What a wonder it is that our common knowledge of a (static) demand and supply 'market' model fails to capture the essence of the dynamics of entrepreneurship!
Neoclassical economics dominates university teaching today, where students are taught economics from a static perspective (of course, higher level economics will focus upon stochastic models). The link between entrepreneurship and economic growth is addressed from an Austrian economic point of view.
The link is this:
Entrepreneurship is a process, and entrepreneurs are defined as:
(i) Risk bearers
(ii) Organizers of resources to higher valued combinations
(iii) Innovators (not inventors)
(iv) Agents alert to opportunities for arbitrage
How entrepreneurship drives economic growth is through the knowledge spillover theory - that knowledge can spill over from (larger) firms who invest in producing innovative outputs, but who fail to use all their knowledge to create innovations. This knowledge spills over to potential entrepreneurs who jump at the opportunity, take risks, organise these info and resources to valuable products and stay alert to arbitrage opportunities. And that's how economic growth happens!
A step away from neoclassical economics, wouldn't you say? For further readings on the link between entrepreneurship and economic growth, refer to studies done by Schumpeter, and the ones I've been reading lately - Audretsch.
Friday, March 28, 2008
Game Theory: Chicken
Mmmm....tasty!
But no, I am not talking about it fried or steamed or boiled or grilled. Chicken is in fact a type of game.
I think this game was played in the movie 'Rebel without a cause' (on that note, I have not watched that movie before, but I heard a little about a game of chicken in there, if I am correct).
The example of the game is as follows. Assume 2 cars are on a single lane highway, facing each other. Let us call them car A and B. On a signal, they will drive towards each other. The subgames are:
(i) A swerves and B remains on the road (both live; A is the chicken)
(ii) Both swerve (both live; both are chickens)
(iii) A remains on the road and B swerves (both live; B is the chicken)
(iv) Both remain on the road (both die)
As you can see, the term 'chicken' is used in a derogatory tone here to imply cowardice to the person that swerves. Clearly, to avoid such a humiliating tease, neither would want to swerve. Similarly, both do not want to die (let us assume they are life-loving people and not suicidal). Hence, by elimination, we are left with two Nash equilibria - one of them must swerve. However, whoever swerves is dependent upon who does not swerve. Sometimes I wonder, wouldn't it be nice to come up with a different type of equlibrium where no one dies and no one faces humiliation? If you have any thoughts on this, shoot me a comment.
But no, I am not talking about it fried or steamed or boiled or grilled. Chicken is in fact a type of game.
I think this game was played in the movie 'Rebel without a cause' (on that note, I have not watched that movie before, but I heard a little about a game of chicken in there, if I am correct).
The example of the game is as follows. Assume 2 cars are on a single lane highway, facing each other. Let us call them car A and B. On a signal, they will drive towards each other. The subgames are:
(i) A swerves and B remains on the road (both live; A is the chicken)
(ii) Both swerve (both live; both are chickens)
(iii) A remains on the road and B swerves (both live; B is the chicken)
(iv) Both remain on the road (both die)
As you can see, the term 'chicken' is used in a derogatory tone here to imply cowardice to the person that swerves. Clearly, to avoid such a humiliating tease, neither would want to swerve. Similarly, both do not want to die (let us assume they are life-loving people and not suicidal). Hence, by elimination, we are left with two Nash equilibria - one of them must swerve. However, whoever swerves is dependent upon who does not swerve. Sometimes I wonder, wouldn't it be nice to come up with a different type of equlibrium where no one dies and no one faces humiliation? If you have any thoughts on this, shoot me a comment.
Game Theory: Price-Matching Guarantees (PMG)
What is a price-matching guarantee (PMG)?
This is common to TV viewers, billboard watchers and general advertisement watchers alike. It's a guarantee by one firm to match the price of another rival for the same product. For instance, in the country where I am living in now, this happens in electronics stores.
The question to ask is this: Is such a seemingly competitive guarantee, truly in the spirit of competition?
What would you think?
Without thinking twice, I would say - 'Oh yes, a sign of competition indeed!'
Upon careful examination, one may actually find that such a guarantee is anti-competitive (this has been around in industrial organisation literature for a while now). Why is that? Well, let us take an example, which I will reference from Dugar (2005 and 2007).
Let us assume 3 firms dominating a product in an economy - what economists call a 'triopoly' (note: monopoly = one seller dominates the market; duopoly = 2 sellers, etc). Assume also that the sellers can choose to price their product between $1 and $100.
Case 1
There is no PMG option. The firm that chooses the lowest price reaps all profits, and the remaining 2 get nothing. Hence, the Nash equilibrium for this problem would be the price vector {1,1,1}. The profits, when split evenly, yield 1/3 per seller.
Case 2
All 3 firms adopt a PMG strategy. Regardless of where the firms choose their prices to be in the range between 1 and 100, all firms will match the lowest price offer (and hence split the profits evenly). Hence, the Nash equlibrium can be a symmetric set of vectors anywhere between {1,1,1} (which is the same as a non-collusive, competitive outcome) and {100,100,100} (the 'best' collusive, monopoly pricing outcome).
There are several other assumptions that come along with this game, but for the moment I will simplify the analysis (if you wish to read more, refer to Dugar (2005) or Dugar (2007) or Dugar and Sorensen (2006)).
It is easy to see that the PMG strategy is in fact a device for tacit collusion between firms - which is in fact, anti-competitive!
Interesting, isn't it?
This is common to TV viewers, billboard watchers and general advertisement watchers alike. It's a guarantee by one firm to match the price of another rival for the same product. For instance, in the country where I am living in now, this happens in electronics stores.
The question to ask is this: Is such a seemingly competitive guarantee, truly in the spirit of competition?
What would you think?
Without thinking twice, I would say - 'Oh yes, a sign of competition indeed!'
Upon careful examination, one may actually find that such a guarantee is anti-competitive (this has been around in industrial organisation literature for a while now). Why is that? Well, let us take an example, which I will reference from Dugar (2005 and 2007).
Let us assume 3 firms dominating a product in an economy - what economists call a 'triopoly' (note: monopoly = one seller dominates the market; duopoly = 2 sellers, etc). Assume also that the sellers can choose to price their product between $1 and $100.
Case 1
There is no PMG option. The firm that chooses the lowest price reaps all profits, and the remaining 2 get nothing. Hence, the Nash equilibrium for this problem would be the price vector {1,1,1}. The profits, when split evenly, yield 1/3 per seller.
Case 2
All 3 firms adopt a PMG strategy. Regardless of where the firms choose their prices to be in the range between 1 and 100, all firms will match the lowest price offer (and hence split the profits evenly). Hence, the Nash equlibrium can be a symmetric set of vectors anywhere between {1,1,1} (which is the same as a non-collusive, competitive outcome) and {100,100,100} (the 'best' collusive, monopoly pricing outcome).
There are several other assumptions that come along with this game, but for the moment I will simplify the analysis (if you wish to read more, refer to Dugar (2005) or Dugar (2007) or Dugar and Sorensen (2006)).
It is easy to see that the PMG strategy is in fact a device for tacit collusion between firms - which is in fact, anti-competitive!
Interesting, isn't it?
Tuesday, March 25, 2008
Politics: Libertarianism
Hayek and Libertarianism.
This view is essentially that government should have a limited role in the economy, advocating a free market system i.e. market capitalism. Some reasons are the inefficiency of government in the sense of a loss of welfare (for instance, welfare losses caused by price floors and ceilings).
Market capitalism requires only 3 things from the government:
(i) The rule of law
(ii) Enforcement of property rights
(iii) Price stability
Am I a libertarian? It is hard to say, seeing as I am attracted to the concept of Schumpetarian economics, but at the same time appreciating the ease of classical economic modelling. Perhaps one day I might become one. At the moment my position stands uncertain. For those that are interested in what libertarianism is about, I encourage you to apply for the Liberty and Society conferences held by The Center for Independent Studies (CIS). Their site is www.cis.org.au.
This view is essentially that government should have a limited role in the economy, advocating a free market system i.e. market capitalism. Some reasons are the inefficiency of government in the sense of a loss of welfare (for instance, welfare losses caused by price floors and ceilings).
Market capitalism requires only 3 things from the government:
(i) The rule of law
(ii) Enforcement of property rights
(iii) Price stability
Am I a libertarian? It is hard to say, seeing as I am attracted to the concept of Schumpetarian economics, but at the same time appreciating the ease of classical economic modelling. Perhaps one day I might become one. At the moment my position stands uncertain. For those that are interested in what libertarianism is about, I encourage you to apply for the Liberty and Society conferences held by The Center for Independent Studies (CIS). Their site is www.cis.org.au.
Random: Jag skrev en ny låt
Does anyone here play the piano or the keyboard?
I had attempted to play the piano before, but quit many years ago.
In the midst of assignments and studying during this Easter break, jag skrev en låt (det var faktist skrivit innan min kort semester under Påsk). När jag spelade den, I think of images of looking out a house/mansion/cottage into the green, dewy forest with a slight chill in the air, and just blue skies above. It is what I picture my deceased uncle Ben's house to look out into. It would have been beautiful, I think, or at least what I picture in my dreams. My aunt had told me of a little bit of his house - if I remember correctly, it had beautiful red drapes.
My uncle Ben died of HIV a long time ago. He was one of the first people to contract the disease (if I was told this story correctly). I don't remember seeing him, but my mother said that I had. He used to send little presents to my brother and myself and sending his love to his nieces and nephews. He was also a former model, because he had high cheek bones. It was quite a surprise to learn of that, as I didn't think of any of my parents or their siblings as being particularly model-material. Of course, they might have looked like models during their time, which I wasn't around for to see. My aunt said that I would have loved Uncle Ben, if he were still around today. I think he died in England, or he could have died in his home country. Jag vet inte vad är den riktig historien, men vad som helst det är, jag önskar att jag kunde har träffat honom.
I had attempted to play the piano before, but quit many years ago.
In the midst of assignments and studying during this Easter break, jag skrev en låt (det var faktist skrivit innan min kort semester under Påsk). När jag spelade den, I think of images of looking out a house/mansion/cottage into the green, dewy forest with a slight chill in the air, and just blue skies above. It is what I picture my deceased uncle Ben's house to look out into. It would have been beautiful, I think, or at least what I picture in my dreams. My aunt had told me of a little bit of his house - if I remember correctly, it had beautiful red drapes.
My uncle Ben died of HIV a long time ago. He was one of the first people to contract the disease (if I was told this story correctly). I don't remember seeing him, but my mother said that I had. He used to send little presents to my brother and myself and sending his love to his nieces and nephews. He was also a former model, because he had high cheek bones. It was quite a surprise to learn of that, as I didn't think of any of my parents or their siblings as being particularly model-material. Of course, they might have looked like models during their time, which I wasn't around for to see. My aunt said that I would have loved Uncle Ben, if he were still around today. I think he died in England, or he could have died in his home country. Jag vet inte vad är den riktig historien, men vad som helst det är, jag önskar att jag kunde har träffat honom.
Monday, March 17, 2008
Trading: The Trading Room
In the heart of the city in which I live, there is a rather known university. Inside this university is not only a maze of walkways and hallways, but also a very special room, which I visited today.
It's the Trading Room. In fact, students are allowed access into the room (which I found a rather big surprise), and they can use the computers to have a look at share prices and movements using the Bloomberg database, and consequently buy/sell/trade shares. Oh, what a wonder that was! I used to think trading was a rather boring activity, until I was involved in a classroom double-auction trading experiment in which buyers and sellers had to agree on offer/supplier prices to validate a trade. How wonderful! It was due to that experience that my eyes were finally opened to the marvel of such a massive database as Bloomberg. How massive one's world can get, just in a small trading room!
It's the Trading Room. In fact, students are allowed access into the room (which I found a rather big surprise), and they can use the computers to have a look at share prices and movements using the Bloomberg database, and consequently buy/sell/trade shares. Oh, what a wonder that was! I used to think trading was a rather boring activity, until I was involved in a classroom double-auction trading experiment in which buyers and sellers had to agree on offer/supplier prices to validate a trade. How wonderful! It was due to that experience that my eyes were finally opened to the marvel of such a massive database as Bloomberg. How massive one's world can get, just in a small trading room!
Statistics: Bayesian Statistics
Many times I marvel at the extent of the human capacity to think. Mr. Bayes, if you created Bayesian statistics, wow, I salute you! I don't fully understand it, as I am not very mathematically inclined, although I am always curious and amazed at the proofs that these mathematicians have.
This is the infamous 'Bayes Theorem':
1. Bayes theorem is an updating rule - you update your theory with new data.
2. An example:
Let A1 = circuits come from supplier 1 (30%); A2 = circuits from supplier 2 (50%); A3 = circuits from supplier 3 (20%).
Let E = probability that a circuit is defective.
P(E|A1) = 0.01; P(E|A2) = 0.03; P(E|A3) = 0.04.
Hence, P(A1|E) = P(E|A1)*P(A1) / [P(E|A1)*P(A1) + P(E|A2)*P(A2) + P(E|A3)*P(A3)]
= 0.01*0.03 / [(0.01*0.3) + (0.03*0.5) + (0.04*0.2)]
= 0.115.
Voila! Honestly, the wonder of Bayes theorem...
This is the infamous 'Bayes Theorem':
1. Bayes theorem is an updating rule - you update your theory with new data.
2. An example:
Let A1 = circuits come from supplier 1 (30%); A2 = circuits from supplier 2 (50%); A3 = circuits from supplier 3 (20%).
Let E = probability that a circuit is defective.
P(E|A1) = 0.01; P(E|A2) = 0.03; P(E|A3) = 0.04.
Hence, P(A1|E) = P(E|A1)*P(A1) / [P(E|A1)*P(A1) + P(E|A2)*P(A2) + P(E|A3)*P(A3)]
= 0.01*0.03 / [(0.01*0.3) + (0.03*0.5) + (0.04*0.2)]
= 0.115.
Voila! Honestly, the wonder of Bayes theorem...
Saturday, March 15, 2008
Schumpeterian Economics: A brief introduction
Schumpeterian economics was pioneered by Joseph Schumpeter (hence the name). I had heard about this type of economics in one of my first year classes, but I guess I never really knew what it was about. A few interesting things:
1. It differs from classical economics, in that there is no such thing as an equilibrium phase - the economy is never at equilibrium; it is continuously undergoing a period of change.
2. Schumpeterian economics is also known as evolutionary economics. The term 'evolution' first appeared in economics BEFORE it appeared in biology literature. It is important to understand this, and how a term such as 'evolution' could be extrapolated to biology, in what a large portion of the world understands as 'evolutionary biology'.
(Evolution still remains a speculative, unproven hypothesis)
Of the types of economics that I know of, there are three types:
1. Keynesian (in general, advocates of the significance of fiscal [governmental] policy)
2. Classical (in general, advocates of the significance of monetary policy)
3. Schumpeterian (my newest discovery)
1. It differs from classical economics, in that there is no such thing as an equilibrium phase - the economy is never at equilibrium; it is continuously undergoing a period of change.
2. Schumpeterian economics is also known as evolutionary economics. The term 'evolution' first appeared in economics BEFORE it appeared in biology literature. It is important to understand this, and how a term such as 'evolution' could be extrapolated to biology, in what a large portion of the world understands as 'evolutionary biology'.
(Evolution still remains a speculative, unproven hypothesis)
Of the types of economics that I know of, there are three types:
1. Keynesian (in general, advocates of the significance of fiscal [governmental] policy)
2. Classical (in general, advocates of the significance of monetary policy)
3. Schumpeterian (my newest discovery)
Gidday/Hejsan!
Hej allihoppa/hello all!
This blog will randomly record about things I am interested in or am thinking about.
I denna blogg skall jag skriva om sakerna jag är intresserad på eller tänker på.
Enjoy!
Njuta av!
Maxie Stjärna
This blog will randomly record about things I am interested in or am thinking about.
I denna blogg skall jag skriva om sakerna jag är intresserad på eller tänker på.
Enjoy!
Njuta av!
Maxie Stjärna
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