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Vernon (and Fred) Smith

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This week’s EconTalk [2] is with my Nobel-prize winning colleague, Vernon Smith. We talk about whether supply and demand works, the purpose of experimental economics, the insights of Hayek and lots of other stuff. He tells an amazing story of how his first paper in experimental economics got accepted at the Journal of Political Economy. He also talks about the work of Roy Radner showing how a firm may deviate from standard models of profit maximization and risk-taking because of the risk of bankruptcy in ending the life of the company. It reminded me of this story about Fred Smith and the early days of Fedex.

When Fred Smith first started FedEx, he struggled desperately to make payroll. At one point he raided the family trust fund without his sisters’ permission (they later sued him) and was forced to keep borrowing money to cover his costs. Finally, the bank in Chicago that had been lending him money said enough—we’re done, No more loans. Smith found himself at O’Hare airport facing the trip back to Memphis knowing he would have to tell his employees that it was over. He simply didn’t have the money to pay them. As he looked up at the departure board for the status of his flight home, he noticed that a flight was leaving soon for Reno. Instead of going to Memphis, he went to Reno and took all the remaining money he had (insufficient to cover the next month’s salaries but still something) and began gambling. (It may have been roulette, but I don’t remember.)

Fortunately, for those of us who often want to get a package somewhere overnight, he had a run of good fortune at the gaming tables, enough to cover the next month’s salaries. During that time, revenue picked up and FedEx survived and ultimately thrived.

I suspect Fred Smith doesn’t spend a lot of time gambling (at casino odds, anyway) with the revenue of FedEx. But facing extinction, he became quite a risk-taker.