Archive for the ‘Economics’ Category

Paying People not to be Bad

Saturday, August 15th, 2009

An idea that has been working its way around my head for a few days is to do with paying people not to do bad things. We are generally confortable with the idea of punishing people who commit crimes. Rewarding people who do good deeds and are successful is also popular. However, rewarding people who are likely to commit a crime but choose not to is controversial. It is unfair to those who are not likely to commit the crime, as they receive no reward but are equally innocent.

One example of paying people not to commit a crime is a publicly subsidised taxi service intended to reduce drink driving. Somebody goes to a bar and drinks alcohol. They might decide to drive home or take a taxi. Their decision to drive, and commit a undoubtedly serious crime, might be based on the risk of having an accident (which many foolishly ignore), the risk of being stopped by the police and the price of a taxi fare.

The government can try to solve this issue by promoting awareness of the risks of drink driving, increasing the importance of the first consideration in the drinker’s mind. Many countries have gut-wrenching adverts showing the harrowing effects of accidents that have resulted from drink driving. This puts the dangers to the front of people’s minds and makes drink driving less socially acceptable. However, alcohol is a notorious judgement inhibitor. Putting aside the thought of danger and feeling contempt for do-gooders are all too easy when drunk.

With regard to the second consideration, the state can put more police on the roads and make the penalties more severe. Of these, more police might be more effective. In my opinion, a criminal commits a crime because he or she assumes that they will not be caught, rather than the assumption that the punishment will be bearable. I doubt that drinkers about to drive say to themselves “Oh well, it’ll only be a year without a driving license.” The ‘Bring back flogging and hanging’ brigade get a grim pleasure from seeing ne’er-do-wells being punished. Such braying for blood is mere sadism. However, a higher probability of being arrested might have an effect.

The third consideration could be to subsidise the taxi companies in an attempt to reduce the cost of fares. If the money comes from general taxation, teetotalers and stay-at-home drinkers might balk at paying for a service that they do not use. The money could also come from a tax levied on bars. Again, customers who stroll tipsily but harmlessly back home from a pub might begrudge having to pay for others. They should console themselves with the no doubt decreased likelihood of being run over.

Is the proverbial stick preferable to the carrot? Tax payers might broadly agree to their money being spent on schemes that reward others for not commiting crimes, which they themselves never intended to commit, because the benefits outweigh the costs. But what are the consequences? Does a subsidised taxi service not encourage people to drink more? Is it not more prudent to make drinkers fully take moral, legal and financial responsibility for getting themselves home?

Metcalfe’s Law and the Hydrogen Economy

Tuesday, June 16th, 2009

Metcalfe’s Law states that the value of a telecommunication network is proportional to the square of the number of users. If there were only one fax machine in the world, it would be useless. Two fax machines can have some use, but three allow twice as many connections as that, and so on.

A more modern example is that of social network sites. One’s choice of social network site is not determined by the colour scheme or the correctness of the technical implementation but by the number of friends that one has on the network. One result of this is that social network sites are forced to be free to use in order to drive adoption. This results in a rather curious business model: give away the product for free, hope that there is explosive growth, pray that you can somehow make a little money from your millions of users once they are in place.

Fuel distribution has a parallel problem. It might be possible to replace petrol and diesel cars with ones fuelled by hydrogen, methane, alcohol, ammonia, compressed air, electricity, deep-fat-frier oil or even cow dung. The problem is that drivers will not buy cars that uses one of these fuels, unless they can buy that fuel ubiquitously. Conversely, nobody’s going to finance the fuel distribution network, until there are the cars to burn the fuel.

A new car company, Riversimple, is trying to break this chicken-and-egg problem by leasing their cars.

http://www.independent.co.uk/life-style/motoring/features/hydrogenpowered-car-makes-debut-1706673.html

Leasing certainly makes more sense for a customer entering a market that has no guaranteed future.

On top of this, part of the design of the car is being released as an open source project:

http://news.bbc.co.uk/2/hi/science/nature/8103106.stm

The hope seems to gain an economy of scale and allow the car to adapt to local conditions. The company is working with BOC, who presumably would do very well from a hydrogen economy. The situation is similar to Google, Mozilla and Chrome. Google want to make money from increasingly sophisticated web applications, so they finance open source projects to build better browsers. Financing a closed source browser would not achieve their aims as efficiently. What is more, as soon as they pulled the plug on a closed source browser, the project would finish. Opening up the source provides a multiplier effect. I imagine that BOC are hoping for a similar multiplier effect with open source fuel cells.

Bankers’ Bonuses

Wednesday, February 11th, 2009

Ordinarily, I do not concern myself with the way that private companies remunerate their staff. If a jockey can make a horse run fast, or a rock star can fill a stadium, it has always seemed fair to me that they should take home a large share of the proceeds.

Occasionally, I have heard people talk with disgust about the salaries of footballers and about how unfair it is that someone can get paid so much for kicking a leather ball, compared to the amount paid to a teacher or a nurse. Unsurprisingly, these arguments usually come from representatives of those fine and noble professions. I need not trouble myself with discussing this sort of unhidden jealousy.

If they insist that they are not jealous, one can always ask if they would prefer the money to go to Rupert Murdoch or another of his ilk.

And then, there are contemporary bankers.

For a long time, ordinary people have been complaining about the size of their pay packets. They are not like the jockey, or the rock star, or the footballer. As executives, they have more control over their pay. They are like a shop manager with his hand in the till. A fine analogy, we may say. Like the shop owner whose manager is robbing from the store, the owners of these companies (the shareholders) need to take control of the executives and stop the theft. It is their responsibility to make sure that bonuses are paid at the levels where they achieve their purpose (to attract and retain the services of the most competent). I never saw any reason why I should concern myself with or be scandalised by the bonuses paid to executives by companies whose shares I did not own.

In this era of government handouts, the issue of bonuses become a lot more fiery. When the government owns large proportions of some banks, we all become shareholders. It becomes our responsibility that the bonuses are paid out effectively.

People are right to be shocked by bankers pocketing government money intended to prime the lending markets. Such behaviour seems criminal. Governments have to do something to avoid this sort of thing, and are introducing caps.

The argument against the caps that has sprung up from those of a classical liberal bent (Oh! How I loathe to have to qualify the word “liberal” with “classical”. Damn you, American socialists! At least have the conviction to describe yourselves honestly.) is that the best bankers will leave the failing banks (in which we are all now shareholders) in order to seek higher bonuses in banks that have not received state funds. A divided banking industry where one half consists of whiz kids in privately owned banks, and the other consists of venal parasites in failing banks propped up by ever increasing government handouts sounds like something out of “Atlas Shrugged”, and it’s in all of our interest to avoid that.

Can we avoid such an outcome? Possibly. Imposing blanket caps (no cash bonuses over fixed amounts for example) runs the risks of causing the flight of any talent left at the top of the banking industry. A better approach might be for all bonuses to be put before all the shareholders of the banks for their approval. This should be the way that large bonuses are always handled anyway. Bonuses from banks that have been part nationalised will obviously have to be scrutinised by the government, which is a major shareholder, as publicly as possible. Other shareholders should have fair voting rights as well.

Whether such a scheme is workable is questionable. It certainly lacks the headline grabbing populism of a fixed cap.

Of course, the argument that the “talent” will go elsewhere presupposes that there are banks ready to pay them and that there is a shortage of top flight bankers looking for work. At this point, I doubt that either of those conditions are true.

How much efficiency is lost in a recession?

Tuesday, December 16th, 2008

Many in the car industry are suffering because of the current global recession. Understandably, politicians are reluctant to let manufacturers go under. For example, some of the French manufacturers are turning to the state for aid (in French):

http://www.lefigaro.fr/…la-filiere-automobile-francaise-.php

Unsurprisingly, one of the conditions of the French bailout is the car makers should not relocate any jobs to factories outside France.

Has anyone done a calculation of the total loss of efficiency of the global economy that is caused by decisions about how companies are run being made for political rather than financial reasons? Am I wrong to assume that it would be a loss in efficiency? Do such measures really increase efficiency?

The Tragedy of Protectionism

Friday, October 10th, 2008

Dr. Hosty, my high school English literature teacher, once said that he had seen Othello on the stage many times but had no intention to see the play performed again. It is too depressing. One can see the cogs turning in Othello’s mind that lead inevitably to the deadly conclusion of the play. Such is the nature of tragedy.

In the aftermath of the 1929 crash, there was the Smooth-Hawley Tariff Act. This raised import duty on thousands of products — bare-faced protectionism. The international response, predictably enough, was retaliatory trade tariffs against the USA. This increased the length and misery of the Great Depression.

Iceland’s banks are collapsing and British savers’ money is at risk. The list of councils with money at risk is long. Gordon Brown is threatening to use anti-terrorism legislation to freeze Icelandic assets in Britain in order to recover the money.

In the current credit crisis, I believe that we are seeing protectionism of a different, less explicit kind. Protectionism drives away foreign investment because it’s less attractive to run a company in a country where one is forced to buy goods and services locally rather than buying the globally optimal ones (which may be the local ones).

There can be few deterrents more certain against foreign investment than the threat of government expropriation of foreign assets. Iceland has invested heavily in the UK. Will Gordon Brown’s actions drive further investment away? We shall see.

The reason that I refer to this as a tragedy is that it appears that Gordon Brown does not have much choice in the matter. He has to try to protect the deposits of British savers and councils; one cannot simply roll over for that amount of cash. However, the money lost may be dwarfed by the repercussions.

They drank our blood … but at least we have work.

Saturday, August 16th, 2008

“The owners are the ones who killed our people and drank our blood,” construction worker Hussain told me three years ago outside a mansion he was building. “But at least it is providing us with work.”

Taken from:

http://www.guardian.co.uk/lifeandstyle/2008/aug/16/drugstrade.afghanistan

The Howard Brothers in the Guardian

Tuesday, February 26th, 2008

Some friends of mine (the Howard brothers of Brighton Wok fame) were interviewed for the Guardian:

http://education.guardian.co.uk/egweekly/story/0,,2259874,00.html

Interesting that the government should seek to levy a tax for education in this way.

In my chosen field (programming), anyone who’s anyone seems to take pride in being self-taught. Programming is very much this sort of skill. Although many programmers have degrees in computer science, they are of little use day to day (if ever) for a programmer, other than to convince someone to employ you.

As I’m self-employed, I don’t send people my CV very oftern, so I consider the three years that I spent at university to have been a complete waste of time and money. Wikipedia, working with people, selling software to clients and long hours at the command line and cursing IE is where I consider my education to have taken place.

If the government were to levy a tax on web programmers to train other programmers, I would be completely against it.

If you want to know how to do something, you should go ahead and do it.

If you want people to give you money, try to sell them something that is of value to them.

Maybe I should put down this cup of coffee and my dog eared copy of “Atlas Shrugged“.

🙂

Why I am not a Jedi Knight

Saturday, August 25th, 2007

I’ve been working with the team behind Brighton Wok for some time now. It’s been very exciting and interesting seeing a feature length movie come together. Almost everybody involved in the movie is in their twenties and we’re all very passionate about almost every detail of the movie.

Cinema is changing very much at the moment. This evening, I watched Dark Resurrection, a Star Wars fan movie from Italy. The movie is being distributed to free on various file sharing networks and it can also be streamed from their site. I recommend the movie and am looking forward to watching the second part. The visual style of the movie was only vaguely similar to that of the original movies, which makes the series look fresher.

*SPOILERS BEGIN*

The story is of a young Jedi whose destiny is to fight an evil Sith lord and possibly turn to the dark side. Near the beginning of the movie, we see her training with her Jedi Master. She beats her teacher and knocks him to the ground. He admonishes her for using anger in order to win the fight. Talk about sore losers! Later, the Jedi master tells his student to control her fear as if fear of people who want to kill you with a red light sabre is a bad thing.

The master is mortally wounded by the Sith. The yound Jedi refuses to accept the death of her master and it appears that she turns to the dark side in order to resurrect him.

When the 2001 census was conducted, there was a lot of talk about the fact that the government asked us to say what our religion was. Word got around that if 10,000 or more people put down the same religion, that would become an official religion of the country and that “Jedi Knight” should be made into an official religion. For want of anything better to say, I went along with this. Now, I think that the Jedi religion would be a pretty crap way to live your life.

For a start, suppressing anger and fear must be a counter-productive tactic. If you feel angry, then you believe that something about your situation (e.g. someone’s behaviour) is somehow unacceptable. Your anger should disappear if the situation changes (the other person changes their behaviour or you learn something that changes the way that you understand the situation). Piously turning from anger achieves nothing.

Consider what would happen if we tried to suppress distrust in a similar way. If I don’t trust somebody, I would be a fool to say to myself: “Don’t give in to fear.” I should either get the person who I don’t trust to reassure me in some way or distance myself from that person.

Fear of anger and confrontation and avoiding them at all possible cost seem to be a common pathologies and very poor ways to deal with your problems. In economics, credit that is freely and easily given out can lead to growth. However, if it is too freely and too easily given out, you end up with a situation like the current sub-prime mortgage meltdown. Something similar happens in personal relationships when anger and confrontation are avoided. It seems reasonable at first to try to suppress your anger and get on with things. Eventually, there will be a painful “correction” (to use a term from markets) when one or both of the parties decides to act on their pent up aggression. Confrontation can be avoided if you give up and move away. Otherwise, it can only be delayed unless somebody decides to act creatively to resolve the conflict.

*SPOILERS END*

Is selling your produce a mistake?

Thursday, August 9th, 2007

There was a report on tonight’s edition of Newsnight on the growing ethanol industry in the corn belt of the US. The growth of this industry was hailed by profiting farmers, those concerned about energy security and those worried by carbon emissions.

However, the report warned that increased corn production is damaging the environment as millions of tonnes of fertiliser are being washed from the fields into the rivers and affecting the fish in the Gulf of Mexico.

Another concern is that the increased price of corn would drive up the price of food and that people in developing countries might starve. The Council on Hemispheric Affairs warns that increased global corn prices have caused the price of tortillas to increase by 100%. Is food worth less than fuel? Are American companies putting profits before people?

How should the various parties respond to this situation? What are their aims and options?

First consider the ethanol producers and corn farmers in the US and Mexico. They are benefiting from increased sales and higher sales prices. Is it reasonable to expect the farmers to be worried about whether their corn is sold for ethanol or food? Why should the ethanol manufacturers feel guilty about paying the top prices to their suppliers?

Then there is the US government, which currently gives tax breaks to the ethanol manufacturers. The government could reduce these tax breaks, reducing the profits of the industry and hurting the pockets of drivers. If oil prices continue to rise and worries about buying oil from dodgy regimes don’t go away, the increased cost might be absorbed by the consumer, increasing tax revenues to the government whilst pissing everyone else off.

They could also increase the tax breaks to ethanol plants, which would benefit every one in the industry and drivers but this would increase the impact on the environment.

The ethanol plants can’t stop buying their main raw material. The US government could introduce tariffs on Mexican corn. This would increase profits for American farmers but also increase the price at the pump for American drivers and reduce the profits of the ethanol plants. The tariffs would also reduce profits for Mexican corn farmers and Mexico’s income of foreign capital. Would this help the poor people of Mexico by reducing the price of corn and allowing them to eat or would the hampered exports and reduced GDP be worse for them in the medium to long term?

Consider this from the Mexican government’s point of view. They could put a cap exports of corn to try to stop the corn leaving the country. This would only benefit Brazil and other countries which export ethanol from crops as they would be depriving themselves of a source of foreign money. Do governments ever cap exports?

Filipe Calderon, the Mexican president’s response was to cap the price of tortillas. This might avoid profiteering but it won’t stop the corn going over seas. If the price of tortillas is capped, Mexican farmers have even more reason to try to sell their corn to the US. This could lead to a scarcity of corn.

Another response the Mexican president had was to increase the quota of duty free corn products coming from the US. If the people of Mexico cannot afford to buy food, why are there any tariffs on food imports? If Mexico can sell some corn products to America whilst buying others from them; the price difference either way cannot be very great, otherwise the American corn market would buy all the corn and none would be left to sell to the Mexicans.

It seems that barriers to free trade are the problem here and the biggest threat to the availability of food to the people of Mexico is government interference in trade.