Category Archives: business economics

Could I have passed muster with YC?

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Paul Graham describes what Y-Combinator looks for in business founders, and he explains why you become a billionaire by building a great product, not by being a bad person. Pointer from Tyler Cowen.

I would bet that the chances that you are a bad, exploitative person are much less if you work at a profit-seeking firm than at a non-profit. Within a profit-seeking firm, I would also bet that the chances that you are a bad, exploitative person are much less if you have a stake in the enterprise as a whole than if you are highly compensated based on individual performance. To be clear, what I am saying is that the non-profit sector is more likely to unintentionally select for bad people than is the for-profit sector. And within the for-profit sector, high compensation without skin in the overall game is more likely to unintentionally select for bad people than is an ownership stake in the overall enterprise.

On the topic of what YC looks for, how would I have done in 1994, when I first started Homefair? Continue reading →

Post-pandemic WFH

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1. Jose Maria Barrero, Nicholas Bloom, and Steven J. Davis write,

Our survey evidence says that 22 percent of all full work days will be supplied from home after the pandemic ends, compared with just 5 percent before. We provide evidence on five mechanisms behind this persistent shift to working from home: diminished stigma, better-than-expected experiences working from home, investments in physical and human capital enabling working from home, reluctance to return to pre-pandemic activities, and innovation supporting working from home. We also examine some implications of a persistent shift in working arrangements: First, high-income workers, especially, will enjoy the perks of working from home. Second, we forecast that the postpandemic shift to working from home will lower worker spending in major city centers by 5 to 10 percent. Third, many workers report being more productive at home than on business premises, so post-pandemic work from home plans offer the potential to raise productivity as much as 2.4 percent.

I would not be optimistic regarding the last point. But I do think that this will really accentuate the class divide. The people who work from home will be able to engage more with their children. They will have more flexibility in general for dealing with everything from medical issues to laundry.

2. I talk with Richard Reinsch about macroeconomics in the age of the virus. I offer the PSST perspective.

on net 10 million people not working. That’s an entrepreneurial opportunity to find something useful for them to do. But that means you have to encourage entrepreneurship. And under the Obama administration, you had discouraging entrepreneurship because they kept piling on regulation. And one of the quiet things that the Trump administration has done is to loosen those regulations so that entrepreneurs could work more quickly. But the current situation is so extreme in terms of the reconfigurations that are needed, that you need just an awful lot of entrepreneurial activity, and it’s going to take a long time for entrepreneurs to figure out how to use these extra 10 million or so people.

Unbundling or rebundling?

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Allison Schrager writes,

Up until fairly recently, we consumed many goods and services bundled together. Your airline ticket price included a meal and checked luggage. Your cable bill included hundreds of channels. A newspaper subscription offered content from many journalists. But changing economics and technology have made bundling less necessary and attractive—at least in the short run. A bundled service offers lots of variety for a fixed price, but you end up paying for things you don’t want. Now, when we book flights online, we can see other airlines’ prices for identical routes; an airline can appear more competitive by breaking out different services. Streaming platforms mean that we no longer must pay for cable channels we don’t watch. And now, members of the media whom colleagues deem “problematic” don’t have to tolerate a hostile newsroom; they can send out an email newsletter or broadcast a podcast to their audience and collect money directly.

I don’t think that unbundling is the endgame in music, journalism, or punditry. Yes, we have pretty much seen the end of bundling music from physical forms, such as a vinyl record or a CD. And we are pretty near the end of the unbundling of the written word from physical forms, such as magazines and newspapers. But as Allison points out, only a few high-profile writers can expect viable subscription revenue in a totally unbundled world. If nothing else, what Clay Shirky called the mental transactions costs make people unwilling to pay for all the content they might like on a case-by-case basis.

Instead, I return to a prediction I made twenty years ago.

For an economic model, I continue to recommend the idea of “clubs.” A club would provide content aggregation, recommendation, and annotation services. Journalists would be paid by clubs, rather than by individual publications. For a consumer, joining a club will provide access to value-added services relative to online content.

Where we something that most closely resembles the club model I had in mind is in the video streaming world. Netflix, Amazon, etc.

If my prediction eventually holds, most writers, will not be able to make it on their own. Instead, they will be bundled together, just not in the traditional magazine or newspaper format. I think that once the club model gets going, the superstars will be recruited by the clubs for competitive purposes.

Business closures

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CNBC reports,

According to Yelp data, permanent closures have reached 97,966, representing 60% of closed businesses that won’t be reopening.

This is what they attribute to the coronavirus. I wonder what the “excess deaths” measure would show. That is, even without the virus, some businesses would close.

My guess is that these are mostly excess deaths, and it will take quite a while for new entrepeneurial activity to employ the people whose jobs have been lost in the process.

Corporate R&D labs

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Ben Southwood writes,

From 1949 authorities pursued a case against AT&T’s Bell Labs, which ultimately resulted in the forced divestiture of their non-telecoms arms, separation from their vertically integrated manufacturing, and compulsory no-fee licensing of all 7,820 of its non-telecoms patents (1.3% of the total stock of patents in force in the USA at the time). There is evidence that this move rippled across the US economy, providing a foundation for many of the great innovations of the next fifty years. But this would be true of almost any mass patent invalidation: the monopoly restrictions of patents once they are granted are the cost we pay for the investment in innovation that came before.

He raises the possibility that whatever short-run gains there were from going after AT&T, the long-run impact was to reduce R&D and growth.

In a business environment with no barriers to entry, it is impossible for a firm to capture the benefits of innovation. Hence, there is little incentive to innovate.

Patents provide one barrier to entry. But that approach has a number of flaws. I am not a fan of patents in general.

The main alternative is barriers to entry that are created by business strategy and execution. Microsoft in the 1990s was the master of using business strategy to erect barriers to entry.

These strategic barriers to entry can work both ways. To the extent that an innovation expands profit opportunities for the incumbent firm, it is encouraged. To the extent that it cannibalizes opportunities for the incumbent firm, it is stifled.

This may explain why Xerox “fumbled the future.” The personal computer and the network appeared to create the possibility of a “paperless office,” which is not a welcome development for the copy machine business.

A bad bet of mine

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A reader reminds me that three years ago, I wrote,

I’ve got $100 that says the market cap of Amazon is lower on July 31, 2020 than it is today.

Spectacularly wrong. Since then, Amazon revenue has roughly doubled and its profits and market cap have roughly tripled. (As I read charts. I could be mis-reading them. Check me.)

The P/E ratio for Amazon has stayed at roughly 150. If it had fallen below 50, I would have won my bet, despite the growth in revenue and profits at Amazon.

At some point, the P/E ratio has to come down to earth. I lost my bet because this has not yet happened.

The S&P 4

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According to MarketWatch,

Just Apple, Microsoft, Amazon and Google account for 21% of the [S&P 500] index.

Some very important economic analysis was developed without taking this possibility into account.

Consider portfolio theory. The idea is that you diversify by holding the market portfolio. But if the market portfolio is itself not diverse, what does that imply? My first thought is it you should require a higher expected return.

Consider industrial organization. Economists usually measure market power by looking at a firm’s share of market sales. But should share of market capitalization be an indicator? Does Amazon’s share of market capitalization in retail predict its future share of market sales in retail?

Are real estate agents racist?

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Timothy Taylor writes,

The growing body of audit studies in US housing markets is not a bunch of anecdotes: it’s data showing that racial discrimination which is illegal under existing law is in fact disturbingly pervasive in US housing markets. I would love to see a wave of these audit studies of housing market discrimination carried out around the country, with loud publicity for the results and also with some legal consequences attached. It would be socially useful if rental agents and real estate agents needed to take seriously the possibility that the ways in which they are treating their minority customers could come under public scrutiny.

He cites a study of the Boston rental market as the latest example. Rental agents were less likely to show a particular apartment to a black applicant than to white applicant with identical qualifications.

I would point out that the Boston rental market is peculiar, in that it seems that the prospective renter must use an agent. In other cities, the owner is allowed to advertise the apartment and renters are allowed to respond directly to ads. My guess is that Boston is different because the rental agents were able to lobby for some legal requirements that are not present elsewhere.

When there is no agent in the picture, the incentive of a landlord or a home seller is to rent or sell to the highest bidder. If you exclude customers, based on race or any other factor, you risk leaving money on the table.

But agents have weird incentives. It works out that they want to complete a transaction with as little effort as possible. Maximizing traffic into the property is not the way to go, especially if we are talking about rent-controlled apartments that are scarce.

But why would an agent discriminate on the basis of skin color? The agent may have an instinct that the black person will not “feel comfortable” in a neighborhood, so that it is not worth spending time showing that person the apartment, given the alternative of showing a white person the apartment.

The study shows that renters with housing vouchers were actually more likely to see the apartment of choice if they were black. That might be because the real estate agent is more confident that a transaction will take place in the case of a housing voucher if the prospective renter is black. The agent figures that the black renter will not have as many options.

My hypothesis is that there would be less racial discrimination in housing and rental markets if agents were out of the picture. I suspect that some agents have some preconceptions that are effectively racist, and I doubt that this can be overcome as long as the incentives of agents are what they are.

I am pretty sure that if you don’t have rent control, rental agents won’t gain a foothold, and the rental market will operate without them. Landlords have an incentive not to discriminate, so my hypothesis would be that in markets without rent control an audit study will not show as much discrimination.

What about buying a home/ If you could design the real estate transaction process from scratch, you could make it as easy to buy and sell a home as it is to sell a used car. In doing so, you would reduce the need for real estate agents, and you might reduce racial discrimination.

Many a young techie has salivated over the prospect of solving this problem. But it is not a technology problem. It is a public choice problem. Uber was able to come out pretty well against the lobbyists for the taxicab industry. Airbnb was able to come out ok against the lobbyists for the hotel industry. The real estate lobby is a tougher nut to crack.

The DARPA process includes an audit

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Benjamin Reinhardt writes,

Every program at DARPA is intensely technically scrutinized by the tech council

The Tech Council is composed of people with technical expertise in the proposed program’s area and adjacent areas. The Tech Council Pitch Meeting is meant to be very high level but council members can ask deep technical questions on anything. The tech council doesn’t have any power besides advising the director on the program’s technical soundness. A purely advisory tech council seems like a good idea because it both avoids decision by committee and keeps all responsibility squarely on the director and PM.

I see this as something like an external audit. I am a big fan of audits. The essay I am working on will suggest audit mechanisms as a way out of our “post-truth” morass.

the closest thing to a framework that PMs use to guide program design is “be able to explain precisely why this idea will work to a group of really smart experts both in the area of the program and adjacent to it.”

Imagine if every research project or graduate course were put through this sort of process.

Pointer from Tyler Cowen, who correctly lauds the essay.