G 302 Business and Economic Strategy in the

G 302: Business and Economic Strategy in the Public Arena Week 1: The Rules of the Game Professor Rasmusen Indiana University Foundation Professor Dept. of Business Economics & Public Policy 1

G 302’s Setting in the Kelley Business Degree n n n 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 2

Goals n n n 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 3

Course Materials n n 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) 4

Course Components n n n Lectures Breakout sessions Reading (even parts not discussed in class may be on tests) Online quizzes Case writeups Exams 5

Grade Components n n n 10% Two Case Write-ups 15% Paper Industry Case 15% Participation (including attendance and miscellaneous in-class work) 25% Midterm Examination 35% Final Examination 6

Office Hours: Tuesday 1: 30 -3, Wednesday 3 -5 p. m. BU 456 Bus. Econ Tenth Street 456 door Fee Lane 7

Interpreting grades You will see your grades in two forms: a raw score, and a z-score n z-score = 85 + 6*(RAW -mean)/(Standard Deviation) n z-scores between 80 and 90 will be B’s n 8

What you will learn today How to justify private property 9

Why does AOL-Time-Warner care about the government? 2001 Sales $ mil. Filmed Entertainment 8, 759 AOL 8, 718 Networks 7, 050 Cable 6, 992 Publishing 4, 810 Music 3, 929 % 23 22 17 17 12 9 Revenue 38 B Cost of Goods Sold 16 B Gross Profit 22 B Gross Profit Margin 57% 10

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. 11

The 2000 Presidential Election: Bush v. Gore “Following the Rules” vs. “Doing What’s Fair” The Rule of Law 12

What does it mean that I own my house? • n • I can live in it I can exclude other people But I can’t turn it into a restaurant 13

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 _______________________ 14

Types of Property Rights • Communal _________________ • Private _________________ • Government (State) _________________ • Corporate _________________ 15

Seals as Communal Property 16

Communal Property’s Disadvantage: The free rider problem ___________________ 17

Communal Property’s Advantage: Convenience--not needing to know ___________________ is the owner ___________________ who 18

Canadian fur: a change in property rights 19

When the U. S. government owns a building, that is most like (a) Communal ownership (b) Private ownership (c) Corporate ownership (d) Lack of property rights (e) The rule of law 20

The role of government n Define ______ property rights n Enforce ______ property rights 21

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. . . 22

Intellectual property n n patent A _____ confers the right to exclude all others from making, using, or selling an invention in the U. S. for 20 years. copyright 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. 23

Property is theft. Karl Marx 24

Benefits of Property n n n effort and innovation Encourage __________ Voluntary exchange between two makes both better off people____________ central bureaucracy No need for a _________ to make decisions about who gets what 25

“Creative Destruction” n n n Property rights create new products, businesses, and jobs But they also destroy old ones Those threatened by change turn to government to stop it 26

Opportunity Cost and Hi-Tech n n n The opportunity cost of activity X is __________________ what you have to give up to do X instead If you go to college, you give up 4 years of wage income, plus tuition. If you want to have employment in hightech industries, where do the workers come from? 27

Globalization & the Demand for Government n n Transportation, communication, free trade “death of distance” Businesses and workers who are hurt lobby for help 28

More generally. . . n n n Governments undermine property rights as well as enforcing them Political power can substitute for productive activity. Taking replaces making Problem: ______________ 29

Markets and Politics n n 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 G 302 represents. 30