Friday, August 29, 2008

Interesting Price Floor Problem

The Cato Institute regularly publishes interesting economic podcasts. The podcast below describes an unusual price setting problem: should wholesalers be allowed to set minimum prices for retailers? The answer is: in some cases, yes. This might be an interesting class assignment. Have the students listen to the podcast and describe how the rise of the internet may make such price floors more important.

The Responsibility of Business

During his acceptance speech last night, Obama stated, "Businesses should live up to their responsibilities to create American jobs."

Is this the responsibility of businesses? As teachers of future business-people, perhaps we should spend some time talking about what really constitutes the responsibility of a business-person.

As for me, I adhere to the Milton Friedman philosophy, that the only obligation that business has towards society is to make as much profits as possible. Read Milton's 1970 New York Times Magazine article articulating this view below.

(In May of 2008 Boone Pickens donated $100 million to Oklahoma State University for endowing faculty chairs and professorships. After becoming incredibly wealthy from business in oil, hedge funds, and other endeavors, Mr. Pickens has embarked on a tremendous philanthropy campaign with OK State as the main benefactor. While I am glad to take the money, I also believe that if Mr. Pickens truly wanted to make the world a better place, instead of giving us money he made, he would take that money and try to make more. That, I guarantee you, is an opinion few of your students have encountered!)

The Social Responsibility of Business is to Increase its Profits
by Milton Friedman
The New York Times Magazine, September 13, 1970. Copyright @ 1970 by The New York Times Company.

When I hear businessmen speak eloquently about the "social responsibilities of business in a free-enterprise system," I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free en­terprise when they declaim that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing em­ployment, eliminating discrimination, avoid­ing pollution and whatever else may be the catchwords of the contemporary crop of re­formers. In fact they are–or would be if they or anyone else took them seriously–preach­ing pure and unadulterated socialism. Busi­nessmen who talk this way are unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades.

The discussions of the "social responsibili­ties of business" are notable for their analytical looseness and lack of rigor. What does it mean to say that "business" has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but "business" as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom.

Presumably, the individuals who are to be responsible are businessmen, which means in­dividual proprietors or corporate executives. Most of the discussion of social responsibility is directed at corporations, so in what follows I shall mostly neglect the individual proprietors and speak of corporate executives.

In a free-enterprise, private-property sys­tem, a corporate executive is an employee of the owners of the business. He has direct re­sponsibility to his employers. That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose–for exam­ple, a hospital or a school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services.

In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them.

Needless to say, this does not mean that it is easy to judge how well he is performing his task. But at least the criterion of performance is straightforward, and the persons among whom a voluntary contractual arrangement exists are clearly defined.

Of course, the corporate executive is also a person in his own right. As a person, he may have many other responsibilities that he rec­ognizes or assumes voluntarily–to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country. He ma}. feel impelled by these responsibilities to de­vote part of his income to causes he regards as worthy, to refuse to work for particular corpo­rations, even to leave his job, for example, to join his country's armed forces. Ifwe wish, we may refer to some of these responsibilities as "social responsibilities." But in these respects he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes. If these are "social responsibili­ties," they are the social responsibilities of in­dividuals, not of business.

What does it mean to say that the corpo­rate executive has a "social responsibility" in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price in crease would be in the best interests of the corporation. Or that he is to make expendi­tures on reducing pollution beyond the amount that is in the best interests of the cor­poration or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire "hardcore" un­employed instead of better qualified available workmen to contribute to the social objective of reducing poverty.

In each of these cases, the corporate exec­utive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsi­bility" reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money.

The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so. The executive is exercising a distinct "social responsibility," rather than serving as an agent of the stockholders or the customers or the employees, only if he spends the money in a different way than they would have spent it.
But if he does this, he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.

This process raises political questions on two levels: principle and consequences. On the level of political principle, the imposition of taxes and the expenditure of tax proceeds are gov­ernmental functions. We have established elab­orate constitutional, parliamentary and judicial provisions to control these functions, to assure that taxes are imposed so far as possible in ac­cordance with the preferences and desires of the public–after all, "taxation without repre­sentation" was one of the battle cries of the American Revolution. We have a system of checks and balances to separate the legisla­tive function of imposing taxes and enacting expenditures from the executive function of collecting taxes and administering expendi­ture programs and from the judicial function of mediating disputes and interpreting the law.

Here the businessman–self-selected or appointed directly or indirectly by stockhold­ers–is to be simultaneously legislator, execu­tive and, jurist. He is to decide whom to tax by how much and for what purpose, and he is to spend the proceeds–all this guided only by general exhortations from on high to restrain inflation, improve the environment, fight poverty and so on and on.
The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This jus­tification disappears when the corporate ex­ecutive imposes taxes and spends the pro­ceeds for "social" purposes. He becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise. On grounds of political principle, it is intolerable that such civil ser­vants–insofar as their actions in the name of social responsibility are real and not just win­dow-dressing–should be selected as they are now. If they are to be civil servants, then they must be elected through a political process. If they are to impose taxes and make expendi­tures to foster "social" objectives, then politi­cal machinery must be set up to make the as­sessment of taxes and to determine through a political process the objectives to be served.
This is the basic reason why the doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce re­sources to alternative uses.

On the grounds of consequences, can the corporate executive in fact discharge his al­leged "social responsibilities?" On the other hand, suppose he could get away with spending the stockholders' or customers' or employees' money. How is he to know how to spend it? He is told that he must contribute to fighting inflation. How is he to know what ac­tion of his will contribute to that end? He is presumably an expert in running his company–in producing a product or selling it or financing it. But nothing about his selection makes him an expert on inflation. Will his hold­ ing down the price of his product reduce infla­tionary pressure? Or, by leaving more spending power in the hands of his customers, simply divert it elsewhere? Or, by forcing him to produce less because of the lower price, will it simply contribute to shortages? Even if he could an­swer these questions, how much cost is he justi­fied in imposing on his stockholders, customers and employees for this social purpose? What is his appropriate share and what is the appropri­ate share of others?

And, whether he wants to or not, can he get away with spending his stockholders', cus­tomers' or employees' money? Will not the stockholders fire him? (Either the present ones or those who take over when his actions in the name of social responsibility have re­duced the corporation's profits and the price of its stock.) His customers and his employees can desert him for other producers and em­ployers less scrupulous in exercising their so­cial responsibilities.
This facet of "social responsibility" doc­ trine is brought into sharp relief when the doctrine is used to justify wage restraint by trade unions. The conflict of interest is naked and clear when union officials are asked to subordinate the interest of their members to some more general purpose. If the union offi­cials try to enforce wage restraint, the consequence is likely to be wildcat strikes, rank­-and-file revolts and the emergence of strong competitors for their jobs. We thus have the ironic phenomenon that union leaders–at least in the U.S.–have objected to Govern­ment interference with the market far more consistently and courageously than have business leaders.

The difficulty of exercising "social responsibility" illustrates, of course, the great virtue of private competitive enterprise–it forces people to be responsible for their own actions and makes it difficult for them to "exploit" other people for either selfish or unselfish purposes. They can do good–but only at their own expense.

Many a reader who has followed the argu­ment this far may be tempted to remonstrate that it is all well and good to speak of Government's having the responsibility to im­pose taxes and determine expenditures for such "social" purposes as controlling pollu­tion or training the hard-core unemployed, but that the problems are too urgent to wait on the slow course of political processes, that the exercise of social responsibility by busi­nessmen is a quicker and surer way to solve pressing current problems.

Aside from the question of fact–I share Adam Smith's skepticism about the benefits that can be expected from "those who affected to trade for the public good"–this argument must be rejected on grounds of principle. What it amounts to is an assertion that those who favor the taxes and expenditures in question have failed to persuade a majority of their fellow citizens to be of like mind and that they are seeking to attain by undemocratic procedures what they cannot attain by democratic proce­dures. In a free society, it is hard for "evil" people to do "evil," especially since one man's good is another's evil.

I have, for simplicity, concentrated on the special case of the corporate executive, ex­cept only for the brief digression on trade unions. But precisely the same argument ap­plies to the newer phenomenon of calling upon stockholders to require corporations to exercise social responsibility (the recent G.M crusade for example). In most of these cases, what is in effect involved is some stockholders trying to get other stockholders (or customers or employees) to contribute against their will to "social" causes favored by the activists. In­sofar as they succeed, they are again imposing taxes and spending the proceeds.

The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his "social responsibility," he is spending his own money, not someone else's. If he wishes to spend his money on such purposes, that is his right, and I cannot see that there is any ob­jection to his doing so. In the process, he, too, may impose costs on employees and cus­tomers. However, because he is far less likely than a large corporation or union to have mo­nopolistic power, any such side effects will tend to be minor.

Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.

To illustrate, it may well be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects. Or it may be that, given the laws about the deductibility of corporate charitable contributions, the stockholders can contribute more to chari­ties they favor by having the corporation make the gift than by doing it themselves, since they can in that way contribute an amount that would otherwise have been paid as corporate taxes.

In each of these–and many similar–cases, there is a strong temptation to rationalize these actions as an exercise of "social responsibility." In the present climate of opinion, with its wide spread aversion to "capitalism," "profits," the "soulless corporation" and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest.

It would be inconsistent of me to call on corporate executives to refrain from this hyp­ocritical window-dressing because it harms the foundations of a free society. That would be to call on them to exercise a "social re­sponsibility"! If our institutions, and the atti­tudes of the public make it in their self-inter­est to cloak their actions in this way, I cannot summon much indignation to denounce them. At the same time, I can express admiration for those individual proprietors or owners of closely held corporations or stockholders of more broadly held corporations who disdain such tactics as approaching fraud.

Whether blameworthy or not, the use of the cloak of social responsibility, and the nonsense spoken in its name by influential and presti­gious businessmen, does clearly harm the foun­dations of a free society. I have been impressed time and again by the schizophrenic character of many businessmen. They are capable of being extremely farsighted and clearheaded in matters that are internal to their businesses. They are incredibly shortsighted and muddle­headed in matters that are outside their businesses but affect the possible survival of busi­ness in general. This shortsightedness is strikingly exemplified in the calls from many businessmen for wage and price guidelines or controls or income policies. There is nothing that could do more in a brief period to destroy a market system and replace it by a centrally con­trolled system than effective governmental con­trol of prices and wages.

The shortsightedness is also exemplified in speeches by businessmen on social respon­sibility. This may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here, as with price and wage controls, businessmen seem to me to reveal a suicidal impulse.

The political principle that underlies the market mechanism is unanimity. In an ideal free market resting on private property, no individual can coerce any other, all coopera­tion is voluntary, all parties to such coopera­tion benefit or they need not participate. There are no values, no "social" responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form.

The political principle that underlies the political mechanism is conformity. The indi­vidual must serve a more general social inter­est–whether that be determined by a church or a dictator or a majority. The individual may have a vote and say in what is to be done, but if he is overruled, he must conform. It is appropriate for some to require others to contribute to a general social purpose whether they wish to or not.

Unfortunately, unanimity is not always feasi­ble. There are some respects in which conformity appears unavoidable, so I do not see how one can avoid the use of the political mecha­nism altogether.

But the doctrine of "social responsibility" taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

SS-AAEA Paper Competition

The Student Section of the AAEA holds a paper competition each year. Students submit a research paper which is judged by one panel of judges, and present their research at the AAEA meetings, and that research is judged by another set of panels. Both the paper and presentation results are combined for a final ranking. This year's winner was Megan Sheely of Purdue University. Congratulations to Megan and her advisor Frank Dooley.

The competition provides students a valuable opportunity to showcase their academic and presentation skills, and provides them with a unique resume line. All high-quality papers are published in the SS-AAEA Journal of Agricultural Economics.

This year's competition included seven superb papers, all of which can be found here. Additionally, for the first time, we taped several of the presentations so that students new to the competition can observe how the presentations are typically conducted and the type of questions typically asked by the judges. The presentation of the winning student, Megan, can be viewed here. Another superb presentation was given by Myriah Johnson, which can be observed here.

I think the last paper by Chris Rodgers from the University of Florida provides an effective example of how a simple regression can aid practical decision-making. Chris, and his advisor Michael Gunderson, graciously provided the data accompanying the paper so that instructors may use it in their class. Please only use the data for teaching purpose.


Wednesday, August 27, 2008

A Textbook College Career

It is a scary thought that advisees rely on me for advice about what they should be doing in college to ensure they are marketable to employers at graduation. People like stories, especially when they are true, so I often tell my advisees stories about a certain student to illustrate a point. The story might pertain to the activities they focused on in college or how they went about finding a job.

Today I chatted with a former student who is graduating this semester. As we chatted about her college accomplishments and experience on the job market, I realized that her college career had been textbook-perfect. College students should aspire to her standards, so I tell her story below. For many reasons it is unlikely any one student can mimic this story, and that is okay. One does not have to do everything perfect to get a great job, they just have to do some things right.

This student entered college knowing she wanted to work in marketing, and she liked the culture of agriculture, so she majored in agribusiness with a marketing option. By knowing exactly what she wanted to do, she was able to shape her college career around her professional career goals.

She separated herself from her peers in the area of marketing a number of ways. First, she wrote a research paper on a marketing issue, publishing it in the SS-AAEA Journal of Agricultural Economics. Second, she participated in marketing team competitions much like NAMA and won first place in a marketing competition. Third, she gained internship experience at the OSU Food and Agricultural Product Marketing Center, where she worked with real products developing client relationships. I seriously doubt many students had these credentials!

Because she placed importance on making good grades but did not obsess about perfect grades, her GPA at graduation was 3.5. Not perfect, but it turns out that many employers do not want perfect grades. The optimal grade range is actually between 3.5-3.75, so once again she did everything perfect. By obtaining the position of President of the Aggie-X Club, her resume reflected an ability to work well with others and lead groups.

As graduation approached this student went through the OSU HIRE program where she obtained a campus interview with a marketing firm. A 45-minute interview, they did not ask her situational questions, like, "describe a situation where you had to utilize your leadership skills to make necessary but unpopular choices." Instead, they told her that the purpose of the interview was simply to get to know her. Everything she needed to know would be taught to her on the job. They only needed to know that she was trainable and worked well with people. It was laid-back, and they just ask her to tell them about herself and how her credentials could contribution to their organization.

After two interviews, the second being held in Connecticut, she was offerred a $49,000 a year job in Florida. They loved her, and she will do a superb job for her.

I asked her whether she was more excited or scared at the prospect of this new job, and she replied scared without hesitation. This is normal, this is good. Her fear at the challenges of a new job will ensure she works extra hard.

I should add that this student had a textbook college career which entailed much work, but she was always a happy person. Her first priority was to enjoy life. And she should - everyone should. One can obtain a textbook college career, achieving their dream job, while still having the time of their life.

If you can't have fun in college, the rest of your life seems pretty bleak.

Note: This young lady will be working for Damian International, an international marketing firm dealing with all types of products. This is not an agribusiness firm. Our students can complete against graduates from the business college for almost any job. Majoring in agribusiness does not restrict one to agricultural industries.

Tuesday, August 26, 2008

Marketing Research Tool - For Teachers

Conjoint analysis and similar topics regarding consumer marketing / behavior tools are increasingly taught at the undergraduate level. My new textbook has an entire chapter devoted to consumer research, and includes instructions on how to estimate random utility functions using simple surveys and regression.

Teachers in this area may be interested in an Excel-based consumer model my colleague Jayson Lusk (also a coauthor of the aforementioned textbook) based off real conjoint analysis data. It lets the user input different scenarios of ground beef products in a grocery store and to view how consumers would behave.

It is great tool for showing students beginning consumer marketing research to understand what the end-product looks like. Its also fun to play with!

Great Essay on Use of Information

My favorite teacher is someone who I have never met, and I have never enrolled in his class. His name is Russ Roberts, and he is an economist at George Mason University. Each week, he publishes a new podcast called EconTalk. In this podcast I listen to the most talented economists discuss contemporary issues. Some issues are more relevant to current events, others more relevant to economic thought.

Before I started learning from Russ Roberts I did not truly appreciate or understand how information is really used in real economies. Only years after my Ph.D. did I understand how dispersed information is among people, and consequently, why decentralized decision-making is so effective.

For teachers wishing to communicate the use of information in society to undergraduate students, Russ Roberts has published a superb essay for use in undergraduate classes.


Becoming a Great Teacher: Part 3

In the past I've discussed what great teachers do. This YouTube clip shows what great teachers do not do. An article discussing the video is here.

This teacher was fired for his antics. Have you ever heard of a professor who embarrased a university who was publicly forgiven by the university? If so, please tell me. I would like to know it happened at least once.

Sunday, August 24, 2008

Useful Links

Below are some links helpful for economics teachers.

1. This blog entry over at Marginal Revolution (a top notch blog, by the way) discusses the use of fiction in teaching economics. The comments are probably the most helpful.
2. This document is a handbook on using the web to teach economics.
3. If you love blogs like I do, this is a guide for using blogs to teach economics. In the past, to really understand economics you had to hang around accomplished economists and hear them talk. The journal articles they write are not enough. Fortunate for young people today, one can hear them talk in their excellent blogs and the superb EconTalk podcasts.
4. eLearning topics (and other good stuff) in economics can be found here.

Studying Really Does Help

Teachers truly believe that studying increases academic performance, but measuring the relationship between grades and studying is a difficult task. One cannot simply observe the correlation between hours spent studying and grades because that raw correlation does not hold other important variables constant. Such correlations are influenced by these other variables, making the correlations difficult to interpret.

For example, students naturally interested in economics will both pay more attention in class and study longer for economics classes. In all probability, they will make higher grades as well. If we detect a positive correlation between their higher grades and longer study hours, what really caused the higher grades: the longer study hours or the greater attention paid in class?

To truly measure the impact of studying, some sort of experiment - natural or unnatural - is needed where an exogenous, random event alters the study habits of a random group of students. A recent article in the B.E. Journal of Economic Analysis Policy contains such an experiment.

A particular Kentucky university requires all incoming students to live in a dormitory and assigns them roommates at random. Some of these roommates happen to bring video games with them. It turns out that a student whose randomly selected roommate brings a video game tends to study less. Thus, if the students whose roommate brought a video game to school performed worse academically, studying really does improve grades - everything else held constant.

The study tested whether a grade difference exists between these students and those whose roommates did not bring a video game, and the latter group did perform better.

Bottom Line: it is proven, studying improves performance, regardless of what kind of student you happen to be!

Thursday, August 21, 2008

Why the Soviet Union Crumbled

A central premise in economics, thanks to Friedrich Hayek, is that the information necessary for making wise decisions in an economy is dispersed across people in an economy. No one person could ever obtain the information necessary to run a command and control economy.

Since 1958, with the essay "I, Pencil" by Leonard Read, this concept has been taught to undergraduates by demonstrating that no one person knows how to make a pencil, much less the ability to bark instructions to comrades on how to make pencils efficiently. Certain individuals, however, know how to make certain parts of pencils, and they coordinate their efforts through markets to make pencils - very cheap pencils, I add.

An economist recently created an excellent PowerPoint presentation to demonstrate this, and made it freely available for you to download here:

Becoming a Great Teacher: Part 2

(This entry of part of an ongoing series of blog entries: previous entries can be found at the following links: Becoming a Great Teacher: Introduction and Becoming a Great Teacher: Part I )

In Part I of Becoming a Great Teacher I discussed how the single most important attribute of great teachers is that they are dynamic presenters. What do I mean by dynamic presenters? Among the descriptions students provided, two are: doing something other than lecturing and keeping students entertained.

In this entry, I suggest one method of breaking the monotony of the classroom I use for a statistics class I teach. The goal of the class is to teach students how to make sense out of large data sets. On the second day of class, to give them a fun data set to begin with, one where they generate the data themselves and therefore understand the data intimately, we leave the classroom and play sports.

First, we go to an open field to hit softballs (picture on left taken today). Each student is expected to swing at each pitch until they hit three balls. Letting the balls roll as far as they can, we then measure the hitting distance. During the next class we look at the data and observe that some people hit very far and some people not far at all. After asking students why some people hit further than others, they quickly volunteer variables like gender and experience playing baseball or softball. At that point, we collect the variable information for each player and I teach them how to run a regression with hitting distance as the dependent variable and variables like gender and experience as the independent variables. The data typically work great, with predictable coefficients and statistical significance.

When teaching how to use test-statistics, I ask the students for the last digit of their cell phone number, and then use that digit as an explanatory variable. It is absurd, of course, but they are surprised to see that the regression will not estimate a coefficient value of zero for this variable. Then they are introduced to the concept of a test-statistic, and of course, the variable is always insignificant. I have been doing this for six years, and have collected over 400 observations. Readers are free to download these data by going here and clicking on Data Available For Download in the left menu.

An alternative to softball is basketball, which I have substituted for softball if it is raining, and this year did it concurrent with softball (picture on left also taken today).

Each student is asked to attempt five free throw shots and five three point shots, and to record the number of shots made each time. We then utilize the number or percent of shots made as the dependent variable, often as a function of gender, experience, and a dummy variable for the three point shot. As you would expect, the coefficient for the three point shot is usually negative and significant.

A Forecasting Contest: At the end of the semester we hold a forecasting contest. Using data collected at the beginning of the semester, students form teams and develop a regression model forecasting softball hitting distances or basketball shooting percentages. The class then returns to the field/court, and are required to bring a guest. Each team predicts the performance of each guest in hitting softballs or shooting basketballs, then the guest is asked to hit/shoot. The teams with the lowest forecast errors receive a higher grade. This activity provides a concrete demonstration of out-of-sample forecasting. Also, because more parsimonious models always seem to win, it illustrates the advantages of simple but smart models.

Readers are also free to download the basketball data I have collected by going here and clicking on Data Available For Download in the left menu.

This activity is not only fun, but I believe helps students better learn regression. Whenever I introduce a new concept in the class I always use the softball/basketball activity as an example, and they seem to catch on quickly. Moreover, students love a break from the classroom.

I've always said I don't know if I know how to teach, but I do know how to get high evaluations, and this activity is guaranteed to boost your evaluations!

Tuesday, August 19, 2008

Agribusiness Students at Koch Industries

Each year, the largest private firm in America, Koch Industries, hires our some of our brightest agribusiness students for both full time jobs and internships. In fact, Koch hires only our best students, causing me to suspect that Koch particularly values the training our undergraduate program provides. To better understand Koch's appeal to our students, and to investigate what our graduates/interns are doing in the workplace, this summer I paid these students a visit at their cubicles.

After my visit I concluded that if I had to describe the one career our department best prepares students for, it is a career at Koch Industries.

With the headquarters located in Wichita, KS, Koch deals in numerous enterprises; including fertilizer, refining, chemicals, polymers, and commodity trading. Like the BASF slogan, they don't make a lot of the products you buy, they make a lot of the products you buy better.

The headquarters gave the impression of a giant brain. Floors stacked upon floors of talented college graduates working under Charles Koch's Market Based Management philosophy, each person was an enthusiastic neuron working in harmonious diligence in the noble pursuit of profits ("noble pursuit" not said sarcastically). For a change, I learned from my former students.

Lindsey's Lesson: The Importance of Supply and Demand

Lindsey Kuzma, shown to the left, is a market analyst specializing in the market for base oil, which I think is a by-product of oil refineries. Koch knew what they were doing when they hired her. I didn't know her as an undergrad but I have seen her performance and wish she had taken my classes! She spends most all of her time in Excel, studying base oil prices, with a particular emphasis on long-term fundamentals. Each week, she participates in a Supply and Demand Meeting where they discuss the supply and demand of base oil. She is expected to understand the big picture of the base oil market, where the market is heading, and must communicate this understanding to others clearly - that is her job! So when teaching supply and demand, and you feel the need to motivate its importance, simply introduce the students to Lindsey Kuzma!

Myriah's Lesson: The Importance of Studying Prices
Most every undergraduate attends lectures regarding the Law of One Price; describing how the price of a commodity should behave across different regions, how to predict price movements, and how to take advantage of price discrepancies.
This is not just academic curiosity. Myriah Johnson conducted an internship in Koch's fertilizer division. One of her jobs consisted of observing fertilizer prices at various locations, accounting for transportation costs between those regions, and comparing the regional net prices to the New Orleans fertilizer price. They call this "net-back analysis." The results of such analyses are used to determine how to set forward contract prices, where to expand their fertilizer market, and dictate storage decisions - among other uses.
Myriah also built economic models to help determine when farmers would switch the form of nitrogen they apply (e.g. liquid or solid nitrogen) to aid Koch's nitrogen storage decisions.
This type of price analysis has been taught for decades in agricultural economics classes. Thanks to Myriah, we know such analyses are still in style!

Jeff's Lesson: Understand Finance and Economics Well, and Explain It Even Better

Jeff Clark had worked at Koch for several years and had more information to provide about the types of projects they perform and the methods they use. I did not have the pleasure of knowing Jeff when he was at OK State, but I was glad I got to meet him during this visit. The guy is smart - really, smart - and articulate. Within five minutes you learn more than a feeble head like mine can hold!
Jeff works in the carbon commercial development portion of Koch, which includes projects like assessing the feasibility of purchasing coal, sulfur, and cement companies. How do they assess the feasibility of company purchases? By constructing economic and financial models. They calculate net present value regularly. They use Excel to conduct "what-if" scenarios. They employ many of the topics taught in agribusiness management and agricultural finance classes. I especially appreciate Jeff's statement that, "around here, you have to think like an economist."
Moreover, Jeff stressed the need to communicate the basics and the results of such analyses clearly. For example, the ability to describe a project succinctly is a necessity. This reminded me of all the memos I wrote in my business communications class, where I learned the challenge of combining information and brevity. Financial analyses at Koch are often sent up a review channel for the upper levels to consider. At each higher rung in the ladder, less information must be presented, less time consumed in the decision, yet at each higher rung the decision becomes more crucial. Understanding the key elements that should be passed along and expressing it clearly is essential to giving any quantitative financial analysis its chance of coming to contribute to the company.

Randis' Advice: Learn to Network
Randis (shown left) was one of my favorite students, who combines a sharp intellect with a contagious zeal for life. Most anything she says, I believe. Randis stressed the importance of networking in obtaining a prestigious job such as the one she fills at Koch. I asked her to articulate what she meant by networking. I had this strange view of networking as being an obnoxious sycophant at cocktail parties, but conjectured that was not the case. Academics' need for networking is not as strong as their need for focus, so networking is not something I know much about.
Randis described networking as doing little things to keep in touch with people. Sending Christmas cards is an example. It is all about not letting other people forget about you. It also entails simply being friendly. Sending a nice email for no good reason, dropping a compliment, asking advice in a manner that illustrates you respect a person: these are all networking skills.
Networking is not something we focus on in college (except for our excellent sales class taught by Kim Anderson). People like Randis are smart enough to figure out networking on their own. I wonder, though, if I could help other students without Randis' natural abilities by spending at least some time on networking?

Shea's Lesson: Hold Onto Something, This Ride is Just Beginning!
Some students are under the false impression that they can stop thinking, stop learning once they get out of college. Shea would quickly tell these students they are in for a rude awakening!
Shea Griffin is an admirably smart person. I wonder if I could even make a test hard enough for her. More than just books-mart, she is naturally clever and perceptive. I know exactly why Koch hired her, and I know Koch was lucky to get her.
Yet Shea was quick to relay how much she had to learn in her newly acquired job as a market analyst at Koch, and the intellectual challenges that everyday business can impose. In school, we told her what she needed to know, she studied it, she answered the questions correctly, and she made her A grade. At Koch, she had to do more than answer the question, she had to figure out what that question was! She had to think: critically and nimbly. We discussed how college could change to prepare students better for these tasks, but between the two of us, did not arrive at any tenable conclusion.
Koch hired Shea because Shea was an academic talent, and Koch knew she would be able to think her way through anything. Our department didn't make Shea. However, our assignment of grades revealed Shea's talent, and Koch jumped on it.
The lesson is that when students graduate they are not expected to simply apply what they were taught. They are expected to learn what they were not taught. To identify the salient questions, and to diligently investigate those questions.
Often in class we frustrate students by making them think for themselves - by making them identify the question - by making them decide how to approach the problem - by refusing to identify the one correct answer, because there rarely is one correct answer. When students show you their frustration, tell them Shea's story. Perhaps they will appreciate your provocations!
A Lesson From All: Become Proficient in Excel!
This was a great visit. I become friends with most all students, and I take personal joy in seeing them happy and successful. They were truly happy working at Koch (I asked them in private just to make sure they were telling the truth). Koch knows they are smart students, and smart students need a challenge, and need control over their own projects.
When I asked Randis about some of her daily tasks she proceeded to tell me about several companies that she "owned." I didn't understand what she meant by "owned", so I asked. It turns out that when Koch gives an employee a project, they tell the employee that they "own" that task. Randis, it turns out, was in charge of overseeing the finances of several companies owned by Koch. It gave her a sense of importance, it gave her work a sense of importance, and I believe motivated her.
I interviewed twice as many people as I mentioned by name here. Others from our department include Amber Houser and Jeff Steichen. If there is one major lesson I took all my interviews it is the importance of Microsoft Excel. Every person I talked to spent a majority of their time in Excel. Remember earlier I stated that Koch headquarters feels like a giant brain? Continuing with this metaphor, Excel is the "software" this "brain" operates. An undergraduate program almost cannot integrate Excel enough.
When the students were asked the Excel functions and formulas they use, one that surprised me was pivot tables. I still do not know what they are, but I plan to learn and teach them. To my relief, Joe Schatzer in our department teaches them now.
That made me realize why our department is so effective. We are academics, and we love learning for the sake of learning. Yet we also care what our students will do when they graduate, and strive to prepare them well. I was not aware of pivot tables but Dr. Schatzer was. My visit reassured me we do a commendable job. There are areas for improvement, of course, but I am proud of our department - yet more proud of our students.

I would like to thank Koch Industries for my visit, Randis Galloway for coordinating my visit, and Shannon Angle-Rugg for her close ties to my department.

British Humor for Libertarian Principles

Many economics teachers have a libertarian bent and express their social philosophy in class. This is not a bad thing, as laissez-faire economics is not just a philosophy, but a science grounded in deep thought and observation.

For teachers wishing to discuss the benefits of free choice in class, and want to use a humorous video relevant to school choice, you will love this video.

Friday, August 15, 2008

Teaching Character

When American universities were first founded, the classroom was used not just for teaching science, but character as well. Today, professors seem ambivalent about what "character" even refers to. Consequently, character is left out of the classroom.

Yet I would argue that we have a duty to encourage the development of a few key character traits which lead to success in the workplace, and perhaps personal happiness as well. In 2006, Shida Henneberry and I published an article in the American Journal of Agricultural Economics titled Show Me the Money! showing that when making hiring decisions, employers place more emphasis on the job candidate's character than they do internship experience, communication skills, grades, academic awards, and any other qualification we could think of.

A recent essay in Prospect Magazine titled, A question of character discusses the renewed interest in character development. Citing other studies, author Richard Reeves states...

measured levels of "application"—defined as dedication and a capacity for concentration—at the age of ten have a bigger impact on earnings by the age of 30 than ability in maths. Similarly, what psychologists call an "internal locus of control"—a sense of personal agency—at the age of ten has a bigger impact than reading ability on earnings.

Serious teachers want to see their students succeed in life. Recent evidence suggests that character development is essential to this success. The kind of character development I am thinking of has nothing to do with religion, it has to do with personal control and emotional intelligience. I think Richard Reeves summarizes the three important character traits well when he states...

The three key ingredients of a good character are: a sense of personal agency or self-direction; an acceptance of personal responsibility; and effective regulation of one's own emotions, in particular the ability to resist temptation or at least defer gratification.

How we instill such character traits is the hard question, one I will try to discuss in future blogs. Do not be disappointed if no such blogs results, as I am deeply conflicted and confused as to why character development can and should be obtained. If the reader has thoughts, please let me know!

Wednesday, August 13, 2008

SS-AAEA Person of the Year: Trent Loos

The Student Section of the American Agricultural Economics Association held its first symposium this year, and gave its first SS-AAEA Person of the Year Award. The recipient is asked to give the Keynote Address at the symposium, and as we expected, Mr. Loos' speech was educational, inspiring, and entertaining.

This superb speech can be seen here. If you are seeking a guest speaker for a conference or other agricultural occasion, I strongly encourage you to consider Mr. Loos. Just watch his speech, and you will understand why!

Parts of the speech may even be useful in a class lecture. I especially enjoyed his discussion of hormone use in beef production.

More information about the award can be found at the above link. Readers interested in nominating someone for the award should contact me.

Monday, August 11, 2008

Research on Teaching

Inside Higher Education posted an interesting essay regarding the lack of research into what teaching and classroom factors affect learning. For example, we tend to naturally assume that students learn more in smaller classes, but what research supports this claim?

The comments below the essay are equally if not more interesting than the essay itself. I especially value the comments that (a) instructors will modify their teaching style in smaller classes and (b) a "different type" of learning occurs in smaller classes.


Wednesday, August 6, 2008

Inspiration from John Steinbeck

John Steinbeck is the quintessential American writer. The Grapes of Wrath is a story, or at least a title, known by every American. Of Mice and Men is perhaps the most heart-wrenching story every told. East of Eden is arguably the greatest book every written - it was the number one bestseller in 1952, and in 2003.

Students know they are no Steinbeck. Writing scares them, and the thought of writing is immediately associated with failure.

Students are not alone, even the great Steinbeck found writing to be a daunting task. Before your students begin their writing assignment, try to inspire them by reading this passage from his semi-autobiography: Travels with Charlie.

It was like starting to write a novel. When I face the desolute impossibility of writing five hundred pages a sick sense of failure falls on me, and I know I can never do it. This happens every time. Then gradually I write one page and then another. One day's work is all I can permit myself to contemplate...
- John Steinbeck, Travels with Charlie: In Search of America

Monday, August 4, 2008

Great Video for Teaching Trade

Understanding the benefits of trade between countries is the most important topic in economics. Yet, when teaching comparative advantage students will invariably argue that trade, while providing long-run benefits, also imposes substantial short-run adjustment costs, which make international trade undesirable.

The most effective method of countering this argument is to demonstrate that the adjustment costs due to trade are just like the adjustment costs due to technological progress. And surely, we do not want to impede technologies like the automobile and the dialysis machine. So why hinder the benefits of trade?

My suggestion is to play the video Mexicans and Machines, created by the Reason Foundation and available at here. It is superb, intelligient, and entertaining - a great teaching tool.

Saturday, August 2, 2008

On Sale for $89.40.... textbook, at Amazon, that is. Why not just charge $90? Despite economists' obsession with understanding prices, we have no explanation to offer. Indeed, in my textbook I state, "We can offer no good reason why so many goods sell for $0.99, 1.99, or $199."

That is, until now. A compelling article published in the April/May 2008 edition of Scientific American Mind discusses psychological research on this interesting phenomenon. Leave it to marketing researchers to answer the more interesting questions about price!

The two marketing professors, Chris Janiszewski and Dan Uy from the University of Florida, conducting a ground-breaking research project where they presented a high-def television to participants and asked them to guess how much the television costs at the wholesale level, given a certain retail price. Consider two retail prices: one of $5,000 and one of $4,988. Participants who saw the $5,000 price tag guessed the wholesale price was actually lower than those who saw the price tag of $4,988! If consumers believe a retail price is closer to the wholesale price, they believe they are getting a better deal and are more likely to purchase.

My textbook sells for $89.40 instead of $90, because shaving 60 cents off the price leads the consumer to believe the book costs more at the wholesale level, and to believe they are getting a better deal.

Friday, August 1, 2008

Superb Essay on Capitalism

Much of my passion for teaching is derived from my passion for capitalism. The ability of people to purchase and produce whatever they wish is the greatest blessing a nation can receive. It is our only salvation from poverty. Sadly, people often view capitalism as something that must be tolerated, not embraced.

Whenever I encounter a superb piece of writings on the wonders of capital, I offer it as an optional reading, and offer it to you, the reader, to consider for your class.

The essay I will identify and provide shortly not only provides a rational view of capitalism, it dwells on the magisty of the capitalistic machine - like how we would never lend money to our neighbor but do not hesitate to loan money to strangers at a financial institution. Lastly, the essay is an example of superb, magnificient writing.

I dare say it is my favorite essay of all time - my colleague Jayson Lusk did not think so though. Decide for yourself!

So here it is, available for free at the Prospect Magazine.

Back From AAEA Meetings

Most agricultural economists were in Orlando, Florida for the AAEA meetings last week. While the meeting participants mostly consisted of agricultural economics professors, around 70 undergraduate students participated as well. In a few upcoming blogs, I will discuss some of these events.

The most notable change of SS-AAEA activities was the first-ever SS-AAEA Person of the Year Award, which was awarded to agricultural advocate Trent Loos. Trent is shown below, with SS-AAEA Student President Alicia Taylor on the left and me on the right - I'm the faculty advisor of the student section of the AAEA.

Trent is an interesting and passionate person. In return for receiving the award, recipients are asked to address the students. Since Trent makes part of his living giving speeches, I knew he would be good, and good he was. The video of his speech will be posted shortly.

Mr. Loos is arguably the most well-known individual within agriculture, especially animal agriculture. Through his radio show Rural Route, his Feedstuffs column and podcast Loos Tales, and his travels around the country, while one may disagree with him at times, one can never doubt his sincere love for American agriculture.

While in Orlando Trent interviewed an agricultural economics student and professor. His hour-long interview with Dr. Derrell Peel of Oklahoma State University about the teaching agricultural economics is available online. To listen, copy in your podcasting tool and tune in to the July 29, 2008 edition.

Also in his Loos Tales podcast Trent interviewed Alicia Taylor in the picture above. To listen, copy in your podcasting tool and tune in to the July 29, 2008 edition.