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The encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.

If all the economists were laid end to end, they would not reach a conclusion.

Economics has become the science of mathematical modeling. But economic behavior is better studied through human history.

I believe that if you work granularly, you can get a perception of things that isn't available from the written analysis. Data can tell you a lot. Opinions without data are severely risky.

Waves are caused by excesses of production, investment, and liquidity in the expansion phase that carries the seeds of its own destruction, leading to overproduction, investment and lending, shortages of raw materials, rising costs, and, eventually, declining demand, profits, and investment. People see the long view as deterministic. They are afraid that they can't predict things over such a long cycle. But I like determinism. There is a comfort to it. It makes investment planning easy.

Note: Business 2.0 is now part of CNNmoney and some older articles are no longer available

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I am not afraid of monopolies because they eventually collapse. Thucydides wrote years ago that hegemony kills itself. A power that has hegemony always becomes arrogant. Always becomes overweened. And always unites the rest of the world against it. A countervailing power always reacts. A hegemonous system is very self-destructive. It becomes defensive, arrogant, and a defender of yesterday. It destroys itself. Therefore no monopoly in history lives for very long.

America's economic growth is driven by population growth, which is expanding rapidly because of immigration. European populations are stagnating -- they are becoming gentrified. One of Japan's biggest problems is that its population is shrinking and graying. That's what's making its economic decline so difficult to repair.

Note: Business 2.0 is now part of CNNmoney and some older articles are no longer available

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There's nothing magical about the United States, in my opinion, except its ability to innovate and innovate freely, and that's what this country's all about.

Why do so many people cling so hard to the notion of efficient markets? Andrew Lo, an economist at MIT, suggests that they may be suffering from a "peculiar psychological disorder known as 'physics envy'...We would love to have three laws that explain 99% of economic behaviour; instead, we have about 99 laws that explain maybe 3% of economic behaviour. Nevertheless, we like to talk as if we are dealing with physical phenomena."

Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it Â… He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

The fact that the New Economy is real, however, doesn't mean that we've understood it. In explaining our success in the nineties to ourselves and the world we have largely drawn on a set of myths that desperately need debunking: that deficit reduction by itself led to the economic recovery of the 1990s; that the brilliance of our economic leaders created our newfound prosperity; that deregulation and self-regulated markets are the key to sustaining that prosperity, and should thus be exported to the rest of the world; and that American-style globalization is based on high-minded principles of equality and social justice and will inevitably lead to global prosperity, benefiting not only financial markets in America but also the poor in the developing world.

Labor's real crisis is not unemployment but unemployabilityÂ… Labor unions will not make a difference. It was precisely because direct labor used to be so simple, mechanical and yet critical to value creation that labor unions made senseÂ… Anyway, the logic behind unions may still apply to some kinds of work -- fast-food servers, apparel assemblers, hospital orderlies. But, again, any job that is simple and repetitive, that requires so little individual creativity that an employee would rather join a union than negotiate an individual career path, will become a prime target for the computer-integrative technologies as the years go by.

All of this means that 10 or 20 or 30 million people -- people with children, people hobbled by dullness and self-doubt, people who played by rules that simply evaporated from the time they were 15 to the time they were 35 -- are hard pressed to see a future. Or make sense of the past. After all, the school system we conceived, the union movements we adjusted to, the "leading" economic indicators we tracked, the Government programs we put in place -- none of these things assumed that virtually every member of society would need the equivalent of college-level skill just to get a decent job.

Note: Business 2.0 is now part of CNNmoney and some older articles are no longer available

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The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist [or] ... academic scribbler of a few years back.

Note: Business 2.0 is now part of CNNmoney and some older articles are no longer available

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The limitations of space have long dictated the economics of exchange transactionsÂ…In the Network Economy, the limitations of space no longer applyÂ…But a funny thing happened on the path to frictionless capitalism. The economics of distance died, but the economics of attention took its placeÂ…But in many markets, customers find themselves overwhelmed with vendors clamoring for their attention, and vendors find themselves in a desperate battle to acquire customers. Customers still need to search, evaluate, negotiate, and configure products on their own. What customers gained in reduced transportation costs, they seem to have lost in increased search costs. These search and evaluation costs continue to create significant friction in commerce.

According to Prospect Theory, if you want to drive decision-makers towards a riskier decision, convince them that they are already losing. If you want to drive decision-makers towards a risk-averse decision, convince them that they are ahead and stand to lose quite a bit.

In his book "A Conflict of Visions," the economist Thomas Sowell argues that much of the philosophical debate of the last 200 years has been shaped by the struggle between two competing views of the world.

The "Unconstrained View" is based on the premise that man is basically good and has a natural desire to behave in ways that maximize the benefit to society as a whole. If a man is not behaving in this manner, the reasoning continues, it must be because he has been corrupted by selfish thoughts or ignorantly clings to wrongheaded ideas. The solution, therefore, is for enlightened individuals to educate the masses as to the operating rules that they should follow to achieve the greater social good. Once the masses have "seen the light," the logic goes, they all will be better off and realize the error of their past ways.

The contrasting "Constrained View" starts from a fundamentally different view of human nature. Its adherents believe that man is inherently self-interested and makes trade-offs within a set of perceived constraints to maximize his personal happiness (or "utility," to an economist). Under this philosophy, if mankind in total is not acting in a manner consistent with the greater good, it is most likely a problem with incentives or constraints. For example, if natives of the rain forest in Madagascar are cutting down trees and selling them to make charcoal, it is not because they are ignorant of the benefit of a pristine environment. Rather, they are trying to fulfill their personal objectives of feeding their families, and no amount of "re-education" will change this behavior.

Computers are great at making information cheaper and cheaper, but it takes humans to respond and act on that data. For most tasks, you still need a person in the loop. But humans can also be a bottleneck. We have more demand and overload on our cognitive abilities, and that prevents technology from being as effective as it can be.

The 20th-century company was characterized by a separation of conceptualization and execution; a small group of people-the "brains"-developed a plan, and a large group of people-the hired "hands"-carried it out. That distinction is obsolete in the information economy.

Note: Darwin Magazine is now dead. Some articles are moving to CIO. I will try to update the links when I have time...

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As Eben Moglen once said: "Society has been vastly underproducing pyramids since the time of the Pharaohs." The economic and social system that made pyramid production sensible simply doesn't exist anymore, and no one seems to miss it, even if we're a few pyramids short of where we'd like to be.

Business thinker Stan Davis uses a pipeline metaphor to describe the pattern of job creation and motion. "I'm not concerned about U.S. job losses so long as we're feeding the front end of the pipeline with growth and innovation," he says. "As each new innovation creates new jobs and new sectors mature, those jobs migrate down the global food chain. The issue is, 'Does the United States represent the front end of the pipeline?' It's a question of how long we stay healthy and grow and innovate and create new sectors."

In the long run, the U.S. economy can be very flexible: 120 years ago, half of the population still worked on farms. So over the long run, we are optimistic that better education and training will prepare most of the workforce to do meaningful work in the computerized world. But education takes time and change is happening fast. Forty years ago, John Kennedy could say, "The rising tide lifts all the boats" and be correct. He governed in a lucky economic time when technology and trade did not favor one group of workers over others.

While politicians still invoke Kennedy's language, it no longer applies. Technology and trade are still engines of economic growth but the engines now favor educated and skilled workers. Less educated workers are paying a big price so the nation as a whole can advance. The short run challenge is to work out a better safety net-long-run training, assistance in areas like health insurance-to get through this period.

At least in the United States, most policymakers understand that in the long run, economic growth requires productivity growth: For per-capita living standards to increase, so must per-capita output. What is less well understood is that productivity growth requires the creation and satisfaction of new wants, not just the more efficient provision of existing wants.

Currently, discussions of productivity tend to focus on increases in efficiency and ignore the development of new markets, which is a dead end: Economies cannot sustain growth in productivity and living standards simply through efficiency. Sure, in the short run, increased efficiency does reduce costs, and as costs decline, people consume more of the good or service. But eventually, the law of diminishing utilities sets in: Sated consumers refuse to buy more even if prices continue to decline. After that, further increases in production efficiencies must come at the expense of the demand for labor.

In principle, societies could accommodate reductions in the demand for labor by increasing the time for everyone's leisure. Over the last century, economic growth has helped reduce working hours and increase vacations. But somehow, beyond a certain point, societies seem unable to accommodate reductions in labor demand by spreading the work around...It is the entrepreneurial activity of creating and satisfying new wants that keeps the system humming.

Outsourcing jobs to low-wage countries resembles efficiency improvement in its symbiotic relationship to the satisfaction of new wants. It improves living standards in the United States, provided the human capital released here can be used to make new goods and services. Otherwise, as with improvements in efficiency, outsourcing is all too likely to reduce the demand for domestic labor.

[In the past,] a new product gave the inventor a monopoly power to set higher prices and earn higher profits. The inventor had a new product that others did not have. In contrast, a new process still left the inventor in a competitive business making a competitive product. The inventor's competitors knew how to make the product, and they could always lower their prices to match the inventor's prices as long as they were covering marginal costs in their old facilities.

In contrast, to establish a similar monopoly position by inventing new process technologies, it was necessary to drive one's competitors out of business completely. To do this, the new process technologies had to have average costs below the marginal costs of the old process technologies. Since marginal costs are typically far below average costs, an enormous (very unlikely) process breakthrough was necessary. Driving one's competitor out of business was also likely to get one into trouble with the antitrust laws. With new products, in contrast, there were no old competitors to be driven out of business. Since new process technologies were less profitable than new product technologies, it was reasonable for a firm to spend most of its R&D money on new product development.

Today, however, levels of technical sophisticationÂ…are not very different. Furthermore, reverse engineering has become a highly developed art formÂ…If I can make a product cheaper than you can, I can take it away from you even if you are the inventor. In today's world, it does very little good to invent a new product if the inventor is not the cheapest producer of that product.

If the winners are the inventors of products, the education of the top 2 5 percent of the labor force is critical, because someone in that group will invent the new products. If the winners are the cheapest and best producers of products, the education of the bottom 50 percent of the population moves center stage, because this part of the work force must master the new processes. If the bottom 50 percent cannot learn what must be learned, new high-tech processes cannot be employed. If a firm or country is to be successful, each and every worker must have high-tech skills.

Put bluntly, those with the best work forces will win the competitive game of the 21st century. The quality of the work force is the key strategic competitive weapon for the individual, the firm, and the nation. In a global economy, those without skills have to face what economists know as "factor price equalization." The unskilled who live in a rich society can make no more than the unskilled who live in a poor society. If the unskilled in rich societies won't work for such wages, unskilled jobs will simply be moved to poor countries where the unskilled will work for such wages. In a global economy, the effective supply of unskilled workers expands enormously and the wages of the unskilled in rich countries fall.

Let me suggest that the military metaphors should be replaced with the language of sports. Despite the desire to win, all sports have a cooperative element as well as a competitive element. One has to agree on the rules of the game, the referees, and what trophies go to the winners. One can want to win, yet remain friends both during and after the game. The economic game of the 21st century will not be economic warfare, but a game that combines the characteristics of World Cup soccer and those of world-class chess.

World Cup soccer is a fluid, aggressive game in which the desire to win is intense. Players must be superb athletes and capable of real teamwork. World-class chess, in turn, requires strategic thinking: the player who is planning his game five moves ahead loses to the player who is thinking six moves ahead.

Americans have never been World Cup soccer champions. Only once in recent history has an American been the world chess champion. Basically, Americans are going to have to learn to play a new, faster game. The rest of the world is not going to learn American football. In the economic game about to be played, Americans will have to learn to live with no time-outs, no huddles, and very limited substitutions. And they will need to learn the skills of chess - long-range planning and strategic moves. In the new economic game about to be played, Americans will have to acquire a lot of new skills.

While American firms often talk as if they are investing vast amounts in their work forces, they in fact invest less in the skills of their workers than either Japanese or German firms. The investment they do make tends to be highly focused on professional and managerial employees. And the limited investments that are made in average workers are narrowly focused on the specific skills necessary to do the next job, rather than on the basic background skills that make it possible to absorb new technologies.

In Germany, there is an extensive training system for the non-college-bound. These young people enter a dual school-industry apprenticeship system at age 15 or 16. At the end of three years, after passing written and practical examinations, they become journeymen with known skill levels. After another three years of work and additional courses in business management, law, and technology, a journeyman can become a master - a credential necessary to open one's own business.

In contrast, America keeps all students on the "college track," even though it knows that only a quarter of them will successfully complete that track. It ignores the fact that skilled blue-collar workers will earn more on average than college-educated workers. The mirage of equal opportunity is used to defeat real opportunity. No one is willing to plan for, or invest in, the skills of the non-college-bound. Relative to the sizes of the two populations, for every $1 per person in taxpayers' money spent on training the non-college-bound, $55 are spent subsidizing those going to college - a system that is neither fair nor efficient.

In our economy, more and more of the output is in quality, variety, customer service, timeliness, and components of output other than the number of units produced at a given cost. As a result, the nature of our GDP is changing; the nature of our competition is changing on the output side.

The same thing is happening on the input side, where more and more of the important inputs to production aren't just labor, capital, energy, and materials, but organizational capital and other intangible assets. Real research and management agendas for the coming decade are to understand better these intangible outputs and inputs because you can't manage what you don't measure.

Note: Older EBF articles are not currently online. I'm not sure if this is temporary or permanent. If you click you will be taken to the Archive.org site to find an archived copy.

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Globalisation offers short-term opportunities: economies of scale, efficiencies from larger markets, and cost savings from cheaper production or services. But with the 'quick buck' comes greater vulnerability. As the business chain lengthens, the risk of failure from one weak link increases. Risks - structural and reputational - are compounded as business extends around the world.

Note: Older EBF articles are not currently online. I'm not sure if this is temporary or permanent. If you click you will be taken to the Archive.org site to find an archived copy.

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Economists are blind to the loss of US industries and occupations, because they believe these results reflect the beneficial workings of free trade. Whatever is being lost, they think, is being replaced by something as good or better. They are unable to identify what the replacement industries and occupations are, but they are certain they are out there somewhere. It does not occur to them that the same incentive (cheap, skilled foreign labour) that causes the loss of one tradable good or service applies to all tradable goods and services. There is no reason why the ‘replacement industry' or knowledge job will not simply follow its predecessor offshore.

Economists misunderstand outsourcing because they have not got to grips with the challenge presented to comparative advantage by highly mobile factors of production and by production functions based on acquired knowledge. Their belief that free trade always makes trading countries better off demonstrates that economists are also unfamiliar with the latest development in trade theory.