economics Archives - Page 19 of 24

Diversity & Sophistication

Economics have been a subject troubled with the idea of scarcity and thinking about means of distributing resources to produce what we call ‘wealth’. Scarcity is a clear-cut notion and ‘abundance’ represents the other end of the spectrum. The problem is that we are so familiar with scarcity we cannot be quite sure what really represents abundance (infinite, in short run or long run?) and thus, we actually have a problem quantifying wealth. What constitutes richness? Money? Gold? Having the most expensive resources? Having in abundance the most useful resource? Having the most diverse resources? Having human capital?

We’ve seen that most of the rich, developed world appears to be the same, with the similar institutions, rule of law and informal market rules; most of them produce certain complex niche products while importing a variety of inputs as well as many other consumer products. On the other hand, developing economies appears more diverse. This shows that the end state of riches can probably be attained through different pathways. The Economists’ latest Economic Focus discuss how recent research shows that sophistication in the economy signals at the potential of an economy.

The Product Space map that the researchers came up with shows that an economy producing at a more centrally located product zone where it is easy to diversify into many other products would fare better than one in an isolated region. However, the isolated products often yield greater profits because they are probably rarer and so competition amongst economies leads to evolutionary forces pushing certain economies into these corners of product space possibly at the expense of potential. In any case, versatility is treasured and flexibility in production will aid economic growth.

Automated Eyes

I stumbled upon Tineye, a ‘reverse image search engine’. It basically allows you to upload an image and then perform a search for pictures that are similar to the image. This is the beginning of answering a question my friend have posted me a couple of years back when he asked if the Internet can help us find out the name of a person from a photo of him/her. Alternatively, if you have a picture of a place, you might want to upload the image to search for where exactly it is. Alas, Tineye is not yet capable of all that, to quote from the Wiki article:

A user uploads an image to the Web application search engine or provides a URL for an image (or for a page containing the image). The search engine will look up other usage of the image in the internet including their time of appearance and including modified images based upon that image. Tineye does not recognise objects or persons in an image, it recognises the entire image, and some altered versions of that image. This includes differently sized versions of the image.

The search engine is provided by Idée, Inc., a Canadian firm that also produces other image-matching technology products, like PixID. A demonstration of the power of this product is shown in this video that follows:

It purportedly helps client tracks usage of their photographs or images online and print publications to manage image license and also to ‘uncover unauthorized image usage’, and it kind of reminds me how it makes patent trolls’ job easier, reflecting a worsened state of gridlock. In other words, while the software may help to raise the opportunity for transactions and thus contribute value to creators, it might potentially discourage mashups in the area of graphic designs. Of course, it has a potential for good as well; scanning through a film can help the production crew find out whether they have obtained permission for all the images or clips used and would thus know what to filter out if they are unable to identify the owners.

The potential of such technology always works both ways and eventually it will be up to Economics to resolve the issues.

Putting a price on nature

For something that combines thoroughly both concepts of economics and the environment. A question that occasionally pops up when we ask about how we can internalise the external costs and benefits of nature, how we can monetise and valuate what is deemed free or priceless and how can we account for environmental protection and conservation in our equations of governance and environmental management.

The trigger for these questions came about when I read The Economist’s Green.view column online and saw an article about “price fixing”: not so much price fixing in terms of what we learn in Economics about monopolistic behaviour, but about how we can fix a pricetag on nature.

There’s plenty of debate with regard to putting a price on nature, as witnessed from the tremendous number of articles that can be found on this issue. The plausibility of this recommendation, with a detailed discussion on how it can work, has been discussed on Earthbeat on Australia’s Radio National, while in very recent history there has been a flurry of writings from Planet Green, The New York Times and BBC News. LiveScience has a more concrete and specific suggestion: a “market-driven approach to habitat preservation”.

Anyway, let me just try to summarise and highlight some of the pros and cons of putting a pricetag on nature. You should read the articles above for much more detailed discussions however.

Why would / should we put a price on nature?

1. Solve misallocation of resources: what we learn in economics in terms of the external costs of, say, water pollution on marine biodiversity, would thus be accounted for when firms do cost-benefit analysis because there’s a explicit price tag attached to it (The Economist uses a slightly different line of argument, I’m just phrasing what I understand in my own words)

2. Allows for developing and some especially-impoverished but nature-rich countries to tap into the money-spinning potential for the natural resources and at the same time enable economic development

3. On the Earthbeat link, it quotes a paper written in the Nature journal 4 years earlier on the value of “ecosystem services”, valued at US$33tr. Compared to the GDP of Earth at US$18tr, it seems like there is plenty of value in these “ecosystem services” waiting to be tapped, of which these services could be invaluable to humans (for example, clean air)

Why cant / shouldnt we put a price on nature?

1. Insult to the concept of the beauty of nature or reducing everything intangible in the environment to a dollar value or ignoring the greater benefits that ecosystems and nature provides. Like the sense of serenity and peace when one walks in a park: that cannot exactly be quantified in a monetary sense, and that may not be reflected even if a pricetag were to be placed on the park

2. How do we put a value to animals that might be of little utility but of much value to conservation and beauty? The article in The Economist compares the panda, which “humans are fond of”, with the dung bettle, which “provide the greatest utility”. How then do you price the two vis-a-vis each other?

The articles themselves cover much more details and examples. Again, this is some more food for thought for those who have always found themselves fighting a moral battle in their minds between economic development and environmental conservation.

State & Markets

While reading about Bihar’s Recovery, it dawned on me the importance of basic government structures in an economy. This sort of realisation had come to me while I was reading about the Haiti crisis and I really think all students of Economics should remind ourselves of the government structures working in the background implied in what we call a ‘Free Market’.

As observed from the article on Bihar, which interestingly is where the Buddha gained enlightenment (according to historical records), the state’s investment in infrastructure, maintaining order, a culture that respect the rights of all citizens (that can only be created from top down) often influenced very much by the enforcement of laws, as well as giving people freedom to pursue the market activities.

When we argue about the importance of not having government interventions in markets, and that state presence should only emerge in the case of market failures, we often neglect the notion that a government is in place in the background to honour the legal tender and anarchy is not the ruling ideology of the day. Trust in the free market is also important and it is upheld by law and order, which once again, falls on the government. As we’ve seen from the earthquake in Haiti, more room for market and less state is not always a good thing. Yet after acknowledging the need for a state we want to combat its advancement into various aspects of society that are usually governed by culture or self-organizing.

Maybe working on the margins of that would help Bihar discover this balance of state and market spaces.

Con-nect-working

Social networks have been rising for some time now. And while they initially started out as mere toys for youngsters, there have been talks of higher degrees of commercialization, how these networks will change the lifestyle of people, and so on. Now that the change has taken place somewhat, it makes sense for The Economist to tabulate some of the impacts these networks have brought in.

To begin, these networks have definitely became an important way people communicate; however mundane or skimpy each little piece of content may be, they are viewed by many people within your network and it broadcasts bits of information about you that couldn’t have been captured in the yesteryears. This is true for the comments you cast, the status messages you post, the photos and videos you uploaded and all the social games that you play. Although online social networks remain essentially much like a bulletin board (except viewership ability of contents are more strictly controlled and with richer content) and thus does little to enrich people’s ability to do real networking, it does a wonderful job at augmenting our real relationships.

This strong link with the real world is a great strength for online social networks. Websites are viewed as corporate facades that give little information about the reality of the companies. On the other hand, the pages for these firms on social networking sites are viewed as better avenues for firms to communicates with their customers. Likewise, a corporate site announcement of a promotion the company is offering does less to boost sales compared to a tweet which might have much more followers.

That is the free advertising service that sites like Twitter and Facebook might offer, which brings us to the question of how money is being made on such networks. A peach of an opportunity, an article in The Economist special report on social networks gives us an idea what are the businesses that taps into the plumbing of social network connections and thriving. For all the talk about connecting with friends, being entertained by your online pets, or having a good laugh from the video your friend has shared, businesses might be the greatest benefactor of this trend.

Jobs’ Book

My sister asked me if The Economist would publish an article on Apple whenever they introduce a new product. I told her that they would if they anticipate that the product Apple produces is sufficiently influential or even revolutionizing. And perhaps that should be the case for iPad, where The Economist thinks is an attempt at transforming 3 industries at one time.

Their full article on the iPad propels their point further, discussing how the product would have a profound impact on the way digital content and media is consumed in the market and how this would alter the economics of digitizing newspapers. While there are many limitations to this product, Apple have traditionally been quick to modify their products to suit the way users use them while incorporating more powerful functions. A quick review of the historical revisions of the iPod before it eventually become the current iPod Touch shows how Apple pulls off their innovation along with changes in consumer preferences while upgrading their product.

We know that something big will be happening when the iPad is available on the market but it’s still too early to decide what it is. For now, we wait.

Bundles of Cables

James Surowiecki from New Yorker talks about the effects of the recent Fox vs Time-Warner Cable affair on public perception. His focus was that the event reminds viewers that much of the money they pay are for stuff they don’t use or don’t want – the idea of bundling, allowing consumer surpluses in one product/good spill over to others which are bundled together with it. This allows less mainstream stuff to be sold to the mass market or introduced to consumers since without bundling their proceeds wouldn’t pay for the cost.

The complexity of the modern economy supports bundling; it helps people make some of their choices. Imagine if you’ve to assemble exactly which channels you want each month based on what is going to be screened on them; or to decide every single module running in your computer during installation (the Linux style); or to decide which brand of sugar, type of coffee beans, water and cup to use for takeaway coffee at breakfast. And James show how customers like them:

The appeal of bundling is partly that it reduces transaction costs: instead of having to figure out how much each part of a package is worth to you, you can make a blanket judgment. Bundling eliminates the problem of fretting about small expenditures, which may be one reason that flat-rate pricing is very common in the vacation industry (cruise ships, all-inclusive travel packages, and so on). It also offers what economists call option value: you may never watch those sixty other channels, but the fact that you could if you wanted to is worth something. Many consumers also perceive bundles as bargains; getting a bunch of things for one price feels like a deal, even when it’s not.

Of course, like what James mentioned at the end of the article, when components of the bundle start fighting over the cost of each of them or the proportion of their share over the entire bundle’s proceeds, it will raise the appeal of à la carte. Imagine when the addition of a Sashimi palette into the buffet table results in the waiter going around to collect extra money from the patrons still in the restaurant and able to enjoy the Sashimi. Those who don’t want the Sashimi and just entered the restaurant would opt for à la carte while those leaving would protest.

The Bigger Brother

A search query on Wikipedia for ‘Big Brother‘ offers a disambiguation page that offers a link to their ‘Authoritarian personality‘ article. Today, we sometimes allude to the concept of ‘Big Brother’ when we talk about our governments but we hardly picture the government being authoritarian, perhaps just more of nannying. Today’s problem for the world, however, is that our Big Brothers are getting too big, as Leader of The Economist this week pointed out.

The cover of The Economist features a big fat monstrous lump attempting to devour a corporate executive reflecting their perception of how appallingly huge and scary governments have become. As a matter of fact, developed world governments might have taken up to much of economic breathing space because of the recent events and will need to scale down their footprint more. It’s always easy to get involved in many activities in the economy but difficult to pull out. The Briefing talks about state spending ballooning and makes a fierce assault on the weaknesses of government.

One of the case mentioned was their failure to make good use of management consultants, who ends up being portrayed as conman treating “the public sector as dumping grounds for airy-fairy ideas”. Oh well, in a crisis everyone suffers, even the management consultants themselves are not doing well.