Cooperate AND Compete Saturday, Apr 17 2010 

Yesterday, in my managerial economics class with professor Komai, we talked about “co-opetition.” Coopetition is a portmanteau of “cooperation” and “competition,” and it essentially means cooperative competition. This is the first time I’ve heard of the concept being formally introduced, and the first time I’ve ever heard of the concept was when Barry Nalebuff, a professor of management at Yale University, gave a speech about it at last March’s Winter Institute. (I wrote about his speech, briefly, here.) The idea that he introduced was that firms, even if they are competitors, work together in such a fashion that they can “expand the pie,” which he argues is better for both the consumer and the firms. He is careful to note that he does not advocate collusion or anti-competitive behavior. The difference between coopetition and, say, collusion is that the former is a strategy for expanding the market whereas the latter is a strategy to divide the market. In this sense, coopetition is not anti-competitive. I’m sure there are various examples that Dr. Nalebluff offers in his book, but I have not read it. One example might be if two newspapers share their distribution systems. In this way, they are not being anti-competitive, but are acting cooperatively to expand total demand (i.e. the size of the market).

What Dr. Nalebluff does brilliantly is take microeconomic and managerial economic theory and apply it to the real world. Too often, these theories focus on competition. How can oligopolies compete? Managerial economics gives many neat theories about how firms can set prices and quantities to compete effectively with their competitors. It also tells us how anti-competitive cooperation between firms is bad for society (e.g. when firms collude). But not often spoke about is how firms can effectively cooperate with each other and still compete at the same time.

This is why, I think, King Banaian of the economics department here at SCSU got so worked up last September about a note hung up on a board on campus that read, “Cooperate, DON’T Compete.” Dr. Banaian implied that such a comment was the result of “indoctrination” and was surprised by how remarkably “economically illiterate that comment was.” (Although, as I explain in the comment section, it’s not at all clear that the writer of this message was even talking about economics.) Even if the author of this message was talking about economics, is it true that such a comment is remarkably “economically illiterate”?

Everyone in economics is taught that competition is a good thing. We’re usually told cooperation is a bad thing. We can learn something from applied managerial economics though, which is that this conception of economics is not necessarily true. Competition in economics is good, yes, but cooperation can be too. Although economists seem to focus on how competition can be used effectively, there are other aspects to consider. Firms, after all, can cooperate with suppliers, can cooperate with governmental agencies, can cooperate with their employees, and can even cooperate with competitors (hence coopetition). More aptly, the comment should read, “Cooperate AND Compete.”

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First Amendment Forum, again Friday, Apr 16 2010 

Today I was able to attend one of the presentations that was a part of the First Amendment Forum on campus, put together by the SCSU Society of Professional Journalists, the Department of Mass Communications, the St. Cloud Times, and others. The topic of the presentation that I attended was “Protecting Journalism in the Era of Dying Newspapers and Social Networking.” Though the topic was about the death of newspapers and the rise of online content and social networking, most of the panelists discussed how they were using or had used social media to complement their writings as journalists, reporters, or editors. However, once the discussion was opened to those in attendance, the issue of the death of traditional media was brought up.

Namely, the issue of charging for online content was brought up. This issue is the same issue that I had addressed in an earlier blog post and letter to the University Chronicle. I didn’t bring it up, but I believe the person who did was the same person I wrote my post in response to (that is, Kyle Stevens). The person asked the panel what they thought about the media charging for online content.

A salient point that one of the panelists (Ramla Bile) brought up was that charging for the news online introduces some problems in that doing so bars certain people (namely the poor) from accessing the news. Bob Collins, who works for Minnesota Public Radio (MPR), said he really wished the Star Tribune would start charging people to read online content, because he believed doing so would drive more people to MPR. Adam Hammer of the St. Cloud Times likened it to the music industry, and the challenges they faced with the digitization of music and the piracy of said music. He explained how people became accustomed to listening to music through digital media, and it was Apple who recognized this and created iTunes to provide a legal channel through which people could access this digital music.

Of course, there’s the other side of this issue. The content wasn’t produced without a cost. How are the media supposed to make money if they can’t charge people to view their content? Both views are valid. We need to balance the ability to make a profit through producing important news and the necessity of not pricing people out of the market for this important news. In other words, we want people to get paid for doing good journalism, but we don’t want to bar people from accessing this journalism simply because they can’t afford it.

Some people might just respond that if people can’t afford something, they don’t deserve it. If you can’t pay for it, why should I give it to you? The problem with this argument, however, is that important news is not just another commodity to be bought and sold. The news, as I have always said, is a cornerstone of democracy. (In economics, it might be called a public good.) Scholars and political theorists have long recognized that a free and vibrant press is the foundation of civic society and liberal democracy. This is what differentiates online news from, say, online music in Hammer’s example. Music is important, yes, but not necessarily a requisite for a functioning democracy.

The question, thus, becomes whether we want to limit the dispersion of knowledge and important news or if we want to make it as free and vibrant as possible. This is where I disagree with Stevens. He believed we should charge for online content, which would have the effect of pricing people out of the market for important news. As I said, though, we need to consider the fact that the content was not produced for free and there is a certain necessity to generate a revenue to at least cover the costs of making such important news available. The suggestion I made, basing my argument off the work of Robert McChesney and John Nichols in their book The Death and Life of American Journalism, was that there be a public subsidy for independent journalism. Both McChesney and Nichols present several convincing arguments in support of their case. A public subsidy for independent (that is, not corporate) news would solve the aforementioned balancing issue; the cost of producing important news would be paid for, and accessing this content would be kept free, allowing for the greatest number of people to access vital information.

Ron Paul is right a lot Tuesday, Apr 13 2010 

Some readers might not believe it, but there was a period of time when I considered myself a “Ron Paul libertarian.” Paul is who inspired me to explore libertarianism and, indeed, politics in general. His run for presidency last election got me to not only explore political concepts differently but to also be actively engaged in the issues of the day, so he has always been an influential person in my political understandings. However, not long ago, I became disillusioned with Paul and suffice it to say I disagree with Paul on several key issues. There’s no need to go into the details of that transformation, but I should point out that I still agree with Paul on many things.

One thing that I particularly like about Paul is that he’s quick to criticize both of the political parties in the United States (even when he belongs to one of them). I don’t usually like to get involved in party politics, as they are usually inane, but I think Paul raises some great points that are hard to ignore. One salient point that he highlighted at last week’s Southern Republican Leadership Conference, much to the chagrin of many of the conservative Republicans in attendance, was the hypocrisy of mainstream Republicanism. He blasted them for their neoconservative tendencies. In his speech that drew both applause and ire, Paul pointed out, “The conservatives and the liberals, they both like to spend.” He condemned how “Conservatives spend money on different things.” To wit, “They like embassies, and they like occupation. They like the empire. They like to be in 135 countries and 700 bases.”

Certainly the right-wing loves to pay lip service to fiscal conservatism, balancing budgets, and keeping spending to a minimum. In practice, however, they act just the opposite, as the record clearly demonstrates. Paul, despite being a member of the Republican party, has no qualms mentioning this. Paul is right in lambasting them for their costly endeavors, which include the expansionist foreign policy, two wars in the Middle East, Wall Street bailouts, tax cuts without spending cuts, and radical spending on military. This is all okay by Republican standards, and they see no inconsistency in their rhetoric for small government and limited spending.

Republicans actually tend to outspend their Democrat counterparts. It was, after all, Bill Clinton who created a budget surplus and George W. Bush who accumulated more national debt than every other president combined (to use the words of Stephen Frank of the political science department and supported by King Banaian of the economics department). While Democrats do spend, they typically “spend money on different things,” like social programs, science, aide, education, and infrastructure. They also don’t tend go on and on about deficits, limiting spending, and so on.

The pattern is familiar. Ronald Reagan, for example, championed free markets, but very rarely ever adhered to the doctrine. Noam Chomsky refers to this as the “really existing free market doctrine,” namely because it rarely is ever consistent with “the official doctrine that is taught to and by the educated classes, and imposed on the defenceless.” George H. W. Bush railed against taxes—before he raised them. George W. Bush touted “no nation building,” before he began his senseless adventurism in the Middle East. Perhaps we shouldn’t expect anything else from politicians.

Indeed, to bring it to the present, Michele Bachmann, the congresswoman from Minnesota, claimed yesterday, “we’ve gone from the United States having 100% of the private economy private, to today the federal government effectively owns or controls 51% of the private economy” over the past 15 months of President Obama’s presidency (this is why she believes Obama is “anti-American” and “the most radical president” in U.S. history). Of course, it’s not very difficult to see how patently absurd her claims are. One of her examples is the bank bailouts. However, as FOX News’ Chris Wallace was quick to point out, it was President Bush who started those bailouts, which Bachmann responded was “unfortunate.” Certainly unfortunate for her argument. Even more unfortunate is that Obama’s actions don’t actually constitute “nationalization.”

As Ben Chabot of the Yale economics department keenly pointed out to NPR in 2008, “it’s not nationalization because they didn’t buy common stock with voting rights, so they don’t have a seat at the table.” The business press is in accord, and believe “the Obama plan is working.” But even if it was nationalization, there’s nothing “anti-American” about nationalization, as Harvard’s Richard Parker is quick to point out. He mentions our long history of government intervention and nationalization, beginning with “the Northwest Ordinance of 1789, and then the Louisiana Purchase of 1803.” He continues with mentioning the vast amount of land, airspace, roads, and valuable infrastructure that the U.S. government owns. During the two world wars, the U.S. government took over sizable portions of the economy—one reason for the U.S.’s recuperation from the Great Depression. After 9/11, Bush “effectively nationalized the private-security firms at airports, and replaced them with the federal TSA.” Needless to say, no one moaned about “anti-Americanism.” As I have always liked to mention, the United States has always been heavily involved in markets (having a Republican president or Congress makes no difference); fantasies about the “American free market system” are just that.

In my opinion, all this says something about the intellectual and moral culture of today’s Republicanism and our society in general. The underpinning assumption on which all this works is that what’s wrong for you is right for me. It’s a poor reflection that we cannot rise to even a minimal moral standard.

Is Social Security in shambles? Saturday, Apr 10 2010 

The answer to this question requires some careful examination that goes beyond the platitudes that we are supposed to take as self-evident. What we’re constantly told is that Social Security is in shambles. It’s bankrupt. The elderly on Social Security are outpacing workers who contribute to it, and we’re headed for a crisis very soon. Even King Banaian, the chairman and a professor of the economics department at SCSU, says we suffer from “cognitive dissonance”; it’s “part of the angst that grips” us, though none of us “want to hear of big changes.” Ed Morrissey from the Hot Air blog says it was foolhardy to listen to those who “assured us that Social Security was safe for decades without reform.”

The reason for this maelstrom is because, as The New York Times reports, “the system will pay out more in benefits than it receives in payroll taxes” this year. The recession has claimed millions of jobs and, as a result, tax receipts are down. At the same time, the Baby Boomer generation is beginning to retire en masse and will be collecting their Social Security benefits. By 2016, “indefinite deficits” are expected. Naturally, we should be frightened.

Indeed, Social Security looks like it is in shambles. Save some major reforms, which may very well including privatizing the system, the entire program appears to be heading for collapse. In fact, we’re probably better off getting rid of it entirely.

That much seems like common sense. If you collect less than you handout, you’re eventually going to go broke and the system cannot continue as is. This common sense is what drives the usual iterations about how Social Security is doomed. But, as with everything claimed to be common sense and self-evident, we should force ourselves to ask if it’s true. The assumption, of course, is that you don’t question it. It’s easy to parrot what the demagogues and pundits are saying on television and blogs; it requires some effort to look a bit beyond the rhetoric and platitudes.

Is it true that a fiscal disaster is on its way? As it happens, it’s not. In fact, if we bother to compare our Social Security system to the pension systems of other highly developed nations, just as the OECD has done, we find that the United States has one of the least generous pension systems for the elderly. Yet the fiscal hawks keep pushing on us “the great deficit scare,” though prominent economist such as Robert Eisner have been telling us for a long time now how absurd their claims are. Eisner’s book is over a decade old now, but we can learn some valuable lessons from it. Moreover, Dean Baker of the Center for Economic and Policy Research warns that the policies deficit hawks want to push through, which are are not based on sound economics, would be much more devastating than any projected deficit.

It’s certainly true the American population is aging, and faster than the workforce is growing (or will be soon). In economics, the technical literature refers to this as the dependency ratio. It tells us the number of dependent people (children under the age of 15 and adults over the age of 65) for every 100 productive people (people aged 16 to 64). The United States does not have the largest dependency ratio—far from it, in fact. And when we actually bother to look, the dependency ratio is not currently at the highest it’s ever been (nor will it be for a long time). That was around 1965. There was a problem in the 1960s, a more significant problem than we face today, back when real GDP was almost a quarter of what it is today (i.e. when we were much poorer).

What did they do about it? Did they say the rights to a decent life in a highly developed nation simply “are not natural rights of the people,” and therefore we should just stop helping the young and the elderly find a more decent life? Actually, that’s not what they did. They increased expenditures. That’s how they dealt with the unprecedented dependency ratio, one we won’t come close to experiencing for a long time. The solution to the current “crisis” is the same. You increase expenditures to ensure disadvantaged people can still live a life that isn’t marred by poverty, sickness, and starvation—so that people’s basic needs are met. There’s a consensus in every rich and developed nation that safety nets are a society’s moral obligation. In fact, the world came together and agreed on the Universal Declaration of Human Rights, which affirms these rights, calling them “indispensable for [a person’s] dignity and the free development of his personality.”

When we actually look at the published literature, there is an almost unanimous agreement that there is no “crisis,” that the dangers of an aging society are being way overblown (it is argued, in fact, that an aging society is beneficial), and that the problems that do lie ahead are quite manageable (in the same way the bigger problems of the 1960s were managed). What’s pointed out is that any fiscal problem that might possibly arise is easily addressed. For example, the Social Security board of trustees report that future problems (because there isn’t one currently) could be remedied with a simple increase on the payroll tax. The estimated 75-year actuarial deficit for OASDI is just 2% of taxable payroll (so you increase it from something like 14% to 16%). The OECD also came out with a major report on easy solutions for any possible future problem that might occur with the pension system, none of which included abandoning the pension system. One reason is because it’s recognized that there is a moral obligation on our part and that there is in fact something that separates us from primitive animals that might simply “let nature take its course” (one of the more repugnant euphemisms I’ve heard).

So the solution, then, is quite simple. We don’t need to get rid of Social Security. Nor is there a need for “big changes” or major reform.

Lords of Finance Monday, Apr 5 2010 

I’ve been reading a little bit of book by Liaquat Ahamed, titled Lords of Finance: The Bankers Who Broke the World. I’ve just started, but it’s an interesting book about the collapse of the world economy during the the 1930s and the four central bankers who he says are responsible for the terrible misery. Seeing as how I’m currently taking a test in my international economics class regarding international finance and the gold standard, I thought I’d share a quote that I found to be rather interesting. The quote is from William Jennings Bryan during his speech at the Democratic convention of 1896, and can be found on pages 13-14 in the book:

You came to tell us that the great cities are in favor of the gold standard; we reply that the great cities rest upon our broad and fertile plains. Burn your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the city. . . . You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.

The quote is interesting because it helps demonstrate the relationship between urban America and rural America. Bryan was very much concerned with American rurality and the farms that dominate it. Of particular concern was the gold standard. Credit growth was being restricted by the amount of gold that central banks had. This effect hurt producers and debtors, especially when prices were declining. The effect, therefore, on farmers, was quite negative. They were both producers and debtors. Credit restriction was troubling for them. It is for this reason that Bryan advocated loose monetary policy and easier credit. The quote above captures these sentiments through Bryan’s use of strong and fervid rhetoric. Though he won the Democratic nomination thrice, Bryan was never elected president.

The quote does have some relevance today. There are some on the right who today still advocate the use of a gold standard (typically euphemized by talk about “sound money”), for whatever reason (Ron Paul might be a notable example). There are benefits, but there are also significant drawbacks, one of which was highlighted by Bryan. In fact, many economists today blame, in part, the rigidity of the gold standard for the collapse of the global economic system during the 1930s. Indeed, several studies have found a strong relationship between a country’s abandonment of the gold standard and that country’s recovery from the depression. One has to wonder if those who advocate “sound money” have thought about the full consequences of reverting back to a gold standard and fixed exchange systems.