Trillion Dollar Economists: How Economists and Their Ideas have Transformed Business
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More About This Title Trillion Dollar Economists: How Economists and Their Ideas have Transformed Business

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A detailed look at how economists shaped the world, and how the legacy continues

Trillion Dollar Economists explores the prize-winning ideas that have shaped business decisions, business models, and government policies, expanding the popular idea of the economist's role from one of forecaster to one of innovator. Written by the former Director of Economic Research at Bloomberg Government, the Kauffman Foundation and the Brookings Institution, this book describes the ways in which economists have helped shape the world – in some cases, dramatically enough to be recognized with a Nobel Prize or Clark Medal. Detailed discussion of how economists think about the world and the pace of future innovation leads to an examination of the role, importance, and limits of the market, and economists' contributions to business and policy in the past, present, and future.

Few economists actually forecast the economy's performance. Instead, the bulk of the profession is concerned with how markets work, and how they can be made more efficient and productive to generate the things people want to buy for a better life. Full of interviews with leading economists and industry leaders, Trillion Dollar Economists showcases the innovations that have built modern business and policy. Readers will:

  • Review the basics of economics and the innovation of economists, including market failures and the macro-micro distinction
  • Discover the true power of economic ideas when used directly in business, as exemplified by Priceline and Google
  • Learn how economists contributed to policy platforms in transportation, energy, telecommunication, and more
  • Explore the future of economics in business applications, and the policy ideas, challenges, and implications

Economists have helped firms launch new businesses, established new ways of making money, and shaped government policy to create new opportunities and a new landscape on which businesses compete. Trillion Dollar Economists provides a comprehensive exploration of these contributions, and a detailed look at innovation to come.

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ROBERT LITAN has spent four decades publishing over 25 books and more than 200 articles about the U.S. economy and has directed economic research at some of the nation’s leading research organizations in both the for-profit and non-profit sectors: the Brookings Institution, the Kauffman Foundation, and Bloomberg Government. He is currently a non-resident senior fellow at the Brookings Institution, Of Counsel to the law firm of Korein Tillery (St. Louis and Chicago), and Chief Economist of Main Street Genome, a new company providing analytics to small companies. He is also a regular contributor to Wall Street Journal’s“Think Tank” blog.

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Preface xi

Chapter 1 Introduction: Economists as Innovators 1

Organization of the Book 5

My Personal Interest (and Bias) 8

Chapter 2 An Easy Introduction to Economics 13

Rationality 13

Markets 19

Market Failures 22

The Macro–Micro Distinction 27

Economic Growth in the Short and Long Run 31

The Equity–Efficiency Tradeoff 32

Innovation and Growth: The Role of Economists 35

The Bottom Line 39

Part I: The Power of Economic Ideas:Direct Use in Business 43

Chapter 3 The Price Is Right 47

The Bloomberg Way of Pricing 49

Auctions 52

Different Prices for Different Folks 69

The Bottom Line 73

Chapter 4 Minimizing Costs 77

Optimization 78

Learning by Doing 87

The Bottom Line 91

Chapter 5 Beyond Moneyball 93

A Brief Guide to Regression Analysis 94

The Business of Forecasting 96

The Business of Economic Consulting 101

Data Analytics and Big Data 104

Econometrics and Sports: Moneyball 106

Regulatory Moneyball 110

The Bottom Line 112

Chapter 6 Experiments in Economics and Business 115

Economics in the Lab: Vernon Smith and Experimental Economics 117

Lab Experiments in Business: Focus Groups 120

Economic Experiments in the Field: Randomized Controlled Trials 121

Business Experimentation in the Field 122

Innovation and Entrepreneurship:

Experimentation as the Foundation of Growth 125

The Bottom Line 133

Chapter 7 Matchmaker, Matchmaker 137

A Gentle Introduction to Market Design and Matching Theory 138

Matchmaking in the Labor Market 146

Matchmaking and Online Dating 149

The Bottom Line 151

Chapter 8 Economists and Mostly Good Financial Engineering 155

Not Putting Your Eggs in One Basket: The Rise of Index Investing 156

Efficient Markets and Their Implications 159

Behavioral Finance 164

Valuing Options: Upsides and Downsides 167

The Bottom Line 173

Part II: Economist-Inspired Policy Platforms for Private Business 177

Chapter 9 Planes, Trains, and . . . Trucks 185

Origins of Transportation Regulation 186

Airline Deregulation 189

Trucking Deregulation 197

Railroad Deregulation 202

Deregulation’s Impact:

The Transportation Industry 203

Deregulation as a Business Platform 207

The Bottom Line 210

Chapter 10 Economists and the Oil and Gas Revolution 213

The Origins and Decline of Price Regulation of Fossil Fuels 214

The Oil and Gas Supply Revolution 221

The Energy Revolution as a

Platform Technology 224

The Bottom Line 227

Chapter 11 Economists and the Telecommunications Revolution 229

Economists in a Quick History of Communications 230

When Natural Monopolies End: The Run-Up to the AT&T Antitrust Case 234

Competition in Telecommunications: The Benefits of AT&T’s Breakup 242

Economists and Price Cap Regulation 248

Economists and Spectrum Allocation 251

The Bottom Line 256

Chapter 12 Economists, Financial Policy, and Mostly Good Finance 261

Economists and Competition in Brokerage Commissions 262

Economists as Detectives: Accelerating Automated Trading 264

Economists and the Financial Crisis 270

How Did the Crisis Happen? A Quick and Easy Guide 271

Subprime Lending 276

Excessive Leverage: An Introduction 277

The Pre-crisis Demise of SEIR 281

The Glass–Steagall Debate 287

The Bottom Line 294

Part III: Looking Ahead 299

Chapter 13 Economic Ideas in Waiting: Business Applications 301

Prediction Markets 302

Potentially Good Financial Innovations 306

Congestion Pricing 312

The Bottom Line 317

Chapter 14 Economic Ideas and Challenges on the Policy Shelf: Business Implications 321

Federal Budget Deficits as Drivers of Policy Change 322

Premium Support for Medicare and Medicaid 326

Taxing Consumption 334

Taxing Carbon 343

The Bottom Line 350

Chapter 15 The Future of Economics: What It Means for Business and Economists 353

The Revolution in Economics 354

How Economics Will Continue to Affect Business 356

Implications for Economists 357

Concluding Thoughts 359

Appendix: Prizes in Economics 361

About the Author 365

Index 367

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“In his new book Trillion Dollar Economists, Robert Litan of the Brookings Institution argues that the economics profession has ‘created trillions of dollars of income and wealth for the United States and the rest of the world.’ That sounds like a nice contribution for a relatively small profession, especially if we do some simple arithmetic…The fun thing about Litan’s book is that he details many clever little ideas about how to run businesses or to manage the economy better. They lie in the realm of optimal pricing and marketing mechanisms, regulation of monopolies, natural-resource management, public-goods provision, and finance.”
Robert J. Shiller, 2013 Nobel laureate and Yale Professor of Economics

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