economy Archives - Page 7 of 9

What are prices for?

The cynic knows the price of everything and the value of nothing
Oscar Wilde

I don’t think this is the first time I’m putting up this quote. But I’m just wondering today. What are prices for? Why are there prices for things? What does a price mean? If anything at all?

Prices are signals from the perspective of economics. The level that clears the market; where demand matches supply. A high price or low price doesn’t really mean much. It’s unclear if the prices reflects costs of production because there can be market power driving margins. Besides, when storage costs are expensive, a producer might be keen to sell excess supply at lower than production costs.

But prices drives behaviours; they create some kind of incentive to produce, to trade, to buy, and sell. It is some kind of benchmark against which we evaluate our preferences. Because we’d try to figure out if something was ‘worth the price’. And so the market moves; and people try to justify prices with attributes, features, emotional storytelling. And prices in turn drives those stories, emotional expression and comparisons.

Blue bins

In the first episode of my recently launched podcast, I kind of ranted about the blue bins in the National Recycling Programme that Singapore has. My major gripe was that the system for blue bins which was completely open access and operated by riding on the back of the public waste collection system was designed to fail because by seeking to include everyone, it made securing a clean stream of recyclables harder.

I noted that an alternative system where people sign up to gain access to the blue bin, and pledge to abide by the ‘rules’ of using the blue bins could do better. They could pledge the following:

they will use the blue bin only for recycleables allowed,
they will ensure the items are cleaned and ready for recycling,
they will only access the blue bin themselves,
they will ensure the blue bin is locked after their use,
they will not deposit into the blue bin when it is full or when they note it is contaminated

Friends at Upcircle has shown that by giving assurance to people who care and show up for the environment that you are able to deal with the recyclables properly, you can actually obtain good quality post-consumer recyclable stream. By preventing those who doesn’t care about recycling from taking part in pseudo-recycling by their own terms, we can actually do better.

Recycling better by excluding people isn’t exactly the best narrative to the ears but in due course, that can actually change the culture.

Mondo Gondo

This is the first time I utter this two words that don’t really mean anything but definitely not the last time. I started a podcast (yes, finally!) and it’s called Mondo Gondo. I picked those words because it rolls off the tongue well. And it’s probably a whitespace in the minds of people what it could mean.

So yes, Mondo Gondo. It’s like a trip into my mind. I’ll be ranting, riffing, ideating, and mostly talking. I wished I could ramble but I designed them to be concise and <15minutes pieces. One of the requirement I have for myself is that they must have some ideas (not answers, just ideas) to make things better.

And why did I do that? Because it’s always worth taking action that allows each and everyone of us to step into a future that we all want to be in. At least one that I’d like to be in. So yes, a podcast. With some show notes here. And thank you in advanced for listening.

What do you do with slack?

I recently spoke to a financial advisor. Not an independent one, just from a firm who was not tied to a single insurer. The idea is getting the best deal, the most competitive deal. This is a marketing business, about serving clients, reaching people. That’s a shame because financial planning should be about brains and not how much you like someone.

But maybe I’m ahead of myself because if brains mean to be able to optimise very well, lowering premiums as a share of overall risk cover, or increasing cover while keeping to the same levels of premium, then it’s not always that good. We need slack in the system. People who might be idling at any one time you sample the workspace. You need to ensure there is breathing space, chattering space, ideation space.

We pay for slack all the time; do you use up all your mobile data and telephone call minutes every month? Do you boil only enough water for a single pot of tea each time? Slack is not a bad thing and over-optimisation creates risks. Perhaps the risk is small but there is always a trade off to be made.

Lord of Finance

After leaving it on my bookshelf for a while I eventually took out Lord of Finance to resume reading books on my journeys. Written by Liaquat Ahamed, I bought it at one of Harris’ 20% storewide sales during a period when I was thinking about reading up more about Finance after the recent crisis. I thought it was good to beef up my knowledge of American finance since Age of Turbulence was the closest I got to reading about the financial sector of America.

The book turns out to be more than what I was expecting. Written in the style that feels very similar to Doris Kearns Goodwin’s Team of Rivals, Lord of Finance traces the little stories that demonstrated the personalities of the four most important central bankers prior to 1929. They had exerted huge influence on the economies of Europe and United States, and unintentionally engineered in the Great Depression with their policies and beliefs. It was interesting to get a peek at a world still obsessed with the almost divine quality of gold as a storekeeper of value and with poor understanding of monetary economics.

Even more intriguing is that monetary policies and innovations are being created by these people who has a nuanced view of monetary economics and poor understanding of the workings of the economy. The stories and opinions of civil servants, politicians and aristocrats in those years demonstrates the experimentation humans had gone through in order to figure out how this gigantic machinery works. Of course, this study and experimentation carries on today.

Liaquat Ahamed got really good reviews (here and here) from New York Times for this book, especially for the fact that the contents of the book chillingly echos the stories of Wall Street in the past couple of years, involving banking heros and monetary policies, speculative bubbles and a huge crash. The description of the mania and the built up to the eventual crash sounds rather familiar to me given that I just finished John Cassidy’s Dot.con a while back. Men’s penchant for not learning from History seems particularly pronounced in bouts of ‘Irrational Exuberance’.

For that, Liquat gives a brilliant analogy for the role of Central Bankers or the policies makers trying to stabilize the economy and also pushing for growth. He sees them much like Sisyphus in the Myth of Sisyphus, condemned the work hard to create the conditions fertile for economic growth only to have speculation and irrational exuberance extinguish the fruits of their labour – much like Sisyphus who have to push a boulder up a mountain knowing that when the deed is done, it’ll roll back to its original position for him to do it again. Perhaps Albert Camus is right, for the struggle probably do fill the central bankers’ hearts and the belief of their heroism keeps them happy.

Lord of Finance simply surprises me with the rich collection of anecdotes about the main characters of the story Liquat tries to tell and the manner it imparts knowledge on finance and the workings of money in the economy to the readers – subtly and not too overwhelmingly technical. As a result the book caters to a wide range of audience; students interested in economics, history, finance and perhaps just stories about great men’s mistakes.

Those interested in getting a preview before making a purchase of the book or going on a trip to the library to borrow it might like to check out New York Times.

Coercion of Free Markets

Inequality is a market failure. We do pick this up in A Levels but then there’s little discourse on that. Not only do we dwell little on the solutions – which ranges from progressive taxation to welfare handouts – we ultimately ignore how inequality undermines the ultimate roles of markets, which is the efficient allocation of resources. I’ve always grasp the idea rather intuitively but then fail to deliver it in a philosophical and economics framework. I’ve pointed out the lack of philosophical musings in today’s study of Economics when I introduced Michael Sandel’s lecture on Markets and Morals.

I’ve always pose the question to my Economics student, if a person earns $1000 a month and another who earns $1 a month both needs a glass of water. The rich guy is willing to pay $10 for the water while the poor one is willing to pay $1. The market thus allocates the water to the rich man. We all know that this allocation is problematic and it doesn’t seem efficient; how is it that, in terms of willingness to pay, a person who is only willing to part with 1% of his monthly income gets the good when another is willing to part with 100% of his monthly income for it? So what exactly is the problem of inequality?

Once again, Michael Sandel points this out in the second lecture presented in this video. You don’t exactly have to watch the lecture in order to grasp the point but the idea is that when inequality (in terms of unequal distribution of income) exists, effective demand cannot properly reflect the ideal sort of demand signal transmission that would allow the market to allocate resources efficiently. In extreme cases, free markets becomes not entirely free. In other words, people are not transacting out of their free will but coerced by their own economic circumstances. We see this very often in the case of poor people in developing countries who are forced to sell organs, resort to prostitution, act as surrogate mothers, become a runner for crack.

Gary Becker is not wrong about the rationality of these people. They’re making rational choices but it is often that their choices is very much limited. That unfeeling market processes coerce us into certain decisions is something close to the hearts of all of us. Often, however, we can’t quite work out what is so unjust about that because we believe that to a large extent, we determine our riches. Somehow, deep in our hearts we know that some other decisions that we made caused us to be in the state we are in such that we are coerced into making that next decision. The fact that this argument comes back to us shows how each and every decision made in the marketplace by us are not independent. This makes for a determinism argument in a market setting where free will is supposed to reign.

There are much wider implications of all these arguments and I shall explore them if I get the chance.

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.

The Story of Stuff

For something animated but no less thought-provoking for the Chinese New Year, a video clip produced by Annie Leonard about how our “stuff” (i.e. consumer goods) are produced and the dangers that have come associated with the production and consumption of these goods. I was first introduced to this video in Junior College by my Geography teacher, and I found it rather animating, enlightening and inspirational, as well as rather easy to digest yet still sufficiently thought-provoking.

The Story of Stuff is a 20 minute video that can be watched on YouTube as well as downloaded from the website for future broadcasts, as I did. Do watch because it alerts you about the behind-the-scenes situation which you have never really thought about when you do shopping. While her perspective is that of government-bashing and firm-bashing, it is still worthy of considering. It is suitable for the kids though they will probably need to be guided along to fully understand the video considering that she uses quite a bit of jargon that might be slightly inaccessible to the young.

[youtube=http://www.youtube.com/watch?v=9GorqroigqM&hl=en_US&fs=1&rel=0]

This video probably comes too late to remind you about what you buy for Chinese New Year, but still, better late than never. Happy Lunar New Year!

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.

When Economics clashes with (Geo)politics

First published in The New York Times on Wednesday, Thomas Friedman writes about the low likelihood of a “benign 2010” given the economic and geopolitical conditions currently brewing. I read the reprinted article on mypaper on Thursday and was rather amused by his arguments.

He started off by saying that 2009 was a pleasant surprise for being a rather peaceful year for “the world’s biggest economies” to heal without any major wars or political / geopolitical disruptions, and then asserts that 2010 would probably not be as peaceful. I do not really agree with him about the “three major struggles” we face (the banks vs President Obama, China vs Google & Iran vs the world), but he has managed to make rather substantial arguments.

Struggle 1: The banks vs President Obama
I did not quite think that this was a significant issue, but that is probably because Singapore is / was pretty sheltered from the full force of the economic breakdown in the West. At least in Singapore, the banks appear to be in rather good shape. But Singapore still bore some brunt from the crisis, thanks to our open economy. I will not go into an argument about how globalized our economy should be (suffice to say that I am for globalization, but not the “free-for-all” some Republicans seem to want) but I must agree that banking regulations need to be stiffened. President Obama has a very tough job balancing giving free rein to the banks to operate and continually grow their wealth (and hence America’s economy too) and managing expectations that as president he should be concerned more about his people who are suffering as a result of the folly of these bankers (and hence should punish the bankers). Either way, this tough balancing act is going to take much more than just “change we can believe in” or “yes we can” as President Obama promised before becoming president. His actions will have direct or indirect impact on the WHOLE world.

Struggle 2: China vs Google
Again, I never thought of this as a huge issue too, but it must certainly be one of much concern to quite a few if columnists keep writing every day about the relations between China and America and whether the trough in relations they are going through marks a change in tact or just posturing. The G2 (Group of 2 – China & America) notion aside, the assault on Google was certainly daring and bellicose. I am more inclined to side with Google and America, but you must also take into consideration the views of millions (of Chinese netizens) that the Chinese government have to assuage and calm. Many of them see the China-bashing as unwarranted and colonial bullying that is behind the times given the ascendant status of China, so I do not foresee that China and America’s retaliatory actions are going to end at just sanctions. I sure hope they do things calmly though… recall the saying “when elephants fight, the grass gets trampled”.

Struggle 3: Iran vs the World
Now this is an issue that I think people do not believe is a sufficiently major problem. Iran’s nuclear proliferation will be very dangerous to America as well as the world, and it will derail all the economic efforts put in by the world’s major economies given the potential changes it will cause to the geopolitical arena. This I think would be the most difficult struggle to resolve, given the ramifications that could spillover into the economic and social spheres (e.g. war). Unfortunately, given all the other problems that America and the world is facing now, it is inevitable for the Iran issue to be placed on the back-burner. But there must be understanding that neglecting the Iran issue and letting it fester will not make it any easier to solve.

I echo Friedman’s wishes that “cooler heads prevail” this year. Or else, as he says, “fasten your seat belts”.