I’ve set a reasonably modest goal for myself of writing 10 blog posts in April. Let’s see if I can get back on this bike (since I really miss it). This is post number 1.
One of my favorite Planet Money episodes (and maybe favorite podcast episodes period) is about why, despite everything we know about economics, Coke stayed five cents for 70 years. I wrote about it back in 2012 and just a few years ago Planet Money did a 3:45 video version of the episode.
I’ve become somewhat obsessed with basketball over the last few years. I’m not entirely sure why, though it’s a combination of it being on at a convenient time (I’ve found Sundays harder to swallow over the last few years) and some really interesting work going on around new approaches and analytics (a few years ago the NBA installed a series of motion-tracking cameras in every stadium allowing for some really interesting analysis of how the game works).
Anyway, my basketball interest has crashed headfirst into my new parenthood, and thus being awake in the middle of the night fairly often. As much as I’d love to be reading serious stuff while I’m waiting for a baby to go to bed at 3am, I just can’t make it work, so I’ve been reading some basketball books. This week it’s The Jordan Rules, which covers the Chicago Bulls 1991 championship season (Jordan’s first). It’s a fun and easy read for the middle of the night.
Anyway, when I read this passage I couldn’t help but fast-forward to today’s conversations around “small ball” (some teams, specifically the Golden State Warriors, are going out and playing without a traditional center and instead running with 5 guys who can dribble and shoot and space the floor). In the mid-1980s the trend was “Twin Towers” (playing with two centers):
But Cartwright didn’t get much playing time in New York after returning from those foot injuries. Patrick Ewing had come along by then, and Brown tried a twin-towers approach with Cartwright and Ewing. That approach had come into vogue when Houston, with Akeem Olajuwon and Ralph Sampson, upset the Lakers in five games in the 1986 Western Conference finals; suddenly everyone wanted two centers. But Ewing didn’t care to play forward, and when Brown was replaced, Cartwright took a seat on the bench behind Ewing. He didn’t like it, but he started to get used to the idea.
At the end of the day, part of what makes sports so interesting to me is that it’s a nearly perfect space for a bunch of economics theories. Advantages are won and lost quickly, new ideas spread through leagues nearly instantly at this point, and at the end of the day all the strategy in the world doesn’t replace talent.
I’ve been reading quite a bit of Brian Arthur’s writing lately. He’s a “complexity economist” from the Santa Fe institute and a pretty interesting all around thinker. Need to put together a bigger writeup of his ideas, but wanted to share his steps on how technology forms the economy around itself from his book Complexity and the Economy:
The steps involved yield the following algorithm for the formation of the economy.
1. A novel technology appears. It is created from particular existing ones, and enters the active collection as a novel element.
2. The novel element becomes available to replace existing technologies and components in existing technologies.
3. The novel element sets up further “needs” or opportunity niches for supporting technologies and organizational arrangements.
4. If old displaced technologies fade from the collective, their ancillary needs are dropped. The opportunity niches they provide disappear with them, and the elements that in turn fill these may become inactive.
5. The novel element becomes available as a potential component in further technologies—further elements.
6. The economy—the pattern of goods and services produced and consumed—readjusts to these steps. Costs and prices (and therefore incentives for novel technologies) change accordingly.
This week’s NYTimes Magazine economics column is all about timesheets. While the whole thing is worth a read, I found the history of timesheets especially interesting:
The notion of charging by units of time was popularized in the 1950s, when the American Bar Association was becoming alarmed that the income of lawyers was falling precipitously behind that of doctors (and, worse, dentists). The A.B.A. published an influential pamphlet, “The 1958 Lawyer and His 1938 Dollar,” which suggested that the industry should eschew fixed-rate fees and replicate the profitable efficiencies of mass-production manufacturing. Factories sold widgets, the idea went, and so lawyers should sell their services in simple, easy-to-manage units. The A.B.A. suggested a unit of time — the hour — which would allow a well-run firm to oversee its staff’s productivity as mechanically as a conveyor belt managed its throughput. This led to generations of junior associates working through the night in hopes of making partner and abusing the next crop. It was adopted by countless other service professionals, including accountants.
Interesting perspective (and data) on the effect of online retailing and the general environment on malls:
I agree with the above perspectives, although I believe they likely understate the eventual impact on malls. A report from Co-Star observes that there are more than 200 malls with over 250,000 square feet that have vacancy rates of 35% or higher, a “clear marker for shopping center distress.” These malls are becoming ghost towns. They are not viable now and will only get less so as online continues to steal retail sales from brick-and-mortar stores. Continued bankruptcies among historic mall anchors will increase the pressure on these marginal malls, as will store closures from retailers working to optimize their business. Hundreds of malls will soon need to be repurposed or demolished. Strong malls will stay strong for a while, as retailers are willing to pay for traffic and customers from failed malls seek offline alternatives, but even they stand in the path of the shift of retail spending from offline to online.
Living in New York it’s easy to forget the importance of malls in retail. Haven’t ever completely understood why that is exactly, but the malls in New York (the only two I can think of off the top of my head are South Street Seaport and Herald Square) feel like afterthoughts and are filled with stores that feel out of place in an otherwise retail-hungry city.
I’ve written in the past about what market leaders do to build categories, and frequently I cite Google as the best example of these strategies. Their approach with laying down fiber and providing really cheap, super fast internet in Kansas City is no exception. Like it did with Chrome (at least at the beginning), Google is trying to jumpstart a stagnant market:
If you are one of the lucky few Kansas City natives to have already signed up for Google Fiber, I don’t begrudge you one megabit; your ancestors had to deal with the Dust Bowl, you deserve a little extra bandwidth. But at its heart, Google’s attempt at being its own ISP is much more about forcing the entrenched service providers — the Verizon’s and Time Warner’s and AT&T’s of this world — to step up their games than it is about making this particular business a raving financial success. When I asked the Google spokeswoman what the ultimate goal of all this was, she replied that Google wants “to make the web better and faster for all users.” The implication is that they don’t necessarily want to do it all by themselves.
For whatever reason I’ve been listening to a lot of podcasts lately. One of my favorites is Planet Money from NPR. Their latest episode is a really interesting look at why Coca-Cola stayed 5 cents for 70 years. Turns out there are two primary reasons: First, the company got into a crazy deal with the bottlers where it was selling syrup at a fixed price of 90 cents a gallon. Because it was a dumb deal and Coke knew it they realized they needed a way to keep the price from spiraling out of control. Their solution was advertising. Because they couldn’t control the sale price they just went out to the market and told everyone it was 5 cents a bottle, meaning retailers were left with no choice but to sell it for the price consumers expected. The second reason is a little less exciting, but still interesting. Apparently Coca-Cola had an insane amount of vending machines around and they were all 5 cents. After getting out of their contract they could raise the price, but they didn’t want to double it and the machine couldn’t take anything but nickels. They tried (and failed) to lobby the government for a 7.5 cent coin, but eventually just kept the price as it was (with a brief period of giving every eighth consumer an empty bottle to artificially raise the price in a crazy way).
Go check out the whole thing.
I don’t know what it says about me, but I’m a sucker for thousand-word stories on things like shipping pallets. Luckily for me, Slate has gone ahead and written one (or rather they wrote one back in August). Here’s a little taste:
Pallet history is both humble and dramatic. As Pallet Enterprise (“For 30 years the leading pallet and sawmill magazine”) recounts, pallets grew out of simple wooden “skids”, which had been used to help transport goods from shore to ship and were, essentially, pallets without a bottom set of boards, hand-loaded by longshoremen and then, typically, hoisted by winch into a ship’s cargo hold. Both skids and pallets allowed shippers to “unitize” goods, with clear efficiency benefits: “According to an article in a 1931 railway trade magazine, three days were required to unload a boxcar containing 13,000 cases of unpalletized canned goods. When the same amount of goods was loaded into the boxcar on pallets or skids, the identical task took only four hours.”
If that doesn’t make you want to read it, I don’t know what will.
Two interesting nuggets in Ezra Klein’s story about studying economics in video games. First, a question I’ve asked myself many times about Facebook and currency:
“Just for example,” Castronova says, “Facebook has an entire currency system that isn’t taxed or regulated. At what point does that threaten what the Federal Reserve does?”
Next it’s a broader point about what effect video games have on the economy-at-large:
There’s also a question of whether actions in online worlds count as real-life economic activity. “Say someone is playing Eve Online for a whole week and not providing services in real life,” Guðmundsson says. “That would hurt GDP [the measure of real-life economic growth], but it would increase the Gross User Product in the virtual world. So did overall value creation really decline?”
An aside in the book I’m reading sparked a thought I figured might be worth sharing. First, the snippet:
From our e-mail providers to our mobile-phone carriers, most companies’ business models are too lucrative to risk by mishandling our personal information and angering the consumer. So it is safe to say that despite the many potential risks represented by the volumes of data available, our past is relatively well safeguarded.
Which reminded me a lot of economic definition of brand. Here’s The Economist’s dictionary of terms on the meaning of brand:
Many economists regard brands as a good thing, however. A brand provides a guarantee of reliability and quality. Consumer trust is the basis of all brand values. So companies that own the brands have an immense incentive to work to retain that trust. Brands have value only where consumers have choice. The arrival of foreign brands, and the emergence of domestic brands, in former communist and other poorer countries points to an increase in competition from which consumers gain. Because a strong brand often requires expensive advertising and good marketing, it can raise both price and barriers to entry. But not to insurperable levels: brands fade as tastes change; if quality is not maintained, neither is the brand.
A brand is a promise: The more valuable it is, the less a company can afford it to be broken.
I wonder, though, whether that’s as true now as it was in earlier times. The example I’ve heard most for thinking of brands in this is not killing your customers. You pay more for a Pepsi than some random house brand because you know it won’t be poisoned (you also know it will always taste the same). But something seems to be changing, especially with digital brands. Maybe it’s that there’s more of them or maybe we have far lower expectations, but I feel like large brands frequently have data breaches or other terrible things and we forgive them in a way that doesn’t really jibe with the two paragraphs above.
If we don’t hold our brands responsible, the very meaning of brand changes. Part of it is that it’s easier to show outrage than it ever was, so when people get up in arms about Facebook’s latest privacy change I suspect it’s not real. Part of it may be the insanity of the news cycle: TJ Maxx loses millions of credit cards and its only a big deal for a day. But none of it explains how a bunch of banks that nearly sunk the economy are able to bounce back (except, maybe, regular brand laws don’t apply to oligopolies).
No matter what, something is different and its important that we understand what it means.
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