Wednesday, November 22, 2006

Santa Claus Entrepreneurship

Santa Claus seems to be very popular in Germany. Not only is he popular he is also in high demand, enough for a Santa to make 55 Euros for 20 minutes of improvisation with kids on Christmas Eve. Why the short supply? I am guessing that is what keeps the wages so high. Even accounting for high opportunity costs of spending time away from family and loved ones for 6 hours on Christmas Eve these wages seem high to me. Other jobs (store counter, waiting tables or at parties) apparently pay less than half of the above mentioned per hour. Is it any specific skills? Well, women can't apply, so can't alcoholics. The Santas currently employed seem to be University students, and they need to be willing to work with kids and big groups, that would disqualify a few more people. They also need to be willing to spend time away from their family Christmas Eve which would clear out a few more people from applying. Alexander's explanation is that the families that request for a Santa do not know that 55 Euros is a lot of money for students, because their own incomes are very high. That does not seem like a very economic argument. I can understand if they value Santa so much as to pay a lot for him. Even so that does not explain the low supply in the specific job market, or competition from others who see the profit opportunity. Apparently a similar Government venture failed, and that makes a lot of sense, because they were trying to employ the unemployed in such activities, and the group of unemployed presumably is biased towards older people and those tend to alcoholism. But why isn't another senior in college starting a Santa business of his own. It seems to me that there is a windfall to be made in this segment of the market. Something is fishy!! Any ideas??

Thursday, November 16, 2006

Milton Friedman (July 31, 1912 – November 16, 2006)

One of the greatest economists of the 20th century Milton Friedman passed away today. He was 94. Friedman was the reason I became so interested in economics and macro economics in particular. I wish I had had a chance to meet him or interact with him. His model of economics teaching is the model I wish to emulate. He was the foremost champion of free markets and brought about a huge and radical revolution in the field of economics. He was intellectually active even at his age and I found his interviews in Commanding Heights as fun to watch as his PBS series Free to Choose. I am sad at his passing, but celebrate his life which was ripe with his intellectual contributions. We shall miss this short man who could convince even the most fanatic communist to believing in free markets with his smiling face but strong arguments. His contributions to the field will live forever and he has his place in the Economics Hall of Fame.

Monday, November 13, 2006

The entrepreneur in economics

It is the case of the missing entrepreneur. He is missing from mainstream economics texts and journals. I have been thinking about a term paper idea and went hunting for literature on entrepreneurs in economics journals. I was surprised that a simple search turned up no recent economic journal articles. There were a few in the 60s and 40s but none since then. The business journals on the other hand seem to have done a lot of work on the entrepreneur. There's even a book by Barreto which talks about the missing entrepreneur. I was really surprised to see this. Of course, I am at a college where the entrepreneur is talked about constantly and apart from Austrian or such leaning economists no one seems to talk about entrepreneur and one historian I read blames Ricardo and his following for the disappearance of the entrepreneur from mainstream economics. The idea is that Ricardo's emphasis on equilibrium concepts and static analysis took-off in mainstream economics. Until then Cantillon, Say and others had been talking a lot about the entrepreneur. Did Adam Smith really talk about the entrepreneur? He talked about the undertaker which I means one who undertakes rather than the common English meaning we associate it with. I am not sure Smith paid a lot of attention to the entrepreneur. Ricardo, Malthus and others did take off from Smith. So did the entrepreneur disappear with Smith? What is surprising is that sociologists are talking about the demand and supply of entrepreneurship and economists do not seem to be. Kirzner did, but he is not cited by the Sociologists. The top business school economists do quote Schumpeter and Kirzner and Baumol even compares Knight and Schumpeter with Kirzner. Well! This is my current quest, to find the elusive entrepreneur in economics journals that are not Austrian.

Wednesday, November 08, 2006

Minimum wages

How does something as logical as the effect of minimum wage on employment escape even the most intelligent individuals? Businesses seem to know and understand that raising minimum wages leads to higher unemployment. I have seen a lot of my students who do believe that when minimum wages are increased it leads to more employment. However, once they see the effect on the demand and supply diagrams they are amazed that it indeed leads to not only a reduction in employment but also unemployment of the low skilled workers the minimum wage legislation is meant to protect. The minimum wage issue is not as political in India as it is here in the US, although I am sure there is similar legislation somewhere. I wonder what reason is behind people supporting the minimum wage legislation. I am in a very libertarian school and do not know how undergrads are taught in other Universities here. Most Universities are more left leaning. Do they teach wrong economics? If they teach correct economics then how do students end up believing that minimum wage is good? I can believe that the other social sciences that emphasise a more human approach may teach the minimum wage legislation was good, but why would they talk about minimum wages in the first place? Atleast economics students should come out with the right idea about minimum wages. Then again we have proof of brilliant economists of not only promoting minimum wage legislation but showing inaccurate research of minimum wage increasing employment.

Lets take a minute to think this through. Lets say you and I run a small business employing about 20 people. The different tasks require varying levels of skills and that is the kind of employment we have; i.e., employees with diifferent levels of skills. We pay them based on their skills, and give bonuses once a year or so to those who perform exceptionally well. We also know that if we pay them lower than a certain amount they are going to find employment elsewhere. So we pay them enough and more to keep them happy in their current jobs. As owners of the business we have obligations to pay creditors, overheads and other expenses in addition to paying our employees. If we are prudent businessmen (which we need to be to remain in business) we will try to minimise our costs and maximise our profits. Now lets assume that due to minimum wage legislation we are forced to pay a higher amount that what we are currently paying to each employee. However our other costs remain the same and employees' capacity does not increase significantly because they are given 50 cents or so more every hour. Lets say on an average each individual gets $20 more every week, which means the additional cost to us owners is $400 a week. We are not producing more, so we are not making any more money than we did before the minimum wage was imposed. This means we are making less profits than before or maybe even making losses. So to remain in business, we have to cut costs, and the easiest thing to do would be to fire a couple of people or so and divide their work among the rest. Who would be fired? Those that contribute least to the company, in other words those with the lowest skills, because the ones with higher skills can take up additional responsibilities. The result, minimum wages which is intended to protect low skilled workers has infact led them to unemployment. Was it malice or greed that led us owners to fire those people? No!! We just wanted to remain in business. By doing so, we managed to provide employment for 20 people initially, and 18 after the minimum wage was imposed or increased. Who are the real losers? Those individuals the legislation intended to protect.

Why does this simple logic escape even the most brilliant minds?