Category Archives: Econ & Money

OK, so he published this for April 15, and I'm behind on my reading.

yesh omrim : A timely thought: According to the American Institute of
Philanthropy, “$35 or less to raise $100 is reasonable for most
charities.”

By comparison, the Federal government, in its fiscal '04 budget, plans to spend about $40 billion on “administration of justice” and about $10 billion on tax collection, in a total budget of about $3250 billion. So even if we attribute the expense of the entire Justice Department and Federal prison system to the cost of government “fund-raising”, it costs the government less than $2 to raise $100. (These figures are from the National Budget Simulation.)

The next time someone tells you that private charities are “more efficient” than the government at achieving some worthy goal, remember these figures.

This could, however, be an economy of scale. Or, perhaps, think of it a measure of how much it is better to be feared than loved?

The Venturpreneur is an interesting blog I stumbled on last week. Now I discover that the author is Gordon Smith, someone I met in Tilburg, the Netherlands (not as strange a place as it may sound for two Americans to meet — Tilburg, along with Amsterdam, is an Internet studies powerhouse).

Gordon is now a law professor at Wisconsin, and he's writting some provocative comments today about the new Google IPO:

The Growth Story: Selling stock in an IPO is not about convincing people that your present performance is stellar. It is about your growth story. People who invest in IPO shares are hoping that your company will become the next Microsoft. A compelling vision is crucial. I have been reading the prospectus for clues about Google's growth story, and this is what I have found.

…

Bottom line: The prospectus is worse than I imagined it could be. I assumed Google would have a difficult time telling a growth story, but I thought that they would give it the old college try. Instead, their growth story is nothing more than a celebration of past accomplishments. “Don't you just love our search technology?!”

Yahoo is currently trading at a price/earnings ratio of approximately 125. Google is currently less efficient at servicing the bottom line, and it admits that operating margins will decline. In the face of these realities, it will need to achieve a price/earnings ratio higher than Yahoo's to obtain the kind of valuations projected over the last few days. While it may reach such lofty heights if retail investors get overly enthusiastic, those prices are not sustainable under any scenario contemplated in the prospectus.

I hope this is pessimistic, although it certainly seems right as far as I can tell. I'd like the first major IPO which is run on a pure public auction, without huge margins to the parasites investment banks, to be a stunning success.

Update: John Battele's take on the IPO

I always sort of suspected that the world might be better off with fewer kinds of toothpaste — an intuition that flies directly in the face of all the free-market stuff I usually believe. Now comes Ben Hyde, summarizing Barry Schwartz's book Paradox of Choice, to explain why this intuition might actually be right:

The punch line of Paradox of Choice is made in a simple cartoon. Partition the world into two kinds of people. The maximizers and the satisfiers. Maximizers spend more resources on getting the best possible outcome while satisfiers don't.

The joke? Maximizers do tend to achieve their goals. They do accumulate more than the satisficers. The ironic revenge of the Gods? They are never satisfied.

He reports that depression is highly correlated with maximizing behavior. Then he lays down the cornerstone of the entire book.

Can you conspire to change a person's behavior? Convert them into a maximizer? How? Yes – you just present them with more choices. That increases the chances their behavior will switch from happy satisfier to depressed maximizer. It's a denial of service attack on the problem solver. It's restructuring the game so that the search algorithms are no longer effective. It's the old chestnut that marketing is war. It's the cliche that planning is what you do to avoid action.

In other words, marketers make more choices to turn rational people into shoppers. But these choices make people less happy than they would otherwise be (the paradox).

But wait. This (as opposed to, say, the quest for shelf space) doesn't alone explain why firms make so many different varieties of what's more or less the same product. What's in it for the firm, which presumably forgoes some small economy of scale? Do unhappy consumers spend more money in a quest for more happiness (either in product quantity or quality or price), or do they just spend more time searching? Do they buy eight kinds of toothpaste to try them out? Does the increased search time expose them to more goods that would have chosen to buy had they but known of them, in which case search makes you happier but poorer? Or do the consumers spend so much time searching they buy less? Or is the depressed consumer an impulse buyer? There has to be some mechanism by which the 'more search, less joy' mentality gets translated into goods or this fails to explain the marketers' incentives. And even if a greater variety of toothpaste on offer makes you generally unhappier it's not at all obvious to me how this translates into toothpaste sales given the fixed quantity of mouths per person.

On a related note, the suggestion that there may be an economic grounding for my suspicions about toothpaste makes me hope that someone will be able to confirm my claim of an economic justification for another of my other potentially irrational beliefs. I have a tendency towards comparison shopping for the lowest price, a maximization behavior that my wife likes to laugh at as obsessive (while no doubt enjoying the savings). I like to rationalize this tendency as a public-spirited behavior with positive externalities: by doing my best to embody Rational Economic Man, and finding the low-cost supplier I am rewarding the low-price supplier (and, especially, failing to reward the price gougers) and thus helping the market be efficient, which contributes to lower prices for everyone. Any truth to that in a world of sensible satisficers?

In a comment to an item below, John Quiggen gently and correctly points out that the insight for which I credited Brad is at least as much his:

If the Internet continues to grow in economic importance, the central role of public goods in its formation will pose big problems for capitalism, though not necessarily to the benefit of traditional forms of socialism.

What's more, he's already working on an article about it. So that's one less project I have to worry about — I can wait for him. The provision of public goods is already one of the major challenges for modern society, one that the US at least responds to fairly badly (see, e.g. the lack public transport in Miami and the really clogged roads) and it's really interesting to speculate about what we should do if the increase in importance of digitized information and tools to play with it makes this problem worse.

Brad and I have written one article which cataloged some of the issues, but it doesn't offer very much in the way of solutions. Much remains to be done here.

In an otherwise normal science look at Valuing Google, Brad writes a sentence that deserves an article:

Social value is drifting away from potential profitability, and this threatens to become a huge problem in our collective social resource allocation mechanisms.

Hey Brad, maybe that should be our next collaborative project (after the one I already suggested we do this summer…)? I have ideas floating around about how you organize efficient state ownership of (some) things.