profit maximization

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Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

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accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, invisible hand, iterative process, John von Neumann, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, open economy, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave

I instead saw a logical error: Stigler’s proof that marginal revenue for the individual firm would converge to market price as the number of firms increased was correct, if those firms all set marginal revenue equal to marginal price. But all the problems that I had identified in this chapter still remained: in particular, producing where supply equaled demand required ‘profit-maximizing’ firms to actually make losses on all goods sold past the point at which industry-level marginal revenue equaled marginal cost. There was only one explanation: equating marginal cost and marginal revenue couldn’t be profit-maximizing behavior. I followed the logic forward and proved that the true profit-maximizing formula was quite different. If competitive firms did actually profit-maximize, they would produce an output much lower than the level where marginal cost equaled marginal revenue. The market outcome was that a competitive industry would produce the same amount as a monopoly, and market price would exceed marginal cost.

A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data available eISBN 9781780322209 CONTENTS Tables, figures and boxes Preface to the second edition Preface to the first edition 1 Predicting the ‘unpredictable’ 2 No more Mr Nice Guy Part 1 Foundations: the logical flaws in the key concepts of conventional economics 3 The calculus of hedonism 4 Size does matter 5 The price of everything and the value of nothing 6 To each according to his contribution Part 2 Complexities: issues omitted from standard courses that should be part of an education in economics 7 The holy war over capital 8 There is madness in their method 9 Let’s do the Time Warp again 10 Why they didn’t see it coming 11 The price is not right 12 Misunderstanding the Great Depression and the Great Recession Part 3 Alternatives: different ways to think about economics 13 Why I did see ‘It’ coming 14 A monetary model of capitalism 15 Why stock markets crash 16 Don’t shoot me, I’m only the piano 17 Nothing to lose but their minds 18 There are alternatives Bibliography Index TABLES, FIGURES AND BOXES Tables 2.1 Anticipations of the housing crisis and recession 3.1 ‘Utils’ and change in utils from consuming bananas 3.2 Utils arising from the consumption of two commodities 3.3 The commodities in Sippel’s ‘Revealed Preference’ experiment 4.1 Demand schedule for a hypothetical monopoly 4.2 Costs for a hypothetical monopoly 4.3 Sales and costs determine the level of output that maximizes profit 4.4 Cost and revenue for a ‘perfectly competitive’ industry identical in scale to hypothetical monopoly 5.1 Input and output data for a hypothetical firm 5.2 Cost drawings for the survey by Eiteman and Guthrie 5.3 Empirical research on the nature of cost curves 7.1 Sraffa’s hypothetical subsistence economy 7.2 Production with a surplus 7.3 Relationship between maximum and actual rate of profit and the wage share of surplus 7.4 The impact of the rate of profit on the measurement of capital 10.1 Anderson’s ranking of sciences 12.1 The alleged Money Multiplier process 13.1 A hypothetical example of the impact of decelerating debt on aggregate demand 13.2 The actual impact of decelerating debt on aggregate demand 14.1 A pure credit economy with paper money 14.2 The dynamics of a pure credit economy with no growth 14.3 Net incomes 14.4 A growing pure credit economy with electronic money 15.1 Von Neumann’s procedure for working out a numerical value for utility 15.2 The Allais ‘Paradox’ 15.3 The Allais ‘Paradox’ Part 2 16.1 The solvability of mathematical models 17.1 Marx’s unadjusted value creation table, with the rate of profit dependent upon the variable-to-constant ratio in each sector 17.2 Marx’s profit distribution table, with the rate of profit now uniform across sectors 17.3 Steedman’s hypothetical economy 17.4 Steedman’s physical table in Marx’s value terms 17.5 Steedman’s prices table in Marx’s terms 17.6 Profit rate and prices calculated directly from output/wage data 17.7 Marx’s example where the use-value of machinery exceeds its depreciation Figures 2.1 US inflation and unemployment from 1955 2.2 Bernanke doubles base money in five months 2.3 Private debt peaked at 1.7 times the 1930 level in 2009 3.1 Rising total utils and falling marginal utils from consuming one commodity 3.2 Total utils from the consumption of two commodities; 3.3 Total ‘utils’ represented as a ‘utility hill’ 3.4 The contours of the ‘utility hill’ 3.5 Indifference curves: the contours of the ‘utility hill’ shown in two dimensions 3.6 A rational consumer’s indifference map 3.7 Indifference curves, the budget constraint, and consumption 3.8 Deriving the demand curve 3.9 Upward-sloping demand curve 3.10 Separating out the substitution effect from the income effect 3.11 Engel curves show how spending patterns change with increases in income 3.12 A valid market demand curve 3.13 Straight-line Engel ‘curves’ 3.14 Economic theory cannot rule out the possibility that a market demand curve may have a shape like this, rather than a smooth, downward-sloping curve 4.1 Leijonhufvud’s ‘Totems’ of the Econ tribe 4.2 Stigler’s proof that the horizontal firm demand curve is a fallacy 4.3 Profit maximization for a monopolist: marginal cost equals marginal revenue, while price exceeds marginal cost 4.4 Profit maximization for a perfectly competitive firm: marginal cost equals marginal revenue, which also equals price 4.5 A supply curve can be derived for a competitive firm, but not for a monopoly 4.6 A competitive industry produces a higher output at a lower cost than a monopoly 4.7 The standard ‘supply and demand’ explanation for price determination is valid only in perfect competition 4.8 Double the size, double the costs, but four times the output 4.9 Predictions of the models and results at the market level 4.10 Output behavior of three randomly selected firms 4.11 Profit outcomes for three randomly selected firms 4.12 Output levels for between 1- and 100-firm industries 5.1 Product per additional worker falls as the number of workers hired rises 5.2 Swap the axes to graph labor input against quantity 5.3 Multiply labor input by the wage to convert Y-axis into monetary terms, and add the sales revenue 5.4 Maximum profit occurs where the gap between total cost and total revenue is at a maximum 5.5 Deriving marginal cost from total cost 5.6 The whole caboodle: average and marginal costs, and marginal revenue 5.7 The upward-sloping supply curve is derived by aggregating the marginal cost curves of numerous competitive firms 5.8 Economic theory doesn’t work if Sraffa is right 5.9 Multiple demand curves with a broad definition of an industry 5.10 A farmer who behaved as economists advise would forgo the output shown in the gap between the two curves 5.11 Capacity utilization over time in the USA 5.12 Capacity utilization and employment move together 5.13 Costs determine price and demand determines quantity 5.14 A graphical representation of Sraffa’s (1926) preferred model of the normal firm 5.15 The economic theory of income distribution argues that the wage equals the marginal product of labor 5.16 Economics has no explanation of wage determination or anything else with constant returns 5.17 Varian’s drawing of cost curves in his ‘advanced’ microeconomics textbook 6.1 The demand for labor curve is the marginal revenue product of labor 6.2 The individual’s income–leisure trade-off determines how many hours of labor he supplies 6.3 An upward-sloping individual labor supply curve 6.4 Supply and demand determine the equilibrium wage in the labor market 6.5 Minimum wage laws cause unemployment 6.6 Demand management policies can’t shift the supply of or demand for labor 6.7 Indifference curves that result in less work as the wage rises 6.8 Labor supply falls as the wage rises 6.9 An individual labor supply curve derived from extreme and midrange wage levels 6.10 An unstable labor market stabilized by minimum wage legislation 6.11 Interdependence of labor supply and demand via the income distributional effects of wage changes 7.1 The standard economic ‘circular flow’ diagram 7.2 The rate of profit equals the marginal product of capital 7.3 Supply and demand determine the rate of profit 7.4 The wage/profit frontier measured using the standard commodity 9.1 Standard neoclassical comparative statics 9.2 The time path of one variable in the Lorenz model 9.3 Structure behind the chaos 9.4 Sensitive dependence on initial conditions 9.5 Unstable equilibria 9.6 Cycles in employment and income shares 9.7 A closed loop in employment and wages share of output 9.8 Phillips’s functional flow block diagram model of the economy 9.9 The component of Phillips’s Figure 12 including the role of expectations in price setting 9.10 Phillips’s hand drawing of the output–price-change relationship 9.11 A modern flow-chart simulation program generating cycles, not equilibrium 9.12 Phillips’s empirically derived unemployment–money-wage-change relation 10.1 Hicks’s model of Keynes 10.2 Derivation of the downward-sloping IS curve 10.3 Derivation of the upward-sloping LM curve 10.4 ‘Reconciling’ Keynes with ‘the Classics’ 10.5 Unemployment–inflation data in the USA, 1960–70 10.6 Unemployment–inflation data in the USA, 1950–72 10.7 Unemployment–inflation data in the USA, 1960–80 10.8 The hog cycle 11.1 Supply and demand in the market for money 11.2 The capital market line 11.3 Investor preferences and the investment opportunity cloud 11.4 Multiple investors (with identical expectations) 11.5 Flattening the IOC 11.6 How the EMH imagines that investors behave 11.7 How speculators actually behave 12.1 Inflation and base money in the 1920s 12.2 Inflation and base money in the post-war period 12.3 Bernanke’s massive injection of base money in QE1 12.4 Change in M0 and unemployment, 1920–40 12.5 Change in M1 and unemployment, 1920–40 12.6 Change in M0 and M1, 1920–40 12.7 M0–M1 correlation during the Roaring Twenties 12.8 M0–M1 correlation during the Great Depression 12.9 Bernanke’s ‘quantitative easing’ in historical perspective 12.10 The volume of base money in Bernanke’s ‘quantitative easing’ in historical perspective 12.11 Change in M1 and inflation before and during the Great Recession 12.12 The money supply goes haywire 12.13 Lindsey, Orphanides, Rasche 2005, p. 213 12.14 The empirical ‘Money Multiplier’, 1920–40 12.15 The empirical ‘Money Multiplier’, 1960–2012 12.16 The disconnect between private and fiat money during the Great Recession 13.1 Goodwin’s growth cycle model 13.2 My 1995 Minsky model 13.3 The vortex of debt in my 1995 Minsky model 13.4 Cyclical stability with a counter-cyclical government sector 13.5 Australia’s private debt-to-GDP ratio, 1975–2005 13.6 US private debt to GDP, 1955–2005 13.7 Aggregate demand in the USA, 1965–2015 13.8 US private debt 13.9 The change in debt collapses as the Great Recession begins 13.10 The Dow Jones nosedives 13.11 The correlation of debt-financed demand and unemployment 13.12 The housing bubble bursts 13.13 The Credit Impulse and change in employment 13.14 Correlation of Credit Impulse and change in employment and GDP 13.15 Relatively constant growth in debt 13.16 The biggest collapse in the Credit Impulse ever recorded 13.17 Growing level of debt-financed demand as debt grew faster than GDP 13.18 The two great debt bubbles 13.19 Change in nominal GDP growth then and now 13.20 Real GDP growth then and now 13.21 Inflation then and now 13.22 Unemployment then and now 13.23 Nominal private debt then and now 13.24 Real debt then and now 13.25 Debt to GDP then and now 13.26 Real debt growth then and now 13.27 The collapse of debt-financed demand then and now 13.28 Debt by sector – business debt then, household debt now 13.29 The Credit Impulse then and now 13.30 Debt-financed demand and unemployment, 1920–40 13.31 Debt-financed demand and unemployment, 1990–2011 13.32 Credit Impulse and change in unemployment, 1920–40 13.33 Credit Impulse and change in unemployment, 1990–2010 13.34 The Credit Impulse leads change in unemployment 14.1 The neoclassical model of exchange as barter 14.2 The nature of exchange in the real world 14.3 A nineteenth-century private banknote 14.4 Bank accounts 14.5 A credit crunch causes a fall in deposits and a rise in reserves in the bank’s vault 14.6 A bank bailout’s impact on loans 14.7 A bank bailout’s impact on incomes 14.8 A bank bailout’s impact on bank income 14.9 Bank income grows if debt grows more rapidly 14.10 Unemployment is better with a debtor bailout 14.11 Loans grow more with a debtor bailout 14.12 Profits do better with a debtor bailout 14.13 Bank income does better with a bank bailout 14.14 Modeling the Great Moderation and the Great Recession – inflation, unemployment and debt 14.15 The Great Moderation and the Great Recession – actual inflation, unemployment and debt 14.16 Modeling the Great Moderation and the Great Recession – output 14.17 Income distribution – workers pay for the debt 14.18 Actual income distribution matches the model 14.19 Debt and GDP in the model 14.20 Debt and GDP during the Great Depression 15.1 Lemming population as a constant subject to exogenous shocks 15.2 Lemming population as a variable with unstable dynamics 17.1 A graphical representation of Marx’s dialectics Boxes 10.1 The Taylor Rule 13.1 Definitions of unemployment PREFACE TO THE SECOND EDITION Debunking Economics was far from the first book to argue that neoclassical economics was fundamentally unsound.

It’s not only because they can abuse the power that being a monopoly can confer: it’s also because, according to neoclassical theory, a monopoly will set its price above the marginal cost of production. If monopolies were the rule, then there could be no supply curve, and standard neoclassical microeconomic analysis would be impossible. Conversely, neoclassical economists love the market structure they call ‘perfect competition,’ because it guarantees that profit-maximizing behavior will cause firms to produce an output at which marginal cost equals price. Only it won’t. The manner in which neoclassical economics derives the result that profit-maximizing behavior by competitive firms means that they will produce where marginal cost equals price commits one of the simplest mathematical mistakes possible: it confuses a very small quantity – an ‘infinitesimal,’ as mathematicians describe it – with zero. When that error is corrected, it is easily shown that a competitive market will also set price above marginal cost, and therefore a supply curve that is independent of the demand curve can’t be drawn.


pages: 207 words: 52,716

Capitalism 3.0: A Guide to Reclaiming the Commons by Peter Barnes

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Albert Einstein, car-free, clean water, collective bargaining, corporate governance, corporate personhood, corporate social responsibility, dark matter, diversified portfolio, en.wikipedia.org, hypertext link, Isaac Newton, James Watt: steam engine, jitney, new economy, patent troll, profit maximization, Ronald Coase, telemarketer, The Wealth of Nations by Adam Smith, transaction costs, War on Poverty, Yogi Berra

If managers are accountable to shareholders for profit-based performance, to whom are they accountable for commons-based performance? Hypothetical answers to such questions can no doubt be drafted, but what would happen in the real world, I suspect, is what The Economist surmises: profit maximization would dominate, accompanied by obfuscation about other goals. Corporate communications departments would try to maximize the appearance of social responsibility for the lowest actual cost. We’d see beautiful ads and reports, but little change in core behavior. It’s important to remember that the profit-maximizing algorithm is enforced not just by laws, but by a variety of carrots and sticks. For example, CEO compensation is typically based on a list of goals established by the board. These often include nonfinancial goals, but the goal that carries the most weight, and is least amenable to obfuscation, is profit.

(Significantly, needs are generic, while thneeds are typically branded.) Filling needs contributes more to human well-being than does selling thneeds, yet our economic system increasingly devotes scarce resources to thneeds. Time to Upgrade | 11 Why do we have so much illth and so many thneeds? Because our economic operating system is far out of balance. On one side, representing owners of capital, are powerful profit-maximizing corporations. On the other side, representing future generations, nonhuman species, and millions of humans with unmet needs, are— almost nothing. The system lacks institutions that preserve shared inheritances, charge corporations for degrading nature, or boost the “demanding” power of people whose basic needs are ignored. Hence the system generates ever more illth, waste, and ever-widening disparities between rich and poor.

Waiting for 3.0 Let’s summarize the history of capitalism thus far. Since arising in the eighteenth century, capitalism has changed the face and chemistry of the earth. It keeps doing so, despite signals of planetary peril, like a runaway steam engine without a governor. It has built mountains of private wealth, but much of that wealth was taken from the commons, and a great deal of it adds little to our happiness. Its main actors, profit-maximizing corporations, are essentially out of control, and the fruits of their exertions are dispensed in a highly unequal way. Why does surplus capitalism behave this way? It’s possible that we consistently hire bad CEOs, but I think otherwise. I think it’s the 32 | THE PROBLEM operating system that causes most CEOs to act not with the next generation, but with the next quarterly statement, foremost in mind.


pages: 335 words: 104,850

Conscious Capitalism, With a New Preface by the Authors: Liberating the Heroic Spirit of Business by John Mackey, Rajendra Sisodia, Bill George

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Berlin Wall, Buckminster Fuller, business process, carbon footprint, collective bargaining, corporate governance, corporate social responsibility, crony capitalism, cross-subsidies, en.wikipedia.org, Fall of the Berlin Wall, fear of failure, Flynn Effect, income per capita, invisible hand, Jeff Bezos, job satisfaction, lone genius, Mahatma Gandhi, microcredit, Occupy movement, profit maximization, Ralph Waldo Emerson, shareholder value, six sigma, Steve Jobs, Steven Pinker, The Fortune at the Bottom of the Pyramid, The Wealth of Nations by Adam Smith, too big to fail, union organizing, women in the workforce

Gallup has found that Americans’ confidence in big business has declined steadily, from about 34 percent in 1975 to a historic low of 16 percent in 2009, rebounding to 19 percent in 2011.15 The Myth of Profit Maximization The persistent myth claiming that the ultimate purpose of business is always to maximize profits for the investors probably originated with the industrial revolution’s earliest economists. How did this myth originate? It appears to have come from two sources: a narrow view of human nature and an inadequate explanation of the causes of business success. Looking to create elegant mathematical models of economic systems, academic economists adopted the narrow view that we humans are maximizers of economic self-interest to the exclusion of all else. By logical extension, businesses, too, were deemed to be pure profit maximizers. These simplistic assumptions enabled economists to create models that seemed to explain some of the workings of the larger economy.

The heroic story of free-enterprise capitalism is one of entrepreneurs using their dreams and passion as fuel to create extraordinary value for customers, team members, suppliers, society, and investors. This is a very different narrative than the one that sees history through the lens of profit maximization. Bill Gates did not start Microsoft with the goal of becoming the richest man in the world. He saw the potential of computers to transform our lives and was on fire to create software that would make them so useful that eventually all of us would own one. He followed his passion and, in the process, became the richest man in the world—but that was the outcome, not his goal or purpose. The myth that profit maximization is the sole purpose of business has done enormous damage to the reputation of capitalism and the legitimacy of business in society. We need to recapture the narrative and restore it to its true essence: that the purpose of business is to improve our lives and to create value for stakeholders.

The pie grows, and there is more for everyone. This idea is at the core of capitalism’s extraordinary and unique ability to generate wealth. The Unintended Consequences of Low-Consciousness Business When businesspeople operate with a low level of consciousness about the purpose and impact of business, they engage in trade-off thinking that creates many harmful, unintended consequences. Such businesses view their purpose as profit maximization and treat all participants in the system as means to that end. This approach may succeed in creating material prosperity in the short term, but the resultant price tag of long-term systemic problems is increasingly unacceptable and unaffordable. Too many businesses fail to recognize the significant impacts they have on the environment, on other creatures that inhabit the planet (such as wildlife and livestock animals), and on the physical health and psyches of team members and customers.


pages: 204 words: 54,395

Drive: The Surprising Truth About What Motivates Us by Daniel H. Pink

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affirmative action, call centre, Daniel Kahneman / Amos Tversky, Dean Kamen, deliberate practice, Firefox, Frederick Winslow Taylor, game design, George Akerlof, Isaac Newton, Jean Tirole, job satisfaction, knowledge worker, performance metric, profit maximization, profit motive, Results Only Work Environment, side project, the built environment, Tony Hsieh, transaction costs

But traditional businesses have long considered purpose ornamental a perfectly nice accessory, so long as it didn't get in the way of the important things. But that's changing thanks in part to the rising tide of aging baby boomers reckoning with their own mortality. In Motivation 3.0, purpose maximization is taking its place alongside profit maximization as an aspiration and a guiding principle. Within organizations, this new purpose motive is expressing itself in three ways: in goals that use profit to reach purpose; in words that emphasize more than self-interest; and in policies that allow people to pursue purpose on their own terms. This move to accompany profit maximization with purpose maximization has the potential to rejuvenate our businesses and remake our world. Drive Drive: The Glossary A new approach to motivation requires a new vocabulary for talking about it. Here's your official Drive dictionary.

An L3C in North Carolina, for instance, is buying abandoned furniture factories in the state, updating them with green technology, and leasing them back to beleaguered furniture manufacturers at a low rate. The venture hopes to make money, but its real purpose is to help revitalize a struggling region. Meanwhile, Nobel Peace Prize winner Muhammad Yunus has begun creating what he calls social businesses. These are companies that raise capital, develop products, and sell them in an open market but do so in the service of a larger social mission or as he puts it, with the profit-maximization principle replaced by the social-benefit principle. The Fourth Sector Network in the United States and Denmark is promoting the for-benefit organization a hybrid that it says represents a new category of organization that is both economically self-sustaining and animated by a public purpose. One example: Mozilla, the entity that gave us Firefox, is organized as a for-benefit organization.

Neither open-source production nor previously unimagined not only for profit businesses are yet the norm, of course. And they won't consign the public corporation to the trash heap. But their emergence tells us something important about where we're heading. There's a big movement out there that is not yet recognized as a movement, a lawyer who specializes in for-benefit organizations told The New York Times. One reason could be that traditional businesses are profit maximizers, which square perfectly with Motivation 2.0. These new entities are purpose maximizers which are unsuited to this older operating system because they flout its very principles. How We Think About What We Do When I took my first economics course back in the early 1980s, our professor a brilliant lecturer with a Patton-like stage presence offered an important clarification before she'd chalked her first indifference curve on the blackboard.


pages: 94 words: 22,435

Bandit Algorithms for Website Optimization by John Myles White

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profit maximization, pull request

Deb knew that Oscar was an established expert in business decision-making, so she suspected the Oscar would have something intelligent to say about her newfound questions about balancing experimentation with profit-maximization. And Oscar was indeed interested in Deb’s idea: "I entirely agree that you have to find a way to balance Cynthia’s interest in experimentation and Bob’s interest in profits. My colleagues and I call that the Explore-Exploit trade-off." "Which is?" "It’s the way Operations Researchers talk about your need to balance experimentation with profit-maximization. We call experimentation exploration and we call profit-maximization exploitation. They’re the fundamental values that any profit-seeking system, whether it’s a person, a company or a robot, has to find a way to balance. If you do too much exploration, you lose money.

After we show that you can configure the epsilon-Greedy algorithm to behave like A/B testing, we’ll show you that the epsilon-Greedy algorithm can also be configured to behave exactly like the profit-maximization rule that Bob hoped Deb would settle upon after her experimental phase was over. Setting up the epsilon-Greedy algorithm to achieve either of these goals is surprisingly easy: Cynthia’s original experimental design involves assigning each visitor to Deb’s website to one of two colors completely at random, which is exactly how the epsilon-Greedy algorithm behaves if it knows about 2 arms and has set epsilon = 1.0. We can do that by simplying instantiating our EpsilonGreedy class with the right parameters: algo = EpsilonGreedy(1.0, []) initialize(algo, 2) Bob’s rule for profit-maximization is also a single line: algo.epsilon = 0.0 Those three lines fully describe Cynthia and Bob’s approaches, which are literally the two most extreme ways that you can configure the epsilon-Greedy algorithm.


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

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Andrei Shleifer, banking crisis, Bernie Madoff, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, moral hazard, mortgage debt, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

Rational indifference to the indirect consequences of one's business and consumption behavior is the reason the government has a duty, in regulating financial behavior, to do more than prevent fraud, theft, and other infringements of property and contract rights, which is the only duty that libertarians believe government has. Without stronger financial regulation than that, the rational behavior of law-abiding financiers and consumers can precipitate an economic disaster. Not only does competition force businessmen to be profit maximizers, which implies, as we have seen, that they will accept a small risk of bankruptcy; we want them to be profit maximizers—it is what drives economic progress. But in this example private virtue is a public vice, because the profitmaximizing businessman rationally ignores small probabilities that his conduct in conjunction with that of his competitors may bring down the entire economy. Similarly, when the economy is weak, it is rational for people to reduce their consumption and increase their savings.

The more an executive's compensation depends on how well his firm does, the fewer risks he may be inclined to take, because all or most of his financial eggs, as distinct from the shareholders', are in that one basket. That is why asymmetric compensation schemes in which compensation tied to stock value is combined with a generous severance package may be in investors' interest. But such schemes may not be in the interest of the nation as a whole if they enhance the risk of a depression — and they do. Securitization also played a role in encouraging short-term profit maximization. Instead of having to wait twenty-five or thirty years to receive the full return on a residential mortgage, exchanging the mortgage for a security gave a bank the present value of the loan up front, increasing the bank's current profits, some part of which would accrue to the bank's executives in the form of salary, bonus, benefits, or stock. A bank could always have sold a mortgage, but securitization made the mortgage market more liquid.

Because of the absence of such a relationship, he does not bear the cost and so is unlikely to give it much weight in deciding what to do —especially if his action creates a significant externality only in conjunction with similar actions of many other people. That is the situation of the individual consumer who desires to plume himself on his frugality by reducing the purchase of luxury items that he can well afford, and of the businessman who decides to take less risk than is profit maximizing in order to benefit the economy as a whole. Still another reason for the epidemic of dissaving that preceded the crash was rapid advances in marketing sophistication and technology. The World Wide Web played a role here (think how easy oneclick ordering makes the buying of consumer products), along with advances in cognitive psychology. Increased sophistication in the marketing of goods and services enabled sellers to induce consumers to shift much of their savings, designed to protect their future consumption, into buying more consumer goods now.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge worker, labour market flexibility, law of one price, Long Term Capital Management, low skilled workers, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, open economy, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, working-age population, World Values Survey

Defined Contribution Plans and Individual Retirement Accounts (401(k)’s) hold more than 40 percent of all mutual fund assets in the US. In the US, the big prize for a money management firm running a family of mutual funds is to become trustee of a corporate 401(k) retirement plan. If such firms face a tradeoff between increasing their chances of becoming (and remaining) trustee and making the optimal investment choices for their clients, the profit-maximizing choice is simple. They do the bidding of MONEY IS POWER 57 the company that has the power to name the trustee. The retirement savers would benefit from having a diversified portfolio. In particular, they should not be overinvested in the stock of their employer since they already face the risk of low income or job loss if their employer should fare badly. However, the company has an interest in having its stock price pumped up by increasing demand.

“This is consistent with the view that important aspects of executive compensation are chosen as a way to transfer wealth from shareholders to executives ex post,” reads the blunt conclusion of Garvey and Milbourn (2006). The outrage constraint in action According to the managerial power theory, the pay level of managers is determined by social norms, not by the mathematical solution of a profit maximization problem. What top managers get depends on what the public and the shareholders are willing to accept. After the subprime crisis hit the world economy and drew attention to the extremely large THE POWER OF THE CORPORATE ELITE 121 paychecks that many executives in the financial industry had collected despite having caused the disaster, the public was outraged, at least temporarily. With large losses of corporations and societies in plain view, people did not believe the pay-for-performance justification for these exorbitant salaries any more.

The problem with this theory is that due to the very high sunk fixed costs for plant and machinery before a production run begins, most MARKET POWER 143 industrial goods are produced under conditions of constant or falling marginal costs – indeed the only globally commonplace industries today known to normally have rising marginal costs are nonmechanized laborintensive industries such as subsistence farming. It gets worse, because information goods (e.g. IT, media content such as movies, music, art etc.) typically cost a very great deal for the very first copy and almost zero for every subsequent copy; so as Shapiro and Varian (1999) point out, the optimal profit-maximizing strategy is to maximize sales right down to a marginal cost of almost zero (i.e. to allow some, but not too much, piracy) which implies a scale of mass production approaching infinity, and therefore is exactly the textbook economics model flipped upside down. Building 100,000 cars in a big factory tends to be cheaper per car than building 1,000 or 20,000 in a smaller factory. Even after the costminimizing plant size is reached, a company that builds another factory and sells twice as many cars can reduce administrative and development costs per car.


pages: 320 words: 86,372

Mythology of Work: How Capitalism Persists Despite Itself by Peter Fleming

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1960s counterculture, anti-work, call centre, clockwatching, corporate social responsibility, David Graeber, Etonian, future of work, Goldman Sachs: Vampire Squid, illegal immigration, late capitalism, Mark Zuckerberg, market bubble, market fundamentalism, means of production, neoliberal agenda, Parkinson's law, post-industrial society, profit maximization, profit motive, quantitative easing, Results Only Work Environment, shareholder value, The Chicago School, transaction costs, working poor

Like all forms of hyper-rationalization, shareholder capitalism fosters a mentality that is generally antisocial and sometimes diabolical when observed from an outside perspective. For example, a large funeral home corporation in the United Kingdom recently had to break some bad news to its shareholders. Dividends will be less than expected because the winter was rather mild. Therefore, fewer elderly people died. The valuable ends of providing funeral home services now become a mere means for profit maximization. The more deaths, the more money made, which is now the end that matters. One may even imagine the firm’s managing directors eventually hoping for a harsh winter (as energy firms clearly do), perhaps even encouraging a speculative market around future weather patterns (as Enron notoriously did) and so forth. We can observe a similar shareholder rationalism depleting city accommodation in the large centres of the capitalist West, something that is directly linked to the reproduction of the global workforce.

For these employers, would it not simply be a ‘waste’ to pay a worker for an extra hour when they technically didn’t do anything? Ultimately, this is a cruel form of employment (low real wages, unpaid ‘waiting time’, no guarantee of work, employees bearing the negative externalities of business, etc.). But it makes perfect rational sense from a myopic economic perspective because it more effectively facilitates the subsidization process. Who will carry the real price that underlies the cost-saving and profit-maximizing employment policies of fast-food restaurants and online book stores? Perhaps family, more reluctantly the now emasculated welfare state, but ultimately the working class itself. We must place this rationalization process once more in the context of class relations defined by subsidization. In the thought experiment above, we travelled back to that alien world 20 or 30 years ago and noted an unfathomable abundance of ‘waste’.

Hence the socially manufactured scarcity that even Dallas, the beggar cum drug dealer residing outside my East London flat, understands well enough. The most interesting trait of the workforce today is the sheer amount of labour exerted that not only goes unpaid (discretionary work, unrecognized overtime, etc.) but is also functionally unessential to the firm, even by the firm’s own standards of profit maximization. This is work done for its own sake, which may look from the outside to be meaningless, but is driven by extant concrete forces not greatly different from ancient rites of superfluous sacrifice. And as we shall note in the forthcoming chapters, this does not undermine the process of hyper-rationalization mentioned in the Introduction, but is integral to it. Most working people recognize that capitalism fanatically underlines the importance of surplus labour in order to maintain its logic of expropriation, so that the rich can enjoy the idleness they are so afraid we might come to think is our entitlement as well.


pages: 151 words: 38,153

With Liberty and Dividends for All: How to Save Our Middle Class When Jobs Don't Pay Enough by Peter Barnes

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Alfred Russel Wallace, banks create money, Buckminster Fuller, collective bargaining, David Ricardo: comparative advantage, declining real wages, deindustrialization, diversified portfolio, en.wikipedia.org, Fractional reserve banking, full employment, hydraulic fracturing, income inequality, Jaron Lanier, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, land reform, Mark Zuckerberg, Network effects, oil shale / tar sands, profit maximization, quantitative easing, rent-seeking, Ronald Coase, Ronald Reagan, Silicon Valley, sovereign wealth fund, the map is not the territory, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Tyler Cowen: Great Stagnation, Upton Sinclair, winner-take-all economy

This better-balanced capitalism—we could call it everyone-gets-a-share capitalism—wouldn’t solve all our problems, but it would do more than any other potential remedy to preserve our middle class, our democracy, and our planet. ODDLY ENOUGH, THIS BOOK BEGAN as an idea for a board game. The idea came to me while I was teaching a course at Schumacher College in England. I wanted to make the point that capitalism—that is, a market economy with private property and profit-maximizing corporations — isn’t necessarily inconsistent with a healthy planet or an equitable society. I projected a PowerPoint slide of the iconic Monopoly board game and said, “Imagine a game like this, except with slightly different rules. There’d be private property, profit-seeking corporations, winners and losers, but at the same time, nature and the middle class would fend for themselves and flourish.”

An affluent economy is a prerequisite for a large middle class but by no means a guarantee. To sustain a large middle class, a nation must consciously and continuously temper the natural impulse of capitalism to minimize labor costs. That has been done by various countries in various ways, but there’s always pushback and never a guarantee that gains for the middle class will endure. Sustaining a large middle class requires counterbalancing the profit-maximizing imperative of corporations. For much of the twentieth century, the requisite counterforce came from labor unions. In the United States and Western Europe, labor unions finished the job that Henry Ford started. Through collective bargaining, they drove up wages and shortened the workweek; through political power, they won such benefits as unemployment insurance and Medicare. In countries like Germany and Sweden, where labor unions have remained strong, so has the middle class.

Consider, for example, health care in America, about one-sixth of our economy. There are many reasons why the United States spends 80 percent more per capita on health care than does Canada, while achieving no better results, but one of the biggest is that Canada has wrung huge amounts of rent out of its health-care system and we haven’t.9 Every Canadian is covered by nonprofit rather than profit-maximizing health insurance, and pharmaceutical prices are tightly controlled. By contrast, in the United States, drug companies overcharge because of patents, Medicare is barred from bargaining for lower drug prices, and private insurers add many costs and inefficiencies.10 Not even major reforms won by President Obama in 2010 are likely to change this. Indeed, by expanding coverage, they may actually increase the rent extracted by health-related companies.


pages: 490 words: 117,629

Unconventional Success: A Fundamental Approach to Personal Investment by David F. Swensen

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asset allocation, asset-backed security, capital controls, cognitive dissonance, corporate governance, diversification, diversified portfolio, fixed income, index fund, law of one price, Long Term Capital Management, market bubble, market clearing, market fundamentalism, passive investing, pez dispenser, price mechanism, profit maximization, profit motive, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, Steve Ballmer, technology bubble, the market place, transaction costs, Vanguard fund, yield curve

Agents take on the role of principal either by allowing the satisfaction of client interests to transcend the imperative of profit generation or by employing the technique of side-by-side investment to transform the fundamental character of the incentive structure. In the case of subordinating profit maximization to client outcomes, the agent pursues the unusual path of valuing client results more highly than personal profit. Unfortunately, few agents in the financial services profession reject the Economics 101 notion of profit-maximizing behavior. In the case of agent co-investment alongside the principals’ assets, the agent becomes a principal. As the degree of co-investment increases, so does the principal orientation of the manager. Few agents possess the means (or the desire) to allow return generation to trump fee collection.

Churning of mutual-fund holdings by investors adds an additional odds-lengthening factor to the equation. At the end of the day, as described in Chapter 7, The Performance Deficit of Mutual Funds, investors cannot win the active management game. The failure of the mutual-fund industry to produce attractive investment results stems from the inherent conflict between behaving as a fiduciary and acting as a profit-maximizer. The contest between serving investor interests and making money never even makes the starting gate. Profits win in a runaway. The crux of the conflict stems from divergence between the goals of the mutual-fund-investor principal and the mutual-fund-manager agent. Investors benefit from low fees, low taxes (related to low portfolio turnover), and fair, transparent arrangements. Managers profit from high fees, high portfolio turnover (related to high taxes), and inequitable, opaque arrangements.

Before management fees, before commissions, before market impact, before sales loads, before contingent fees, and before taxes, investors in actively managed mutual funds face a coin flip. After all fees and expenses, investors experience a performance deficit. Rational mutual-fund investors avoid active management. CHAPTER SUMMARY Management fees and trading costs represent the most important battlegrounds in the contest between fiduciary responsibility and profit maximization. In the arena of active management, investor interests suffer a resounding defeat. Profits win and responsibility loses. Sales loads constitute an affront to investors. A sales load leads to certain-return diminution that no-load investors avoid. In fact, evidence suggests that the size of the load corresponds to the load fund’s performance deficit. In spite of widespread recognition of the superiority of no-load funds, load funds remain extremely popular, driven by the brokerage community’s fee-induced marketing greed.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, corporate governance, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, interest rate swap, Internet Archive, invisible hand, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, moral hazard, mortgage debt, mortgage tax deduction, oil shock, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

The difference in emphasis is important, because the Coasian view sees the corporation's role as maximizing efficiency, not profit, which is another matter entirely. Advertising, planned obsolescence, predatory pricing, and spurious innovation are partly or wholly socially useless, even malignant, activities, but they are profit-maximizing. Veblen also argued that an industrial system run for social efficiency rather than maximum profit might see more internalized and fewer market transactions. Sometimes profit-maximizing will lead to socially beneficial combination and coordination, but sometimes it won't. Janet Knoedler (1995) argued, for example, that GM's integration with its suppliers (like Fisher auto body) had less to do with economizing on costs than with simplifying the annual style change, a marketing rather than an industrial consideration.

Reading the updated Berle 27 years later, even more than the 1932 original, it's hard to imagine that anyone could have thought that modern corporate society moves by anything significantly different from the maximization of profit. But the belief that the advent of the large corporation had changed capitalism into a more humane, progressive force was a core belief of American liberalism from the New Deal through the end of the 1960s. Profit maximization, the motor of 19th century entrepreneurial capitalism, had been replaced by growth, and competition by long-term corporate planning and administered prices. In one moving cri de rentier (pp. 115-116), Berle and Means denounced the potential for managerial abuse of the poor owner: "out of professional pride," managers may "maintain labor standards above those required by competitive conditions," or "improve quality above the point" that is likely to be maximally profitable to shareholders!

Stockholder rebellion among large corporations was "so rare that it can be ignored," because trouble-free GOVERNANCE profitability was the norm. Of course, management told Congressional committees that the board and the stockholders were in control, and conducted yearly meetings to flatter the nominal owners, but Galbraith's corporation was run by the technostructure. Unlike Baran and Sweezy, Galbraith dismissed profit maximization as the goal of the giant firm in favor of the growth in sales and prestige. To thrive, it needed not maximum profits, but "a secure minimum of earnings" that would keep it from having to tap troublesome capital markets or cope with demanding outside stockholders (pp. 151-152). Secure mediocrity was the ideal. The technostructure had little to gain from high profits, which would only be passed along to shareholders, and might even entail higher risk — risk that could disturb managerial autonomy.


pages: 273 words: 93,419

Let them eat junk: how capitalism creates hunger and obesity by Robert Albritton

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Bretton Woods, California gold rush, clean water, collective bargaining, computer age, corporate personhood, deindustrialization, Food sovereignty, Haber-Bosch Process, illegal immigration, immigration reform, invisible hand, joint-stock company, joint-stock limited liability company, land reform, late capitalism, means of production, offshore financial centre, oil shale / tar sands, peak oil, price stability, profit maximization, profit motive, South Sea Bubble, the built environment, union organizing, Unsafe at Any Speed, upwardly mobile

First, capital’s privileging of short-term profits over all other considerations leads to an indifference to preserving the long-term quality of land, lakes, rivers and oceans. Profits may dictate deforestation, land degradation, and the pollution of bodies of water. Longterm conservation for the sake of future generations requires a relationship of stewardship, a relationship diametrically opposed to short-term profit maximization by private corporations only concerned for their own immediate gain. In principle, the imperatives 24 L E T T H E M E AT J U N K of profit could drive capital to cut down all forests; cover arable land with suburbs; convert arable land to growing tobacco and other addictive drugs; empty bodies of water of fish; pollute land, water, and air; or divert food crops to ethanol production even when large numbers of people do not have enough food.

Capital homogenizes natural landscapes by destroying species diversity, by desertification, by pollution, by monoculture, by harvesting “exotic animals”, by strip mining, by strip malls, by diverting rivers, by urbanization and suburbanization, by overfishing in the oceans, by building dams, by paving over the landscape, by clear-cutting forests or by any smoothing or homogenizing of the landscape that would speed up the turnover of capital’s circuits and thus profits. In general space is homogenized by capital when its diversity gets in the way of capital mobility, when mass production and consumption require standardization, and when the built environment is standardized by capitalist commercialization and profit fixation. The material, qualitative or use-value characteristics of space can be quite resistant to being totally subsumed to short-term profit maximization. A major result of this is that capital has always developed unevenly spatially. Yes, it has always had an expansive and globalizing thrust, but this has run up against oceans and untamed land masses, the limits of technology, political policies stemming from semi-sovereign nation-states, and social formations that are to varying degrees resistant or hostile to capitalism. Indeed capital has only managed to gain as much global hegemony as it has by often compromising its own inner principles, as, for example, when popular movements have forced upon it concerns for quality of life which it would otherwise ignore.

The growing season could be extended, the maturation of a crop could be speeded up, and irrigation made agriculture less weather-dependent. For the first time in history, the natural qualitative/material constraints that had always figured so large in limiting the ability of capital in this sector seemed to be overcome. Now it seemed that human technology could at last subsume the vagaries of nature to the quantitative concerns of profit maximization, and nature could be forced to submit to the rapid increases in productivity needed by capital to keep up with industrial rates of expansion. As is characteristic of capital in general, social costs could be ignored since either they were sufficiently long-term that damages would not show up immediately, they would be hard to trace, or they could by paid for by the taxpayer. The privatization of profits and socialization of costs made agriculture a veritable paradise for profit making, with the collateral damage deferred to future generations.


pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

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Albert Einstein, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, More Guns, Less Crime, mortgage debt, Nash equilibrium, Nate Silver, New Journalism, nudge unit, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Walter Mischel

Simon had coined the term “bounded rationality,” but had not done much fleshing out of how boundedly rational people differ from fully rational ones. There were a few other precedents, but they too had never taken hold. For example, the prominent (and for the most part, quite traditional) Princeton economist William Baumol had proposed an alternative to the traditional (normative) theory of the firm (which assumes profit maximization). He postulated that firms maximize their size, measured for instance by sales revenue, subject to a constraint that profits have to meet some minimum level. I think sales maximization may be a good descriptive model of many firms. In fact, it might be smart for a CEO to follow this strategy, since CEO pay oddly seems to depend as much on a firm’s size as it does on its profits, but if so that would also constitute a violation of the theory that firms maximize value.

For example, after Hurricane Katrina devastated New Orleans, Home Depot and other chains loaded up trucks with emergency supplies of food and bottled water to give away. At the same time, such a natural disaster will induce some entrepreneurial folks to load a truck with plywood in a nearby city and sell it in the devastated areas for whatever price it will fetch. In this case, both sellers are profit-maximizing. The chain store is establishing a reputation for fair dealing that will have long-term payoffs, whereas the “temporary entrepreneurs” will be back home in a couple days with a tidy profit and either a slightly guilty conscience or pride in their efforts to help improve the allocation of scarce resources, depending on their point of view. But firms don’t always get these things right. The fact that my MBA students think it is perfectly fine to raise the price of snow shovels after a blizzard should be a warning to all business executives that their intuitions about what seems fair to their customers and employees might need some fine-tuning.

There is clear evidence that people dislike unfair offers and are willing to take a financial hit to punish those who make them. It is less clear that people feel morally obliged to make fair offers. Although it is true that in the Ultimatum Game the most common offer is often 50%, one cannot conclude that Proposers are trying to be fair. Instead, they may be quite rationally worried about being rejected. Given the empirical evidence on respondents’ behavior, the profit-maximizing strategy in the Ultimatum Game is for the Proposer to offer about 40% of the pie. Lower offers start to run the risk of being rejected, so a 50% offer is not far from the rational selfish strategy. Whether the offers made by Proposers are driven by fairness or selfish concerns, the outcomes of the Ultimatum Game appear to be quite robust. Proposers make offers of close to half the pie, and Responders tend to reject offers of less than 20%.


pages: 306 words: 78,893

After the New Economy: The Binge . . . And the Hangover That Won't Go Away by Doug Henwood

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accounting loophole / creative accounting, affirmative action, Asian financial crisis, barriers to entry, borderless world, Branko Milanovic, Bretton Woods, capital controls, corporate governance, correlation coefficient, credit crunch, deindustrialization, dematerialisation, deskilling, ending welfare as we know it, feminist movement, full employment, gender pay gap, George Gilder, glass ceiling, Gordon Gekko, greed is good, half of the world's population has never made a phone call, income inequality, indoor plumbing, Internet Archive, job satisfaction, joint-stock company, Kevin Kelly, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, manufacturing employment, means of production, minimum wage unemployment, Naomi Klein, new economy, occupational segregation, pets.com, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, statistical model, structural adjustment programs, Telecommunications Act of 1996, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, total factor productivity, union organizing, War on Poverty, women in the workforce, working poor, Y2K

But another function of the New Economy discourse was apologetic and/or disciplinary. In an article on union battles with Verizon Communications over the growth of the firm's nonunion operations, particularly in wireless, New York Times reporter Steven Greenhouse (2000) described it as "a struggle, stripped to its essentials, [that] pits old-line labor against the New Economy." That's one way to read it. You could also read it as a classic labor-management battle, with a profit-maximizing firm favoring a new nonunion subsidiary over an old, unionized one. But Greenhouse's interpretation—assisted by the phrase "stripped to its essentials," which is pretty devious, given that he's adding spin, not stripping anything away— gives the nonunion strategy the cachet of newness and the inevitabiHty of technological progress, making the unions seem Hke stodgy holdovers. And, as Adrian Lucas of the Zurich-based financial software house Actant AG put it in an unpublished interview with the Dutch journalist Geert Lovink, the New^ Economy discourse "is primarily a form of disciplining entrants to the labour market.

Firms operating internationally show a lower return on assets and a lower stock market value relative to assets than do otherwise similar domestic firms. Companies that export from their home base, however, show superior performance. In this analysis, multinationahzation looks Hke a poor substitute for old-fashioned exports. Reasons are unclear, but it may be that managers of MNCs are more interested in empire-building than in profit maximization. Even if this conclusion is overstated, there's Httle evidence that going worldwide is the profit-sweUing strategy that both antiglobalizers and business ideologues assume. On the facing page is a table showing the location and profitabihty of foreign investments by U.S. multinationals. A couple of points stand out from the colorless mass of numbers. First, such investments are overwhelmingly located in rich countries.

Galbraith's stockholders were almost vestigial, a "purely pecuniary association" divorced from management, too numerous and dispersed to have any influence. When displeased with "their" corporation, they would sell the stock rather than pick a fight wdth management. Stockholder rebellion among large corporations was "so rare that it can be ignored," because trouble-free profitabihty was the norm. Galbraith's corporation was run by a "technostructure" of suits and geeks. Profit maximization was a thing of the 1960s past. To Galbraith, high profits would only be passed along to shareholders and would undoubtedly come only with an increase in risk. Pay was relatively modest and unconnected to the stock price. Secure mediocrity was the goal. Galbraith's corporation had become subservient to the larger society and the state, with the state providing economic stabilization and an educated workforce.


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

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affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, lump of labour, Malacca Straits, market bubble, microcredit, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional

Instead, the Gap, like most other firms, has some degree of market power, which means very simply that the Gap has some control over what it can charge. The Gap could sell sweatshirts for $9.99, eking out a razor-thin profit on each. Or it could sell far fewer sweatshirts for $29.99, but make a hefty profit on each. If you were in the mood to do calculus at the moment, or I had any interest in writing about it, then we would find the profit-maximizing price right now. I’m pretty sure I had to do it on a final exam once. The basic point is that the Gap will attempt to pick a price that leads to the quantity of sales that earn the company the most money. The marketing executives may err either way: They may underprice the items, in which case they will sell out; or they may overprice the items, in which case they will have a warehouse full of sweatshirts.

Al Gore complained during the 2000 presidential campaign that his mother and his dog were taking the same arthritis medication but that his mother paid much more for her prescription. Never mind that he made up the story after reading about the pricing disparity between humans and canines. The example is still perfect. There is nothing surprising about the fact that the same medicine will be sold to dogs and people at different prices. It’s airline seats all over again. People will pay more for their own medicine than they will for their pet’s. So the profit-maximizing strategy is to charge one price for patients with two legs and another price for patients with four. Price discrimination will become even more prevalent as technology enables firms to gather more information about their customers. It is now possible, for example, to charge different prices to customers ordering on-line rather than over the phone. Or, a firm can charge different prices to different on-line customers depending on the pattern of their past purchases.

Try explaining the benefits of globalization to shoe workers in Maine who have lost jobs because their plant moved to Vietnam. (Remember, I was the speechwriter for the governor of Maine; I have tried to explain that.) Trade, like technology, can destroy jobs, particularly low-skilled jobs. If a worker in Maine earns $14 an hour for something that can be done in Vietnam for $1 an hour, then he had better be 14 times as productive. If not, a profit-maximizing firm will choose Vietnam. Poor countries lose jobs, too. Industries that have been shielded from international competition for decades, and have therefore adopted all the bad habits that come from not having to compete, can be crushed by ruthlessly efficient competition from abroad. How would you like to have been the producer of Thumbs-Up Cola in India when Coca-Cola entered the market in 1994?


pages: 607 words: 133,452

Against Intellectual Monopoly by Michele Boldrin, David K. Levine

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accounting loophole / creative accounting, agricultural Revolution, barriers to entry, cognitive bias, David Ricardo: comparative advantage, Dean Kamen, Donald Trump, double entry bookkeeping, en.wikipedia.org, Ernest Rutherford, experimental economics, financial innovation, informal economy, interchangeable parts, invention of radio, invention of the printing press, invisible hand, James Watt: steam engine, Jean Tirole, John Harrison: Longitude, Joseph Schumpeter, linear programming, market bubble, market design, mutually assured destruction, Nash equilibrium, new economy, open economy, pirate software, placebo effect, price discrimination, profit maximization, rent-seeking, Richard Stallman, Silicon Valley, Skype, slashdot, software patent, the market place, total factor productivity, trade liberalization, transaction costs, Y2K

It is a different and arguably more pernicious source of social inefficiency than the previous three, as it operates invisibly: how much innovation and productivity growth could have taken place in the software industry if Microsoft had not succeeded in stifling innovation is very hard to imagine, let alone quantify. This form of inefficiency is specific to the kind of monopoly power that patents and copyrights bring about. Being its “discoverers,” we will christen it “IP-inefficiency” and illustrate its working by means of a few significant examples. The theory of why IP-efficiency comes about is rather simple: like every profit maximizing entrepreneur, monopolists are willing and able to do anything legally and technically feasible to retain their monopoly profits. Later in the book, we talk about the Schumpeterian model of dynamic efficiency via creative destruction. This model dreams of a continuous flow of innovation due to new entrants overtaking incumbents and becoming monopolists until new innovators quickly take their place.

Lo himself points out that the main channel through which the Taiwanese reform had a positive effect was by fostering foreign direct investment in Taiwan, especially in those sectors in which patents are widely used. This is an important point, which deserves a separate comment. In a world in which strong patent protection in some countries coexists with weak protection in others, a country that increases patent protection should observe an increase in the inflow of foreign investment, especially in those sectors where patented technologies are used. Profit-maximizing entrepreneurs always choose to operate in those legal environments where their rights are the strongest. In the United States, for example, economists and people with common sense alike have long argued that the policy of offering tax incentives and subsidies to companies that relocate in one state or another is not a good policy for the United States as a whole. Nobody denies that if you provide a company with high-enough subsidies and tax incentives, it will probably take them and relocate to your state, at least temporarily.

The argument goes as follows: monopoly power allows price discrimination – that is, the sale of the same good for a high price to people valuing it a lot (usually people richer than average) and for a low price to people valuing it little (usually people poorer than average). As a result of the absence of patent protection, there are very many new drugs that are not marketed in poor countries by their original producer, as the latter is not protected by reliable patents in that country. If it were, the profit-maximizing monopolist would have an incentive to quickly introduce those drugs, at prices lower than in rich countries, also in poor countries. This would increase the welfare of the poor country’s residents, as they would receive the medicine earlier rather than later. Although the argument sounds perfectly logical (leave aside the issue of how large the gains from this earlier marketing of new medicines would be), there are two points its advocates either do not notice or underplay.


pages: 577 words: 149,554

The Problem of Political Authority: An Examination of the Right to Coerce and the Duty to Obey by Michael Huemer

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Cass Sunstein, Chelsea Manning, cognitive dissonance, cuban missile crisis, Daniel Kahneman / Amos Tversky, en.wikipedia.org, Eratosthenes, experimental subject, framing effect, Gini coefficient, illegal immigration, impulse control, Isaac Newton, Julian Assange, laissez-faire capitalism, Machinery of Freedom by David Friedman, Milgram experiment, moral hazard, Phillip Zimbardo, profit maximization, profit motive, Ralph Nader, RAND corporation, rent-seeking, Ronald Coase, The Wealth of Nations by Adam Smith, unbiased observer, uranium enrichment, WikiLeaks

Economic theory teaches that a monopoly will restrict output to socially suboptimal levels while raising prices to levels that maximize its own profits but lower the total utility of society. If, for example, a company held a monopoly on shoe production, there would be too few shoes, and they would be too expensive.33 That is the problem with a rationally self-interested monopolist. But matters are worse than this, because we cannot even assume that a monopolist will be rational. Competition makes firms act as something approximating rational profit maximizers by eliminating those who do not behave in that way. In the absence of competitive pressures, a firm has much more leeway. Optimists may observe that an organization with a robust monopoly can survive while magnanimously sacrificing profits for the good of society, if it happens to be so inclined. But it can also survive while clinging to inefficient production methods and resisting innovation; rewarding well-connected but incompetent people; wasting money on half-baked, ideologically motivated plans; ignoring evidence of customer dissatisfaction; and so on.

Even in this case, insisting that all disputes should be resolved via Susan is not Sally’s best option for taking advantage of that leeway. The reason is that customers are likely to place a greater negative value on Sally’s dispute resolution procedure than the positive value that Sally places on it, because customers tend to place negative value on perceived unfairness in addition to the potential monetary costs of unfair procedures. Instead, Sally’s best (profit-maximizing) option is simply to raise her price by $50. The same principles apply to employer-employee relationships. There is an optimal wage for an employer to pay such that, if the employer pays more than that, he lowers his total profits due to increased labor costs, but if he pays less, he lowers his total profits due to difficulty in attracting desirable employees. Any provision in an employment contract that employees regard as unfair or simply disadvantageous amounts to an extra cost of accepting a job with this employer or, equivalently, a decline in the rewards of the job.

Eventually, either all firms would go out of business, in which case society would devolve into a state of chaos, or the last firm able to hold out would acquire a monopoly on the industry, whereupon it would evolve into a state. There are several reasons why the foregoing scenario is unlikely to transpire: i) The argument unrealistically assumes that actual and potential crime victims favor unlimited compensation. This assumption may be driven by a conception of human beings as homo economicus, pure profit maximizers: since higher compensation equals higher profit, crime victims will favor unlimited increases in compensation. Normal human beings, however, do not see criminal victimization as an opportunity to get rich; that sort of thinking is generally reserved for scam artists. Most normal people wish to avoid being crime victims, if possible, and to secure justice in the event that they are victimized.


pages: 167 words: 50,652

Alternatives to Capitalism by Robin Hahnel, Erik Olin Wright

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3D printing, affirmative action, crowdsourcing, inventory management, iterative process, Kickstarter, loose coupling, means of production, profit maximization, race to the bottom, transaction costs

The Solidarity Economy The “solidarity economy” goes beyond other forms of social empowerment by constituting an alternative way of directly organizing economic activity that is distinct from capitalist market production, state organized production, and household production (Figure 11).6 Its hallmark is production organized by collectivities directly to satisfy human needs not subject to the discipline of profit-maximization or state-technocratic rationality. The state may be involved in funding these collectivities, but it does not directly organize them or their services.7 The system of child daycare provision in Quebec is a good example. In 2008 parents only paid seven Canadian dollars per day for full-time daycare for preschool children provided by community-based nonprofit daycare center, but provincial government subsidies ensured that providers were paid a living wage.

What sustainability requires is that the participants’ commitment to the institutions is not undermined by the effects of its operation. 4Throughout this paper I will address my comments strictly to Robin’s writing on participatory economics. I recognize, of course, that many of the ideas were developed jointly with Michael Albert. 5Like Robin, I reject the narrow meaning of efficiency adopted by many economists as the profit-maximizing use of resources in a market. Rather, efficiency refers to the allocation of all resources (including the time of all participants) that best reflects the optimal trade-offs for alternative uses of those resources. Efficiency must include a full account of positive and negative externalities. 6I don’t think my lack of intuition here is because I have not read the technical economic papers that Robin refers to in his essay, papers which he describes as proving that his planning mechanism generates optimal outcomes.


pages: 209 words: 80,086

The Global Auction: The Broken Promises of Education, Jobs, and Incomes by Phillip Brown, Hugh Lauder, David Ashton

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affirmative action, barriers to entry, Branko Milanovic, BRICs, business process, business process outsourcing, call centre, collective bargaining, corporate governance, credit crunch, David Ricardo: comparative advantage, deindustrialization, deskilling, Frederick Winslow Taylor, full employment, future of work, glass ceiling, global supply chain, immigration reform, income inequality, industrial robot, job automation, Joseph Schumpeter, knowledge economy, knowledge worker, labour market flexibility, low skilled workers, manufacturing employment, market bubble, market design, neoliberal agenda, new economy, pensions crisis, post-industrial society, profit maximization, purchasing power parity, QWERTY keyboard, race to the bottom, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, sovereign wealth fund, stem cell, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, transaction costs, trickle-down economics, winner-take-all economy, working poor

Just as the breakdown of national barriers exposed workers to the full force of the global auction, erstwhile national champions were similarly exposed to foreign competition. When one firm acts to take advantage of lower costs offshore, it often leads their competitors to follow, unless they can create a particular niche advantage by remaining at home. Those corporations that exist just for profit—maximizing returns to shareholders—are more likely to strip out costs within global operations by taking advantage of differences in wage rates and cultural differences in social expectations. As we were told in more that one company interview, “In China, they’re hungry to work.” Such companies are at the forefront of the trends toward offshoring high-value activities to low-cost locations. According to Japanese management guru Kenichi Ohmae, the value of global networks is giving companies the freedom to drive down costs while maintaining quality through the threat, or use, of exit strategies, given a choice of providers.

It is the societal, state, or local capacity to exploit the collective intelligence of workers, sometimes in collaboration with those living in other countries, in the production of goods and services that people want. This is what counts rather than merely increasing the supply of college graduates.23 However, rebuilding a productive economy that contributes to the quality of people’s lives is difficult to envisage within a model of shareholder capitalism that rewards senior executives for short-term profit maximization based on driving down labor costs both at home and overseas. It has been too easy for the short-term interests of corporate managers and shareholders to be put before those of American workers and the longer-term interests of the nation’s economy. Companies need to operate within a regulatory framework where they are encouraged to balance immediate competitive pressures to reduce costs and increase profits with an eye on the medium term and the interests of employees and local communities.


pages: 353 words: 81,436

Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck

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banking crisis, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, collective bargaining, corporate governance, David Graeber, deindustrialization, Deng Xiaoping, Eugene Fama: efficient market hypothesis, financial deregulation, financial repression, full employment, Gini coefficient, Growth in a Time of Debt, income inequality, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, late capitalism, means of production, moral hazard, Occupy movement, open borders, open economy, Plutonomy: Buying Luxury, Explaining Global Imbalances, profit maximization, risk tolerance, shareholder value, too big to fail, union organizing, winner-take-all economy, Wolfgang Streeck

Contrary to neo-Marxist theories, a legitimation crisis may therefore also grow out of discontent on the part of ‘capital’ with democracy and its associated obligations – hence without a progressive, system-transcending evolution of the demands of society on economic and social life, such as many thought to lie ahead in the 1970s. A legitimation crisis theory that starts with capital treats firms and their owners and managers as advantage-seeking profit maximizers rather than as prosperity machines, or functionaries obediently carrying out government economic policy. ‘Capital’ will appear in it as a self-willed and self-interested collective actor, strategic and capable of communication but only to a limited extent predictable, which may be dissatisfied and express itself accordingly. In a class theory modelled on classical political economy, who or what belongs to capital may be determined by its main form of income.

Kalecki, ‘Political Aspects of Full Employment’, Political Quarterly, vol. 14/4, 1943, pp. 322–31). 41 Hence it is that employers and economists axiomatically suspect workers of ‘shirking’ – and insist that, because of their ‘opportunism with guile’, they need to be kept under effective supervision or ‘monitoring’. 42 Of course there is a grey area where the categories mix, today more than ever. In it we find various forms of payment by results, akin to piece-rates for manual industrial workers; small savers who rely on both wage and capital income; and the proceeds from so-called ‘human capital’, which may be regarded as income from both labour and capital. What matters here is the analytical distinction between the dynamic of capital accumulation geared to open-ended profit maximization and the traditionalism of a secure livelihood at a given, or predictably rising, level of income. Both economic cultures exist alongside each other in capitalism as different action orientations, represented by different social groups and institutions with conflicting, and partly overlapping, expectations and requirements (W. Streeck, ‘Taking Capitalism Seriously: Towards an Institutional Approach to Contemporary Political Economy’, Socio-Economic Review, vol. 9/1, 2011, pp. 137–67). 43 This was a common term in the 1970s critiques of capitalism.


pages: 421 words: 125,417

Common Wealth: Economics for a Crowded Planet by Jeffrey Sachs

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agricultural Revolution, air freight, back-to-the-land, British Empire, business process, carbon footprint, clean water, colonial rule, corporate social responsibility, correlation does not imply causation, demographic transition, Diane Coyle, Edward Glaeser, energy security, failed state, Gini coefficient, Haber-Bosch Process, income inequality, income per capita, intermodal, invention of agriculture, invention of the steam engine, invisible hand, Joseph Schumpeter, knowledge worker, labor-force participation, labour mobility, low skilled workers, microcredit, oil shale / tar sands, peak oil, profit maximization, profit motive, purchasing power parity, road to serfdom, Ronald Reagan, Simon Kuznets, Skype, statistical model, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, unemployed young men, War on Poverty, women in the workforce, working-age population

Forests downwind of these factories were being destroyed by the resulting acid rain. Smokestack scrubbers can remove the sulfur dioxide from the flue gas by mixing the gas with lime to produce calcium sulfate, thereby preventing the acid rain. The flue gas desulfurization represents an added cost for the factory, but a cost that is much less than the benefit of saving the forests. The problem is that in a free and unregulated market, each profit-maximizing power plant lacks the incentive to buy a scrubber. Despite the large social benefits, the firm itself would reduce its profits by investing in the scrubber. A public policy to correct the market prices is needed to give the power plants the incentive to buy the smokestack scrubbers. Four types of policies can be used to align private incentives and society’s environmental interests. The simplest is a tax on the environmental harm, in this case a tax on sulfur emissions.

Since money in the pocket today is worth more than the same amount in the future (because money today can be invested at the market interest rate and thereby grow over time), the decision will be to keep the fish in the lake only if the market value of the fish stock is expected to increase more rapidly than the rate of interest. If the price of the fish per ton is expected to remain unchanged, and if the fish is a slow-growing species, then the value of the fish in the lake will grow less rapidly than the rate of interest. The profit-maximizing owner will deplete the fish stock and perhaps drive a rare species to extinction, rather than wait to sell more fish in the future. Private (or community) ownership alone will not save the species. Two subtle issues are at work in this example. The first is that the market price of a species will generally not reflect the species’ societal value as part of Earth’s biodiversity. Market prices do not reflect the value that society puts on avoiding the extinction of other species, only the direct consumption value of those species (for food, aphrodisiacs, pets, hunting trophies, or ornaments).

History has shown otherwise, however. Privatization, if done in a sloppy manner, can result in the changeover from a public monopoly to a private monopoly, with the private monopolist not even constrained by the need to win the next election. Private monopolies may have no interest whatsoever in ensuring access for the poor, specifically those households which are unable to pay the monopolist’s profit-maximizing price of water. One effective compromise between public ownership and privatization can be the insistence that private providers offer a lifeline tariff, which guarantees to each household a free fixed amount of water each day for uses that the household needs to stay alive (drinking, cooking, and hygiene). Water use above the minimum is charged by the meter, at the market rate, but in this way everybody, even the most indigent, is guaranteed a lifeline.


pages: 424 words: 115,035

How Will Capitalism End? by Wolfgang Streeck

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accounting loophole / creative accounting, Airbnb, Ben Bernanke: helicopter money, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, Clayton Christensen, collective bargaining, conceptual framework, corporate governance, credit crunch, David Brooks, David Graeber, debt deflation, deglobalization, deindustrialization, en.wikipedia.org, eurozone crisis, failed state, financial deregulation, financial innovation, first-past-the-post, full employment, Gini coefficient, global reserve currency, Google Glasses, haute cuisine, income inequality, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, labour mobility, late capitalism, market bubble, means of production, moral hazard, North Sea oil, offshore financial centre, open borders, pension reform, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, post-industrial society, private sector deleveraging, profit maximization, profit motive, quantitative easing, reserve currency, rising living standards, Robert Gordon, savings glut, secular stagnation, shareholder value, sharing economy, sovereign wealth fund, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Uber for X, upwardly mobile, winner-take-all economy, Wolfgang Streeck

Societies are complex entities that do not die in the way organisms do: with the rare exception of total extinction, discontinuity is always embedded in some continuity. If we say that a society has ended, we mean that certain features of its organization that we consider essential to it have disappeared; others may well have survived. I propose that to determine if capitalism is alive, dying or dead, we define it as a modern society17 that secures its collective reproduction as an unintended side-effect of individually rational, competitive profit maximization in pursuit of capital accumulation, through a ‘labour process’ combining privately owned capital with commodified labour power, fulfilling the Mandevillean promise of private vices turning into public benefits.18 It is this promise, I maintain, that contemporary capitalism can no longer keep – ending its historical existence as a self-reproducing, sustainable, predictable and legitimate social order.

Taking class and power into consideration, one can see the state, government and politics in democratic-capitalist societies being fundamentally exposed to continuous pressures to accommodate contradictory needs and demands – pressures that permanently produce new constraints and opportunities for revision of the institutions governing the political economy. On the one hand, it is only by political intervention into the free play of market forces that the collective benefits that a democratic society expects from a capitalist economy can be extracted from it – that, in other words, the private vice of profit maximization may be converted into the public benefit of social progress, to sustain a political equilibrium helping the sitting government to build political legitimacy. On the other hand, except in special situations of very high economic growth, it would appear that the social corrections of the market that are needed to achieve political equilibrium in a democracy tend to undermine the confidence of capital owners and investors, thereby upsetting the economic equilibrium that is equally essential for capitalist-democratic stability.

Rather than the straightforward functionalism of much of the ‘new economic sociology’, the approach I propose features a dialectical version of it, one under which the functioning of capitalism depends vitally on the presence, essential but never guaranteed, of effective opposition to it. Whether such opposition can arise and do its work depends, in turn, on the existence of political resources that allow for the mobilization of countervailing power, a condition that cannot fundamentally be entrusted to the self-interest of capitalist profit maximizers. Capitalism entails, in addition to whatever else it may entail, an ever-present possibility of self-destructive destruction of its social containment, in the course of a politics of liberalization conceived as progressive removal of boundaries of all sorts, towards a final triumph of collectively irresponsible individual interests. Preventing this requires a non-capitalist politics capable of defining and enforcing general interests in the sustainability of human society, bringing capitalist actors to their senses and forcing them to act in line with their better insights, whether they already have them or not.


pages: 237 words: 72,716

The Inequality Puzzle: European and US Leaders Discuss Rising Income Inequality by Roland Berger, David Grusky, Tobias Raffel, Geoffrey Samuels, Chris Wimer

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Branko Milanovic, Celtic Tiger, collective bargaining, corporate governance, corporate social responsibility, double entry bookkeeping, equal pay for equal work, fear of failure, financial innovation, full employment, Gini coefficient, hiring and firing, illegal immigration, income inequality, invisible hand, labour market flexibility, labour mobility, Long Term Capital Management, microcredit, offshore financial centre, principal–agent problem, profit maximization, rent-seeking, shareholder value, Silicon Valley, Silicon Valley startup, time value of money, very high income

Wimer into college,4 while the demand for college students is kept artificially low because, in at least some countries, elite private and public schools engage in explicit rationing of their available slots. It’s not as if Oxford University, for example, is meeting the rising interest in its degrees by selling some profit-maximizing number of them. If top universities did meet the demand in this way, the excessive returns to a high-prestige education would disappear. But instead they’ve decided to ration. When, by contrast, the demand for hybrid cars increased dramatically in the U.S., car manufacturers responded by ramping up production to a profit-maximizing level, not by setting up hybrid-car “admissions committees,” not by carefully interviewing and testing prospective buyers, not by asking them to submit detailed resumes and statements about how the hybrid-owning experience will change their lives.


pages: 348 words: 99,383

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope by John A. Allison

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Affordable Care Act / Obamacare, bank run, banking crisis, Bernie Madoff, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, fiat currency, financial innovation, Fractional reserve banking, full employment, high net worth, housing crisis, invisible hand, life extension, low skilled workers, market bubble, market clearing, minimum wage unemployment, moral hazard, obamacare, price mechanism, price stability, profit maximization, quantitative easing, race to the bottom, reserve currency, risk/return, Robert Shiller, Robert Shiller, The Bell Curve by Richard Herrnstein and Charles Murray, too big to fail, transaction costs, yield curve

Because it is extremely difficult to compete with Freddie and Fannie (as the government guarantees their liabilities), a large portion of BB&T’s mortgage originations business was sold to Freddie and Fannie. We retained the servicing to ensure a high level of customer satisfaction. There were times when, from an interest-rate risk and loan demand perspective, we would have liked to hold the loans in our own portfolio. However, the front-end accounting cost was so large that we sometimes kept selling the mortgages even though we did not think it was an economic profit-maximizing strategy. You may say that we were maximizing short-term profit. However, the income from holding mortgages would be spread over seven or eight years rather than being recognized in the current quarter. It is impossible to explain this difference to even sophisticated investors because it does not make sense. Why did an accounting system that treats such similar transactions so differently and creates a strong incentive for banks to securitize instead of portfolio (hold on its books) home mortgages get created?

In fact, the rating agencies have indicated that the credit ratings of these giant financial institutions are several grades higher than they would be without the implied government guarantee post-Dodd-Frank. This situation creates a major competitive advantage for these giant firms in the long term. When times are good again and the regulators look away (because of political pressure created by the massive lobbying efforts of these crony capitalist/socialist firms), the companies will be back taking irrational risk, with the goal of short-term profit maximizing. A zebra does not change its stripes. In my career, Citigroup has been saved by the government three times. Each time, it has afterward become bigger and worse. This is an almost certain outcome of the distorted incentive system that keeps incompetent companies in business. In the meantime, these government-supported companies will develop strategies that involve terribly risky investments and that will drive their remaining midsize competitors out of whole market segments.


pages: 377 words: 97,144

Singularity Rising: Surviving and Thriving in a Smarter, Richer, and More Dangerous World by James D. Miller

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23andMe, affirmative action, Albert Einstein, artificial general intelligence, Asperger Syndrome, barriers to entry, brain emulation, cloud computing, cognitive bias, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, David Brooks, David Ricardo: comparative advantage, Deng Xiaoping, en.wikipedia.org, feminist movement, Flynn Effect, friendly AI, hive mind, impulse control, indoor plumbing, invention of agriculture, Isaac Newton, John von Neumann, knowledge worker, Long Term Capital Management, low skilled workers, Netflix Prize, neurotypical, pattern recognition, Peter Thiel, phenotype, placebo effect, prisoner's dilemma, profit maximization, Ray Kurzweil, recommendation engine, reversible computing, Richard Feynman, Richard Feynman, Rodney Brooks, Silicon Valley, Singularitarianism, Skype, statistical model, Stephen Hawking, Steve Jobs, supervolcano, technological singularity, The Coming Technological Singularity, the scientific method, Thomas Malthus, transaction costs, Turing test, Vernor Vinge, Von Neumann architecture

Why, then, does Robin think that the population increase will exceed the gains from innovation? To understand his reasoning, let’s delve into a simple economic scenario: Pretend that someone emulates Robin and places the software in the public domain. Anyone can now freely copy e-Robin, although it still costs something to buy enough computing power to run him on, say a hundred thousand dollars a year. A profit-maximizing business would employ an e-Robin if the e-Robin brought the business more than $100,000 a year in revenue. After Moore’s law pushes the annual hardware costs of an e-Robin down to a mere $1, then a company would hire e-Robins as long as each brought the business more than $1 per annum. What happens to the salary of bio-Robin if you can hire an e-Robin for only a dollar? David Ricardo implicitly knew the answer to that question.

Here we would run into many of the problems that I discussed in chapters 3 and 4 when I explained the difficulties of creating a friendly artificial intelligence. In a world of trillions of emulations in which we attempt to rule, our existence would depend on maintaining control of the entire group, something that at least intuitively appears to be exponentially more difficult than coding one ultra-AI to like us. A business certainly wouldn’t want rebellious emulations. But a profit-maximizing company wouldn’t be too bothered by creating a group of emulations that had a one-in-a-million chance of rebelling because compared to all the other risks that normal companies face, this danger would be trivial. But, of course, if enough organizations each create a small risk of something very bad happening, then that very bad thing becomes very likely to happen. Maintaining control of a huge number of emulations would probably require that bio-humans create emulations whose task would be to prevent other emulations from rising up against us.


pages: 402 words: 98,760

Deep Sea and Foreign Going by Rose George

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Admiral Zheng, air freight, Albert Einstein, bank run, cable laying ship, Captain Sullenberger Hudson, Costa Concordia, Edward Lloyd's coffeehouse, Exxon Valdez, failed state, Filipino sailors, global supply chain, Google Earth, intermodal, London Whale, Malacca Straits, Panamax, pattern recognition, profit maximization, Skype, trade route, UNCLOS, UNCLOS, urban planning

They operate according to understandable business norms. I read studies that analyse piracy as a ‘market-dependent crime’. They decide that it operates best in a stable environment, not anarchy, which is why many pirates come from the less chaotic areas of Somalia like Puntland. Stability is needed to get supplies. I read that the average profit margin for piracy in 2010 was 25–30 per cent, that pirates are ‘the very essence of rational, profit-maximizing entrepreneurs described in classical economics’. In 2010, Harvard Business School chose Somali piracy as the best business model of the year. Breakdowns of the pirate economic model have been done. One suggests that it costs $300,000 to kit out a pirate attack, including $2000 for weapons and ammunition; $14,000 for skiffs and outboards; $1200 for curved ladders; $4000 for GPS receivers and radios; $7000 for food; $30,000 for miscellaneous equipment; $180,000 for bribes.

id=10PORTLOUIS44&q=high-seas-affairs Chapter 7: No Man’s Land 1 None of these is piracy Hugh Williamson, ‘Piracy at Sea: The Humanitarian Impact’, presentation given at International Conference on Piracy at Sea, 16–18 October 2011, Malmo, Sweden. 2 Yo-Ho-Toe David Willetts, ‘Yo-ho-toe: Navy nab pirate with 24 digits’, Sun, 6 February, 2012. – A thin Somali in a yellow jumpsuit Indian Ocean with Simon Reeve, Kenya and the Horn of Africa, BBC, released 22 April 2012. – Profit-maximizing entrepreneurs ‘The Economics of Piracy: pirate ransoms and livelihoods off the coast of Somalia’, Geopolicity, May 2011, p.ii. – $300,000 to kit out a pirate attack Pelton, op. cit. 3 100 most important people in shipping ‘4. Garaad Mohammed, Pirate, Somalia Inc.’, Lloyd’s List, 14 December 2010, http://www.lloydslist.com /ll/incoming/article351642.ece – Hostages killed in 2011 ‘A Moment for Victims of Piracy At Sea’, OceanusLive. org, 1 January 2012, http://www.oceanuslive.org/Main/ ViewNews.aspx?


pages: 317 words: 87,566

The Happiness Industry: How the Government and Big Business Sold Us Well-Being by William Davies

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1960s counterculture, Airbnb, business intelligence, Cass Sunstein, corporate governance, dematerialisation, experimental subject, Exxon Valdez, Frederick Winslow Taylor, Gini coefficient, income inequality, invisible hand, joint-stock company, market bubble, mental accounting, nudge unit, profit maximization, randomized controlled trial, Richard Thaler, road to serfdom, Ronald Coase, Ronald Reagan, science of happiness, sentiment analysis, sharing economy, Slavoj Žižek, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, Steve Jobs, The Chicago School, The Spirit Level, theory of mind, urban planning

But if this sounds like the recipe for inclusive community, it isn’t. Hsieh advises businesses to identify the 10 per cent of employees who are least enthusiastic towards the happiness agenda, and then lay them off.18 Once this is done, the remaining 90 per cent will apparently become ‘super-engaged’, a finding which is open to more than one psychological interpretation. As the science of happiness has moved closer to the front line of profit-maximizing business, something curious has happened to it. For Bentham, happiness was something which resulted from certain activities and choices. Neo-classical economists such as Jevons and behaviourist psychologists such as Watson assumed something similar, implying that individuals could be lured to make certain choices by dangling a pleasurable carrot in front of them. But in the context of business consultancy and individual coaching, happiness looks altogether different.

Slogans such as these, belonging to Nike and McDonald’s respectively, offer the ethical injunctions of the post-1960s neoliberal era. They are the last transcendent moral principles for a society which rejects moral authority. As Slavoj Žižek has argued, enjoyment has become an even greater duty than to obey the rules. Thanks to the influence of the Chicago School over government regulators, the same is true for corporate profitability. The entanglement of psychic maximization and profit maximization has grown more explicit over the course of the neoliberal era. This is partly due to the infiltration of corporate interests into the APA. In the run up to the DSM-V, published in 2013, it was reported that the pharmaceutical industry was responsible for half of the APA’s $50 million budget, and that eight of the eleven-strong committee which advised on diagnostic criteria had links to pharmaceutical firms.33 The ways in which we describe ourselves and our mental afflictions are now shaped partly by the financial interests of big pharma.


pages: 306 words: 85,836

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

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Affordable Care Act / Obamacare, airport security, augmented reality, barriers to entry, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, security theater, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs

Here is how perch is priced: 2-piece perch meal: $3.58 3-piece perch meal: $4.69 4-piece perch meal: $6.45 So you get that third piece of perch cheap, but they nail you on the fourth piece. This certainly hints at Harold’s thinking there is some logic to this sort of pricing. Ultimately, though, my guess is that the person who chose these prices was just confused. One thing I have realized as I have worked more with businesses is that they are far from the idealized profit-maximizing automatons of economic theory. Confusion is endemic to firms. After all, firms are made up of people, and if people are confused most of the time by economics, why wouldn’t that carry over to firms? Why Are Kiwifruits So Cheap? (SJD) I’ve been eating a lot of kiwifruits lately. (You may also know them as the Chinese gooseberry.) At the corner deli near my home on the West Side of Manhattan, I can buy three for a dollar.

Maybe this really did have something to do with a world record bid. A quick Google search, however, revealed that the Postal Service isn’t condoning the chain mail. Actually, the explanation for why the letter got delivered without postage is even more interesting to me: apparently the automated mail-sorting machines fail to catch many letters that are missing a stamp. On reflection, this does make sense—profit maximization requires setting the marginal cost of an action equal to the marginal benefit. If almost all letters have stamps, then the benefit of checking each one with 100 percent accuracy is infinitesimal, so it makes sense to let some unstamped letters through. (The same idea holds for catching people who don’t pay their train fare.) Now, I am curious to know exactly how lax the Postal Service is.


pages: 112 words: 30,160

The Gated City (Kindle Single) by Ryan Avent

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big-box store, carbon footprint, deindustrialization, edge city, Edward Glaeser, income inequality, labor-force participation, low skilled workers, manufacturing employment, offshore financial centre, profit maximization, rent-seeking, Silicon Valley, Thorstein Veblen, transit-oriented development, Tyler Cowen: Great Stagnation

A worker thinking about taking a position that pays twice his current wage in a city that's three times as expensive will quickly realize that this means a reduction in his real earnings, and he'll think twice before accepting. Employers in high cost areas must pay wages that are high relative to those in other cities if they’re to have any workers at all. But these employers are, in most cases, profit-maximizing firms. They're not going to pay higher wages if they don't have to. Say you're a software entrepreneur who sells products to companies all over the world, and who locates in Silicon Valley. The Valley is very expensive; the rent is high and it takes high wages to lure workers. Those costs eat into your profits. A rational business owner would look the numbers over and quickly conclude that the smart decision is to move to a cheaper location, where workers don't need to be paid as much.


pages: 695 words: 194,693

Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, Cass Sunstein, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, Louis Bachelier, mandelbrot fractal, market bubble, means of production, money: store of value / unit of account / medium of exchange, moral hazard, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, too big to fail, trade liberalization, trade route, transatlantic slave trade, transatlantic slave trade, tulip mania, wage slave

The current debate about foreign ownership of companies has contrasted the argument that sovereign funds have the same interests as any other shareholder (profit maximization) versus the suggestion that foreign owners will use their stake to further national interests. I believe that profit maximization will dominate most board decisions by sovereign funds, but that the potential for the exercise of rights in the national interest is also present and of potential concern. The reason for this is governance. States have a fiduciary duty to their citizens, not to other shareholders in a company. In certain circumstances, they will face trade-offs between profit maximization and national interest, and it is only right that they serve their citizens first. A question for every country is whether a sovereign fund will become a diplomatic necessity in the future.


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

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accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, backtesting, Bernie Madoff, BRICs, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, mortgage tax deduction, new economy, Own Your Own Home, passive investing, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, The Myth of the Rational Market, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

If they see a price about to break through a resistance area, they tend to buy before, not after, it breaks through. This suggests that others will try to anticipate the signal still earlier. Of course, the earlier they anticipate, the less certain they are that the signal will occur and that the trade will be profitable. Perhaps the most telling argument against technical methods comes from the logical implications of profit-maximizing behavior. Suppose that Universal Polymers is selling at around 20 when Sam, the chief research chemist, discovers a new production technique that promises to double the company’s earnings. Sam is convinced that the price of Universal will hit 40 when the news of his discovery comes out. Because any purchases below 40 will provide a swift profit, he may well buy up all the stock he can until the price hits 40, a process that could take no longer than a few minutes.

For example, the transaction costs involved in trying to capitalize on the January Effect are sufficiently large that the predictable pattern is not economically meaningful. Third, the predictable pattern that has been found, such as the dividend yield effect, may simply reflect general economic fluctuations in interest rates or, in the case of the small-firm effect, an appropriate premium for risk. Finally, if the pattern is a true anomaly, it is likely to self-destruct as profit-maximizing investors seek to exploit it. Indeed, the more profitable any return predictability appears to be, the less likely it is to survive. An exchange between Robert Shiller, a skeptic about market efficiency, and Richard Roll, an academic economist who was also a businessman running billions of dollars of investment funds, is quite revealing. After Shiller stressed the importance of fads and inefficiencies, Roll responded as follows: I have personally tried to invest money, my client’s money and my own, in every single anomaly and predictive device that academics have dreamed up….


pages: 651 words: 135,818

China into Africa: trade, aid, and influence by Robert I. Rotberg

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barriers to entry, BRICs, colonial rule, corporate governance, Deng Xiaoping, energy security, European colonialism, failed state, global supply chain, global value chain, income inequality, Khartoum Gordon, labour market flexibility, land reform, megacity, microcredit, offshore financial centre, out of africa, profit maximization, purchasing power parity, RAND corporation, Scramble for Africa, South China Sea, special economic zone, structural adjustment programs, trade route, Washington Consensus

Beijing may have some overall strategic thinking to do about its role in Africa and Latin America, but China is not a monolithic polity. Debates go on inside China’s policymaking circles all the time. The Chinese leadership may want certain outcomes from China’s engagement in Africa and Latin America, but it may not be able to control a rapidly expanding network of state and private actors who have entered these markets based on the logic of globalization and profit maximization. Domestic Developmental Dynamics It is not sufficient to study Africa’s or Latin America’s or any individual country’s relations with China from a narrow bilateral perspective. Nor is it complete to focus on a particular theme, such as energy, human rights, or strategic ambitions. China’s domestic developmental dynamics will have a decisive impact on how the Chinese government and Chinese firms behave abroad.

These constraints and limitations primarily come from the current stage in China’s own domestic development, which is characterized by 03-7561-4 ch3.qxd 9/16/08 4:08 PM Page 61 China’s Emerging Partnerships in Africa 61 —a brutal, cutthroat capitalist market economy (or as some call it, a primitive accumulation process in its classical Marxist sense); —severe exploitation of labor forces; —a lack of protection for workers and the collapse of the welfare and health care system; —greedy forces of profit maximization; —widespread corruption in both political and economic areas; —the worsening of environmental and ecological conditions; —a lack of corporate responsibility and transparency; and —no experience or expertise with democratic governance. All of these market-driven developments will not just stay within Chinese borders; they will move to the rest of the world as China expands into Africa and other parts of the globe.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Washington Consensus

Even more importantly for practical politicians, Russian communism and German fascism now presented rival models that America and Britain could not ignore. As the socio-political system began to evolve from the first era of capitalism to the second, economics also had to reinvent itself. It did this by dividing into two distinct branches. The traditional branch, later described as microeconomics, continued to use the tools of nineteenth-century marginal theory to analyze the behavior of utility-maximizing individuals and profit-maximizing companies in competitive markets for ordinary commodities such as coal, tomatoes, or shoes. The new branch of the subject, called macroeconomics, was invented more or less from scratch in the 1930s by Keynes and his Cambridge collaborator, Richard Kahn, along with the Polish economist Michal Kalecki. It focused not on ordinary goods but on the factors of production that create new wealth—labor, capital, and money—and especially on how the fluctuating demand for all these factors of production generates instability in the economy as a whole.

The reality, as demonstrated by the Third World debt crisis, when the institutions that went bankrupt were all strictly regulated utility banks, is that finance always and everywhere involves a combination of the utility and the casino, of socially indispensable fiduciary functions and privately profitable speculation on unpredictable risks. Rather than trying artificially to separate out the public and private characteristics of banking, the new thinking about capitalism should acknowledge that financial institutions will always be in some sense public-private hybrids, subject to the messy confusion of political and profit-maximizing incentives that infuriated Henry Paulson and the other free-market ideologues who wanted to demolish Fannie Mae and Freddie Mac. Banks may be legally structured as private companies, answerable only to their shareholders, but they have a uniquely important social function and thus operate in the public realm, with implicit government support. Their managements, shareholders, and regulators must therefore recognize the symbiotic interdependence between private banking and government.


pages: 538 words: 121,670

Republic, Lost: How Money Corrupts Congress--And a Plan to Stop It by Lawrence Lessig

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asset-backed security, banking crisis, carried interest, cognitive dissonance, corporate personhood, correlation does not imply causation, crony capitalism, David Brooks, Edward Glaeser, Filter Bubble, financial deregulation, financial innovation, financial intermediation, invisible hand, jimmy wales, Martin Wolf, meta analysis, meta-analysis, Mikhail Gorbachev, moral hazard, place-making, profit maximization, Ralph Nader, regulatory arbitrage, rent-seeking, Ronald Reagan, Silicon Valley, single-payer health, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, WikiLeaks, Zipcar

The reason for laws regulating pollution is that pollution is an external cost of production, which is to say a cost not borne by the polluting company or its shareholders, and in making business decisions profit maximizers don’t consider costs they don’t bear. Banks consider the potential costs of bankruptcy to themselves in deciding how much risk to take but do not consider the potential costs to society as a whole.34 The banks were thus freed of the burden of federal regulation, yet driven by the discipline of market regulation to assume far more risk than was good for the economy. As Posner concludes: Am I saying that deregulation made bankers and through them borrowers take risks that were excessive from an overall social standpoint? Yes, once we recognht=ougize that competition will force banks to take risks (in order to increase return) that the economic and regulatory environment permits them to take, provided the risks are legal and profit-maximizing, whatever their consequences for the economy as a whole.35 This was also the conclusion of the Financial Crisis Inquiry Commission: “Unchecked, competition… can place the entire financial system at risk.”36 And indeed, as the commission concluded, in this case it did: More than 30 years of deregulation and reliance on self-regulation by financial institutions championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe.37 From the perspective of the economy as a whole, the banks thus took on more risk than was sensible.


pages: 501 words: 134,867

A Line in the Tar Sands: Struggles for Environmental Justice by Tony Weis, Joshua Kahn Russell

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Bakken shale, bilateral investment treaty, call centre, carbon footprint, clean water, colonial exploitation, conceptual framework, corporate social responsibility, decarbonisation, Deep Water Horizon, en.wikipedia.org, energy security, energy transition, Exxon Valdez, failed state, global village, guest worker program, happiness index / gross national happiness, hydraulic fracturing, immigration reform, investor state dispute settlement, invisible hand, LNG terminal, market fundamentalism, means of production, Naomi Klein, new economy, Occupy movement, oil shale / tar sands, peak oil, profit maximization, race to the bottom, smart grid, special economic zone, working poor

Today, ENGO campaigns have retained key features that are at the root of the tensions with grassroots campaigning: the bureaucratic and top-down organizing style; accountability to campaign funders rather than affected communities; the narrow focus on the official policy-making process; and the single-issue (non-systemic) approach to popular education. Below, I will discuss the case of the Great Bear Rainforest campaign in British Columbia. Throughout this chapter, I indicate how ENGOs have, for the most part, shied away from anything that might smack of anti-capitalism, and even from identifying corporate power and profit maximization as central to the problems that they claim to address. On the contrary, many have embraced the frameworks of “green capitalism” or “ethical consumerism”—no doubt, in part, to appease funders and reassure policy-makers of their respectability. ENGOs’ Failure to Address Colonialism and Environmental Racism In Canada, ENGOs have begun to recognize how resource extraction is a racialized issue, in which business priorities outweigh concerns about the pollution and destruction wrought on First Nations communities.

To see why, recall that corporations are purely self-interest-motivated institutions, in the sense that what they do depends on their economic calculations of costs and benefits. Their options are evaluated in terms of how they positively or negatively affect the organization’s vital interests, which centre on growth, the maximization of profits, and shareholder returns.3 As a result, if activists want to influence corporate behaviour, the only way to do so is to threaten the corporation’s vital interest in profit maximization. Can the movement to shut down the tar sands carry out actions that directly threaten the profitability of firms like Suncor, Syncrude, TransCanada, and Enbridge? In my view, it can do so only to a very limited degree. Consider the kinds of threats that grassroots activism can pose for these corporations when relying on popular education, public protest, and confrontational disruption or defiance.


pages: 219 words: 63,495

50 Future Ideas You Really Need to Know by Richard Watson

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23andMe, 3D printing, access to a mobile phone, Albert Einstein, artificial general intelligence, augmented reality, autonomous vehicles, BRICs, Buckminster Fuller, call centre, clean water, cloud computing, collaborative consumption, computer age, computer vision, crowdsourcing, dark matter, dematerialisation, digital Maoism, Elon Musk, energy security, failed state, future of work, Geoffrey West, Santa Fe Institute, germ theory of disease, happiness index / gross national happiness, hive mind, hydrogen economy, Internet of things, Jaron Lanier, life extension, Marshall McLuhan, megacity, natural language processing, Network effects, new economy, oil shale / tar sands, pattern recognition, peak oil, personalized medicine, phenotype, precision agriculture, profit maximization, RAND corporation, Ray Kurzweil, RFID, Richard Florida, Search for Extraterrestrial Intelligence, self-driving car, semantic web, Skype, smart cities, smart meter, smart transportation, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Stewart Brand, strong AI, Stuxnet, supervolcano, telepresence, The Wisdom of Crowds, Thomas Malthus, Turing test, urban decay, Vernor Vinge, Watson beat the top human players on Jeopardy!, web application, women in the workforce, working-age population, young professional

Pew Oceans Report, 2003 If you find all this a little fanciful, consider for a moment that there is already a system in use in parts of the UK whereby video feeds are used to monitor animals automatically, working out when they’re ready to be slaughtered. The technology maps animal outlines, then uses algorithms to work out weight, feed requirements and likely market days. Why bother? Because of cost savings and profit maximization. Fishing without fishermen But applying cutting-edge science and technology to the food chain won’t be limited to the land. Out at sea similar techniques will be applied to farm fish in the open ocean. The idea here is to build vast motorized—or possibly sail-powered—cages, fill them with laboratory-bred baby fish and float them out to sea. Food can either come from the open ocean or be scattered into the cages from supply vessels, which know exactly where the cages are thanks, once again, to GPS.


pages: 170 words: 51,205

Information Doesn't Want to Be Free: Laws for the Internet Age by Cory Doctorow, Amanda Palmer, Neil Gaiman

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Airbnb, barriers to entry, Brewster Kahle, cloud computing, Dean Kamen, Edward Snowden, game design, Internet Archive, John von Neumann, Kickstarter, optical character recognition, Plutocrats, plutocrats, pre–internet, profit maximization, recommendation engine, rent-seeking, Saturday Night Live, Skype, Steve Jobs, Steve Wozniak, Stewart Brand, transfer pricing, Whole Earth Catalog, winner-take-all economy

I think that old media will continue to find a home in the new world. After all, 2011 was the year that a silent film (The Artist) swept the Oscars. Despite the waxing fortunes of recorded performances, live music and live theater continue to thrive—indeed, taken as a whole, these industries are bigger than they have ever been. The entertainment industry has a long history of characterizing its profit-maximization strategies as do-or-die existential crises. If we can’t control the printing press/the record player/the radio/cable/VCRs/the Internet, they say, we will die. The reality is more like “If we can’t control these things, we’ll have to invent some new ways of making money, and make less from the old ways.” It’s happened many times before. 3.21 What Is Copyright For? THE PURPOSE OF copyright shouldn’t be to ensure that whoever got lucky with last year’s business model gets to stay on top forever.


pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

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airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Edward Glaeser, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Washington Consensus, white flight

Compensation levels of high income earners such as CEOs seem also to be determined largely by bargaining.3 Other models highlight the role of norms in the spread that is considered acceptable between, say, the CEO’s compensation and the amounts earned by rank-and-file employees. Most economists would acknowledge that workers in the United States and Europe greatly benefited from the more egalitarian social understanding of the 1950s and 1960s. Yet other models suggest that profit-maximizing reasons motivate certain firms to pay more than the going market wage, without departing from the marginal-productivity framework as such. For example, above-market “efficiency” wages, as they are called, may make sense for employers in order to motivate workers or minimize labor turnover (to reduce costs of hiring and training). These wrinkles move us away from general-purpose models and take us back, again, to specific models that may be relevant in different settings.

Masters of Mankind by Noam Chomsky

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affirmative action, Berlin Wall, failed state, income inequality, land reform, Martin Wolf, means of production, nuremberg principles, offshore financial centre, oil shale / tar sands, Plutocrats, plutocrats, profit maximization, Ralph Waldo Emerson, Silicon Valley, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, union organizing, urban renewal, War on Poverty, Washington Consensus

Similarly, the American people “understand” the necessity for the grotesquerie of the space race, which is quite susceptible to Madison Avenue techniques and thus, along with the science-technology race in general, serves as “a transfigured, transmuted and theoretical substitute for an infinite strategic arms race; it is a continuation of the race by other means.”53 It is fashionable to decry such analyses—or even references to the “military-industrial complex”—as “unsophisticated.” It is interesting, therefore, to note that those who manipulate the process and stand directly to gain by it are much less coy about the matter. There are some perceptive analysts—J. K. Galbraith is the best example—who argue that the concern for growth and profit maximization has become only one of several motives for management and technostructure, that it is supplemented, perhaps dominated, by identification with and adaptation to the needs of the organization, the corporation, which serves as a basic planning unit for the economy.54 Perhaps this is true, but the consequences of this shift of motivation may nevertheless be slight, since the corporation as planning unit is geared to production of consumer goods55—the consumer, often, being the national state—rather than satisfaction of social needs, and to the extension of its dominion in the organized international economy.


pages: 257 words: 13,443

Statistical Arbitrage: Algorithmic Trading Insights and Techniques by Andrew Pole

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algorithmic trading, Benoit Mandelbrot, Chance favours the prepared mind, constrained optimization, Dava Sobel, Long Term Capital Management, Louis Pasteur, mandelbrot fractal, market clearing, market fundamentalism, merger arbitrage, pattern recognition, price discrimination, profit maximization, quantitative trading / quantitative finance, risk tolerance, Sharpe ratio, statistical arbitrage, statistical model, stochastic volatility, systematic trading, transaction costs

Defining risk moments (or events) as times when a stock price trace changes direction such that a peak or trough is formed, it is desirable for risk minimization purposes to select pairs that show similar event histories—peaks and troughs close in time with similar 22 STATISTICAL ARBITRAGE sized moves for the two stocks between these events. Such pairs are less likely to react divergently (except, perhaps, in the immediate aftermath) following a disturbance to the market (political, industrial development, etc.). For profit maximization, it is desirable that between events the two stocks develop along different price trajectories, exhibiting as much negative correlation—moving apart, then together—as possible. See Chapter 5 for a formal treatment of desirable and undesirable pair correlations. 2.4.2 Event Analysis The turning point algorithm works as follows: 1. A local maximum in the price series is a turning point if subsequently the price series declines by an amount giving a negative return greater in absolute value than a specified fraction of the local, annualized return volatility. 2.


pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

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asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, liquidity trap, London Interbank Offered Rate, margin call, market clearing, moral hazard, mortgage tax deduction, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, Plutocrats, plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

Morgan acted the same way when he personally ended the panic of 1907 in New York by taking all the other bankers into his library one by one and making them come clean about their loans and investments. He decided which banks deserved loans and which needed to be merged or shut down. It worked, though the politicians in Washington never forgave him for saving the economy when they could not. The idea that a private, profit-maximizing banker could be the ‘‘lender of last resort’’ for the whole system drove them nuts. Despite nearly a century of populist resistance to a government-sponsored bank, Congress passed the Federal Reserve Act in 1913. A CAMEL IS BORN Like almost all legislative sausage-making in Congress, the Federal Reserve Act was an ugly compromise. Congress represented strong local interests in their states.


pages: 238 words: 73,824

Makers by Chris Anderson

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3D printing, Airbnb, Any sufficiently advanced technology is indistinguishable from magic, Apple II, autonomous vehicles, barriers to entry, Buckminster Fuller, Build a better mousetrap, business process, crowdsourcing, dark matter, David Ricardo: comparative advantage, death of newspapers, dematerialisation, Elon Musk, factory automation, Firefox, future of work, global supply chain, global village, industrial robot, interchangeable parts, Internet of things, inventory management, James Hargreaves, James Watt: steam engine, Jeff Bezos, job automation, Joseph Schumpeter, Kickstarter, Lean Startup, manufacturing employment, Mark Zuckerberg, means of production, Menlo Park, Network effects, profit maximization, race to the bottom, Richard Feynman, Richard Feynman, Ronald Coase, self-driving car, side project, Silicon Valley, Silicon Valley startup, Skype, slashdot, South of Market, San Francisco, spinning jenny, Startup school, stem cell, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, supply-chain management, The Nature of the Firm, The Wealth of Nations by Adam Smith, transaction costs, trickle-down economics, Whole Earth Catalog, X Prize, Y Combinator

And what’s clear about these new producers is that they’re not going to be making the same one-size-fits-all products that defined the mass-production era. Instead, they’re going to be starting with one-size-fits-one and building from there, finding out how many other consumers share their interests, passions, and unique needs. Happiness economics What’s interesting is that such hyperspecialization is not necessarily a profit-maximizing strategy. Instead, it is better seen as meaning-maximizing. Writing in The New York Times Magazine, Adam Davidson sees this as a natural evolution of an affluent country where the basic needs for the middle class and above have all been more than met: The hot field of happiness economics argues, rather persuasively, that once people reach some level of comfort, they are willing—even eager—to trade in potential earnings at a lucrative but uninspiring job for less (but comfortable) pay at more satisfying work.


pages: 261 words: 64,977

Pity the Billionaire: The Unexpected Resurgence of the American Right by Thomas Frank

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Affordable Care Act / Obamacare, bank run, big-box store, bonus culture, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Deng Xiaoping, financial innovation, housing crisis, invisible hand, Naomi Klein, obamacare, payday loans, profit maximization, profit motive, road to serfdom, Ronald Reagan, shareholder value, strikebreaker, The Chicago School, The Myth of the Rational Market, Thorstein Veblen, too big to fail, union organizing, Washington Consensus, white flight, Works Progress Administration

One of the stranded passengers, meanwhile, possesses great political power; he is able to threaten top railroad officials and have the train proceed into the tunnel of desire just like the flesh-and-blood passengers of 1910 wanted. And then the passengers are suffocated for his insolence. Politics, in short, is what causes train accidents. Government does not protect passengers; it imperils them. If allowed to act on their profit-maximizing own, corporations would never endanger passengers’ lives, much as those moochers deserve to be endangered. For more on the Wellington disaster, see Ruby El Hult, Northwest Disaster: Avalanche and Fire (Portland, OR: Binfords and Mort, 1960) and Gary Krist, The White Cascade: The Great Northern Railway Disaster and America’s Deadliest Avalanche (New York: Henry Holt, 2007). To get up to speed on the history of train wrecks, try Mark Aldrich’s Death Rode the Rails: American Railroad Accidents and Safety, 1828–1965 (Baltimore: Johns Hopkins University Press, 2006).


pages: 296 words: 78,227

The 80/20 Principle: The Secret to Achieving More With Less by Richard Koch

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Albert Einstein, barriers to entry, business process, delayed gratification, fear of failure, income inequality, inventory management, Johann Wolfgang von Goethe, knowledge worker, profit maximization, rolodex, Ronald Reagan, wage slave

Instead of dealing with 1,000 suppliers, purchases were consolidated through the 200 suppliers who comprised 95 percent of total supplies (a 95/20 Principle). The organization was streamlined and flattened. At the heart of the market meltdown, Corning turned away business. This might seem perverse, but it worked. A simpler, smaller operation rapidly restored profits. Less was more. MANAGERS LOVE COMPLEXITY At this point it is worth asking: why do supposedly profit-maximizing organizations become complex, when this plainly destroys value? One important answer, alas, is that managers love complexity. Complexity is stimulating and intellectually challenging; it leavens boring routine; and it creates interesting jobs for managers. Some people believe that complexity obtrudes when no one is looking. No doubt—but complexity is also sponsored by managers, just as it sponsors them.


pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

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Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, Mark Zuckerberg, McMansion, mortgage debt, mortgage tax deduction, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

They are also able to attract capital more easily: the amount of venture capital flowing into European financial-­technology firms, for example, has not been this high since the dot-com era. That is not to be complacent about finance. Growth and greed can distort good ideas. But when the next financial crisis comes, my bet is that it will stem from an established market, probably property, in which mainstream investors and profit-maximizing institutions have gotten carried away once again. The balance that regulators have to strike is watchfulness for the risks that can cause real economic damage and tolerance for the ideas that can produce real benefits. My belief is that tremendous good will come out of the financial industry in the coming years, thanks to the sorts of entrepreneurs and innovators we have met in the preceding pages.


pages: 236 words: 67,953

Brave New World of Work by Ulrich Beck

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affirmative action, Asian financial crisis, Berlin Wall, collective bargaining, conceptual framework, Fall of the Berlin Wall, feminist movement, full employment, future of work, hiring and firing, illegal immigration, income inequality, informal economy, job automation, knowledge worker, labour market flexibility, labour mobility, low skilled workers, McJob, means of production, mini-job, postnationalism / post nation state, profit maximization, purchasing power parity, rising living standards, Silicon Valley, working poor, working-age population

Ecological globalization risks also find local expression. And the crises of ecology and justice form an inner unity: ‘There can be no justice between the sexes in a world of ecological crises and global apartheid, if the social and political structures that protect the poor are dismantled because they “block” free trade or are considered “inefficient” or “extravagant” in the sense of the market logic of profit maximization.’28 In so far as capitalist successes based on information tech-nology remove the shackles of human labour, reports of victories and bad tidings become two sides of the same coin. Both the profits of transnational corporations and the unemployment figures are on the rise in the welfare niche-societies of Western Europe. The same trend that means a roller-coaster for the economy is becoming a living nightmare for working people.


pages: 283 words: 81,163

How Capitalism Saved America: The Untold History of Our Country, From the Pilgrims to the Present by Thomas J. Dilorenzo

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banking crisis, British Empire, collective bargaining, corporate governance, corporate social responsibility, financial deregulation, Fractional reserve banking, Hernando de Soto, income inequality, invisible hand, Joseph Schumpeter, laissez-faire capitalism, means of production, medical malpractice, Menlo Park, minimum wage unemployment, Plutocrats, plutocrats, price stability, profit maximization, profit motive, Ralph Nader, rent control, rent-seeking, Ronald Coase, Ronald Reagan, Silicon Valley, statistical model, The Wealth of Nations by Adam Smith, transcontinental railway, union organizing, Upton Sinclair, working poor, Works Progress Administration

Locke catalogues the personal and business-practice traits of those who have been pioneers of industry and wealth creation in America. Manne, Henry G. The Modern Corporation and Social Responsibility. Washington, D.C.: American Enterprise Institute, 1972. One of the founders of the “law and economics” movement explains how businesses can best be “socially responsible” by steadfastly concentrating on profit maximization. Martin, Albro. James J. Hill and the Opening of the Northwest. New York: Oxford University Press, 1976. An excellent biography of the man who, without any governmental assistance, built a transcontinental railroad, better and more profitably than his subsidized rivals. McGee, John S. “Predatory Pricing: The Standard Oil (N.J.) Case.” Journal of Law and Economics, vol. 1, October 1958.


pages: 288 words: 76,343

The Plundered Planet: Why We Must--And How We Can--Manage Nature for Global Prosperity by Paul Collier

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agricultural Revolution, Berlin Wall, business climate, Doha Development Round, energy security, food miles, megacity, new economy, offshore financial centre, oil shock, profit maximization, rent-seeking, Ronald Coase, Scramble for Africa, sovereign wealth fund, stem cell, Stewart Brand

The benefits to society as a whole are not aligned with the interests of those with the power of decision. To internalize these externalities, which means to align incentives with the social interest, the value of the entitlements should accrue to the entity setting the rules. In a fish farm this happens automatically: the owner of the fish farm takes out only the number of fish that is consistent with long-term profit maximization. The miracle of the market is that his interest is aligned with ours. He makes money by providing us with what we want. By assigning the rights over the oceans to the United Nations the high seas would, in effect, be turned into a giant fish farm. The bare minimum would be for the United Nations to limit the harvest to a scientifically determined sustainable rate; that which would keep the stock constant.


pages: 249 words: 73,731

Car Guys vs. Bean Counters: The Battle for the Soul of American Business by Bob Lutz

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corporate governance, currency manipulation / currency intervention, flex fuel, medical malpractice, Ponzi scheme, profit maximization, Ralph Nader, shareholder value, Steve Jobs, Toyota Production System, transfer pricing, Unsafe at Any Speed, upwardly mobile

attitude. The focus has to be on the customer. 9. It’s better to have Manufacturing lose ground in the Harbour Report, building high net-margin vehicles with many more hours, than being best in the world building low-hour vehicles that we take a loss on. We need to recognize that everything is a trade-off, that we can’t maximize the performance of any one function to the detriment of overall profit maximization. The same goes for every discipline: A gorgeous vehicle that disappoints in quality will fail. A car incorporating every conceivable new safety technology makes no contribution to safety if it becomes unaffordable to the customer or we can’t afford to build it. A vehicle with a single-minded focus on “absence of thingsgone-wrong” will fail miserably if it is dull, unexciting, a dog to drive, and ugly.

The Armchair Economist: Economics and Everyday Life by Steven E. Landsburg

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Albert Einstein, Arthur Eddington, diversified portfolio, first-price auction, German hyperinflation, Golden Gate Park, invisible hand, means of production, price discrimination, profit maximization, Ralph Nader, random walk, Ronald Coase, sealed-bid auction, second-price auction, second-price sealed-bid, statistical model, the scientific method, Unsafe at Any Speed

Perhaps the City Council would prefer to start charging its own admission fee, using the proceeds to improve city services or to lower taxes. This would yield a benefit to everyone in Springfield with no offsetting cost. Here is a rare occurrence of the most sought-after and frequently elusive goal in economic policy—a genuine free lunch. Alternatively, the city could auction off the aquarium to the highest bidder. Once again the lunch is free. The proceeds of the auction can be used to do good while the new owner's profit-maximizing behavior is of no consequence to anybody but himself. Fixed resources—land in a particular location, a unique aquarium, an unusual skill, or an unusual preference—yield economic gains to those who own them. If there are no owners, there are no gains. The Indifference Principle ensures that all gains are either transferred to a fixed-resource owner or effectively discarded. Economists tend to feel that it is better for someone to reap the benefits of a resource than for no one to reap them, and therefore tend to think that the institution of property is a good thing.


pages: 1,073 words: 302,361

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

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asset-backed security, Bernie Madoff, buttonwood tree, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, fear of failure, financial innovation, fixed income, Ford paid five dollars a day, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, merger arbitrage, moral hazard, mortgage debt, paper trading, passive investing, Ponzi scheme, price stability, profit maximization, risk tolerance, Ronald Reagan, Saturday Night Live, South Sea Bubble, time value of money, too big to fail, traveling salesman, value at risk, yield curve, Yogi Berra

He had had to figure out how to extend the firm’s reach beyond Sidney Weinberg’s friends and to learn how to impart the firm’s collected wisdom and knowledge more broadly as the firm grew more rapidly. This led him to create the New Business Group and the firm’s fourteen principles. These innovations, however, took the firm only so far toward the modernization it desperately needed. To get the firm the rest of the way fell to the next generation of the firm’s leaders, Friedman and Rubin. According to Institutional Investor, the firm’s new leaders established an “Ad Hoc Profit Maximization Committee,” whose members were “intelligent men from Mars,” according to Friedman, and the purpose of which was “to bring new perspectives to the firm’s various businesses by questioning how things are run … without threatening the ethos.” Then there was the “bevy” of new consultants who showed up at the firm. Marketing consultant Anthony Buzan—a “creative provocateur,” Geoff Boisi said—had been hired to counter the perception that Goldman was a follower, not a leader, when it came to financial innovation.

We really mean it.” —— WHATEVER SOCIAL AND behavioral problems the firm seemed to be having as the John Weinberg era faded away, there was no question Goldman Sachs—more than ever—still knew how to make money. Institutional Investor estimated the 1990 “honeypot” at “north of $600 million,” and Forbes wrote, without caveat, that the firm made $1 billion in net income in 1991. The Ad Hoc Profit Maximization Committee seemed to be working quite well. Goldman was not only the leader in the traditional investment banking businesses of underwriting debt and equity securities and in advising on M&A deals, but it had also started to become a leader in the business of investing its own capital, as a principal in trades and as a major investor in a variety of its own private-equity, bridge loan, and hedge funds.

Woolworth Company Gadhafi, Mu‘ammar al- Galbraith, John Kenneth, 2.1, 2.2, 2.3, 2.4, 2.5 Gang of Five, 5.1, 5.2 Gant, Donald Gapper, John gasoline Gasvoda, Kevin, 19.1, 20.1 GATT treaty Gaul, Paul Geissinger, John Geisst, Charles Geithner, Timothy, prl.1, 22.1 General Atlantic General Cigar Company General Electric, 2.1, 3.1, 3.2, 3.3, 4.1, 7.1, 8.1, 9.1 European bonds underwritten for RCA’s merger with, 10.1, 10.2 General Foods Corporation, 2.1, 3.1, 3.2, 4.1, 4.2, 10.1 General Motors General Re Corporation Gensler, Gary, 17.1, 18.1 George, Edward Germany, 1.1, 3.1, 14.1, 14.2, 14.3 Geronemus, Roy Gerst, David get-rich-quick schemes Getty Oil Gilbert, Cass Gilmour, James Giuliani, Rudolph, 11.1, 11.2, 11.3, 11.4, 11.5, 11.6, 11.7, 11.8, 11.9, 11.10 Glass-Steagall Act (1932), 2.1, 4.1, 10.1, 16.1 Glauber, Robert Glengarry Glen Ross (Mamet), 4.1 Glenn, John Global Crossing gold, 3.1, 9.1, 9.2 gold coins, 1.1, 1.2 Goldfield, Jacob, 13.1, 13.2, 16.1 Goldman, Bertha, 1.1, 1.2, 1.3 Goldman, Henry, 1.1, 1.2, 2.1, 4.1 Federal Reserve System designed by Germany supported by Goldman Sachs inherited by retirement of, 1.1, 1.2, 4.1 as risk-taking Sears IPO handled by, 1.1, 1.2, 1.3 underwriting and, 1.1, 1.2 Goldman, Henry, Jr. Goldman, Julius Goldman, Louisa see Sachs, Louisa Goldman Goldman, Marcus in arrival to U.S. death of gold coins of IOUs bought and sold by, 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 5.1 money for Jewish immigrants collected by Sam Sachs made partner of, 1.1, 1.2 Goldman, Rebecca Goldman, Rosa see Sachs, Rosa Goldman Goldman, Sachs & Dreyfus Goldman Sachs: “Ad Hoc Profit Maximization Committee” at, 12.1, 12.2 Administrative Department of American Cyanamid Corporation lawsuit against annual budgeting at antitrust lawsuit against, 4.1, 8.1 arbitrage department of, 5.1, 5.2, 5.3, 5.4, 6.1, 6.2, 6.3, 6.4, 7.1, 7.2, 9.1, 9.2, 10.1, 11.1, 11.2, 11.3, 12.1, 15.1; see also Levy, Gustave Lehmann; Rubin, Robert bad news not shared by, 7.1, 7.2, 7.3; see also “big short” in battles with other companies board of directors at, 17.1, 17.2, 22.1 bond department of, 3.1, 3.2, 5.1, 5.2, 10.1, 10.2, 14.1 Bouton’s potential lawsuit against branch offices of, 3.1, 4.1 Broad Street building of, 4.1, 5.1, 6.1, 7.1 Buffett’s loan to, prl.1, prl.2 business department of Business Standards Committee of, 24.1, 24.2 Buying Department of, 7.1, 7.2, 7.3 calling effort of capital of, 1.1, 1.2, 4.1, 4.2, 5.1, 5.2, 6.1, 7.1, 9.1, 10.1, 10.2, 12.1, 12.2, 12.3, 14.1, 14.2, 14.3, 15.1, 15.2, 15.3, 16.1 Capital Structure Franchise Trading Group of Catching’s company created for Catching’s power grab at collusion accusations against commercial paper traded by, 1.1, 1.2, 1.3, 1.4; see also commercial paper compensation at, prl.1, prl.2, prl.3, prl.4, 5.1, 7.1, 7.2 competitiveness at confidentiality and nondisparagement agreements at, prl.1 conflict management by, prl.1, 15.1, 17.1 Corporate Finance Department of, 7.1, 7.2, 7.3, 17.1 Corzine’s desire to enlarge in crash of 1929, 2.1, 2.2, 2.3, 2.4, 3.1 Depression strategy of, prl.1, 3.1 discipline at 85 Broad Street building of, prl.1, 8.1, 10.1, 10.2, 17.1 envy of ethical code of, prl.1, 8.1, 16.1, 17.1 Executive Committee of, 15.1, 16.1, 16.2, 16.3, 16.4 factors in prowess of as family business fear of Financial Institutions Group of (FIG), 15.1, 15.2, 16.1, 16.2, 16.3, 16.4, 16.5, 16.6 fine paid by Firmwide Risk Committee at Fixed-Income, Currencies and Commodities (FICC) at, 14.1, 16.1, 17.1, 17.2, 17.3, 17.4, 17.5, 19.1 fixed-income division of, 10.1, 10.2, 10.3, 12.1, 12.2, 12.3, 13.1, 14.1, 14.2, 14.3, 14.4, 15.1, 15.2, 15.3, 16.1, 17.1 Ford IPO handled by, 4.1, 5.1, 5.2, 8.1, 12.1 foreign exchange department of, 1.1, 9.1, 14.1, 15.1, 15.2, 17.1 “great rehabilitation” of, 3.1, 3.2 hot IPO’s distributed by hundredth anniversary of internal e-mails of, prl.1, prl.2, prl.3, prl.4 International Advisory Committee of international expansion of, 8.1, 12.1, 12.2, 14.1, 14.2, 14.3, 14.4, 15.1, 15.2, 15.3, 16.1, 17.1, 17.2 interview process at investment banking of, prl.1, prl.2, 3.1, 4.1, 4.2, 4.3, 4.4, 5.1, 6.1, 7.1, 7.2, 8.1, 8.2, 8.3, 9.1, 9.2, 10.1, 10.2, 14.1, 14.2, 15.1, 15.2, 16.1, 18.1; see also investment banking Investment Banking Services (IBS) investment trusts of, 2.1, 2.2, 2.3, 2.4, 3.1, 3.2, 4.1, 5.1, 8.1, 9.1 J.


pages: 593 words: 189,857

Stress Test: Reflections on Financial Crises by Timothy F. Geithner

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Affordable Care Act / Obamacare, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bernie Madoff, Bernie Sanders, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Doomsday Book, eurozone crisis, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, housing crisis, Hyman Minsky, illegal immigration, implied volatility, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Nate Silver, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, savings glut, short selling, sovereign wealth fund, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

He would later quip that there hadn’t been a useful financial innovation since the ATM. I took his discomfort seriously, but I didn’t have the strength of his convictions. I had never worked in banking, so I had no basis for comparison to the past. I didn’t see the financial sector as either irretrievably broken or inherently wise. I saw it as an inherently risky business, a collection of profit-maximizing individuals with profit-maximizing shareholders, providing generally valuable economic services. I was rarely shocked by reports of rapacious behavior. I took it as a given. I rarely socialized with Wall Street executives—I did run into Volcker once at a lavish celebration of Peterson’s Blackstone Group, and he whispered, only half-jokingly: “You shouldn’t be here!”—but I talked to them regularly to get their perspectives on the markets and the economy.


pages: 843 words: 223,858

The Rise of the Network Society by Manuel Castells

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Apple II, Asian financial crisis, barriers to entry, Big bang: deregulation of the City of London, borderless world, British Empire, capital controls, complexity theory, computer age, Credit Default Swap, declining real wages, deindustrialization, delayed gratification, dematerialisation, deskilling, disintermediation, double helix, Douglas Engelbart, edge city, experimental subject, financial deregulation, financial independence, floating exchange rates, future of work, global village, Hacker Ethic, hiring and firing, Howard Rheingold, illegal immigration, income inequality, industrial robot, informal economy, information retrieval, intermodal, invention of the steam engine, invention of the telephone, inventory management, James Watt: steam engine, job automation, job-hopping, knowledge economy, knowledge worker, labor-force participation, labour market flexibility, labour mobility, laissez-faire capitalism, low skilled workers, manufacturing employment, Marshall McLuhan, means of production, megacity, Menlo Park, new economy, New Urbanism, offshore financial centre, oil shock, open economy, packet switching, planetary scale, popular electronics, post-industrial society, postindustrial economy, prediction markets, Productivity paradox, profit maximization, purchasing power parity, RAND corporation, Robert Gordon, Silicon Valley, Silicon Valley startup, social software, South China Sea, South of Market, San Francisco, special economic zone, spinning jenny, statistical model, Steve Jobs, Steve Wozniak, Ted Nelson, the built environment, the medium is the message, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, total factor productivity, trade liberalization, transaction costs, urban renewal, urban sprawl

Under capitalism, the separation between producers and their means of production, the commodification of labor, and the private ownership of means of production on the basis of the control of capital (commodified surplus), determined the basic principle of appropriation and distribution of surplus by capitalists, although who is (are) the capitalist class(es) is a matter of social inquiry in each historical context, rather than an abstract category. Under statism, the control of surplus is external to the economic sphere: it lies in the hands of the power-holders in the state – let us call them apparatchiki or lingdao. Capitalism is oriented toward profit-maximizing, that is, toward increasing the amount of surplus appropriated by capital on the basis of the private control over the means of production and circulation. Statism is (was?) oriented toward power-maximizing, that is, toward increasing the military and ideological capacity of the political apparatus for imposing its goals on a greater number of subjects and at deeper levels of their consciousness.

Preston, Pascal Prigogine, Ilya printing, China privatization Prodi, Romano producer networks producer services production; assembly line; capitalist; cross-border; flexibility; globalization; lean; networking; offshore; organization transformed; social relations; technology productivity; competitiveness; computer manufacturing; electronics; employment; globalization; G-7 countries; industrialism; innovation; knowledgebased; labor costs; Mexico; North/South; OECD countries; profitability; services; Solow; technology; time professionals profit-maximizing profitability: crisis; information technologies; productivity; US property rights property slump Pursell, Carroll Putnam, Robert Pyo, H. Qian, Wen-yuan Quayle, Dan Quinn, James Brian Qvortup, Lars Qwest race: Internet use; professionals; see also ethnicity racism radio Ralle, P. Ramonet, Ignacio Rand Corporation Randlesome, Collin R&D Reagan, Ronald real virtuality Redding, S.

Debtor Nation: The History of America in Red Ink (Politics and Society in Modern America) by Louis Hyman

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asset-backed security, bank run, barriers to entry, Bretton Woods, card file, central bank independence, computer age, corporate governance, credit crunch, declining real wages, deindustrialization, diversified portfolio, financial independence, financial innovation, Gini coefficient, Home mortgage interest deduction, housing crisis, income inequality, invisible hand, late fees, London Interbank Offered Rate, market fundamentalism, means of production, mortgage debt, mortgage tax deduction, p-value, pattern recognition, profit maximization, profit motive, risk/return, Ronald Reagan, Silicon Valley, statistical model, technology bubble, the built environment, transaction costs, union organizing, white flight, women in the workforce, working poor

Policymakers, in numerous instances, often acted with the best of intentions, seeking to solve pressing economic and social problems, like unemployment, wealth inequality, and discrimination. Yet the policies, once enacted, often had far-reaching, unexpected consequences. For lenders, figuring out ways to extend credit met with both success and failure. The short-hand way in which historians describe capitalist decision-making as “profit maximizing” obscures the gut-wrenching difficulty of discovering new ways to make money. But once discovered, whether borne by profit or inscribed in law, new ways to lend spread throughout the economy. At certain junctures, which are the focus of this book, sudden changes in the larger political, economic, and social structures surrounding debt abruptly reoriented lending practices. These moments of transformation came from all quarters, and while the most powerful institutions—commercial banks, corporations, government agencies—frequently played the most crucial roles, those with less power in America, when organized, contributed to the changes as well.

., 260 Bussing, Irvin, 77, 83, 85 Buy Now, Pay Later: Advertising Credit, and Consumer Durables in the 1920s (Olney), 293n3, 294n9 Calder, Lendol, 294n9, 297n26, 297n39, 297n41, 297n44, 301n149 INDEX Caldor’s, 168; “Caldor’s Credit Card,” 168 Calvert, Robert, 152 Campbell, Sharyn, 195, 203 capital, 5; allocation of, 5–6; risk-weighted capital, 256; transformation of into debt, 5 Capital Moves (Cowie), 295n11 Capital One, 257, 272, 273 capitalism: and the allocation of capital, 5–6; consumer capitalism, 7; and “profit maximizing,” 2; success of, 284–85 Caplan, P. I., 96 Caplovitz, David, 175–76, 176, 177, 343n25 “‘Carry Credit in Your Pocket’: The Early History of the Credit Card at Bank of America and Chase Manhattan” (Wolters), 316n2 Cassaday, Norman, 117 CBS News, 210 Central Bank (Walnut Creek, California), 250 Chadbourne, Archie, 36 Changing Times, 171 Charga-Plates, 117–18, 133, 145, 146, 149–50; group Charga-Plate plan, 326; in the postwar era, 120–27, 127–28 charge account credit.


pages: 286 words: 90,530

Richard Dawkins: How a Scientist Changed the Way We Think by Alan Grafen; Mark Ridley

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Alfred Russel Wallace, Arthur Eddington, bioinformatics, cognitive bias, computer age, conceptual framework, Dava Sobel, double helix, Douglas Hofstadter, epigenetics, Fellow of the Royal Society, Haight Ashbury, interchangeable parts, Isaac Newton, Johann Wolfgang von Goethe, John von Neumann, loose coupling, Murray Gell-Mann, Necker cube, phenotype, profit maximization, Ronald Reagan, Stephen Hawking, Steven Pinker, the scientific method, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Yogi Berra

Again building on Williams’ ideas, Dawkins pointed out, though not in these terms, that logically the concept of selfishness makes sense only within a larger set of ideas, in which there is an entity to be selfish, a quantity whose numerical value says how well-off the entity is, and a range of possible actions that can be taken by the entity. Mathematics and the social sciences nowadays use mathematical formalizations of this larger context (‘optimization programmes’) in game theory and economics, to cope with familiar economic issues such as consumer choice theory and profit maximization by firms. By bringing this larger set of ideas into the centre of the biological argument, Dawkins was able to pursue the logic of adaptationism further. Linking selfishness to replicators, he argued that the entity concerned was the gene and the quantity that surviving genes would come through natural selection to act as if maximizing was their replication. This link between replicator dynamics on the one hand and selfishness on the other, brilliantly encompassed in the title of the book, is the very centre of Darwin’s argument, but spelled out in a way that is more practical for further analysis: of course, it could only be articulated after Mendelian genetics had been discovered.


pages: 268 words: 112,708

Culture works: the political economy of culture by Richard Maxwell

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1960s counterculture, AltaVista, Apple's 1984 Super Bowl advert, barriers to entry, Berlin Wall, big-box store, business process, corporate governance, cuban missile crisis, deindustrialization, Fall of the Berlin Wall, Francis Fukuyama: the end of history, global village, Howard Rheingold, income inequality, informal economy, intermodal, late capitalism, Marshall McLuhan, medical malpractice, Network effects, profit maximization, Ralph Nader, refrigerator car, Ronald Reagan, Silicon Valley, structural adjustment programs, talking drums, telemarketer, the built environment, Thorstein Veblen, Unsafe at Any Speed, urban renewal, Victor Gruen, Whole Earth Catalog, women in the workforce

Corporate capitalism’s inexorable appropriation of sport culture replaced the amateur(ish) volunteerism of official “old-boy” sporting values with the scientific business principles and rationalities espoused by “men and women of the Corporation.”17 These new values infiltrated sport via “modern forms of domination, such as ‘business administration,’ and techniques of manipulation, such as market research and advertising.”18 Sport was thereafter effectively and efficiently reorganized in accordance with corporate values and a logic of profit maximization. Initially in the postwar United States, and 133 David L. A n d r e w s subsequently in the corporatizing economies of Western Europe, Japan, and Australasia, this imperious corporate model transformed sport into big business, undermining once and for all any claim that sport enjoyed a semiautonomous relation to the political economy. Once conclusively appropriated by corporate capitalism, the very constitution and delivery of sport culture became dialectically implicated in subsequent changes in the economic order.


pages: 304 words: 22,886

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein

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Al Roth, Albert Einstein, asset allocation, availability heuristic, call centre, Cass Sunstein, choice architecture, continuous integration, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, endowment effect, equity premium, feminist movement, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta analysis, meta-analysis, Milgram experiment, pension reform, presumed consent, profit maximization, rent-seeking, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Saturday Night Live, school choice, school vouchers, transaction costs, Vanguard fund, Zipcar

After all, managers in the public sector have to answer to voters, and managers in the private sector have as their mandate the job of maximizing profits and share prices, not consumer welfare. Indeed, some of those who are most suspicious of governments think that the only responsibility of private managers is to maximize share prices. As we have emphasized, the invisible hand will, in some circumstances, lead those trying to maximize profits to maximize consumer welfare too. But when consumers are confused about the features of the products they are buying, it can be profit maximizing to exploit their confusion, especially in the short run but possibly in the long run too. The invisible hand works best when products are simple and purchased frequently. We worry very little about consumers being ripped off by their dry cleaners. A dry cleaner who loses shirts or suddenly doubles prices will not be in business long. But a mortgage broker who fails to point out that the teaser rate will disappear quickly is long gone by the time the customer gets the bad news.


pages: 258 words: 83,303

Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization by Jeff Rubin

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air freight, banking crisis, big-box store, BRICs, carbon footprint, collateralized debt obligation, collective bargaining, credit crunch, David Ricardo: comparative advantage, decarbonisation, energy security, food miles, hydrogen economy, illegal immigration, immigration reform, invisible hand, James Watt: steam engine, Just-in-time delivery, market clearing, megacity, North Sea oil, oil shale / tar sands, oil shock, peak oil, profit maximization, reserve currency, South Sea Bubble, the market place, The Wealth of Nations by Adam Smith, trade liberalization

When unions go through the math, they will come to the realization that in a world where emissions cost money, the factories their members work in have a comparative global advantage. If your emissions are a third less than those of your competitors, you want the price of emissions to be as high as possible—because the bigger the cost of emissions, the greater your cost advantage from emitting less. That’s not tree-hugging environmentalism, just plain old profit-maximizing economics. Organized labor will soon need to advocate for more stringent standards for carbon emissions. In the process, blue-collar jobs become green-collar jobs. Not only does that change the way labor acts, it sets the stage for political alliances that would once have seemed absurd. Save the world from disastrous human-induced climate change and in the process bring back home high-paying industrial jobs that most of us thought were gone forever: that’s a powerful combo in any political constituency, and it’s one that will soon agitate for a radical shift in US carbon policy.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, moral hazard, mortgage tax deduction, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

In 2002, as part of the Bush administration’s Blueprint for the American Dream, they committed to finance $1.1 trillion in loans to minority borrowers.79 The riskiest mortgages, however—the ones that pushed the housing bubble to dizzying heights—were simply off-limits to Fannie and Freddie. The GSEs could not buy many subprime mortgages (or securitize them) because they did not meet the conforming mortgage standards. As profit-maximizing private corporations, Fannie and Freddie tried to relax their underwriting standards in order to get into the party, reducing documentation requirements and lowering credit standards. But ultimately, regulatory constraints prevented them from plunging too far into subprime lending. As housing expert Doris Dungey wrote, “[T]he immovable objects of the conforming loan limits and the charter limitation of taking only loans with a maximum [loan-to-value ratio] of 80% … plus all their other regulatory strictures, managed fairly well against the irresistible force of ‘innovation.’ ”80 As a result, in 2004–2006, as subprime lending reached its peak in both volume and innovation, Fannie and Freddie were pushed out of large parts of the market, because the loans being made violated their underwriting standards and because the Wall Street banks were so eager to get their hands on those loans.


pages: 339 words: 100,075

Pump Six and Other Stories by Paolo Bacigalupi

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Columbine, hiring and firing, price stability, profit maximization

A man in good clothes, a yellow card to boot, should have known that he was nothing but a bit of bloodied bait before a Komodo lizard. At least the stupid melon didn't bleed on his fancy clothes when the white shirts were done with him. That one had no habit of survival. He forgot that he was no longer a Big Name. But Tranh is learning. As he once learned tides and depth charts, markets and bio-engineered plagues, profit maximization and how to balance the dragon's gate, he now learns from the devil cats who molt and fade from sight, who flee their hunters at the first sign of danger. He learns from the crows and kites who live so well on scavenge. These are the animals he must emulate. He must discard the reflexes of a tiger. There are no tigers except in zoos. A tiger is always hunted and killed. But a small animal, a scavenging animal, has a chance to strip the bones of a tiger and walk away with the last Hwang Brothers suit that will ever cross the border from Malaya.


pages: 309 words: 86,909

The Spirit Level: Why Greater Equality Makes Societies Stronger by Richard Wilkinson; Kate Pickett

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Berlin Wall, clean water, Diane Coyle, epigenetics, experimental economics, experimental subject, Fall of the Berlin Wall, full employment, germ theory of disease, Gini coefficient, impulse control, income inequality, knowledge economy, labor-force participation, land reform, Louis Pasteur, meta analysis, meta-analysis, Milgram experiment, offshore financial centre, phenotype, Plutocrats, plutocrats, profit maximization, profit motive, Ralph Waldo Emerson, statistical model, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, ultimatum game, upwardly mobile, World Values Survey

Perhaps we need public bodies and non-profits, funded from public revenue, able to negotiate a price at which to buy access or copyrights for the nation. Perhaps we need international bodies able to negotiate free access to educational and business resources throughout the world. From the point of view of society as a whole, the tendency for technological change to reduce marginal costs is rapidly tipping the balance of advantage away from allowing profit-maximizing corporations to control the distribution of goods. Increasingly they can only rely on the remnants of monopolistic power provided by patents or copyright. We need to find new ways of paying organizations and individuals for life-enhancing research, creativity and innovation – the geese which lay the golden eggs – which does not then restrict access to the benefits. Perhaps we need charities to fund the development of software for free worldwide use.


pages: 471 words: 109,267

The Verdict: Did Labour Change Britain? by Polly Toynbee, David Walker

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banking crisis, Big bang: deregulation of the City of London, call centre, central bank independence, congestion charging, Corn Laws, Credit Default Swap, decarbonisation, deglobalization, deindustrialization, Etonian, failed state, first-past-the-post, Frank Gehry, gender pay gap, Gini coefficient, high net worth, hiring and firing, illegal immigration, income inequality, knowledge economy, labour market flexibility, market bubble, millennium bug, North Sea oil, Northern Rock, offshore financial centre, pension reform, Plutocrats, plutocrats, Ponzi scheme, profit maximization, purchasing power parity, shareholder value, Skype, smart meter, stem cell, The Spirit Level, too big to fail, University of East Anglia, working-age population, Y2K

If the test is Labour’s impact on people’s minds and behaviour, the evidence is weaker. That is not to diminish Labour’s achievements, nor to underestimate the strength of tribal antagonism to Labour across comfortable England, married to the myopic bias of business. On leaving the CBI, the scales fell from the eyes of Sir Richard Lambert, leading him to denounce a business culture of short-term profit maximization and boardroom greed; at no point, however, did Labour look likely to pick up that critique. Another reason for Labour’s fearfulness was, and remains, the bias of the national newspaper press. Try governing calmly, let alone progressively, amid its catcalls, lies, bullying and bile. Europhobic, tax-allergic, crime-neurotic, mean, prurient, reactionary – this was the tone set by the Daily Mail and Murdoch and a large cohort of British journalists.


pages: 339 words: 88,732

The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson, Andrew McAfee

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, access to a mobile phone, additive manufacturing, Airbnb, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, American Society of Civil Engineers: Report Card, Any sufficiently advanced technology is indistinguishable from magic, autonomous vehicles, barriers to entry, Baxter: Rethink Robotics, British Empire, business intelligence, business process, call centre, clean water, combinatorial explosion, computer age, computer vision, congestion charging, corporate governance, crowdsourcing, David Ricardo: comparative advantage, employer provided health coverage, en.wikipedia.org, Erik Brynjolfsson, factory automation, falling living standards, Filter Bubble, first square of the chessboard / second half of the chessboard, Frank Levy and Richard Murnane: The New Division of Labor, Freestyle chess, full employment, game design, global village, happiness index / gross national happiness, illegal immigration, immigration reform, income inequality, income per capita, indoor plumbing, industrial robot, informal economy, inventory management, James Watt: steam engine, Jeff Bezos, jimmy wales, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kevin Kelly, Khan Academy, knowledge worker, Kodak vs Instagram, law of one price, low skilled workers, Lyft, Mahatma Gandhi, manufacturing employment, Mark Zuckerberg, Mars Rover, means of production, Narrative Science, Nate Silver, natural language processing, Network effects, new economy, New Urbanism, Nicholas Carr, Occupy movement, oil shale / tar sands, oil shock, pattern recognition, payday loans, price stability, Productivity paradox, profit maximization, Ralph Nader, Ray Kurzweil, recommendation engine, Report Card for America’s Infrastructure, Robert Gordon, Rodney Brooks, Ronald Reagan, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Simon Kuznets, six sigma, Skype, software patent, sovereign wealth fund, speech recognition, statistical model, Steve Jobs, Steven Pinker, Stuxnet, supply-chain management, TaskRabbit, technological singularity, telepresence, The Bell Curve by Richard Herrnstein and Charles Murray, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, Tyler Cowen: Great Stagnation, Vernor Vinge, Watson beat the top human players on Jeopardy!, winner-take-all economy, Y2K

Similar stories have been and will be told in music and media; in finance and publishing; in retailing, distribution, services, and manufacturing. In almost every industry, technological progress will bring unprecedented bounty. More wealth will be created with less work. But at least in our current economic system, this progress will also have enormous effects on the distribution income and wealth. If the work a person produces in one hour can instead be produced by a machine for one dollar, then a profit-maximizing employer won’t offer a wage for that job of more than one dollar. In a free-market system, either that worker must accept a wage of one dollar an hour or find some new way to make a living. Conversely, if a person finds a new way to leverage insights, talents, or skills across one million new customers using digital technologies, then he or she might earn one million times as much as would be possible otherwise.


pages: 385 words: 111,807

A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collateralized debt obligation, colonial rule, Corn Laws, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Akerlof, Gini coefficient, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, interchangeable parts, interest rate swap, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land reform, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, shareholder value, Silicon Valley, Simon Kuznets, sovereign wealth fund, spinning jenny, structural adjustment programs, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population, World Values Survey

* The Keynesian theory says that at that point the government should tighten its fiscal and monetary policies, lest the economy overheats and generates too much inflation. * Many people use the term ‘the state’ as something broader than ‘the government’ and something akin to ‘the country’. This distinction has good philosophical and political justifications. But, for the purpose of this book, the two terms can be used interchangeably. * When a firm has market power, the profit-maximizing level of output is lower than the socially optimal one, which is where the maximum price that a consumer is willing to pay is the same as the minimum price that the producer requires in order not to lose money. When the amount produced is less than the socially optimal quantity, it means not serving some consumers who are perfectly willing to pay more than the minimum price that the producer requires but who are unwilling to bear the price at which the firm can maximize its profit.


pages: 382 words: 92,138

The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato

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Apple II, banking crisis, barriers to entry, Bretton Woods, California gold rush, call centre, carbon footprint, Carmen Reinhart, cleantech, computer age, credit crunch, David Ricardo: comparative advantage, demand response, deskilling, energy security, energy transition, eurozone crisis, everywhere but in the productivity statistics, Financial Instability Hypothesis, full employment, Growth in a Time of Debt, Hyman Minsky, incomplete markets, information retrieval, invisible hand, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, natural language processing, new economy, offshore financial centre, popular electronics, profit maximization, Ralph Nader, renewable energy credits, rent-seeking, ride hailing / ride sharing, risk tolerance, shareholder value, Silicon Valley, Silicon Valley ideology, smart grid, Steve Jobs, Steve Wozniak, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, total factor productivity, trickle-down economics, Washington Consensus, William Shockley: the traitorous eight

Furthermore, the ability to engage in innovation differs greatly between companies and is one of the main reasons that firms are so different from each other, and why it is nearly impossible to find firms distributed ‘normally’ around an ‘optimal-size firm’ (the ‘representative’ agent), a concept so dear to neoclassical microeconomic theory. Figure 3. Sources of funding for R&D in the USA in 2008 Source: National Science Foundation (2008). The high risk and serendipitous characteristic of the innovation process is one of the main reasons why profit-maximizing companies will invest less in basic research; they can receive greater and more immediate returns from applied research. Investment in basic research is a typical example of a ‘market failure’: an instance where the market alone would not produce enough basic research so the government must step in. This is why there are few people, on all sides of the political spectrum, who would not agree that it should be (and is) the State that tends to fund most basic research.


pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

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affirmative action, Asian financial crisis, bank run, banking crisis, bilateral investment treaty, borderless world, Bretton Woods, British Empire, capital controls, Carmen Reinhart, central bank independence, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, eurozone crisis, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, joint-stock company, Kenneth Rogoff, labour market flexibility, labour mobility, land reform, Long Term Capital Management, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, price stability, profit maximization, race to the bottom, regulatory arbitrage, savings glut, Silicon Valley, special drawing rights, special economic zone, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

They fund universities and research labs, and they consciously act to influence the direction of technological progress, pushing green technologies over others, for example. Technology is hardly a free-for-all.10 Ultimately, the analogy that Henry Martyn and his intellectual descendants employed is a useful one: free trade is indeed just like technical progress. But don’t let the rhetoric fool you. The fact that we intervene so heavily in the process of technological change should teach us something. If economics were only about profit maximization, it would be just another name for business administration. It is a social discipline, and society has other means of cost accounting besides market prices. But what exactly does that mean for the conduct of trade policy? What kind of rules should we apply, and how do we prevent ourselves from sliding into unbridled protectionism—from turning into modern-day equivalents of Ned Ludd’s followers during the Industrial Revolution, who opposed the spread of new textile technologies and destroyed mechanized looms?


pages: 294 words: 85,811

The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care by T. R. Reid

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Berlin Wall, British Empire, double helix, employer provided health coverage, fudge factor, medical malpractice, profit maximization, profit motive, single-payer health, South China Sea, the payments system

Somebody at Prudential had determined that the Japanese yen was a foreign currency; that violated the rules. My company later switched our health insurance to Aetna, which employed a similar dodge: The adjuster said she couldn’t pay our claims because she couldn’t call the doctor’s office to verify the bills. It seems that Aetna had a phone system for its adjusters that didn’t allow international calls. So naturally, all our claims had to be denied. The most maddening of all the profit-maximizing mechanisms in the U.S. health insurance industry is the practice known as “rescission,” a legal term that means “We’re canceling your coverage.” This occurs when an insured person who has been paying premiums for months or years has a serious accident or contracts a serious disease, which can mean serious bills for the insurance company to pay. At that point, the insurer’s Rescission Department digs through all the records, looking for a reason to cancel the sick person’s coverage.


pages: 324 words: 92,805

The Impulse Society: America in the Age of Instant Gratification by Paul Roberts

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, accounting loophole / creative accounting, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, asset allocation, business process, Cass Sunstein, centre right, choice architecture, collateralized debt obligation, collective bargaining, corporate governance, corporate social responsibility, crony capitalism, David Brooks, delayed gratification, double helix, factory automation, financial deregulation, financial innovation, full employment, game design, greed is good, If something cannot go on forever, it will stop, impulse control, income inequality, inflation targeting, invisible hand, job automation, Joseph Schumpeter, knowledge worker, late fees, Long Term Capital Management, loss aversion, low skilled workers, new economy, Nicholas Carr, obamacare, Occupy movement, oil shale / tar sands, performance metric, postindustrial economy, profit maximization, Report Card for America’s Infrastructure, reshoring, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, shareholder value, Silicon Valley, speech recognition, Steve Jobs, technoutopianism, the built environment, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, Walter Mischel, winner-take-all economy

But it is a failure rooted in a marketplace that is now so married to the psychology of the consumer that it mirrors that psychology’s least attractive attributes—not least the tendency, wired in by evolution, to prize immediate rewards and ignore future costs. You can see this have-it-now reflex in the way our entire consumer culture treats immediate gratification as if it were life’s primary goal, to be pursued as efficiently and unapologetically as possible. But you can also see it among the institutions in charge of the consumer economy, not least the institutions of business. We may always have been a profit-maximizing species, but there was a time when profit was regarded as inseparable from broader social goals and obligations. Today, those obligations are treated increasingly as “inefficiencies” to be minimized or eliminated entirely with cost-cutting technologies and lean strategies. This intensifying emphasis on the bottom line helps explain the unprecedented level of corporate earnings, which have more than recovered from the Great Recession.


pages: 326 words: 106,053

The Wisdom of Crowds by James Surowiecki

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AltaVista, Andrei Shleifer, asset allocation, Cass Sunstein, Daniel Kahneman / Amos Tversky, experimental economics, Frederick Winslow Taylor, George Akerlof, Howard Rheingold, I think there is a world market for maybe five computers, interchangeable parts, Jeff Bezos, Joseph Schumpeter, knowledge economy, lone genius, Long Term Capital Management, market bubble, market clearing, market design, moral hazard, new economy, offshore financial centre, Picturephone, prediction markets, profit maximization, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Toyota Production System, transaction costs, ultimatum game, Yogi Berra

In the end, though, economic arguments may not be enough to get the theaters to abandon the one-price-fits-all model—a model that the theaters themselves discard when it comes to the difference between showing a movie during the day and seeing one at night (matinees are cheaper than evening shows), but that they cling to when it comes to the difference between Finding Nemo and Gigli (for which they charge the same price). The theaters’ unwillingness to change is not a well-considered approach to profit maximization and more a testament to the power of custom and convention. Prices are uniform today because that’s how they were done back in the days when Hollywood made two different kinds of movies: top-of-the-line features and B movies. Those films played in different kinds of theaters at different times, and where people lived and when they saw a movie affected how much they paid. But tickets to all A-list movies cost the same (with the occasional exception, actually, of a big event film, like My Fair Lady, which played in theaters with reserved seating and cost more).


pages: 452 words: 110,488

The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead by David Callahan

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1960s counterculture, affirmative action, corporate governance, David Brooks, deindustrialization, East Village, forensic accounting, full employment, game design, greed is good, high batting average, housing crisis, illegal immigration, income inequality, job satisfaction, market fundamentalism, McMansion, microcredit, moral hazard, new economy, New Urbanism, offshore financial centre, oil shock, Plutocrats, plutocrats, postindustrial economy, profit maximization, profit motive, RAND corporation, Ray Oldenburg, rolodex, Ronald Reagan, shareholder value, Silicon Valley, Steve Jobs, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, Thorstein Veblen, War on Poverty, winner-take-all economy, World Values Survey, young professional

"Today's leading companies are expected not only to create wealth and produce superior goods and services but also to conduct themselves as 'moral actors'—as responsible agents that carry out their business within a moral framework ... society has endowed the corporation with a moral personality." Paine backs up this assertion with survey data about the changed views of employees, citizens, consumers, and even some investors. This new outlook is diametrically opposed to the trend within corporations over the past two decades, which has been to strip companies of moral purpose and focus solely on profit maximization. Ordinary people, it appears, aren't so keen on that trend. Paine is prodding corporate leaders to get in step with the public by pointing out ways that an investment in ethics pays. She emphasizes four points, all of which jibe with common sense: It helps companies to manage risk, especially the risk of a fatal scandal. It enhances the functioning of companies by building positive and cooperative values among employees.


pages: 372 words: 89,876

The Connected Company by Dave Gray, Thomas Vander Wal

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A Pattern Language, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, Atul Gawande, Berlin Wall, business process, call centre, Clayton Christensen, complexity theory, en.wikipedia.org, factory automation, Googley, index card, interchangeable parts, inventory management, Jeff Bezos, Kevin Kelly, loose coupling, market design, minimum viable product, more computing power than Apollo, profit maximization, Richard Florida, self-driving car, shareholder value, side project, Silicon Valley, skunkworks, software as a service, South of Market, San Francisco, Steve Jobs, Steven Levy, Stewart Brand, The Wealth of Nations by Adam Smith, Tony Hsieh, Toyota Production System, Vanguard fund, web application, WikiLeaks, Zipcar

Bad profits come at the expense of happy customers and long-term sustainable growth. Bad profits come from customers who are locked in, who feel trapped or abused. Bad profits come from nuisance fees, like airlines charging extra for checked baggage, car rental companies charging $10 per day for a GPS unit that cost them $100, or banks charging $15 to $25 for a bounced check that costs the bank less than $3. Bad profits maximize transaction value, but they destroy relationships in the process. And bad profits are addictive. Once you have started down the bad-profit road, it can be hard to turn back. In retail banking, up to a third of earnings comes from bad profits. In mobile and telecom, as much as 40% of profits come from relationship-destroying activities. Profits in and of themselves should never be a goal.


pages: 383 words: 81,118

Matchmakers: The New Economics of Multisided Platforms by David S. Evans, Richard Schmalensee

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Airbnb, big-box store, business process, cashless society, Deng Xiaoping, if you build it, they will come, Internet Archive, invention of movable type, invention of the printing press, invention of the telegraph, invention of the telephone, Jean Tirole, Lyft, M-Pesa, market friction, market microstructure, mobile money, multi-sided market, Network effects, Productivity paradox, profit maximization, purchasing power parity, ride hailing / ride sharing, sharing economy, Silicon Valley, Snapchat, Steve Jobs, Tim Cook: Apple, transaction costs, two-sided market, Uber for X, Victor Gruen, winner-take-all economy

This interdependency of demands results from indirect network effects. It is what distinguishes multisided platforms from single-sided firms. Traditional economics, including what is still taught in most economic textbooks and in most MBA courses, completely ignores indirect network effects and the consequences of interdependent demand. When economists account for indirect network effects in our theoretical models, the profit-maximizing price to the participants on one side could be less than the cost of providing an additional unit; it could be zero or, in other words, free; or it could be less than zero in the sense that the business actually pays the participant something when he or she uses the product. This theoretical result could have been just a curious possibility that we could use to try to keep students awake.


pages: 350 words: 103,988

Reinventing the Bazaar: A Natural History of Markets by John McMillan

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accounting loophole / creative accounting, Albert Einstein, Andrei Shleifer, Anton Chekhov, Asian financial crisis, congestion charging, corporate governance, crony capitalism, Dava Sobel, Deng Xiaoping, experimental economics, experimental subject, fear of failure, first-price auction, frictionless, frictionless market, George Akerlof, George Gilder, global village, Hernando de Soto, I think there is a world market for maybe five computers, income inequality, income per capita, informal economy, invisible hand, Isaac Newton, job-hopping, John Harrison: Longitude, John von Neumann, land reform, lone genius, manufacturing employment, market clearing, market design, market friction, market microstructure, means of production, Network effects, new economy, offshore financial centre, pez dispenser, pre–internet, price mechanism, profit maximization, profit motive, proxy bid, purchasing power parity, Ronald Coase, Ronald Reagan, sealed-bid auction, second-price auction, Silicon Valley, spectrum auction, Stewart Brand, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, War on Poverty, Xiaogang Anhui farmers, yield management

A study of the U.S. market for antiulcer drugs, in which four manufacturers competed, estimated that a 10 percent increase in price would have been followed by only a 7 percent decrease in demand.16 This means (if you do the arithmetic) that an increase in the price would elicit an increase in the total revenue earned, implying that had there been a single supplier, as in many other pharmaceutical markets, the price would have been set much higher. When demand is inelastic, textbook economics says, a profit-maximizing monopolist prices far above its production cost. Where the buyers are not price-sensitive, charging what the market will bear means setting prices very high. Patents, for the invaluable purpose they serve, come with a real cost. Since intellectual property laws are defined and enforced by the state, and since they represent an uneasy compromise between the needs of the innovator and the needs of the user, the rules of the pharmaceutical market are not cast in stone.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

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affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, New Urbanism, Plutocrats, plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

We believe that the unvarnished invisible hand story, although right in a fundamental way, is wrong at the level of detail and approximation that is necessary to explain what we need to know about macroeconomies. The old story about capitalism is correct: it gives us what we think we want. But capitalism does not act as its own policeman if we fail to watch over it and give it proper directions. It actively, competitively, seeks the most profit-maximizing opportunities. Capitalism will follow such opportunities wherever they lead us. That, of course, is relevant for the recent world financial crisis. The recession, deep as it has been, has been a tragedy for people around the world. They have been losing their jobs, their houses, and their dreams. But recessions do have at least one silver lining: the cut they take into economic life reveals how capitalist societies really work.


pages: 339 words: 95,988

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt, Stephen J. Dubner

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airport security, Broken windows theory, crack epidemic, desegregation, Exxon Valdez, feminist movement, George Akerlof, Joseph Schumpeter, mental accounting, moral hazard, More Guns, Less Crime, oil shale / tar sands, peak oil, pets.com, profit maximization, Richard Thaler, school choice, sensible shoes, Steven Pinker, Ted Kaczynski, The Chicago School, The Market for Lemons, Thorstein Veblen, War on Poverty

Levitt and then Dubner subsequently visited Feldman’s bagel operation near Washington, D.C. Their research led to an article that was substantially similar to the version of the story published here: Stephen J. Dubner and Steven D. Levitt, “What the Bagel Man Saw,” The New York Times Magazine, June 6, 2004. Levitt has also written an academic paper about Feldman’s bagel operation: “An Economist Sells Bagels: A Case Study in Profit Maximization,” National Bureau of Economic Research working paper, 2006. / 43 The “Beer on the Beach” study is discussed in Richard H. Thaler, “Mental Accounting and Consumer Choice,” Marketing Science 4 (Summer 1985), pp. 119–214; also worth reading is Richard H. Thaler, The Winner’s Curse: Paradoxes and Anomalies of Economic Life (New York: Free Press, 1992). 2. HOW IS THE KU KLUX KLAN LIKE A GROUP OF REAL-ESTATE AGENTS?


pages: 264 words: 115,489

Take the money and run: sovereign wealth funds and the demise of American prosperity by Eric Curt Anderson

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asset allocation, banking crisis, Bretton Woods, business continuity plan, business intelligence, business process, collective bargaining, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, diversified portfolio, floating exchange rates, housing crisis, index fund, Kenneth Rogoff, open economy, passive investing, profit maximization, profit motive, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, sovereign wealth fund, the market place, The Wealth of Nations by Adam Smith, too big to fail, Vanguard fund

Furthermore, he noted that sovereign wealth funds present the peril of subsidized private business deals in a manner that “would create an unfair advantage over U.S. or foreign corporations who must rely on the private credit markets for competing for the same acquisitions.” Finally, Eizenstat declared, “sovereign wealth funds may be political or intelligence-gathering tools out to harm the United States, rather than profit maximizers.”119 Like Undersecretary McCormick, Ambassador Eizenstat was relatively effusive about the potential that sovereign wealth funds could offer the United States. As with McCormick, Eizenstat reminded the Joint Economic Committee about how such investment “support[s] economic growth and job creation . . . help[s] keep industry competitive . . . grease[s] the wheels of the international economy by helping to right financial imbalances . . .


pages: 493 words: 139,845

Women Leaders at Work: Untold Tales of Women Achieving Their Ambitions by Elizabeth Ghaffari

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Albert Einstein, AltaVista, business process, cloud computing, Columbine, corporate governance, corporate social responsibility, dark matter, family office, Fellow of the Royal Society, financial independence, follow your passion, glass ceiling, Grace Hopper, high net worth, knowledge worker, Long Term Capital Management, performance metric, pink-collar, profit maximization, profit motive, recommendation engine, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley startup, Steve Ballmer, Steve Jobs, thinkpad, trickle-down economics, urban planning, women in the workforce, young professional

They’re seeing their raw resources and the rising costs associated with depletion of water or energy or clean air or even human talent—all with direct impacts on their business. They’re seeing the financial reward or punishment of not focusing on the environment and society. They’re seeing employee satisfaction or losing their employees—who today are less interested in the simple focus on profit maximization and more interested in the consequence for society or the environment. I think we are just at the cusp of having this younger generation of people who are now in management and leadership positions and who really want to use the power of corporations to make the world better. Ghaffari: You’ve also said elsewhere that your research is exploring the linkage between diversity and CSR—“using CSR as a hook to re-engage women with business as employees, consumers, and investors.”


pages: 790 words: 150,875

Civilization: The West and the Rest by Niall Ferguson

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Admiral Zheng, agricultural Revolution, Albert Einstein, Andrei Shleifer, Atahualpa, Ayatollah Khomeini, Berlin Wall, BRICs, British Empire, clean water, collective bargaining, colonial rule, conceptual framework, Copley Medal, corporate governance, credit crunch, David Ricardo: comparative advantage, Dean Kamen, delayed gratification, Deng Xiaoping, discovery of the americas, Dissolution of the Soviet Union, European colonialism, Fall of the Berlin Wall, Francisco Pizarro, full employment, Hans Lippershey, haute couture, Hernando de Soto, income inequality, invention of movable type, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, John Harrison: Longitude, joint-stock company, Joseph Schumpeter, land reform, land tenure, Louis Pasteur, Mahatma Gandhi, market bubble, Martin Wolf, means of production, megacity, Mikhail Gorbachev, new economy, probability theory / Blaise Pascal / Pierre de Fermat, profit maximization, purchasing power parity, quantitative easing, rent-seeking, reserve currency, road to serfdom, Ronald Reagan, savings glut, Scramble for Africa, Silicon Valley, South China Sea, sovereign wealth fund, special economic zone, spice trade, spinning jenny, Steve Jobs, Steven Pinker, The Great Moderation, the market place, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, total factor productivity, trade route, transaction costs, transatlantic slave trade, transatlantic slave trade, upwardly mobile, uranium enrichment, wage slave, Washington Consensus, women in the workforce, World Values Survey

It can be seen not just in forest fires but also in earthquakes and epidemics. Only the steepness of the line varies.11 The political and economic structures made by humans share many of the features of complex systems. Indeed, heterodox economists such as W. Brian Arthur have been arguing along these lines for decades, going far beyond Adam Smith’s notion of an ‘Invisible Hand’, seeming to guide multiple profit-maximizing individuals, or Friedrich von Hayek’s later critique of economic planning and demand management.12 To Arthur, a complex economy is characterized by the interaction of dispersed agents, a lack of any central control, multiple levels of organization, continual adaptation, incessant creation of new market niches and no general equilibrium. In contradiction to the core prediction of classical economics that competition causes diminishing returns, in a complex economy increasing returns are quite possible.


pages: 629 words: 142,393

The Future of the Internet: And How to Stop It by Jonathan Zittrain

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A Declaration of the Independence of Cyberspace, Amazon Mechanical Turk, Andy Kessler, barriers to entry, book scanning, Brewster Kahle, Burning Man, c2.com, call centre, Cass Sunstein, citizen journalism, Clayton Christensen, clean water, corporate governance, Daniel Kahneman / Amos Tversky, distributed generation, en.wikipedia.org, Firefox, game design, Hacker Ethic, Howard Rheingold, Hush-A-Phone, illegal immigration, index card, informal economy, Internet Archive, jimmy wales, license plate recognition, loose coupling, mail merge, national security letter, packet switching, Post-materialism, post-materialism, pre–internet, price discrimination, profit maximization, Ralph Nader, RFC: Request For Comment, RFID, Richard Stallman, Richard Thaler, risk tolerance, Robert X Cringely, SETI@home, Silicon Valley, Skype, slashdot, software patent, Steve Ballmer, Steve Jobs, Ted Nelson, Telecommunications Act of 1996, The Nature of the Firm, The Wisdom of Crowds, web application, wikimedia commons

A mainstream dominated by non-generative systems will harm innovation as well as some important individual freedoms and opportunities for self-expression. However, generative and non-generative models are not mutually exclusive. They can compete and intertwine within a single system. For example, a free operating system such as GNU/Linux can be locked within an information appliance like the TiVo, and classical, profit-maximizing firms like Red Hat and IBM can find it worthwhile to contribute to generative technologies like GNU/Linux.1 Neither model is necessarily superior to the other for all purposes. Moreover, even if they occupy a more minor role in the mainstream, non-generative technologies still have valuable roles to serve. But they develop best when they can draw on the advances of generative systems. Generativity instigates a pattern both within and beyond the technological lay ers of the information technology ecosystem.


pages: 503 words: 131,064

Liars and Outliers: How Security Holds Society Together by Bruce Schneier

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airport security, barriers to entry, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, corporate governance, crack epidemic, credit crunch, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, experimental economics, Fall of the Berlin Wall, financial deregulation, George Akerlof, hydraulic fracturing, impulse control, income inequality, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Nash: game theory, joint-stock company, Julian Assange, meta analysis, meta-analysis, microcredit, moral hazard, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, offshore financial centre, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, too big to fail, traffic fines, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K

Figuring out whether to cooperate or defect—and then what norm to follow—means taking all of this into account. I'm not trying to say that people use some conscious calculus to decide when to cooperate and when to defect. This sort of idea is the basis for the Rational Choice Theory of economics, which holds that people make trade-offs that are somehow optimal. Their decisions are “rational” not in the sense that they are based solely on reason or profit maximization, but in the much more narrow sense that they minimize costs and maximize benefits, taking risks into account. For example, a burglar would trade off the prospective benefits of robbing a home against the prospective risks and costs of getting caught. A homeowner would likewise trade off the benefits of a burglar alarm system against the costs—both in money and in inconvenience—of installing one.


pages: 320 words: 87,853

The Black Box Society: The Secret Algorithms That Control Money and Information by Frank Pasquale

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Affordable Care Act / Obamacare, algorithmic trading, Amazon Mechanical Turk, asset-backed security, Atul Gawande, bank run, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, cloud computing, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, Debian, don't be evil, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, Filter Bubble, financial innovation, Flash crash, full employment, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, informal economy, information retrieval, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, Julian Assange, Kevin Kelly, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, Mark Zuckerberg, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, precariat, profit maximization, profit motive, quantitative easing, race to the bottom, recommendation engine, regulatory arbitrage, risk-adjusted returns, search engine result page, shareholder value, Silicon Valley, Snapchat, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, WikiLeaks

Establishing webmaster forums that allow for that type of dialogue between the ranked and the ranker has, to this point at least, seemed like a fair and responsible business practice to Google itself.66 W AT C H I N G ( A N D I M P R O V I N G ) T H E W AT C H E R S 163 If Google thought of its rankings as a kind of virtual world— one whose members have essentially accepted (via terms of ser vice) the absolute sovereignty of the ruler of that territory— such a dialogical process would make little sense. In the digital feudalism of virtual worlds, no one has a right to question the unilateral decision of the ruler. Errors would only have meaning as lost profit opportunities, not as failures to run a competition properly. At its best, Google recognizes itself as a trusted adviser to its users rather than as a purely profit-maximizing entity. And Google is not alone in exercising power over the Internet. Apple, Facebook, Twitter, and Amazon can also rely on opaque technologies, sometimes leaving users in the dark as to exactly why any given app, story, or book is featured at a particular time. We should expect any company aspiring to order vast amounts of information to try to keep its methods secret, if only to reduce controversy and foil copycat competitors.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund

It can even be argued that the Department of Defense, through its finance of research into integrated circuits during the 1950s and ’60s, was primarily responsible for the rise of the personal computer industry. The Pentagon’s Republican defenders would never admit it, but one of its main contributions to the strength and well-being of the United States has been in providing it with a surrogate industrial policy. Freed from the threat of free riders and the imperatives of short-term profit maximization, scientists and companies working for the U.S. military have created many of the technologies on which the country’s prosperity is now based. Whether by design or accident, the military-industrial complex, which President Eisenhower warned his countrymen about half a century ago, has arguably done more to encourage scientific research than the entire private sector of the U.S. economy. Although it is more than a half century old, Bator’s taxonomy of market failures remains useful.


pages: 494 words: 142,285

The Future of Ideas: The Fate of the Commons in a Connected World by Lawrence Lessig

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AltaVista, Andy Kessler, barriers to entry, business process, Cass Sunstein, computer age, dark matter, disintermediation, Erik Brynjolfsson, George Gilder, Hacker Ethic, Hedy Lamarr / George Antheil, Howard Rheingold, Hush-A-Phone, HyperCard, hypertext link, Innovator's Dilemma, invention of hypertext, inventory management, invisible hand, Jean Tirole, Jeff Bezos, Joseph Schumpeter, linked data, Menlo Park, Network effects, new economy, packet switching, price mechanism, profit maximization, RAND corporation, rent control, rent-seeking, RFC: Request For Comment, Richard Stallman, Richard Thaler, Ronald Coase, Search for Extraterrestrial Intelligence, SETI@home, Silicon Valley, smart grid, software patent, spectrum auction, Steve Crocker, Steven Levy, Stewart Brand, Ted Nelson, Telecommunications Act of 1996, The Chicago School, transaction costs

,” Journal of Law & Economics 41 (1998): 529; Hazlett, “Spectrum Flash Dance: Eli Noam's Proposal for 'Open Access' to Radio Waves,” Journal of Law & Economics 41 (1998): 805; Hazlett and Sosa, “Was the Fairness Doctrine a 'Chilling Effect'? Evidence from the Postderegulation Radio Market,” Journal of Legal Studies 26 (1997): 279; Hazlett, “The Rationality of U.S. Regulation of the Broadcast Spectrum,” Journal of Law & Economics 23 (1990): 133. 17 See, e.g., Hazlett, “Spectrum Flash Dance,” 816. (“Profit maximization will force competitive band managers to devise better technical means to increase wireless communications traffic.”) 18 The source of the skepticism is traced, as Yochai Benkler describes, to Claude E. Shannon, “Communication in the Presence of Noise,” Proceedings of the IRE 37 (1949): 10, and Claude E. Shannon, “A Mathematical Theory of Communication,” Bell System Technology Journal 27 (1948): 379 and 623 (two-part publication).


pages: 422 words: 131,666

Life Inc.: How the World Became a Corporation and How to Take It Back by Douglas Rushkoff

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affirmative action, Amazon Mechanical Turk, banks create money, big-box store, Bretton Woods, car-free, colonial exploitation, Community Supported Agriculture, complexity theory, computer age, corporate governance, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, death of newspapers, don't be evil, Donald Trump, double entry bookkeeping, easy for humans, difficult for computers, financial innovation, Firefox, full employment, global village, Google Earth, greed is good, Howard Rheingold, income per capita, invention of the printing press, invisible hand, Jane Jacobs, John Nash: game theory, joint-stock company, Kevin Kelly, laissez-faire capitalism, loss aversion, market bubble, market design, Marshall McLuhan, Milgram experiment, moral hazard, mutually assured destruction, Naomi Klein, new economy, New Urbanism, Norbert Wiener, peak oil, place-making, placebo effect, Ponzi scheme, price mechanism, price stability, principal–agent problem, private military company, profit maximization, profit motive, race to the bottom, RAND corporation, rent-seeking, RFID, road to serfdom, Ronald Reagan, short selling, Silicon Valley, Simon Kuznets, social software, Steve Jobs, Telecommunications Act of 1996, telemarketer, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trade route, trickle-down economics, union organizing, urban decay, urban planning, urban renewal, Vannevar Bush, Victor Gruen, white flight, working poor, Works Progress Administration, Y2K, young professional

The “selves” we so laboriously constructed and revised over the past four hundred years—though decidedly artificial—seemed real enough to twentieth-century economists, especially as they attempted to apply the scientific model to the softer social sciences. At least economics, like physics, could be expressed in numbers. Unlike Freud’s unconscious ids, economic actors could be tracked on a balance sheet. As a result, however, the entire theoretical framework for economics was built, at least initially, around the assumption of a profit-maximizing individual. It was a leap, but one supported by the decade’s leading psychologists, and one that provided the leaders of the free world with a social model capable of confronting the financial and ideological challenges of managing the postwar industrial economy. While the Soviets struggled to build a centralized bureaucracy that could administrate the needs of all people, free economies turned to the market.


pages: 651 words: 161,270

Global Spin: The Corporate Assault on Environmentalism by Sharon Beder

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battle of ideas, business climate, centre right, clean water, corporate governance, Exxon Valdez, Gary Taubes, global village, invisible hand, laissez-faire capitalism, oil shale / tar sands, price mechanism, profit maximization, Ralph Nader, RAND corporation, Ronald Reagan, shareholder value, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, the market place, The Wealth of Nations by Adam Smith, urban planning

Foreword The book you are holding is the first I have come across to deal with the real environmental crisis—the one that consists not of decaying eco-systems, ozone depletion and global warming, but of the corporate domination of what we are able to hear, see, know and think; the crisis that lies in the fact that the modern mass media system is not a medium for the ‘free’ discussion of ideas and viewpoints, but is deeply embedded in, and dependent on, the wider corporate status quo, and on the related capacity of corporate communications and economic power to boost facts, ideas and political choices that are conducive to profit maximization, and to stifle those that are not. In this situation, specific environmental issues can hardly be considered the central—let alone the sole—problem for environmentalists, given that corporate domination makes the raising of public awareness and concern for these issues all but impossible. After all, it hardly matters whether a person is bleeding to death, poisoned, or dying from hypothermia, if some kind of obstacle is preventing all medical aid from reaching the patient.


pages: 497 words: 130,817

Pedigree: How Elite Students Get Elite Jobs by Lauren A. Rivera

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affirmative action, availability heuristic, barriers to entry, Donald Trump, fundamental attribution error, glass ceiling, income inequality, job satisfaction, knowledge economy, meta analysis, meta-analysis, new economy, performance metric, profit maximization, profit motive, school choice, Silicon Valley, Silicon Valley startup, The Wisdom of Crowds, unpaid internship, women in the workforce, young professional

They compared the top salaries offered at EPS firms to those of the lowest-paying jobs, perhaps because these are the distinctions commonly made by the staff of campus career services offices and circulated in student lore.15 For many students, the choice seemed to be one between living large—earning huge salaries and pursuing a fast-paced, glamorous lifestyle—or going broke—earning tiny salaries and eking out a dull existence. Thus, the decision to choose Wall Street over Main Street was not a purely instrumental one based solely on profit maximization. It was also a social and cultural choice. Students saw themselves as poised at a crossroad, choosing between the upper and middle ranks of the American class structure. Many wanted to ensure a spot in the former. Large numbers of new graduates from elite institutions cluster in major metropolitan centers such as New York, Boston, San Francisco, Chicago, and Washington, DC. In part, they are drawn by the excitement, amenities, and social opportunities that such cities offer; in addition, these locations are attractive because they are where many friends and classmates (who also have accepted positions at professional service firms in these cities) are heading.16 When explaining why they found EPS jobs appealing, the students I interviewed often cited the desire to live in “big cities” with vibrant social scenes, places where “the action” is.


pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

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bank run, banking crisis, barriers to entry, Bernie Madoff, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial innovation, full employment, fundamental attribution error, George Akerlof, income inequality, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, Steven Pinker, telemarketer, The Market for Lemons, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, Zipcar

The presence of people who will respond in this way to nancial opportunities is part of the success story—poorly understood by most of the public—of modern financial institutions. For nancial theorists, it is often di cult to comprehend the real reasons we have the nancial institutions that we do and the reasons that they contribute so well to a good society. Many theorists have tried to represent people as merely pro t maximizers, perfectly sel sh and perfectly rational about it. But people really do care about their own self-esteem, and profit maximization is at best only a part of that self-esteem. Moral Purpose It might appear that the sleaziness constantly pursued by the regulators is a real taint on the entire profession of nance. But in fact the practice of nance does not universally incline its practitioners to such behavior. It also seems to reward people with a certain kind of moral purpose—one that may be visible to outsiders only intermittently.


pages: 507 words: 145,878

Predator's Ball by Connie Bruck

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diversified portfolio, financial independence, fixed income, mortgage debt, offshore financial centre, paper trading, profit maximization, The Predators' Ball, yield management, Yogi Berra, zero-coupon bond

These are some of Scherer’s findings, from his case studies and statistical research: • Contrary to the Council’s view that merger-makers sought companies where management had failed, most in fact targeted well-managed entities (such as National Can). What they were generally attracted by was not sick companies or slipshod management but undervalued assets. • Takeovers by firms with no managerial expertise in the acquired company’s line of business tended to impair, not improve, efficiency. • Takeovers frequently led to short-run profit-maximizing strategies, such as the “cash cow” strategy under which “a business is starved of R&D, equipment modernization, and advertising funds, and/or prices are set at high levels inviting competitor inroads, leaving in the end a depleted, non-competitive shell.” • On average, acquisitions were less profitable for the acquiring firms than the maintenance of existing businesses and the internal development of new business lines


pages: 572 words: 134,335

The Making of an Atlantic Ruling Class by Kees Van der Pijl

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anti-communist, banking crisis, Berlin Wall, Boycotts of Israel, Bretton Woods, British Empire, capital controls, collective bargaining, colonial rule, cuban missile crisis, deindustrialization, deskilling, diversified portfolio, European colonialism, floating exchange rates, full employment, imperial preference, Joseph Schumpeter, means of production, North Sea oil, Plutocrats, plutocrats, profit maximization, RAND corporation, strikebreaker, trade liberalization, trade route, union organizing, uranium enrichment, urban renewal, War on Poverty

Baker, ‘Trade Union internationalism and the supranational state’, Capital & Class 5 (Summer 1978), p. 97; cf. Cox, p. 206. 78. Etty and Tudyka, pp. 386–387. 79. K. Busch, Die multinationalen Konzerne. Zur Analyse der Weltmarktbewegung des Kapitals, Frankfurt 1974, pp. 136–137; Ch. Layton, L’Europe et les investissements américains, Paris 1968 (1966), p. 41. 80. Calculated from Kragenau, pp. 94–95, table A.1.7. 81. J.R. Hiller, ‘Long-Run Profit Maximization? An Empirical Test’, Kyklos, vol. 31 no. 3 (1978), p. 484. 82. H. Levy and M. Sarnat, ‘Devaluation Risk, Portfolio Balance and International Capital Flows’, Konjunkturpolitik, vol. 22 no. 5 (1976), p. 314. 83. Fortune, March 1961, p. 88. 84. Fortune, September 1957, p. 181; January 1958, p. 125; July 1962, pp. 149–150. 85. Fortune, July 1962, p. 264. 86. Layton, pp. 230, 235. 87. Perlo, p. 191. 88.


pages: 436 words: 123,488

Overdosed America: The Broken Promise of American Medicine by John Abramson

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germ theory of disease, Louis Pasteur, medical malpractice, medical residency, meta analysis, meta-analysis, p-value, placebo effect, profit maximization, profit motive, RAND corporation, randomized controlled trial, stem cell, Thomas Kuhn: the structure of scientific revolutions

If we are to begin to solve the crises in American medicine, we first need to stop pretending that the current organization of the production and dissemination of medical knowledge is serving the public’s interest. The ideal of “well-ordered science” (a phrase coined by philosopher Philip Kitcher in his book Science, Truth, and Democracy) is often replaced in commercially sponsored medical research by the ideal of profit-maximizing science. Dr. Andrew Bodnar, a senior vice president at Bristol-Myers Squibb, summarized this issue when he told the New York Times, “In a science-driven organization, the notion of marketing versus science is really a false dichotomy.” Disciplined science performed by impartial researchers and openly shared with professional colleagues and the public is often replaced with games of cat and mouse in which corporate sponsors do their best to hide both the ways that their scientific results have been spun, and the results that can’t be spun.

Investment: A History by Norton Reamer, Jesse Downing

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Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, Brownian motion, buttonwood tree, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, moral hazard, mortgage debt, Network effects, new economy, Nick Leeson, Own Your Own Home, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

Their investment mandate was fairly broad, initially being confined New Clients and New Investments 135 to government bonds but later including mortgages, utility debt, and even the common equity of large corporations.42 These savings banks tended to be domiciled in the northeastern United States, where the demographics of a large swath of wage earners employed in industrial jobs were an appropriate match for their intended clients. Developing alongside mutual savings banks were the commercial banks, which were focused predominantly on making loans for profit maximization and had a strong foothold on the frontier portions of the country. The commercial banks required lower capitalization, and their governance structures were not as sophisticated as those of mutual savings banks, where prominent and successful trustees would oversee the soundness of the bank. Therefore, commercial banks tended to make more risky and potentially more rewarding loans, which meant that although they facilitated growth in many areas, they were less stable than their mutual savings banks counterparts.

How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

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Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, Brownian motion, business process, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, discounted cash flows, disintermediation, diversification, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, full employment, George Akerlof, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, John von Neumann, linear programming, Loma Prieta earthquake, Long Term Capital Management, margin call, market friction, market microstructure, martingale, merger arbitrage, Nick Leeson, P = NP, pattern recognition, pensions crisis, performance metric, prediction markets, profit maximization, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Richard Feynman, Richard Feynman, Richard Stallman, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional

That was perhaps a good thing, since the nature of my high school was such that no further science courses were offered, anyway. Fortunately, both my high school and college offered a reasonable collection of math courses, completely liberated from physics and engineering as the default applications. Thus, my first encounter with applied calculus was in a high school business class, where we were trying to find the profit-maximizing quantity that a monopolist would offer to the market. My first exposure to vector operations involved the inner product of a list of prices and quantities. And so on . . . All in all, not a bad starting point for what I would be doing later, but I have found that whenever people try to illustrate mathematical concepts with “helpful” examples from the physical world around us, I generally do better by politely ignoring them and narrowly sticking to the concepts themselves or trying to come up with my own intuition rooted in the world of money.

Making Globalization Work by Joseph E. Stiglitz

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affirmative action, Andrei Shleifer, Asian financial crisis, banking crisis, barriers to entry, Berlin Wall, business process, capital controls, central bank independence, corporate governance, corporate social responsibility, currency manipulation / currency intervention, Doha Development Round, Exxon Valdez, Fall of the Berlin Wall, Firefox, full employment, Gini coefficient, global reserve currency, happiness index / gross national happiness, illegal immigration, income inequality, income per capita, incomplete markets, Indoor air pollution, informal economy, inventory management, invisible hand, Kenneth Rogoff, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, microcredit, moral hazard, North Sea oil, offshore financial centre, oil rush, open borders, open economy, price stability, profit maximization, purchasing power parity, quantitative trading / quantitative finance, race to the bottom, reserve currency, rising living standards, risk tolerance, Silicon Valley, special drawing rights, statistical model, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, trickle-down economics, union organizing, Washington Consensus

As we shall explain in chapter 3, the underlying economic forces for globalization too may change over time, as the composition of production and trade changes. 10. These are views already incorporated into corporate governance in many European countries. The views expressed here are, I should note, as reasonable as they may seem to the laymen, highly controversial ___ particularly within American academia. There are some extreme conditions under which one can show value(or profit-) maximizing behavior of firms lead to economic efficiency, and it is upon these extreme models that much of the economics literature focuses. But so long as there is imperfect information or an incomplete set of markets, then maximizing the well-being of shareholders does not lead either to economic efficiency or general well-being. See, for instance, Sanford J. Grossman and Joseph E. Stiglitz, "On Value Maximization and Alternative Objectives of the Firm," Journal of Finance, vol. 32, no. 2 (May 1977), pp. 389-402. 6. 7. 8. 9.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

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bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, investor state dispute settlement, invisible hand, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

This chapter has argued that the benefits are at best questionable, and if that is the case, the answer to whether the benefits of the euro are worth the costs is unambiguous. VALUES: SOCIAL JUSTICE AND THE IMPORTANCE OF COLLECTIVE ACTION Some of the privatizations, such as those involving basic services, raise questions of values: a society may feel that there is a basic right to minimal access to water or electricity, rights and values that might be undermined by a profit-maximizing monopolist. Labor rights and worker protections illustrate other aspects of the struggle over values. Some have questioned whether the programs that have been imposed on the countries in crisis have gone beyond those designed to increase economic performance. Not content with an approximately one-fifth decline in labor costs in Greece,24 it appears that the Troika wants to weaken workers’ bargaining rights, which would lead to still lower wages.


pages: 424 words: 121,425

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran

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access to a mobile phone, affirmative action, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, cashless society, credit crunch, David Graeber, disintermediation, diversification, failed state, fiat currency, financial innovation, financial intermediation, Goldman Sachs: Vampire Squid, housing crisis, income inequality, Internet Archive, invisible hand, Kickstarter, M-Pesa, McMansion, microcredit, mobile money, moral hazard, mortgage debt, new economy, Own Your Own Home, payday loans, peer-to-peer lending, price discrimination, profit maximization, profit motive, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, the built environment, the payments system, too big to fail, trade route, transaction costs, unbanked and underbanked, underbanked, union organizing, white flight, working poor

Many CDBA supporters confidently assumed that these institutions would not only serve the poor but lend profitably and achieve returns on investments.39 Former Treasury secretary Lawrence Summers envisioned “a successful CDFI [as] perhaps best compared to a niche venture capital firm that deploys its superior knowledge of an emerging market niche to invest and manage risk better than other investors.”40 Summers labeled these banks “market scouts” that would seek out profits in overlooked markets.41 Donald Lash, an early CDBA advocate, claimed that competition in banking would open the way for CDFIs to expand in response to market needs. Lash gave examples of banks whose lending in underserved areas was “surprisingly profitable.”42 The CDFI fund envisioned that modest funds and incentives could induce profit-maximizing institutions to meet the needs of struggling communities without structurally changing the banking framework. Although modeled after ShoreBank’s bold change-the-world mission, the CDBA was not intended to change the business of banking to meet the needs of the poor but to fit the needs of the poor into the business of banking. Unlike the Progressive and the Populist movements that brought about the credit union and the savings and loan, the CDBA movement was rooted in the market ethos that defines modern banking.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

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Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, haute couture, illegal immigration, income inequality, invention of the telephone, invention of the wheel, invisible hand, John Nash: game theory, John von Neumann, Kevin Kelly, knowledge economy, labour market flexibility, late capitalism, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Death and Life of Great American Cities, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Washington Consensus, women in the workforce, yield curve, yield management

Speculators make money only if they buy cheap and sell dear; only speculators who make money will stay in the market for long. So prices will fluctuate less in a market with active speculation than without. 21 Yet speculation in the stock market bubble was obviously destabilizing, driving prices to fantastic levels from which they subsequently collapsed. If all traders were perfectly rational (consistent, Culture and Prosperity { 245} self-interested, profit-maximizing, well-informed), there would be no room for speculation, profitable or unprofitable. To give Friedman's argument a chance of being true, there needs to be a little bit of irrationality-noise trading-but not too much. Noise traders lose money to clever speculators. But if noise traders predominate, then speculators who base their trading on fundamental values risk oblivion as noise traders sell paper to each other at ever higher prices.


pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

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algorithmic trading, asset-backed security, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, collateralized debt obligation, computer age, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, large denomination, Long Term Capital Management, market bubble, Martin Wolf, Menlo Park, mobile money, Monroe Doctrine, moral hazard, mortgage debt, new economy, oil shale / tar sands, oil shock, peak oil, Plutocrats, plutocrats, Ponzi scheme, profit maximization, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, The Chicago School, Thomas Malthus, too big to fail, trade route

But during the last decade, they also accumulated huge quantities of dollars—some held as central bank reserves, others banked day to day as oil revenues, and still others flexing their muscles in so-called sovereign wealth funds. The latter, now much in global headlines, are the investment units—think of them as government-owned hedge fund equivalents, but bigger—deployed by countries that hold large reserves of currency (China, Saudi Arabia, Kuwait, Singapore, Abu Dhabi, and others). Their task is to pursue profit-maximizing financial strategies and undertake foreign direct investment and share-holding beyond the proper function of central banks. Many of these dollar holdings can be modified or redeployed quickly. Central banks in Beijing, Dubai, and Damascus can decide to further diversify their reserves, selling off a percentage of dollars in order to reinvest in euros, yen, or a basket of currencies. Sovereign wealth funds, some given wide discretion by their governments, can buy exotic securities, bid to purchase foreign companies, or speculate for or against foreign currencies.

The End of Power: From Boardrooms to Battlefields and Churches to States, Why Being in Charge Isn’t What It Used to Be by Moises Naim

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additive manufacturing, barriers to entry, Berlin Wall, bilateral investment treaty, business process, business process outsourcing, call centre, citizen journalism, Clayton Christensen, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, conceptual framework, corporate governance, crony capitalism, deskilling, disintermediation, don't be evil, failed state, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, illegal immigration, immigration reform, income inequality, income per capita, intermodal, invisible hand, job-hopping, Joseph Schumpeter, Julian Assange, Kickstarter, Martin Wolf, megacity, Naomi Klein, Nate Silver, new economy, Northern Rock, Occupy movement, open borders, open economy, Peace of Westphalia, Plutocrats, plutocrats, price mechanism, price stability, private military company, profit maximization, Ronald Coase, Ronald Reagan, Silicon Valley, Skype, Steve Jobs, The Nature of the Firm, Thomas Malthus, too big to fail, trade route, transaction costs, Washington Consensus, WikiLeaks, World Values Survey

Weber’s central message was that without a reliable, well-functioning organization, or, to use his term, without a bureaucracy, power could not be effectively wielded. If Weber helped us understand the rationale and workings of bureaucracy in the exercise of power, the British economist Ronald Coase helped us understand the economic advantages that they conferred on companies. In 1937, Coase produced a conceptual breakthrough that explained why large organizations were not just rational according to a certain theory of profit-maximizing behavior but, indeed, often proved more efficient than the alternatives. It was no coincidence that, while still an undergraduate, in 1931–1932, Coase carried out the research for his seminal paper, “The Nature of the Firm,” in the United States. Earlier he had flirted with socialism, and he became intrigued by the similarities in organization between American and Soviet firms and, in particular, by the question of why large industry, where power was highly centralized, had emerged on both sides of the ideological divide.20 46 Coase’s explanation—which would help earn him the Nobel Prize in economics decades later—was both simple and revolutionary.


pages: 425 words: 122,223

Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein

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Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, buy low sell high, capital asset pricing model, debt deflation, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, full employment, implied volatility, index arbitrage, index fund, interest rate swap, invisible hand, John von Neumann, Joseph Schumpeter, law of one price, linear programming, Louis Bachelier, mandelbrot fractal, martingale, means of production, new economy, New Journalism, profit maximization, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, stochastic process, the market place, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, transfer pricing, zero-coupon bond

See also Capital Asset Pricing Model; Random price fluctuations; specific types of securities arbitrage Black/Scholes formula of: see Black/Scholes formula earnings ratio efficient markets and future of growth stocks information and interest rates and intrinsic value and manipulation risk and security analysis and shadow transfer trends value differentiation zero downside limit on “Price Movements in Speculative Markets: Trends or Random Walks” (Alexander) “Pricing of Options and Corporate Liabilities, The” (Black/Scholes) Probability theory Procter & Gamble Profit maximization Program trading Prospective yield “Proposal for a Smog Tax, A” (Sharpe) Puts: see Options Railroads RAND Random Character of Stock Prices, The (Cootner) “Random Difference Series for Use in the Analysis of Time Series, A” (Working) Random price fluctuations/random walks selection of securities and “Random Walks in Stock Market Prices” (Fama) Rational Expectations Hypothesis “Rational Theory of Warrant Pricing” (Samuelson) Regulation of markets Return analysis: see Risk/return ratios Review of Economics and Statistics Review of Economic Studies, The “RHM Warrant and Low-Price Stock Survey, The” Risk arbitrage calculations diversification and dominant expected return and minimalization portfolio premium return ratios Rosenberg’s model stock prices and of stocks vs. bonds systematic (beta) trade-offs valuation of assets and “Risk and the Evaluation of Pension Fund Performance” (Fama) Risk-free assets Rosenberg Institutional Equity Management (RIEM) “Safety First and the Holding of Assets” (Roy) Samsonite Savings rates Scott Paper Securities analysis Securities and Exchange Commission Security Analysis (Graham/Dodd) Security selection Separation Theorem Shadow prices “Simplified Model for Portfolio Analysis, A” (Sharpe) Singer Manufacturing Company Single-index model Sloan School of Management Standard & Poor’s 500 index “State of the Art in Our Profession, The” (Vertin) Stock(s) cash ratios common expected return on growth income international legal restrictions on market value variance volatility Stock market (general discussion) Black Monday (October, 1987, crash) “Stock Market ‘Patterns’ and Financial Analysis” (Roberts) Supply and demand theory Swaps Tactical asset allocation theory Tampax Taxes.


pages: 331 words: 60,536

The Sovereign Individual: How to Survive and Thrive During the Collapse of the Welfare State by James Dale Davidson, Rees Mogg

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affirmative action, agricultural Revolution, bank run, barriers to entry, Berlin Wall, borderless world, British Empire, California gold rush, clean water, colonial rule, Columbine, compound rate of return, Danny Hillis, debt deflation, ending welfare as we know it, epigenetics, Fall of the Berlin Wall, falling living standards, feminist movement, financial independence, Francis Fukuyama: the end of history, full employment, George Gilder, Hernando de Soto, illegal immigration, income inequality, informal economy, information retrieval, Isaac Newton, Kevin Kelly, market clearing, Martin Wolf, Menlo Park, money: store of value / unit of account / medium of exchange, new economy, New Urbanism, offshore financial centre, Parkinson's law, pattern recognition, phenotype, price mechanism, profit maximization, rent-seeking, reserve currency, road to serfdom, Ronald Coase, school vouchers, seigniorage, Silicon Valley, spice trade, statistical model, telepresence, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, trade route, transaction costs, Turing machine, union organizing, very high income

Some mutual funds operating in the United States have averaged annual gains of more than 10 percent for more than half a century. If you could do no better than that and you are among the top 1 percent of American earners, then your net worth is reduced by more than $33 million just by the income tax you pay in excess of $45,000 annually. Compared to a jurisdiction without income tax, the loss is $55 million. $55 Rather Than $55 Million If the profit-maximizing assumptions of economists are correct, as we believe they generally are, one of the more certain predictions you could make is that most people would act to salvage $55 million if they could. That is our prediction. When the black magic of compound interest becomes more clear in the minds of successful people in high-tax countries, they will begin to shop in earnest among jurisdictions, just as they now shop for automobiles or compare rates on insurance policies.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, invisible hand, John Harrison: Longitude, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Mark Zuckerberg, market bubble, market fundamentalism, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, obamacare, offshore financial centre, paper trading, patent troll, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, women in the workforce

It deployed a strategy known as FUD (fear, uncertainty, and doubt), creating anxiety about compatibility among users by programming error messages that would randomly appear if Netscape was installed on a Windows computer. The company also did not provide the disclosures necessary for full compatibility as new versions of Windows were developed. And most cleverly, it offered Internet Explorer at a zero price—free, bundled in as part of its operating system. It’s hard to compete with a zero price. Netscape was doomed.36 It was obvious that selling something at a zero price was not a profit-maximizing strategy—in the short run. But Microsoft had a vision for the long run: the maintenance of its monopoly. For that, it was willing to make short-run sacrifices. It succeeded, but so blatant were its methods that courts and tribunals throughout the world charged it with engaging in anticompetitive practices. And yet, in the end, Microsoft won—for it realized that in a network economy, a monopoly position, once attained, is hard to break.


pages: 540 words: 168,921

The Relentless Revolution: A History of Capitalism by Joyce Appleby

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1919 Motor Transport Corps convoy, agricultural Revolution, anti-communist, Asian financial crisis, asset-backed security, Bartolomé de las Casas, Bernie Madoff, Bretton Woods, BRICs, British Empire, call centre, collateralized debt obligation, collective bargaining, Columbian Exchange, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, Doha Development Round, double entry bookkeeping, epigenetics, equal pay for equal work, European colonialism, facts on the ground, failed state, Firefox, Ford paid five dollars a day, Francisco Pizarro, Frederick Winslow Taylor, full employment, Gordon Gekko, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Hernando de Soto, hiring and firing, illegal immigration, informal economy, interchangeable parts, interest rate swap, invention of movable type, invention of the printing press, invention of the steam engine, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, Jeff Bezos, joint-stock company, Joseph Schumpeter, knowledge economy, land reform, Livingstone, I presume, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, moral hazard, Ponzi scheme, profit maximization, profit motive, race to the bottom, Ralph Nader, refrigerator car, Ronald Reagan, Scramble for Africa, Silicon Valley, Silicon Valley startup, South China Sea, South Sea Bubble, special economic zone, spice trade, spinning jenny, strikebreaker, the built environment, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thorstein Veblen, total factor productivity, trade route, transatlantic slave trade, transatlantic slave trade, transcontinental railway, union organizing, Unsafe at Any Speed, Upton Sinclair, urban renewal, War on Poverty, working poor, Works Progress Administration, Yogi Berra, Yom Kippur War

This turned out to be a temporary labor force, for the Tupi refused to farm. They fled into the recesses of the forests or killed themselves when the Portuguese attempted to coerce them to work. It was more plunder than production, as one scholar commented, and when it was over, the Portuguese in Brazil turned to the sugar production that they had mastered closer to home.7 Breaches on the Spanish Lake Nowhere is the profit-maximizing imperative of capitalism more in evidence than in the sugar sweep in Europe’s New World colonies. Columbus carried sugarcane slips to the Caribbean on his second trip. Spanish authorities back home encouraged their cultivation, but the colonists themselves were more interested in precious metals. It was left to the Portuguese in Brazil to demonstrate the profits to be boiled out of sugarcane once you secured workers to do the drudgery.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, merger arbitrage, Mikhail Gorbachev, Milgram experiment, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Naomi Klein, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, pets.com, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond

Facing infrastructure needs, governments sought to alleviate public squalor by appealing to private profits, with indifferent results. Locust Plagues At the 2007 Super Return annual industry conference, the financier Henry Kravis argued that private equity “leads not only to value creation, but also to economic and social benefits, for example, increases in employment, innovation, and research and development.”5 The reality was short-run profit-maximizing strategies where businesses were “starved of R&D, equipment modernization and advertising funds and/or prices are set at high levels inviting competitor inroads, leaving in the end a depleted non-competitive shell.”6 Under Terra Firma, EMI was not interested in developing new artists but exploiting its existing libraries. Investors in Qantas and EMI openly indicated their desire for an early exit.


pages: 678 words: 216,204

The Wealth of Networks: How Social Production Transforms Markets and Freedom by Yochai Benkler

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affirmative action, barriers to entry, bioinformatics, Brownian motion, call centre, Cass Sunstein, centre right, clean water, dark matter, desegregation, East Village, fear of failure, Firefox, game design, George Gilder, hiring and firing, Howard Rheingold, informal economy, invention of radio, Isaac Newton, iterative process, Jean Tirole, jimmy wales, market bubble, market clearing, Marshall McLuhan, New Journalism, optical character recognition, pattern recognition, pre–internet, price discrimination, profit maximization, profit motive, random walk, recommendation engine, regulatory arbitrage, rent-seeking, RFID, Richard Stallman, Ronald Coase, Search for Extraterrestrial Intelligence, SETI@home, shareholder value, Silicon Valley, Skype, slashdot, social software, software patent, spectrum auction, technoutopianism, The Fortune at the Bottom of the Pyramid, The Nature of the Firm, transaction costs

A new channel that is added will more often try to take a bite out of a large pie represented by some lowest-commondenominator audience segment than to try to serve a new niche market. Only after a relatively high threshold number of outlets are reached do advertiser-supported media have sufficient reason to try to capture much smaller and higher-intensity preference clusters--what people are really interested in. The upshot is that if all storytellers in society are profit maximizing and operate in a market, the number of storytellers and venues matters tremendously for the diversity of stories told in a society. It is quite possible to have very active market competition in how well the same narrow set of stories are told, as opposed to what stories are told, even though there are many people who would rather hear different stories altogether, but who are in clusters too small, too poor, or too uncoordinated to persuade the storytellers to change their stories rather than their props. 311 The networked information economy is departing from the industrial information economy along two dimensions that suggest a radical increase in the number of storytellers and the qualitative diversity of stories told.


pages: 585 words: 165,304

Trust: The Social Virtue and the Creation of Prosperity by Francis Fukuyama

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barriers to entry, Berlin Wall, blue-collar work, business climate, capital controls, collective bargaining, corporate governance, deindustrialization, Deng Xiaoping, deskilling, double entry bookkeeping, equal pay for equal work, European colonialism, Francis Fukuyama: the end of history, Frederick Winslow Taylor, full employment, George Gilder, glass ceiling, global village, hiring and firing, industrial robot, Jane Jacobs, job satisfaction, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, labour market flexibility, labour mobility, land reform, low skilled workers, manufacturing employment, mittelstand, price mechanism, profit maximization, RAND corporation, rent-seeking, Ronald Coase, Silicon Valley, Steve Jobs, Steve Wozniak, The Death and Life of Great American Cities, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, transfer pricing, traveling salesman, union organizing

But human beings are, in Williamson’s words, “opportunistic” and characterized by “bounded rationality” (meaning that they do not always make optimally rational decisions); integrated corporations are necessary because outside suppliers cannot be relied on to do what they contract to do.14 Firms integrate vertically, then, in order to reduce transaction costs. They continue to expand until the costs of large size begin to exceed the savings from these transaction costs. That is, large organizations suffer from diseconomies of scale: the free rider problem becomes more severe the larger the organization becomes;15 they are prone to agency costs, where the firm’s bureaucracy develops a stake in its own survival rather than profit maximization; and they suffer from information costs when managers lose track of what is happening in their own organizations. In Williamson’s view, the multidivisional corporation, which was pioneered by American corporations at the beginning of the twentieth century, was an innovative response to this problem that combined the transaction cost economies of integration with decentralized, independent profit centers.16 It should be clear, however, that the Japanese keiretsu is another innovative solution to the problem of scale.

When Cultures Collide: Leading Across Cultures by Richard D. Lewis

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Ayatollah Khomeini, British Empire, business climate, business process, colonial exploitation, corporate governance, global village, haute cuisine, hiring and firing, invention of writing, Mahatma Gandhi, new economy, oil shale / tar sands, open borders, profit maximization, profit motive, Scramble for Africa, Silicon Valley, trade route, transaction costs, upwardly mobile, urban sprawl, women in the workforce

Western Southeast Asian Love of individualism Personal ego Fondness for the collective Personal interests subordinated to the group Security and harmony Achievements must contribute to group goals Cooperation, restraint, adaptation to the other Life is a challenge Achievement and self-actualization goals Competitiveness, aggression, direct confrontation (continued) 452 WHEN CULTURES COLLIDE Western Southeast Asian (continued) Overt action Persuasion, argument, competition Subtle, sometimes ambiguous action Persuasion is presumptuous, Asians seek common ground, sharing Social and cultural change is evolutionary Internal rewards Sensitive to social pressures Face saving, face giving define behavior Technological change is rapid External rewards Profit-sensitive Law, contractual obligations define behavior Western banter, familiarity, nicknames Delegate to professionals Meritocracy Planning top down Management goals: ✦ profit maximization ✦ organizational efficiency ✦ high productivity Politeness, gentleness, low voice, social rank, mutual respect Delegate to kinship Patronage system Policies and guidelines top down, tactical plans bottom up Management goals: ✦ social responsibility ✦ harmonious work atmosphere ✦ high performance seen as ruthless The differences are striking. Westerners are of course generally self-determined and dynamic; Southeast Asians have deep cultural dynamics embedded in deeply rooted practices and customs.

The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

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To be sure, to counter that risk, the Russian government is using some of its oil and gas revenues to directly or indirectly finance acquisition of nonenergy productive assets. The list is long—steel, aluminum, manganese, titanium, tankers, and aircraft. But these are largely technologies originally developed a century earlier. Moreover, these industries are poised to serve as "national champions" rather than profit-maximizing organizations. A Russian presence at the cutting edge of twenty-first-century technologies has yet to be felt, although President Putin and his advisers announced ambitious plans in 2005 for special, albeit state-controlled, technology zones. T he sharp fall in the value of the ruble following Russia's collapse into bankruptcy in 1998 forced the conversion of a grossly uncompetitive economy built up under generations of central planning into a marginally competitive one.