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G302: Business and Economic

Strategy in the Public Arena

Week 1: The Rules of the Game

Professor RasmusenIndiana University Foundation ProfessorDept. of Business Economics & Public

Policy

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G302’s Setting in the Kelley Business Degree

Don’t get blindsided by the government and pressure groups

Politics is both a threat to everything else you’ve learned, and an opportunity to use it

Politics sets the rules of the game. The rules are changeable---if you know how

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Goals

To understand why “the system” tries to control your business, and how

To understand how to control the system

To understand how to defend your way of life

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Course Materials Readings packet, TIS Oncourse—I will post the powerpoint

slides there at the end of each week. Check there for emails too.

A packet of notecards. Bring this to section and class.

For next time: hand in a notecard with your name, major, and what you hope to be doing 20 years from now (e.g., bank VP, accounting partner)

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Course Components

Lectures Breakout sessions Reading (even parts not discussed in

class may be on tests) Online quizzes Case writeups Exams

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Grade Components 10% Two Case Write-ups 15% Paper Industry Case 15% Participation (including

attendance and miscellaneous in-class work)

25% Midterm Examination 35% Final Examination

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Office Hours

Office Hours: Tuesday 1:30-3, Wednesday 3-5 p.m.

BU 456Tenth Street

Fee Lane

456door

Bus.Econ

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Interpreting grades

You will see your grades in two forms: a raw score, and a z-score

z-score = 85 + 6*(RAW -mean)/(Standard

Deviation) z-scores between 80 and 90 will be B’s

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How to justify private property

What you will learn today

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Why does AOL-Time-Warner care about the government?

2001 Sales $ mil. % Filmed Entertainment 8,759 23AOL 8,718 22Networks 7,050 17Cable 6,992 17Publishing 4,810 12Music 3,929 9

Revenue 38B Cost of Goods Sold 16B

Gross Profit 22B

Gross Profit Margin 57%

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Intangible Property is Crucial to AOL-Time Warner

Book value: $98 billion Intangibles: $125 billion (including $80 billion in goodwill)

Market value: $60 billion

In 2002-I, the company took a $54 billion writeoff of Time-Warner goodwill.

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The 2000 Presidential Election: Bush v. Gore

“Following the Rules” vs. “Doing What’s Fair”

The Rule of Law

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What does it mean that I own my house?

• I can live in it I can exclude other people• But I can’t turn it into a restaurant

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With secure property rights:

________________________________________________________________________________

_____________________________________________

People will spend their energy working with the property they have, rather than trying to take property away from other people

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Types of Property Rights

•_________________________________

•_________________________________

•_________________________________

•_________________________________

•Communal

•Private

•Government (State)

•Corporate

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Seals as Communal Property

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Communal Property’s Disadvantage:

______________________________________The free rider problem

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Communal Property’s Advantage:

______________________________________Convenience--not needing to know who is the owner______________________________________

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Canadian fur:a changein property rights

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When the U.S. government owns a building, that is most like

(a) Communal ownership

(c) Corporate ownership

(b) Private ownership

(d) Lack of property rights

(e) The rule of law

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The role of government ___________ property rights

___________ property rights

Define

Enforce

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U.S. Constitution, Article I:

Section 8. The Congress shall have power...

To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries...

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Intellectual property A _________ confers the right to exclude

all others from making, using, or selling an invention in the U.S. for 20 years.

A _________ confers the right to exclude all others from reproducing, distributing or performing a work for 50 years after the death of an author. Covers writing, software, music, art, movies.

patent

copyright

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Property is theft.

Karl Marx

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Benefits of Property

Encourage ____________________ Voluntary exchange between two

people________________________ No need for a _________________ to

make decisions about who gets what

effort and innovation

central bureaucracy

makes both better off

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“Creative Destruction” Property rights create new

products, businesses, and jobs But they also destroy old ones Those threatened by change turn

to government to stop it

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Opportunity Cost and Hi-Tech

The opportunity cost of activity X is ___________________________________

If you go to college, you give up 4 years of wage income, plus tuition.

If you want to have employment in high-tech industries, where do the workers come from?

what you have to give up to do X instead

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Globalization & the Demand for Government

Transportation, communication, free trade “death of distance”

Businesses and workers who are hurt lobby for help

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More generally...

Governments undermine property rights as well as enforcing them

Political power can substitute for productive activity.

Problem: ___________________________Taking replaces making

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Markets and Politics 100 years ago most businessmen

could ignore politics (but not steel or railroads!)

Today, business is on the defensive. Politics can’t be ignored. It isn’t the most important thing in business-- but it’s worth the 2% of your IU credits that G302 represents.