Economics and Ethics

The beginning of August nears and time to gear up for Fall classes. This is also a time I get to read more of the news. One story floating out there is the New Jersey corruption case that snared several public officials and even some Rabbis. The interesting part of the case (yes, political corruption has become too common to be interesting) is the black market that has developed for kidneys. It seems that we have a simple supply and demand problem – a growing demand for transplanted kidneys and a paltry supply. As usual, laws on the books have helped create the black market rather than make it easier for getting needed kidneys.

But this is one is a tough issue from an ethical point – do we want to create business markets for human organs? Should people be compensated for giving away their kidneys? Even a market person like me sees problems with this. I like the idea of good Samaritans donating, rather than this become a mercenary trade.

Yet, because demand has grown out of step with supply (or if supply has been artificially depressed), a potentially bigger problem has developed—a black market for organ trafficking. Consider that the demand for organs is very inelastic regarding price: those that need an organ transplant will be willing to pay just about anything as described by a Dr. Satel, who herself received a kidney transplant. Dr. Satel said had not a friend stepped up to donate her kidney she would have been desperate enough to pay the six-figure amount in the black market.

This might be a good current event for an economics class – or ethics (or at least a good report for a student to write about!). Honestly, I don’t know what the right answer is on this one. Dr. Satel makes a case of compensating organ donors but how do you set a price on something that is priceless?

Democracy and economic freedom

My colleagues Dr's. Stack and Gartland recommended the book The Elephant and the Dragon, which does a nice job of explaining the impact of globalization for the two fastest growing economies of China and India. The book along with current events in Honduras point to the impotence of democracy unless there is also functioning economy.

As pointed out in the book China and India have grown because global economic forces that have driven companies to source manufacturing and services to these countries which have a capable supply. They have done it with two very different political structures as China is extremely autocratic, a communist regime, and India democratic. Although autocratic, China's leaders have opened up much of the economy to be capitalistic, which has created enormous growth and significantly increased the wealth of its citizens--though MANY still live on a pittance the pittance has grown and created a consuming class that has also fueled the growth.

This raises the question of what is more important: political freedom or economic freedom? It is assumed that these are tied together but China has shown not necessarily. Their regime is still in many ways VERY repressive (right now they are trying to enforce a rule that all computers have censoring software on them so the government can monitor what people are doing on the Internet). But the country has made great strides since the Mao regime crippled the economy from the 1950s to the 1970s (Mao died in 1976). Ironically, the centralized control has made it easier to institute economic reforms. India's growth has been much slower than it might because of the inefficiency of their democratic government.

In fact, even with few political rights, people can improve their lots greatly if they have some type of economic freedom. Early in the 20th Century, American Jews faced lots of discrimination and were largely unrepresented in government office. Yet, because they had some freedom to pursue careers in law, medicine, and business many Jews were able to achieve success.

On the other hand democratic regimes like Honduras struggle because they cannot establish an effective economy. Reportedly, 50% of Honduras people live in abject poverty and many more in poverty. This condition leads to democratically elected leaders seeking power grabs (ala Hugo Chavez), which seems to have taken place here (though there are different opinions on who is at fault). Democracy is easily taken for granted by Americans, but the one thing that is essential to making it work is that there are economic freedoms with some form of market mechanism underlying those freedoms.

More Operation Breakthrough

As a follow up to my last post on Operation Breakthrough and our Executive Fellows, here is an article in today's KC Star featuring our MBA graduate who is working on helping change law to help low income working mothers.

Getting laws changed or enacted take a long time and the work by Audrey Johanns and her Fellows group have got the ball rolling in this difficult process. Somewhere near the capitol building (pictured to the right) is Audrey's Cafe.

Giving to Operation Breakthrough

On Friday, our Executive Fellows class spent the afternoon at Operation Breakthrough, a safe haven for 670 under-privileged kids that live in our city. Seeing the place and hearing its leader, Sister Berta, is somewhat transformative for those of us who rarely experience the challenges these kids (and their parents) face.

What I also learned from our session is how much our executive MBA students and faculty have already contributed to this Kansas City organization. First, 2001 Executive Fellow alum Gary DeRigne has been an essential liaison and adjunct professor in leading student consulting projects. We some of the fruits of these projects on our visits -- e.g., a fellows team a couple of years ago created career information graphics that are still prominently displayed in the room where teens hang out.

Second, two fellows students who graduated last month took the time to come and present the projects their teams worked on this past year. And they were significant projects:

• Audrey who operates a cafe across the street from the Capitol building in Jefferson City made the 2-hour drive to talk about the political action project her team led this past year. She reported that progress had been made on a bill that impacts poor families and child care but that the job had not been completed.


• Jeff talked about how his team's project led to the creation of 4 summer internships at KCP&L this summer. That is, 4 teens affiliated with Operation Breakthrough's services now are working this summer to gain real work experience (and these are paying jobs).


• We also learned of the other projects done this past year by our fellows students.

It is a wonderful cause -- Gary, Audrey, and Jeff came entirely because of their commitment to the cause -- and I salute all our students over the years who have contributed. Sister Berta told me on Friday we should monetize these contributions. Maybe she was exaggerating that it was probably worth $250,000 . . . but whatever the cost it was worth it.

Greenland Up?

The late management guru, Peter Drucker, wrote that we know only two things about the future:

• It cannot be known.


• It will be different from what exists now and from what we now expect.

In business this is evident all the time. Three years ago, Dell was sitting pretty as its main competitor H-P was trying to recover from a messy "divorce" from its CEO and tyring to figure out how to overcome a disadvantageous cost position. Today, Dell is trying to figure out how to come out from under weakening demand in a mature PC business and changing consumer preferences for buying those computers (one that actually has favored H-P). Business Week reports Dell is now desparately looking to acquire companies that can get it into new growth businesses.

Drucker's statement works for economies and countries as well. It was a great irony to learn (sometime in my youth or adulthood) that despite their names and their latitudes, Iceland was a land of opportunity while Greenland was a desolate mass of ice. Reagan and Gorbachev held their famous summit in Reykjavik, Iceland (Greenland was never an option). Iceland was home to many banks and the climate is considered quite balmy compared to other northern exposures.

Yet, today The Business Week asks if Greenland is now the "next emerging economy"? Ruled by Denmark, the large island is about to be granted a right to self-government for the 56,000 people that live there (mostly native inuits). It seems Greenland has some resources of value today -- swift rivers (translated to hydroelectric power) and lead and zinc. The low power costs are important to businesses like computer storage companies who must store servers in cool, regulated places. Conversely, Iceland has suffered mightily from the financial meltdown . . . Even for countries fortunes change because the future always changes.

Ironically, Greenland's surge will be further helped by global warming; as ice melts, rivers run faster and now-covered resources (i.e., lead and zinc) become accessible. I suspect our race to reverse global warming effects will have all kinds of consequences--intended and unintended.

GM Bail Out

It seems we live in extraordinary times when the government takes on a 70% ownership of a for-profit enterprise. Actually, there is lots of precedent for government intervention from all administrations. Reagan "bailed out" Harley Davidson by giving them loans and favorable tariffs.

Taking on such a large equity stake, however, creates added potential problems related to simple management principle of allocating resources. Companies operate with limited resources -- they must make choices and prioritize. Very effective units within companies (or even whole companies) often pardoxically succeed BECAUSE they have fewer resources. Japanese auto companies in the 1950s could not compete with Detroit's vast production lines that took up lots of space (not available in the island country) forcing them to create lean manufacturing, which turned out be a great innovation and advantage.

Now consider a small unit inside a company. If it is managed well, someone has line authority of this unit with some kind of budget. And the good managers figure out how to get results with the resources they have. (Several baseball teams over the last twelve years have proven that they can win with significantly less money than some of their competition because they are more resourceful and innovative.) Now imagine the CEO parachuting in to run a unit -- he or she will most likely put more resources to bear not necessarily because they are needed (many times they are because the unit is being starved) but because he or she can do it. They just have easier access to people, cash budgets, etc. They have power, which includes easier access to resources.

Now consider President Obama and Congress (and every other VIP who will assert ownership) and the irresistable tempation to meddle and eventually pouring more resources to the problems rather than manage it. Forget the many unintended diasasters to the market by having a government player using policy and pusestrings to create market winners, the fundamental problem is that it will be too easy to throw $$ at problems that need to be managed with innovative ideas.

And here is one person's rendition of other unintended consequeces, as well.

Best place to Work?

As you know, Google has had tremendous success over the last several years, becoming a huge enterprise on the strength of its primary internet search business. A colleague sent me some pictures of some of the perks Google employees enjoy in their workplace. They have areas where professional masseurs work, pool tables for relaxation, exotic cafeterias or as pictured above relaxation rooms with massage chairs in the ambience of stocked aquariams.

If that doesn't get you excited, how about private cabin areas for you to sneak away to take care of personal affairs . . . pictured to the right.

It actually, looks a little creepy to me and signals for sure a bit of hubris that so often takes hold of successful companies. Nearly always, however, these companies eventually find themselves struggling to control costs in the face of increasing competition, leading to layoffs . . . and these perks won't seem so neat when you are out of a job. In fact, Google may eventually have to repurpose another nifty perk -- slides for quick access to different floors -- so that those laid off can slide right out the door!