economics Archives - Page 20 of 24

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.

Public Education

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Traditionally education has been mostly funded by the governments, at least mass education. Things didn’t start out this way of course; education started out as some sort of pastime for the rich kids and subsequently became a tool to distinguish the aristocrats and peasants, serving the function of supporting what was eventually called ‘high culture’.

In fact, education wasn’t so focused on writing, reading and arithmetic in the beginning – it consists mostly of life-skills like archery, horse-riding, a little hand combat, a couple of classics. But then people realised that civilized behaviours helped cultivate deeper relationships between people and improved interactions between strangers whose education has resulted in some sort of informally synchronized norms. Crude traders therefore decided to become ‘educated’.

As technological advancement made education an economic necessity, government started to intervene in the market for education. Theoretically speaking it is because the rising external marginal benefit resulting from education so the good becomes more of a market failure as the potential positive spillover effects increase. Mass education became important as the educated bunch tend towards a critical bulk. When everyone around you are educated then the cost of not being educated rises. When all your trading partners consist of educated people who demand certain standard of conduct when doing business, then there’s more pressure to be educated. Government spending on education thus climbed, but in a good way.

It’s then a pity that budget deficits caused by the economy education have been helping to support all the while is causing funding for education to be slashed. Yet like what is mentioned The Economist article, this is an important opportunity for private sector education providers. For-profit education might sound like a bad idea since they have all the incentives to dish out qualifications to those with ‘financial quality’ and shun the poor smart ones; this is the moment for them to correct their image and raise their standards of education to those of public education; this selectivity will benefit them long after a boom in private-section education industry.

Carrots & Sticks

Carrots and Sticks — Singular Representation...

The Economist recently featured an article on the need to package carrots as sticks to help people be more motivated. It is essentially saying that people responds more strongly to loss than gain but since companies need to make credible threats (a very game theory sort of idea) without being deemed unfair (as they would if they had threatened to dock pay) they will have to make their carrots seem like sticks.

But then, is it always about money? A couple of days back I was walking around the bookstore and I spotted a new book – Daniel Pink’s Drive: The Surprising Truth About What Motivates Us, he talks about the stuff that motivates us. We often thought of them as money but he figures out that it’s about “autonomy, mastery, and purpose”, which makes a lot of intuitive sense. The incentive systems in our world often do not drive ordinary souls to excellence. Perhaps, firms and organization must rethink their way they manage their people and this will revolutionize human resource departments and HR work.

The ideas in the book relates closely to another book I saw. It’s Richard Sennett’s documentation of the philosophy of craftsmanship, The Craftsman (reviews here and here). His definition of craftsmanship, “an enduring, basic human impulse, the desire to do a job well for its own sake” sounds like a logical consequence when an individual is well-motivated. Perhaps then, craftsmanship is the spirit to be promoted.

Once again, it’s time to stock up books…

Drill, baby, drill… not!

I subscribe via email to The Daily Green, a website that advocates green consumption as well as champions environmental initiatives by the green movement. I chanced upon this article on high gas prices in Alaska one day in my email. It took me by surprise because one would think that since Alaska produces quite a significant amount of America’s gas (gasoline, referred to as oil or petrol in the Singaporean context), one would be surprised by how expensive petrol can be in Alaska. And what caught me by greater surprise is that this article was written by a green Republican! Jim DiPeso, The Green Conservative of The Daily Green, is policy director of Republicans for Environmental Protection, and if you, like me, used to think that Republicans do not believe in saving the environment, then you thought wrong.

Coming back to this article, in the “Land of Sarah Palin”, to have oil prices higher than the rest of the country and to have stage legislators calling for fuel price regulations would be a surprise given our assumptions that Alaskan oil would fuel the state and that Republicans are against price controls or regulation. The article highlights the components of the cost of petrol, and highlights that essentially all that crude oil pumped out of Alaska goes into the global market, subject to global market pricing, which is subjected to influence by OPEC (Organisation of Petroleum Exporting Countries) as well as influence by global events that will affect demand and supply of crude oil worldwide.

In addition, Alaska’s petrol market is described as oligopolistic, i.e. players have more pricing power in a relatively-small state with little competition in supply of petrol compared to other states. Given that competition in refining and distribution of petrol is limited in Alaska, the prices would probably already been higher even if Alaskan oil went straight to Alaska. The fact that petrol producers in Alaska even need to import crude oil from other countries will debunk the myths about Alaskan-produced oil.

So essentially, the “drill, baby, drill” lobby who claim that the answer to lower petrol prices would be to open up more oilfields in Alaska are quite mistaken. Looks like The Green Conservative is pitting himself against other Republicans who belong to that lobby. And perhaps the solution might turn out to be more competition instead, which is something the Republicans should focus on instead of drilling their way out of an energy crisis in America (and give the environment a reprieve!)

Aliens & Laws

The Lexington of the latest The Economist made an important point about the indirect impact of terrorism on America. Migration of brains into America has slowed, tourist has become rather fed-up with security checks that comes with a vacation in America and even conferences have moved away from there as a result of the hassle brought about by security restrictions. Perhaps improving the ‘service quality’ of border customs would improve the situation.

The interesting phenomena raised in the article is that giving illegal workers legal status will help reduce their competition with the American workers.

American blue-collar workers fear that Mexican immigrants will undercut their wages. Mr Hinojosa-Ojeda says they won’t if they are legal. The fear of deportation makes illegal workers accept worse conditions, he finds. Once legal, they demand higher wages, and no longer drag down those of the native-born.

The report on the economic benefits of immigration reform is available from Center for American Progress. The idea fits into conventional wisdom about making choices between alternatives. Removing the option of getting deported would naturally help raise the expectations of the foreign workers and make it harder for them to compete with those native-born.

Monikers aka Generalisations

An article in The Economist raised a rather interesting but oft-neglected problem: the proliferation of labels and categories where countries are haphazardly shuffled in, without consideration for historical or geographical accuracy. I first encountered this in JC Geography, when we were taught to evaluate (it’s amazing though that we have to be taught how to evaluate, but this is the A-levels for you) the tendency of geographers to pigeon-hole countries into monikers like the North and the South or Third World, Second World and First World, which can be highly inaccurate and neglects discrepancies or outliers. In the topic of Globalisation, we were taught that to divide the world into a simplistic North-South divide would be to forget about what it really means to be geographically in the Northern hemisphere or Southern hemisphere. Developed countries like Australia and Singapore, for instance, would be technically south of what is in the North in the divide but that does not mean these countries are economically comparable to other countries in the South.

Pardon if what I just described to you sounds confusing, but you will get a better idea if you read The Economist article, which gives many more examples of blatant generalisations in history and geography. Even labels we consider absolutely normal or acceptable might hint of insensitivities. We often refer to South America as Latin America, but this term smacks of colonialism, and the continent while still speaking mainly Spanish and Portugese is certainly wielding its own influence rather than continue to be within the Latin or European sphere of influence.

These labels are certainly convenient, but we should never forget that they must be questioned every now and then to check their relevance. Like, even the oft-used ‘developed’ and ‘developing’ countries could be questioned in terms of the spheres they cover and how to categorise countries. For instance, would Singapore be a ‘developed’ or ‘developing’ country? And based on what indicators?

Something for the GP (General Paper) and Geography student to think about.