economist magazine

Economics focus

2009-12-19T06:22:00.000-08:00

The last of the great general economists died on December 13th, aged 94

“I WAS reborn, born as an economist, at 8.00am on January 2nd 1932, in the University of Chicago classroom,” wrote Paul Samuelson in a memoir published earlier this month. He became probably the most influential economist of the second half of the 20th century. For his work in several branches of the dismal science he became the first American economics Nobel laureate. Through his bestselling textbook, he introduced millions of people to the subject. And right to the end he kept on mentoring the profession’s brightest stars.

His actual birth took place almost 17 years earlier in the steel town of Gary, Indiana, to a family of upwardly mobile Polish immigrants. His earliest memories—of the recession of 1919-21 and strikebreaking immigrant workers from Mexico, and of the boom and bust that followed—shaped Mr Samuelson’s macroeconomic views throughout his life. He approved of massive government spending to help an economy escape from recession when monetary policy can do no more. When the Obama administration introduced just that sort of stimulus this year, partly on the advice of Mr Samuelson’s nephew, Larry Summers, who is Mr Obama’s chief economic adviser, he was quick to approve.

Though regarded as America’s leading standard-bearer for Keynesian economics, he called himself a “cafeteria Keynesian”, just picking the bits he liked. His combination of Keynesian and classical economic ideas became known as the “neoclassical synthesis”. From his chair at the Massachusetts Institute of Technology and in his column in Newsweek, the self-described “dull centrist” became a fierce critic of the libertarian Chicago School, and especially of Milton Friedman (writer of a rival Newsweek column). Markets are not perfect, he believed, and dire warnings from Friedman, and earlier from Friedrich von Hayek, about the regulation of markets “tells us something about them rather than something about Genghis Khan or Franklin Roosevelt. It is paranoid to warn against inevitable slippery slopes…once individual commercial freedoms are in any way infringed upon.”

As for Mr Samuelson’s friend of 50 years, Alan Greenspan, once chairman of the Federal Reserve, “the trouble is that he had been an Ayn Rander”—a devotee of laissez-faire capitalism. “You can take the boy out of the cult but you can’t take the cult out of the boy,” Mr Samuelson told the Atlantic this summer. “He actually had [an] instruction, probably pinned on the wall: ‘Nothing from this office should go forth which discredits the capitalist system. Greed is good’.”

The huge sales of Mr Samuelson’s textbook, “Economics”, first published in 1948 and updated every three years, owed much to his lively writing. (The abstract of his recent memoir ended with the words: “Boo hoo.”) The book transformed how economics was—and is—taught around the world. If the earlier editions too readily believed that an economy could achieve equilibrium, that may have stemmed from the author’s conviction that mathematics could be a useful tool for economists, and that economics had much to learn from physics and the laws of thermodynamics. Today it is fashionable to argue that economics was led astray by “physics envy”, which blinded it to the subtleties of human behaviour, yet after winning his Nobel prize in 1970 Mr Samuelson anticipated economists’ current interest in biological systems by writing several papers on Mendelian dynamics.

The inefficient market

He was the last of the great general economists, making important contributions on trade, macroeconomics, public finance and consumer behaviour. Yet he decided, at around 50, that to remain academically competitive he had to specialise. Perhaps because it was close to his beloved mathematics, the specialist field he chose was financial economics.

His work helped lay the foundations for two of the field’s biggest ideas: the efficient-market hypothesis and options pricing. In 1965 he published a paper explaining that in well-informed and competitive speculative markets, price movements over time will be essentially random—a concept at the heart of the efficient-market hypothesis later described in its full majesty by Eugene Fama, whom Mr Samuelson believed ought to win a Nobel prize. In the 1950s it was Mr Samuelson who had rediscovered the pioneering early work of Louis Bachelier, a French mathematician whose insights would later underpin the Black-Scholes option-pricing model; and it was Mr Samuelson who suggested the assumption, that share prices move according to geometric Brownian motion, which makes this model workable. Mr Samuelson remained close to Robert Merton, who won a Nobel for his work with Fischer Black and Myron Scholes on options pricing.

Yet Mr Samuelson also understood that beyond the ivory tower the conditions necessary for efficient markets rarely existed; they needed regulating. “To understand economics you need to know not only fundamentals but also its nuances,” Mr Samuelson would explain. “When someone preaches ‘Economics in one lesson’ I advise: Go back for the second lesson.” The latest crisis (for which he felt some responsibility, since he had helped develop financial derivatives that company executives did not understand) proved that “free markets do not stabilise themselves. Zero regulating is vastly suboptimal to rational regulating. Libertarianism is its own worst enemy!”

Mr Samuelson was happy to be “linked with such Methuselah masters as Verdi” who did some of their best work in old age. He was able to do so, not least, because of his interest in evidence-based medicine. For decades he read the New England Journal of Medicine, and—noting a weakness in his male ancestors—he was an early adopter of cholesterol-reducing statin pills, as well as skimmed milk. His passion for “looking for theoretical understandings of empirical reality” may help explain his long life, as well as his lengthy list of achievements.

Crashing Economy - Are You Going to Be a Victim, Or a Survivor?

2008-11-22T01:12:00.000-08:00

In the midst of the current economic downturn, there may be a few who don't survive, but you don't have to be a victim. You don't have to worry about the current economic strife, if you know how to survive and build business on the Internet.

The Crashing Economy doesn't have to crash your business.

During a recession, if you know how to generate income, you can overcome the bankruptcy doom and gloom of the economic crisis.

"He who controls traffic, controls the keys to the kingdom," according to Mike Filsaime. This strategy holds a particular truth if you're working a business that requires buyers.

Maintaining income is a numbers game.

Once you've learned the secret of getting massive numbers of people to your website, you'll amass profits and wealth too. On average, 10% of the traffic to your website will buy 10% of the products available on your website. What's available? Who's stopping by to buy your products?

Maximizing income means maximizing traffic.

In order to optimize your income, you must generate more traffic and create a site of interest for people to visit. As important as it is to grab your reader's attention, it's more important to grab their clicks. If you don't have a good, high-quality call to action that gets results... You're LOSING MONEY!

Increase Click through Rates.

There are several ways to get high click through rates. The key to high click through rates is that you need to grab the reader's attention. Whether you use banners, buttons, pay per click or paid email, if nobody is clicking on your ads, you're losing money. You've got to grab their attention and grab their clicks.

Create a Working CALL TO ACTION.

Your call to action has to tell the reader what to do. Tell them your price is going up, they must act now, and give them specific directions "CLICK HERE" so they know what to do. People won't do anything unless you tell them to do it. Tell them what you expect of them, they'll follow.

Go to http://makeyourfirstmilliononline.com and sign up for a FREE Subscription of COOL MILLIONS. You'll receive a FREE Copy of the Make Your First Million Online FREE REPORT "Kick-Butt Internet Business Guide" Tips & Strategies to Make Your First Million Online by Jan Verhoeff.

7 Tips For Selling in a Down Economy

2008-11-22T01:10:00.000-08:00

ght now, selling is tough business. After the heady days of excess, people are tightening their belts in a natural reaction to an economy that may or may not be in a recession. Yet there are still people out there who need or want to buy your products and services. If you are a salesperson, it is more important than ever to be at the top of your game.

Here are seven tips for selling your products and services even if the economy is in a recession:

1. In a down economy, people are more comfortable buying value, reliability, versatility and effectiveness. They want practical solutions for their problems. They may not be so interested in the bells and whistles right now.

2. Re-train yourself not only in selling but in your products and services. Brush up on your selling technique. And study your own products and services. Become an expert.

3. Remain positive with your prospects. Your prospects are already fearful. Make sure you don't add to that fear. Highlight the positive aspects of your business and products. Be confident in your presentation and follow-up.

4. Be authentic. Don't try to be what you are not. If you are naturally funny, a little humor in your presentation can be a great way to break the ice with your prospects. But if you are normally a serious person, contrived humor can fall like a brick and disengage your prospects. Be yourself and let your prospects get to know you as you get to know them.

5. One-on-one personal selling is back. Converse with your prospects in order to develop long term relationships. Ask questions and really listen to the responses. Be sure to incorporate those responses in your presentation. Devise a custom solution to solve your prospects' problems.

6. Communicate with prospective customers. Deliver an accurate, thorough proposal to your prospects. And be sure to follow up. Completely answer any questions your prospects may have. And ask if there is anything else you can explain.

7. Make it easy for your customers to buy from you. Prepare your paperwork in advance. Offer a variety of payment methods. And once the deal is signed, be sure to keep in touch with your customers.

This is not the same selling environment you probably faced a couple of years. Salespeople now have to sell their products and services. It's what we should have been doing all along. Get back to the basics of selling.

Annette Greco is co-owner of a successful home remodeling business, author of The Kitchen Remodeling Cookbook: The Survival Guide to Cooking When Your Kitchen Can't and co-founder of On The Level Consulting. The remodeling business requires a successful combination of sales, marketing, administration and production. It is even more important for the small remodeling company to execute all areas well and in the right combination. Find out how to maximize profits while minimizing time and stress. Sign up for On The Level Consulting's FREE online newsletter to find out how. Visit http://www.onthelevelconsulting.com

Selling Skills For Today's Economy!

2008-11-22T01:08:00.000-08:00

In today's economy sales professionals need to be equipped with the appropriate selling skills, following a proven selling system or sales process, in order to succeed and meet their sales targets.

They can no longer afford to carry on with traditional selling skills of doing dog and pony shows, feature and benefit dumps, or hit and run closes.

Today's economy demands engaging selling skills, not telling selling skills. Engaging selling skills attract and engage prospects into personal and business conversations - Personal conversations to build rapport and trust; Business conversations to qualify opportunities to do business.

Engaging sales skills starts with a desire to create relationships. Keep in mind that people buy from people, people they like and they trust. Once trust is established, a relationship starts. That is the sales skill foundation to a sales transaction.

To build that rapport, or trust, requires conversational selling skills focused on the prospect, not on you, your company or your products. The selling skill required here is to show a genuine personal interest in the person in front of you. You do that by asking questions, questions that they would like to respond to and talk about.

So, what do people like to talk about?

People like to talk about themselves, their families, hobbies, job, etc. These are more personal conversations. The selling skills required here are asking questions, listening and using your body language to show interest.

Your job is to get them to open up and to keep talking. The more they talk, the more you listen, the more you learn and the more they like and trust you.

Mind you there are also other selling skill techniques to build rapport. One of the best rapport building sales skills comes from Nero Linguistic programming (NLP) where mirroring and matching body language, tonality and words enhances rapport building quickly and magically.

You will know when your rapport selling skill has been established, just by the way the prospect has opened up with you. When they get to the point where they can't stop talking, you know you got the rapport selling skill that would allow you to move onto the next step in the selling system, or sales process.

With rapport, trust and relationship starting, you can then move from personal to business conversation, by simply interjecting another question - Bill, I really appreciate what you are sharing with me, but how much time have you set aside for our meeting?

With the answer to this sales skill question, a new sort of business conversation starts. Your time allocated is either confirmed or extended, either of which matter, as it is the next sales skill question that will make the difference.

"Bill, what is it that you would like to accomplish over the next X minutes?"

Most sales people only think of their objective, and not that of the customers. It is the customer's objective that is most important, so let's get it out of them first. Then we can add our's into the scenario.

For example, they could reply with, "I would like to learn more about your company and it's products or services."

You can then reply with an inclusion of your objective. For example, "that's great Bill, as I too would like to learn more about your company to determine if there is an opportunity for us to do business together or not. Is it ok if we ask each other questions?

Do you mind if I take some notes?

Getting permission to ask questions, and to take notes, is also an important selling skill. It shows interest, and makes the prospect feel important.

There are other parameters that can be set at this stage, but what is most important is that each step in a sales process or selling system is a selling skill.

The selling skill that is most required in today's economy is to be asking questions, listening, showing concern and taking the prospect through a self discovery qualifying process.

Bob Urichuck is an International Speaker, Trainer and Best-Selling Author. Learn personally from Bob in the areas of Sales, Motivation, Leadership and Team Skills. Bob presents a series of great ideas and strategies with combination of facts, humor, and practical concept in a high-energy and self-discovery process that you can apply right away to achieve results. Subscribe to Bob's Free Newsletter, worth $297, visit http://www.BobU.com Now!

When Genius Failed Book Review

2008-05-17T15:32:00.000-07:00

Everyone has heard of the Securities and Exchange commission. They regulate the markets that common people like you and I invest in, but what they don't regulate is private investment groups. Groups, that you and I cannot get into unless are net-worths are somewhere beyond a million dollars. The purpose of the SEC is to protect us and the financial market but what if one of these private groups could single-handily destroy the global financial system by itself?

This is where the story of Long-Term Capital Management comes to play in the book When Genius Failed. Most of us are unaware of the crisis that could have occurred to the financial system without the Fed helping to produce a bailout plan for Long-Term Capital Management. One company, one $100 Billion Money Making Giant, holding one trillion dollars in global paper assets, led by one genius, John Meriwether.

In reading this book you will learn:

Who John Meriwether is

How Long-Term Capital Management got so big

What a Hedge Fund is

Why the stock market is can never be an exact science

Why burning bridges in relationships is a bad idea

Long-Term Capital Management used a model to build the biggest hedge-fund firm known to the world. On their journey there they continually squeezed the banks they were borrowing money from down to the lowest interest rates and borrowing fees possible; leaving some resentment that would play a big part in the downfall of Long-Term Capital Management.

The partners of Long-Term Capital Management believed in their investing strategy so firmly that they would not waver; not even in the face of global disaster.

I give this book a 10/10 for the retelling the story of this hedge-fund giant and the danger that private investors can have on the global markets and financial systems.

Tom Van is the owner and author of http://www.thomasvan.net The core focus of his website is to promote financial literacy and self-reliance by providing free educational articles on his website and blogging about his experiences.

He is the author of the creative finance blog which involves the use of buying things you want using creative methods when traditional methods are unavailable to you. You can learn more about his creative finance blog by visiting http://www.thomasvan.net/category/blogs/creative-financing

To see more book reviews by this author visit http://www.thomasvan.net/book-reviews/book-reviews

Article Source: http://EzineArticles.com/?expert=Thomas_Van

The Evonomist

2008-05-17T15:31:00.000-07:00

It is refreshing to see that someone is in recognition of the interrelatedness and intricacies inherent in most of the subject matters and natural and not so natural phenomena and come up with an explanation and a brief summary of two otherwise incongruent subject matters of evolution and economics in an interrelated and more of a cause and effect correlation. It was not a long time ago that chemistry and physics were found to be two faces of a coin at the advent of the discovery of atomic and subatomic particles and the formulation of the laws of modern physics. May be from the outset nature and natural process were all along following and obeying the same fundamental and comprehensive rule .Or we were just busy in the per suet of individual part and pieces of the general rule governing the grand universal scheme of things we neglected to look at it in generalized ways and kept at it as deep till such time we are forced to look at the confluence of it with one or the other of fields of study to get to the crux of it all.

It was not a long time ago that I wrote an article about the relationship between the material self and the conscious self and come up with a conclusion that the conscious self is all about the preservation of the material self. Economics is about the preservation of the material self and evolution is the process as the author has explained it eloquently. " According to the economist Eric D.Bienhocker who published these calculations in his revelatory work 'The origin of Wealth' (Harvard Business school Press,2006), the explanation is to be found in complexity theory , Evolution and economics are not just analogous to each other ,but they are actually two forms of a larger phenomenon called complex adaptive systems, in which individual elements, parts or agents interact , then process information and adapt their behavior to changing conditions ,immune systems, ecosystems, Language, the Law and the Internet are all examples of complex adaptive systems." Evonomics by Michael Shemer, Scientific American magazine January 2008.

Here I can't pass without emphasizing the individual's individual act in response to the unique conditions and circumstances the individual finds himself in, never mind the dynamism and state of flux of the conditions beyond account due to the infinite number of variables acting and interacting at a particular point in time. It is not without reason that I wanted to emphasize on the indeterminable, it is rather to show why central economic planning failed and continues to fail. In an economy every individual is a player according to his/her individual unique and dynamic condition, unique and changing skill and individually unique talents in a uniquely individual place in time in the grand economic entity. In other word the grand economic entity is a grand sum total of these unique individuals whose unique circumstances are beyond determination by any grand central planner. There can be no greater lie than to claim to have a central plan that will account all the dynamic and flux needs and conditions of the individual elements of the entity than to let it flow according to the governing on the ground and instantaneous changing circumstances. I again remember a communist slogan that says "We will put nature under our control" only to be proved wrong many times over. We only know a piece of the totality of what nature has for us leave alone capture nature in its totality. This I hope will be just a little foot note to the Authors eloquent exposition of a grand topic as we all are individual footnotes to the totality of human knowledge and wisdom.

Article Source: http://EzineArticles.com/?expert=Ayele_Teklemariam

On Wal-Mart - The Bully of Bentonville - How the High Cost of Everyday Low Prices Is Hurting America

2008-05-17T15:30:00.000-07:00

In "Wal-Mart: The Bully of Bentonville - How the High Cost of Everyday Low Prices Is Hurting America," Author Anthony Bianco made an argument about the predicament that Wal-Mart is in.... Should we agree with his argument? Agree or not, Bianco's argument painted an interesting future of American society? Interestingly, 'interesting future' in Chinese figure of speech usually denotes "people living in hard times (e.g., the Great Depression or the Russian Revolution).

In a nutshell, Bianco is arguing that Wal-Mart's bullying tactics of ensuring 'everyday low prices produces a high cost that is hurting America.' The remedy he offered can be interpreted as the need for Wal-Mart to replace its present business model with a new business model; stop squeezing employees and suppliers, and charge customers a little more (Businessweek.com, 2007).

Alas, Mr. Bianco portrayed Wal-Mart as 'a leopard that cannot (in this case, will not) change its spots.' In basketball parlance, Wal-Mart lives or dies by its jump shots. Quoting Bianco, "it simply knows no other way to compete and seems no more capable of altering its path now than a hammer can avoid the nail it was made to pound" (Bianco, 2007, p. 289).

As a matter of fact, Wal-Mart knows it is at a crossroad in its development as a corporation. However, Wal-Mart CEO Lee Scott thinks that his company doesn't need a new business plan instead the U.S. Government needs a new public policy plan. In deed, Scott "declared Wal-Mart's support for an increase in the federal minimum wage of $5.15" (Bianco, 2007, p. 288). At first glance, an observer would speculate that Wal-Mart is pulling something new out of its nefarious bag of tricks. It would be like the Neo-conservatives adopting the golden rule, 'the meek shall inherit the earth,' than the iron rule, 'might make right.' What is the reason for Scott's paradoxical position? Let's hear it from Scott, himself: "We can see first-hand at Wal-Mart how many of our customers are struggling to get by.... Our customers simply don't have the money to buy basic necessities between pay checks. There are global forces at work flattening pay scales" (Bianco, 2007, p. 288).

Bianco's view is that Wal-Mart is one (the most powerful) of the global forces that is at work flattening pay scales because of its low-price, low-wage image - an image that sets the standard for the world economy (Bianco, 2007).

I'm in total agreement with Bianco's argument about Wal-Mart's predicament and the crossroad it finds itself. Hopefully, Wal-Mart will tinker (for the better) with its business plan as it tries to sell more organic food and fashionable apparel to capitalize on their higher margins profit. Thus, it will have an incentive to stop squeezing its employees since it will be charging (actually, it is at the current moment) more for the high-end products (Businessweek.com, 2007).

If Wal-Mart should adopt my recommendation given in the preceding paragraph, it will impede the global forces that are at work flattening pay scales. In fact, Wal-Mart would remake (for the better) its low-price, low-wage image into a fair-price, fair-wage image - an image that will set a new standard for the world economy (Bianco, 2007).

If not, the future of American society will witness a Wal-Mart self-destructing like General Motors and the Steel Industry. Verily, the self-professed unsinkable Wal-Mart would crash into the iceberg (the need for a new business plan) of reality. Unfortunately, American society will be a passenger on Wal-Mart's sinking Titanic, and like the employees of General Motors and the Steel Industry they will suffer the consequences of Wal-Mart's hubris.

In conclusion, I described Bianco's argument that Wal-Mart has to make the change that matters - the need to replace its low-price, low-wage image with a fair-price, fair-wage image - in order to get itself out of its predicament. In turn, I produced arguments of my own that agrees with Bianco's conclusion, and the importance of Wal-Mart's compliance to ensure a better future for American society.

In the role of a devil's advocate, I once entertained the thought that Wal-Mart's present business plan might be a benefit to the pharmaceutical industry. For example, American society would benefit from the low prices that a Wal-Mart would force upon its pharmaceutical suppliers. After all, the pharmaceutical industry notoriously shares a spot in 'the axis of evil (including the healthcare industry)' that tries 'to squeeze the blood out of the turnip.' (For example, Michael Moore's Sicko provides great documentation on the preceding sentence). Then, I asked myself wouldn't the Wal-Mart induced pharmaceutical low prices produce a high cost that would in turn hurt America?

Karl A. Mitchell

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Book Review - The Economic Institutions Of Capitalism By Oliver Williamson

2008-05-17T15:29:00.001-07:00

In this book, Williamson presents a refined and elaborated version of his transaction cost theory that he had first outlined in his 1975 book Markets and Hierarchies: Analysis and Anti-trust Implications. His book attempts to systematically examine those economic issues that classical economic theory simply assumes away. The classical economics believes that markets are perfect, and if they are not then the action to remove market failures needs to be initiated. Williamson, on the other hand, focuses on these economic issues that are acknowledged to be widely prevalent in any economic system. “If complexity is deep in the nature of things economic then that ought to be acknowledged rather than suppressed. An equilibrium approach to economics is thus preliminary to the study of main issues (Hayek on P8).” This book, then, is a scrutiny of such economic phenomenon as market structures, monopolies, anti-trust policies, labor policies, public utility regulation, vertical integration and other economic institutions that have traditionally been neglected by the economic theory.

His basic proposition that most of us are familiar with by now is that the transaction costs should be treated as a fundamental unit of analysis for understanding such issues. Drawing on three streams of research- economics, organization theory and contract law, he repeatedly highlights the need to consider the governance (or transaction) costs. “Rather than characterize the firm as a production function, transaction cost economics maintains that the firm is more usefully regarded as a governance structure (P13).” While his basic argument appeared sound and plausible, I got an impression that Williamson attributed more to transaction costs than it deserved. Why should we regard only governance costs? Why should we think that the firm is only a governance structure? In other words, in my view, instead of correcting an existing flaw in the theory, he seems to be, to borrow the stock market jargon, proposing an over-correction. The field would be better off considering a cost function that combines both production and governance costs or at least choosing the concept based on the specific requirements of the situation or problem at hand.

Having said that, let’s now delve into the foundations of the transaction cost economics which is first three chapters in the book. Until this book, Williamson considered opportunism, bounded rationality, frequency and uncertainty to be the building blocks of TCE. However, in this book, he rightly puts forth asset specificity alongside opportunism and bounded rationality as the three legs of TCE. “Any attempt to deal seriously with the study of economic organization must come to terms with the combined ramifications of bounded rationality and opportunism in conjunction with a condition of asset specificity” (P42), which is assumed to be the most critical dimension of TCE (P30). Without asset specificity, markets are believed to be in a competitive world even if people are opportunistic and rationally bounded. This is because buyers and sellers can freely move between market players.

In contrast, uncertainty and frequency drop down a tad bit in the scheme of things. Now, they are supposed to be meaningful in presence of first three elements only. Conceptually, this makes a lot of sense. Take for example, if market players are uncertain about the outcomes, but they believe in the fairness of the parties to contract, the market mechanism would be adequate to deal with all the contingencies since the players would share equitably in the profits. However, we understand that such a behavioral assumption would be wrong since opportunism and bounded rationality are common behavioral traits. What intrigues me, albeit, is that if they are such common traits, then why they should even be made variables in the model. After all, a variable that doesn’t vary is no variable at all. It is not surprisingly, therefore, to see most literature to refer only to asset specificity, uncertainty and frequency as the three pillars of TCE. Williamson himself seems to acknowledge this in a subsequent chapter when he mentions that “principal dimensions for describing transactions are frequency, uncertainty and asset specificity (P242).”

After outlaying his conception of economic fundamentals, Williamson proceeds on to explain the boundaries of firm, which is to say what transactions will take place in market and what within the hierarchically organized structures. In his opinion, if the expected costs or risk of transacting in a marketplace are higher than the cost of organizing the functions internally, then such transactions will take place within the firm. If we ignore his exaggerated claims, this is indeed novel and useful approach at looking the firm size and boundaries. No longer is the size of firm held irrelevant as is the case in classical economics. No longer is it believed that the firms will operate at marginal cost whether they produce internally or buy externally. It opens up a can of worms that classical economics under its perfect market and equilibrium economics assumptions puts aside as aberrations. This is a welcome change in the approach to the study of industrial economics.

Next, Williamson moves on to the main theme of the book: providing alternative explanations vertical integration, mergers and monopolies, and joining issues with anti-trust enforcements. He believes that vertical integration results not because of technological determinism or a desire for monopolistic power but from a pragmatic desire to economize on transaction costs. In the similar vein, he contends that non-standard contracting practices such as long-term contracts are not monopolistic practices, but perfectly justifiable attempts at minimizing transaction costs. Further, he attributes such decisions “to a condition of asset specificity (P86)” since asset specificity in conjunction with uncertainty “makes it more imperative to organize transactions within the governance structure that have the capacity to work things out (P79).” The author makes a persuasive case for five out of six hypotheses on the boundaries of firm. However, his fifth hypothesis that claims that “firms will never integrate for production reasons alone” seems a little far-stretched. The fact that some firms organize for efficiency reasons doesn’t and can’t automatically preclude the fact that some firms organize for monopolistic or technological reasons. Once again, the author’s case would have been better served by refraining from such overstatements.

Next, Williamson turns his attention to analysis of such arrangements as can neither be classified as market contracts nor as hierarchical structures, but fall somewhere in between. Also known as hybrid structures, these include credible commitments, joint ventures, relational contracting, hostage models, reciprocal arrangements, and network relationships. His main claim is that even when such arrangements appear to be exercise of monopolistic power, they may be justifiable from transaction cost perspective. “A comparative institutional assessment of contractual alternatives discloses that efficiency purposes are often served by hostages and it is in the mutual interest of the parties to achieve that result. Not only can producers be induced to invest in the mutual interest of the parties to invest in the most efficient technology, but buyers can be induced to take delivery whenever demand realizations exceed marginal cost.” Interesting proposition, but it doesn’t explain the impact on the hostage (e.g. P&G) if the monopoly (e.g. Wal-Mart) decides to dump it! His second main claim derives from Coase’s 1960 article on problem of social cost. Recall Coase’s claim that when people are left to bargain among themselves, most economic externalities can be better resolved than when courts or other non-market interventions take place. Williamson develops on this proposition and claims that parties to a contract don’t normally take recourse to courts, but try to use “private ordering” to resolve their disputes. I would presume this would chiefly be out of concern for future business relations.

Let’s wrap up this review with a summary of strengths and weaknesses. For the strengths, I will let the Williamson speak for himself. To quote him,“As compared with other approaches to the study of economic organizations, transaction cost economics (1) is more micro-analytic (2) is more self-conscious about its behavioral assumptions (3) introduces and develops the economic importance of asset specificity (4) relies more on comparative institutional analysis (5) regards the business firm as a governance structure rather than as a production function and (6) places greater weight on the ex-post institutions of the contract, with special emphasis on private ordering as compared with court ordering.” -Williamson, P387

While the theory is conceptually persuasive and logically sound, a principal weakness of transaction cost analysis lies in its post-facto nature of analysis. Notwithstanding Williamson’s superb efforts, it has been rather difficult to define it in a way that it can be measured and tested. The theory in its current formulation continues to be plagued with a criticism that it’s tautological in nature, after all ex-post facto any system can be shown to be economizing on transaction cost or at least that it will be eventually replaced if it doesn’t. Therefore, transaction cost economics needs to find variables with predictive powers.

Williamson mentions three limitations of his work- its crude form, instrumentalism, and incompleteness. To me, these appeared more to be challenges for future research rather than any weaknesses in the theory. Besides occasional excessive enthusiasm and exaggerations and the difficulty in operationalization of the concept, a major challenge in reading this book is to be prepared to learn a new language! Williamson’s choice of words lives a reader with no less an impression.

Overall, Williamson does a superb job in developing the transaction cost economics that had first appeared in Coase’s 1937 article ‘nature of firm’, but had been left untouched until this work because of difficulties in operationalization and empirical testing. Williamson succeeded in overcoming most of these challenges and it is for the future researchers to meet the rest.

Reference:

Williamson, Oliver. The Economic Institutions of Capitalism. 1st. New York: The Free Press, 1985.

Punit Arora is a research scholar on management and public policy.

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Considering Economics and Financial Measures in Turbulent Times

2008-05-17T15:27:00.000-07:00

How on Earth could this happen, how come the economy is taking an economic downturn, why did the housing bubble burst and who are we to blame (this time)? Well, indeed those are all excellent questions and you will get a mixed basket of answers from various economists, still, without a better understanding of these issues, it probably will not make much sense to you.

Economic Business Cycles are part of the flow of the financial world, nation's economies and industry sectors. Sometimes the gambling casino we call the stock market seems to be at odds with reality, and we see false positives. Here, let me illustrate my point; read this book:

"The Handbook of Economic and Financial Measures" by Frank J. Fabozzi and Harry I. Greenfield - 1984.

This book is perfect for journalists, investors, economists, attorneys, financial planners, bankers, business owners, corporate executives, politicians, decision makers, MBA students, and you. Once you read this book you will never be lost with terms such as inflation, stagflation, deflation, GNP, GDP, trade deficits, government deficit, business cycles, business capitalization, stock market, sector rotations and you will be able to follow along quite nicely when the Fed Chairman is giving his opinion of the state of the US economy to congress.

In fact, I recommend this handbook for anyone who is serious about their financial future and the decisions they make. Judging by the enormous amount of debt that consumers have, it appears that we need financial literacy courses when folks end high school. And yes our politicians could sure use a bit of education on their spendthrift ways as well. But, if you own or run a business, then you ought to know a thing or two about economics, so for you I very much recommend this book.

"Lance Winslow" - Online Blog Content Service. If you have innovative thoughts and unique perspectives, come think with Lance; http://www.WorldThinkTank.net/. Lance Winslow's Bio

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Freakonomics - A Book By An Ecomomist That Isn't About Economics

2008-05-17T15:26:00.000-07:00

Steven D. Levitt is the economist. Stephen J Dubner is the writer. But Freakonomics is more about statistics and what to make of them than it is about economics.

The book is a truly interesting read and reminds me of John Allen Paulos' book, Innumeracy. The authors of Freakonomics claim that there is no unifying theme to the book, but I disagree. The unifying theme, just as in Innumeracy, is a theme about how people, in general, misread and misunderstand statistics and cause-and-effect relationships in society.

But before you think to yourself that statistics and math is boring and so don’t read the book, think again. This book is phenomenal and is a New York Times best seller for a reason.

Levitt and Dubner use outrageous examples to bring statistics and cause-and-effect relationships to life.

Do you want to know what the Ku Klux Klan and real estate agents have in common? Read the book

Ever wonder why drug dealers live with their mothers? Read the book.

Is the big drop in crime in New York City attributable to Julian Fantino? This answer, as well, can be found in the book

Freakonomics is on my list of ten best books ever. I think anybody that reads it will love it just as much as I did, except maybe for Mary Rosh (Read the book to find out why Mary Rosh probably wouldn’t like it).

I have one, and only one, criticism of the book. Freakonomics ends with an anecdotal story about Ted Kaczynski (the Unabomber) to help visualize a certain argument. The use of anecdotes is a big reason why so many of the innumerate fail to understand statistics and cause-and-effect relationships.

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The Freakonomics Blog is one of Tino's favorite blogs. If you own a copy of Freakonomics visit the blog where you can register to receive a signed bookplate from Levitt and Dubner.

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