probably be unable to collect those taxes in a cost effective manner. However from a scientific perspective, it is a nice thing because it shows that some bureaucrats have looked long and hard at fiscal affairs and decided that witches should share in carrying the fiscal burden. Spells and curses be damned. On the other hand, the witches are disappointing because they should offer the government the opportunity to pull taxes from a  magic hat in exchange for being allowed a tax cut for all time.