Over 1000 tests from 1951 onwards.
Atomic Tests Were a Tourist Draw in 1950s Las Vegas – entrepreneurial alterness alert
10 Aug 2014 Leave a comment
in entrepreneurship, environmentalism, health and safety, market efficiency, survivor principle Tags: entreprunerial alterness, times have changed
Who Routinely Trounces the U.S. Stock Market? Try 2 Out of 2,862 Funds – NYTimes.com
30 Jul 2014 Leave a comment
in entrepreneurship, financial economics, survivor principle Tags: active investing, efficient markets hypothesis, indexed linked investing, passive investing, stock picking
For the three years ended March 2014, 14.10% of large-cap funds, 16.32% of mid-cap funds and 25.00% of small-cap funds maintained a top-half ranking over three consecutive 12-month periods. Random expectations would suggest a rate of 25%.
After five years, two funds are still beating the market in each of the last five years.The rest of fallen by the wayside.
via Who Routinely Trounces the Stock Market? Try 2 Out of 2,862 Funds – NYTimes.com
George Stigler on do business owners maximise profits?
29 Jul 2014 Leave a comment
in applied price theory, Armen Alchian, entrepreneurship, George Stigler, survivor principle, theory of the firm Tags: george stigler, market selection, profit-maximisation
Entrepreneurs often do not know why they survived in competition. George Stigler in his autobiography told this wonderful story about how you could not get businessmen to admit in a survey that they maximise profits.
You go to their office and asked them: Do they maximise profits?
Their answer would be, of course, not. I am here to provide employment to my workers and put a small amount aside for the education of my children.
The surveyor would then ask them: if you do were to raise your prices, do you expect to increase your profits?
The businessman answers no.
The surveyor how would then ask them: if you were to cut your prices, do you expect to increase your profits?
The businessman answers no.
The survey would then ask: can you point to a time in the last 12-months where you substituted profit for some other objective?
At this point of time, you would be thrown out of their office as some sort of lunatic.
The separation of ownership from control
24 Jul 2014 3 Comments
in Armen Alchian, industrial organisation, Ronald Coase, survivor principle, theory of the firm Tags: Armlen Alchian, Eugene Fara, Harold Demsetz, Ronald Coase, separation of ownership and control, theory of the firm
Eugene Fama divides firms into two types: the managerial firm, and the entrepreneurial firm.
The owners of a managerial firm advance, withdraw, and redeploy capital, carry the residual investment risks of ownership and have the ultimate decision making rights over the fate of the firm (Klein 1999; Foss and Lien 2010; Fama 1980; Fama and Jensen 1983a, 1983b; Jensen and Meckling 1976).
Owners of a managerial firm, by definition, will delegate control to expert managerial employees appointed by boards of directors elected by the shareholders (Fama and Jensen 1983a, 1983b). The owners of a managerial firm will incur costs in observing with considerable imprecision the actual efforts, due diligence, true motives and entrepreneurial shrewdness of the managers and directors they hired (Jensen and Meckling 1976; Fama and Jensen 1983b).
Owners need to uncover whether a substandard performance is due to mismanagement, high costs, paying the employees too much or paying too little, excessive staff turnover, inferior products, or random factors beyond the control of their managers (Jensen and Meckling 1976; Fama and Jensen 1983b, 1985). Any paucity in knowledge slows the reactions of owners in correcting managerial errors including slip-ups in the recruitment and the retention of experienced older employees.
The entrepreneurial firms are owned and managed by the same people (Fama and Jensen 1983b). Mediocre personnel policies and sub-standard staff retention practices within entrepreneurial firms are disciplined by these errors in judgement by owner-managers feeding straight back into the returns on the capital that these owner-managers themselves invested. Owner-managers can learn quickly and can act faster in response the discovery of errors in judgement. The drawback of entrepreneurial firms is not every investor wants to be hands-on even if they had the skills and nor do they want to risk being undiversified.
Many of the shareholders in managerial firms have too small a stake to gain from monitoring managerial effort, employee performance, capital budgets, the control of costs and the stinginess or generosity of wage and employment policies (Manne 1965; Fama 1980; Fama and Jensen 1983a, 1983b; Williamson 1985; Jensen and Meckling 1976). This lack of interest by small and diversified investors does not undo the status of the firm as a competitive investment.
Large firms are run by managers hired by diversified owners because this outcome is the most profitable form of organisation to raise capital and then find the managerial talent to put this pool of capital to its most profitable uses (Fama and Jensen 1983a, 1983b, 1985; Demsetz and Lehn 1985; Alchian and Woodward 1987, 1988).
More active investors will hesitate to invest in large managerial firms whose governance structures tolerate excessive corporate waste and do not address managerial slack and error. Financial entrepreneurs will win risk-free profits from being alert and being first to buy or sell shares in the better or worse governed firms that come to their notice.
The risks to dividends and capital because of manifestations of corporate waste, reduced employee effort, and managerial slack and aggrandisement in large managerial firms are risks that are well known to investors (Jensen and Meckling 1976; Fama and Jenson 1983b). Corporate waste and managerial slack also increase the chances of a decline in sales and even business failure because of product market competition (Fama 1980; Fama and Jensen 1983b). Investors will expect an offsetting risk premium before they buy shares in more ill-governed managerial firms. This is because without this top-up on dividends, they can invest in plenty of other options that foretell a higher risk-adjusted rate of return.
The discovery of monitoring or incentive systems that induce managers to act in the best interest of shareholders are entrepreneurial opportunities for pure profit (Fama and Jensen 1983b, 1985; Alchian and Woodward 1987, 1988; Demsetz 1983, 1986; Demsetz and Lehn 1985; Demsetz and Villalonga 2001). Investors will not entrust their funds to who are virtual strangers unless they expect to profit from a specialisation and a division of labour between asset management and managerial talent and in capital supply and residual risk bearing (Fama 1980; Fama and Jensen 1983a, 1983b; Demsetz and Lehn 1985). There are other investment formats that offer more predictable, more certain rate of returns.
Competition from other firms will force the evolution of devices within the firms that survive for the efficient monitoring the performance of the entire team of employees and of individual members of those teams as well as managers (Fama 1980, Fama and Jensen 1983a, 1983b; Demsetz and Lehn 1985). These management controls must proxy as cost-effectively as they can having an owner-manager on the spot to balance the risks and rewards of innovating.
The reward for forming a well-disciplined managerial firm despite the drawbacks of diffuse ownership is the ability to raise large amounts in equity capital from investors seeking diversification and limited liability (Demsetz 1967; Jensen and Meckling 1976; Fama 1980; Fama and Jensen 1983b; Demsetz and Lehn 1985).Portfolio investors may know little about each other and only so much about the firm because diversification and limited liability makes this knowledge less important (Demsetz 1967; Jensen and Meckling 1976; Alchian and Woodward 1987, 1988).
It is still unwise to still suppose that portfolio investors will keep relinquishing control over part of their capital to virtual strangers who do not manage the resources entrusted to them in the best interests of the shareholders (Demsetz 1967; Williamson 1985; Fama 1980, 1983b; Alchian and Woodward 1987, 1988).
Managerial firms who are not alert enough to develop cost effective solutions to incentive conflicts and misalignments will not grow to displace rival forms of corporate organisation and methods of raising equity capital and loans, allocating legal liability, diversifying risk, organising production, replacing less able management teams, and monitoring and rewarding employees (Fama and Jensen 1983a, 1983b; Fama 1980; Alchian 1950).
Entrepreneurs win profits from creating corporate governance structures that can credibly assure current and future investors that their interests are protected and their shares are likely to prosper (Fama 1980; Fama and Jensen 1983a, 1983b, 1985; Demsetz 1986; Demsetz and Lehn 1985). Corporate governance is the set of control devices that are developed in response to conflicts of interest in a firm (Fama and Jensen 1983b).
Aaron Director and the default answer to why hard to understand business practices exist is ‘monopoly’ and the default policy response is ‘call the cops’
21 Jul 2014 Leave a comment
in industrial organisation, survivor principle Tags: Aaron Director
There are the myriad of ways in which real world business practices behave differently from the caricaturing in textbooks. Those differences sometimes arouses suspicious responses from economists.
Visions of market power and deadweight loss triangles dance their heads, and some of the suspect practices have been constrained by anti-trust policy. Director rejected this kind of intellectual laziness, and he sought, sometimes successfully, to inoculate those around him against it.
Director approached all business practices with the methodology that entailed asking very basic questions and answering them in a rigorous logic that it appealed ultimately to facts.
The style was verbal – some combination of Socratic dialogue and Adam Smith. This style had the disadvantage of producing few closed-form solutions. But it had the advantage of permitting analysis of the kind of problems that eluded simple solutions.
Indeed I believe that one reason for Director’s lasting influence he was able to show that simple judgements about business practices often cannot withstand rigorous scrutiny.
Sam Peltzman
The perennial gale of creative destruction at work: those all-powerful television networks
14 Jul 2014 Leave a comment
in economics of media and culture, entrepreneurship, industrial organisation, survivor principle Tags: creative destruction, media bias, Schumpeter, television networks
What Sam Walton do to make his family rich?
10 Jul 2014 2 Comments
in applied price theory, applied welfare economics, entrepreneurship, industrial organisation, market efficiency, survivor principle, technological progress Tags: entrepreneurship, innovation, Walmart
HT: antidismal.blogspot via cafehayek
How does a free press emerge through the market process?
10 Jun 2014 Leave a comment
in economic history, economics of media and culture, industrial organisation, market efficiency, survivor principle Tags: competition as a discovery process, Free press
For much of the 19th century U.S. newspapers were public relations tools funded by politicians. Information hostile to a paper’s political views were ignored or dismissed as sophistry. Newspaper independence was rare. Fraud and corruption in 19th century America approached today’s more corrupt developing nations.
The newspaper industry underwent fundamental changes between 1870 and 1920 as the press became more informative and less partisan.
– 11 per cent of urban dailies were independent in 1870,
– 62 per cent were in 1920.
The rise of the informative press was the result of increased scale and competitiveness in the newspaper industry caused by technological progress in the newsprint and newspaper industries.
• From 1870 to 1920, when corruption appears to have declined significantly within the United States, the press became more informative, less partisan, and expanded circulation considerably.
• By the 1920s, the partisan papers no longer coupled allegations of the corruption of their party members with condemnation of the character of the person making the charge.
A reasonable hypothesis is rise of the informative press was one of the reasons why the corruption of the Gilded Age was sharply reduced during the Progressive Era.
A supply-side model suggesting that newspapers weigh the rewards of bias—politicians’ bribes or personal pleasure—against the cost of bias—lost circulation from providing faulty news.
The key predictions of the model are that, as the size of the market for newspapers rises, and as the marginal cost of producing a paper falls, newspapers will become less biased and invest more in gathering information.
Corruption declined because media proprietors discovered that they could maintain and boost circulation by exposing it. An independent press which kept a watchful eye over government and business was a spontaneous order that was a by-product of rising incomes and literacy of readers.
Politicians did not help the process along. Technological innovations and increased city populations caused a huge increase in scale.
Newspapers become big businesses; they increased readership and revenue by presenting factual and informative news. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, it is from their high regard to their own interest.
Following these incentives, newspapers changed from political tools to impartial reporting. Those newspapers that did not did not survive in competition.
HT: The Rise of the Fourth Estate: How Newspapers Became Informative and Why It Mattered by Matthew Gentzkow, Edward L. Glaeser, and Claudia Goldin in Corruption and Reform: Lessons from America’s Economic History (2006).
Hollywood economics
04 Jun 2014 Leave a comment
in applied price theory, industrial organisation, survivor principle Tags: global subsidy markets, Hollywood economics
Peter Jackson and the rest of the New Zealand film industry recently received a large increase in tax breaks and subsidies to stay competitive in the global subsidy market that is film production. But for the increased subsidy, the New Zealand film industry would have suffered from runaway productions. Whether that race to the bottom is a game worth playing is for another time.
The Directors Guild of America and the Screen Actors Guild of America define runaway productions as motion picture productions or television shows that are
intended for initial release/exhibition or television broadcast in the US, but are actually filmed in another country.
One foreign shore for these runaway productions is New Zealand. New Zealand is a major beneficiary from the growth in internationally mobile cultural productions.
Runaways can be creative runaways because of script requirements or settings that cannot be duplicated or because the preferences of the actors or director.
An economic runaway goes abroad to reduce costs. The concerns of the Screen Actors Guild about runaway productions date back to the 1950s.
Consumer demand is an important driver of the globalisation of film production both in terms of expected quality of productions and a willingness to patronise individual films and television shows.
Film and television is part of a much larger, highly competitive and price-sensitive leisure and entertainment market.
Film producers learnt right from the start that audiences demanded novelty and innovation – they wanted to be surprised again and again. Short films evolved into full-length feature films with complex narratives. Sound, colour, spectacle, and endless special effects and increasingly sophisticated distribution and exhibition networks were required to stay ahead.
Film-going choices are driven to a high degree by a demand for novelty and a taste for uncertainty. Audiences take a chance on a film they may not know much about, which is a large part of the experience sought.
The first law of Hollywood economics is ‘nobody knows anything’. Extreme uncertainty is pervasive in film and television show production.
Every film and show is a unique product. In the film industry, the uniqueness of each film means product innovation is both rapid and thoroughly unpredictable.
Many famous films and shows succeeded because the producers made something that audiences did not know they wanted to see.
Their success surprised everyone, including the producers. Star Wars, Rocky, National Lampoon’s Animal House, The Blair Witch Project, The Gods Must Be Crazy, My Big Fat Greek Wedding, The Godfather, Fawlty Towers and Seinfeld are all examples.
Big budgets do not guarantee a profit; star power and large marketing budgets do not reduce ‘the terror of the box office’ and the films involving stars often run over budget.
There is no typical movie – industry profits depend disproportionately on rare blockbusters, and there are many dogs – 78 per cent of films are unprofitable. Steven Bonars explains it well:
In 2000 the average top 1% film earned 100 times as much and the average top 10% film earned 50 times as much as the median film.
Today these box office ratios are about 1400:1 and 550:1 for movies in the top 1% and 10% respectively.
The share market as a spy, investigator and muckraker: using share price movements to uncover secrets and solve mysteries
23 May 2014 Leave a comment
in applied price theory, financial economics, industrial organisation, survivor principle Tags: Armen Alchian, event studies
Armen Alchian successfully identifying lithium as the fissile fuel in the Bikini Atoll atomic bomb using only publicly available financial data. The early 1954 RAND corporation memo by Alchian was classified a few days later.
The Stock Market Speaks: How Dr. Alchian Learned to Build the Bomb by Joseph Michael Newhard, August 27, 2013 at for a replication study of Alchian’s event study of share market reactions to the Bikini Atoll nuclear detonations in 1954 updated with declassified information and modern finance theory.
An extra challenge for Alchian was not only was the component of the bomb classified, whether the explosion was atomic or hydrogen was classified too.
The share price of the supplier of lithium surged within a few days.
The replication study by Newhard found a significant upward movement in the price of Lithium Corporation relative to the other corporations. Within three weeks of the explosion, its shares were up 48% before settling down to a monthly return of 28% despite secrecy, scientific uncertainty, and public confusion surrounding the test; the company saw a return of 461% for the year.
The share market is a surprising efficient tool for discerning new knowledge.
After the Challenger space shuttle disaster in 1986, the share market identified within the hour which component supplier made the faulty part and marked it down accurately as to damages and loss of business. The blue ribbon commission of inquiry took 6-months to find the culprit.
In the period immediately following the crash, securities trading in the four main shuttle contractors singled out Morton Thiokol as having manufactured the faulty component.
Intraday stock price movements following the challenger disaster
At market close, Thiokol’s shares were down nearly 12 per cent. By contrast, the share prices of the three other firms started to creep back up, and by the end of the day their value had fallen only around 3 per cent.
Morton Thiokol shed some $200 million in market value on the day. Over the next several months, the other contractors recovered and outperformed the market while Morton Thiokol lagged.
As a result of the investigation, Morton Thiokol had to pay legal settlements and perform repair work of $409 million at no profit. It also dropped out of bidding for future business.
The $200 million equity decline for Morton Thiokol in hindsight is a reasonable prediction of lost cash flows that came as a result of the judgment of culpability in the crash.
William Brown found that a group of firms that had significant ties to Lyndon Johnson increased in the market value after President Kennedy’s assassination. The share prices of General Dynamics, whose main aircraft plant was located in Fort Worth, Texas, climbed from $23.75 on November 22 to $25.13 on November 26, and by February 1964 was up over $30, a jump of around 30 per cent in three months.
Over the ten trading days following the announcement of Timothy Geithner’s nomination as U.S. Treasury Secretary, financial firms with a connection to Geithner experienced a cumulative abnormal return of about 12% relative to other financial sector firms. This reversed when his nomination ran into trouble due to unexpected tax return issues.
Pat Akey (2013) looked at the abnormal returns in share prices around close U.S. congressional elections. Firms gain on the election of a politician with whom they are connected – and they lost when he or she is defeated. The cumulative abnormal return to be between 1.7% and 6%.
Corporate welfare and middle-class welfare defined
20 May 2014 Leave a comment
in applied welfare economics, industrial organisation, Public Choice, rentseeking, survivor principle Tags: corporate welfare, farm welfare, middle-class welfare
The term corporate welfare was coined by Ralph Nader in 1956. Corporate welfare is subsidies, tax breaks, or other favourable treatment for business and implies that business are much less needy of such treatment than the poor.
The Right talks of the deserving and undeserving poor. The Left countered with payments to business.
Supporters of corporate welfare often justify them as remedying some sort of purported market failure.
Businesses, big and small, see market failure everywhere under balance sheets that are in the red.
The notion behind corporate welfare is profits should be private while losses should be a reason for a taxpayer bailout.
Both direct and indirect subsidies to businesses are classified as corporate welfare. The reason is businesses as supposed to make a profit or go out of business.
If a business is losing money, they should try better or do something different or just go out of business.
Losses are not a reason for a taxpayer bailout. No business project should be premised on government subsidies.
The purpose of the capital market is to direct investment to projects that have a future and take support away from failing projects.
The capital market is picking winners and losers every day because that’s its job. That’s what it’s good at.
The participants in the capital market who are not good at picking winners and avoiding losers will themselves will go soon out of business.
Corporate welfare is increasingly used interchangeably with crony capitalism.
A kissing cousin of corporate welfare is farm welfare. These are the countless subsidies that farmers get in Europe and America, and in the past, in New Zealand.
Middle-class welfare is cash payments by the government to the non-poor. These payments to the middle-class can be for having children such as in Working for Families, for early-childhood education or for childcare. Middle-class welfare also can be tax breaks and subsidies for retirement savings of the nonpoor.
It is pointless to tax the middle-class and then give them their money pretty much straight back as a cash payment for a particular purpose be it child care or for their retirement. Middle-class welfare covers at least in part expenses the middle-class could have covered themselves but for the taxes.
Utopia, you are standing in it! 
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