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PHOTO BY STAN WALDHAUSER
Tom Holmes
Economics
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What
factors influence the diffusion of Wal-Mart stores?
Why is there such a high geographic correlation between nursing-home
unionization and coal mines?
How important were railroads to the growth of the nation?
Through innovative synthesis of economic theory and data, Tom Holmes
digs into such questions and unearths truths about how economies
arrange themselves: a tradition of economics known as industrial
organization.
“I am fundamentally interested in how production is organized,”
says Holmes, Curtis L. Carlson Professor of Economics. “I’m
interested in seeing how big the productive units are and where
they are. Do they put everybody in one big plant or lots of little
plants scattered around the country?” As he elaborates, the
map of his research agenda slowly reveals hidden treasures.
Unhidden Agenda
Early in their schooling, economists learn that firms grow to the
size at which they minimize average production costs. This often
results in large production facilities that allow companies to take
advantage of economies of scale. But pushing strongly against that
tendency is the cost of bringing goods to market. A single huge
factory could achieve low costs per unit, but the expense of shipping
products to stores across the nation could overwhelm the scale economy
savings.
That balance is at the heart of Holmes’ research agenda. “If
you
pile up production in this one little spot, you can have great efficiencies,
but how are you going to get it to people?” he asks. “That’s
really the trade off that drives much of my work: enjoying scale
economies versus saving on transportation costs.”
A recent Holmes paper published in the “Journal of Political
Economy”, for example, examines why companies tend to put
sales offices in large cities. One potential explanation is that
salespeople in large cities have greater access to market information
that enables them to match customer needs. But by carefully constructing
a model and comparing it to U.S. data, Holmes finds that scale economies
and transportation costs may be more persuasive reasons.
Economics of Density
Similar factors play a role in his Wal-Mart research, which examines
the time-path of the corporation’s store openings across the
country. It might seem that Wal-Mart would have chosen the highest
quality locations around the country, one by one, as it expanded
its empire. But instead, Holmes concluded, the company pursued economies
of density: locating new stores close to older ones in order to
save money on deliveries, infrastructure, management and advertising.
A short animated movie clip created by Holmes tracks the company’s
diffusion across the United States from 1962 to 2004 and shows it
spreading like a virus—or pollinating like a flower, depending
on your point of view.
While scale and transportation costs are critical baseline factors,
they alone can’t explain why industries locate where they
do. Government policies play a significant role, as does labor union
activity. “I often look at how avoidance of labor unions or
government regulations might tilt company decisions,” Holmes
says. He uses his benchmark models incorporating scale and transportation
to then measure the separate impacts of regulation and union activity.
Digging Deeper
A unifying theme in Holmes’ research is the importance of
digging hard for data and comparing those data tightly with theory.
Most economists lean toward either theory or econometrics. Not Holmes.
“A lot of people do well in this field by just doing the math,
sitting in their office with pen and paper,” he observes.
“And others are really specialists with data. It’s just
worked well for me to try to play both cards.”
So while his papers are filled with high theory and intricate
math, they also incorporate gigabytes of data that are meticulously
assembled from government databases, industry sources, local phonebooks
or online articles. And while he could outsource the data gathering
to others, Holmes chooses to do much of it himself. “Yeah,
I get dirty,” he jokes. “I’ll do a lot of the
data work; at the very early stages I always need to do it.”
For Holmes, a direct relationship with the data is essential. “It’s
never enough for me to run some regression and just see what pops
up,” he says. “I look at my data and look at the outliers,
and I say, what’s their story? You learn a lot by digging.
You often learn about something new that you didn’t even know
existed. If I didn’t dig I’d miss out on my best ideas.”
Holmes’ Schooling
Holmes’s zeal for economics started with his first college
seminar. “I went to my first econ class never even having
heard the term ‘supply and demand.’ I had no idea what
it was about,” he recalls. “And, well, I just fell in
love with it. I couldn’t believe it. I basically never did
anything else.”
He majored in math and economics at the University of Pennsylvania.
Then he got his Ph.D. at Northwestern University in 1985. After
teaching at the University of Wisconsin, he became a Federal Reserve
Bank of Minneapolis economist in 1993, joining the University faculty
two years later. In 2003 he was awarded the Carlson Chair.
In addition to his research, Holmes teaches both graduate and undergraduate
classes at the University. “I really enjoy undergraduate teaching,”
he says, recalling his own initial classes in the field. But working
with graduate students is especially gratifying. “I get the
most out of the one-on-one working with students on their theses,”
he says. “It’s really thrilling to see somebody put
their research together. One of the most rewarding aspects of this
job is to see your grad students grow.”
Holmes’ enthusiasm about economics begs an obvious question
about his own children, the eldest of whom has just started college.
Would he predict that any of the three will follow in their father’s
footsteps? Holmes smiles widely. “That’s still to be
determined,” he responds, always the cautious scholar. “I’m
hoping. I don’t want to be too pushy. But I think it’s
the greatest job—and the greatest field—in the world.”
By Douglas Clement
Reprinted with permission from the Fall 2006 edition of Minnesota
Economics, a publication of the Department
of Economics.
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