Ben Mathew Economics
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Publisher Economics

12/22/2013

2 Comments

 
The New York Times ran an opinion piece, Triumph of the English Major, by book editor and English major, Gerald Howard. While working for Penguin Books in the early '80s, Howard reissued "two early novels by the fine writer Alice Adams." The project delivered a 7 percent return, and the bean counters weren't happy.
So there I was in our C.F.O.’s office with a P. & L. that just eked out a 7 percent return. He looked at that piece of paper dubiously. He looked at me dubiously. I made some weak noises about literary excellence, backlist sales, commitment to authors. He continued to look at me dubiously. Then, with that wry and sad expression with which financial people have regarded liberal arts people since at least the invention of movable type and perhaps even written language, he signed off on my shortfallen P. & L. and said to me, “You know, we could make more money by just putting this advance into a certificate of deposit.”

I produced the properly crestfallen face because I knew he was right. Inflation was rampant and C.D.’s were paying 10 percent per annum or more. What a drag I was on the corporation. But I grabbed the P. & L. before he could have second thoughts, thanked him and backed out of his office.

However, as I went back to my office I experienced an instance of what the French call “stair wit.” I thought, wait a minute, I am putting that $7,500 to work. It’s an investment. The chain of activity I am putting in motion will give work to printers and shippers. It will provide bookstores (there were still bookstores) with tangible goods to sell at a profit. The revenue from those sales will help to pay my salary, my colleagues’ salaries, even our C.F.O.’s salary. Alice Adams will have some thousands of dollars in her pocket — maybe to invest in a C.D. All this and a few thousand people fewer than I put down on the P. & L. (I’d lied, of course) will have bought and enjoyed two excellent novels that deserved to be in print.

Whereas if we’d just put that money in the hands of a bank, they would just ... well, I was pretty hazy on what a bank would actually do with that money, but my general sense was that it would sit there in a vault microbially propagating itself and what good would that do anybody? Economically I was putting my shoulder — or Penguin’s shoulder — to the wheel! I came away with the conviction that I wasn’t useless anymore.
Two problems with this analysis:

First, whiles it's true that t
he $7,500 investment in reissuing Alice Adams novels gives work to printers, shippers, etc. if he had just ordered $7,500 worth of ice cream for the whole office, it would have generated work for dairy farmers, ice cream shops, etc.. So which is better? Prices guide you. A high rate of return from an investment (a high price for your output) is a signal that your investment is going towards the things that society values. If you get a 7 percent rate of return from Alice Adams and a 10 percent return from Stephen King, then the printers and shippers you had "given work to" printing and shipping Alice Adams should have been printing and shipping Stephen King instead. Henry Hazlitt's Economics in One Lesson debunks many common fallacies of this variety.

Second, $7,500 in the hands of a bank does not "sit there in a vault microbially propagating itself." It would have been lent to someone else to invest is some other venture--maybe printing and shipping Stephen King.
Chapter 19 of Economics covers how banks work.

I wish the definition of "liberal arts" included economics.

2 Comments
Gerald Howard
12/28/2013 04:11:25 am

A cynic is a man who knows the price of everything and the value of nothing.

Reply
Ben Mathew
1/2/2014 02:11:51 am

Gerald, Thanks for stopping by and reading my response to your article in the New York Times. I'm not nearly as clever as Oscar Wilde, so I'll give you a much less quotable quote on the relationship between price and value:

An economist is a man (or woman) who knows that, in a well functioning market economy, price equals marginal value.

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    Ben Mathew

    Author of Economics: The Remarkable Story of How the Economy Works

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