"Knowledge is one of the scarcest of all resources in any economy, and the insight distilled from knowledge is scarcer still."
Thomas Sowell, Basic Economics (3rd edition) p. 95
Wednesday, November 25, 2009
Tuesday, November 24, 2009
Clash of the Super Retailers
Whenever the question about successful leverage of the Internet is posed, many people think very directly of Amazon, a corporation that started more than a decade ago by selling books over the Internet and has now grown into an true Internet colossus. And this corporation has extended its reach to the extent that it is now better described as a Internet retailer than as a bookshop. So by extending into the sale of clothes, electronics and magazines, Amazon has transcended the conventional description of an Internet bookstore and is more properly a mass retailer.
Amazon's retailing success has attracted the notice of Walmart which intends to contest the retail markets in the US and has started a price war on a number of consumer items. Brad Stone and Stephanie Rosenbloom write about the competition the NYT here, confirming that the two firms are now clearly on each other's radar screen as competitors and have taken the discount fight to a number of high profile books and electronic equipment. This price war has been most intense more recently and the analysts quoted in the story state that it is the case of either meeting its match.
As a student of economics and competition, it is fascinating to me that while Amazon has online retail muscle, in terms of revenues, it is clear that it can maintain the online fight for a long time. I also think that Walmart is probably the only business that could come close to even challenging Amazon in a commercial way. My thinking though is that none of these two will obliterate the other and that Jeff Bezos is probably right that there's enough space for more entrants. It is also clear that that this commercial jostling provides evidence that thee long-held view that physical and Internet stores were different is unravelling. Finally, it is clear that in an open economy, the competitors for any dominant firm can come from any other industry. While this fight is still at its incipient stage, the beneficiaries will be the consumers of the services and students of business who will no doubt be studying this as a case in business class.
Amazon's retailing success has attracted the notice of Walmart which intends to contest the retail markets in the US and has started a price war on a number of consumer items. Brad Stone and Stephanie Rosenbloom write about the competition the NYT here, confirming that the two firms are now clearly on each other's radar screen as competitors and have taken the discount fight to a number of high profile books and electronic equipment. This price war has been most intense more recently and the analysts quoted in the story state that it is the case of either meeting its match.
As a student of economics and competition, it is fascinating to me that while Amazon has online retail muscle, in terms of revenues, it is clear that it can maintain the online fight for a long time. I also think that Walmart is probably the only business that could come close to even challenging Amazon in a commercial way. My thinking though is that none of these two will obliterate the other and that Jeff Bezos is probably right that there's enough space for more entrants. It is also clear that that this commercial jostling provides evidence that thee long-held view that physical and Internet stores were different is unravelling. Finally, it is clear that in an open economy, the competitors for any dominant firm can come from any other industry. While this fight is still at its incipient stage, the beneficiaries will be the consumers of the services and students of business who will no doubt be studying this as a case in business class.
Tuesday, November 17, 2009
Marking Two Decades After the Berlin Wall
Throughout the world, students of history and politics will today muse about the collapse of the Berlin wall and the ultimate collapse of communist rule in eastern Europe. The world will today mark two complete decades since then and a preponderant number of the world's population does not only have an idea about the difference, but many more seem to have forgotten what the age was like. I am unable to recount what it was like principally because I was yet a minor and had not developed an acute sense of what the events meant for human history in addition to the fact that I am not a citizen of Europe.
My ideas about the communist experiment that was undertaken most prominently in eastern Europe come from my reading about a decade ago of two important but nevertheless very different books. My understanding of socialism and its effects on the people who lived under it were was made quite clear by reading the first volume of The Gulag Archipelago. While I had not completely defined a coherent political philosophy then, I concluded that ideology informed the society that did that to other human beings was unacceptable and inhuman. Later, I came to read Friedrich von Hayek's The Road to Serfdom and came to understand an argument stating why socialism inevitably leads to the quest to dominate people and to coercion at all costs. Granted that von Hayek makes some bold claims that were not to bee, the general diagnostics and the reason that centralized planning is doomed to failure is stated as clearly as one can demand.
And this brings me to M. Tupy's essay here in which he writes about the meaning of the collapse of communism in eastern Europe. Having lived as a child and seen communism come towards it collapse as predicted by von Hayek, the essay tells stories from a perspective that I rarely encounter. It is pleasing to see that after a few decades of being subjected to life in communist paradise, even those who know no alternative, like Tupy's aunt, understood that the system cannot be good for most.
And so to my mind, one does the cause of human freedom greater service by circulating stories such as Marian Tupy's and Adriana Lukas here that would be recorded by a mere heated debate and vituperation that characterizes most debates about communism. It is just so true that all are deserving of freedom but freedom is not free.
My ideas about the communist experiment that was undertaken most prominently in eastern Europe come from my reading about a decade ago of two important but nevertheless very different books. My understanding of socialism and its effects on the people who lived under it were was made quite clear by reading the first volume of The Gulag Archipelago. While I had not completely defined a coherent political philosophy then, I concluded that ideology informed the society that did that to other human beings was unacceptable and inhuman. Later, I came to read Friedrich von Hayek's The Road to Serfdom and came to understand an argument stating why socialism inevitably leads to the quest to dominate people and to coercion at all costs. Granted that von Hayek makes some bold claims that were not to bee, the general diagnostics and the reason that centralized planning is doomed to failure is stated as clearly as one can demand.
And this brings me to M. Tupy's essay here in which he writes about the meaning of the collapse of communism in eastern Europe. Having lived as a child and seen communism come towards it collapse as predicted by von Hayek, the essay tells stories from a perspective that I rarely encounter. It is pleasing to see that after a few decades of being subjected to life in communist paradise, even those who know no alternative, like Tupy's aunt, understood that the system cannot be good for most.
And so to my mind, one does the cause of human freedom greater service by circulating stories such as Marian Tupy's and Adriana Lukas here that would be recorded by a mere heated debate and vituperation that characterizes most debates about communism. It is just so true that all are deserving of freedom but freedom is not free.
Monday, November 16, 2009
SuperFreakonomics: Guessing Factor X
Leaving aside the controversy that has arisen from the ideas on geoengineering that have been included in the new publication by S.Levitt and S. Dubner, I think that most of the stories and the applications of economics thinking are informative. So while Elizabeth Kolbert has gone at the authors with hammer and tongs, I am convinced that the authors make a simple and correct case by stating the fact that the menu of solutions ought to be expanded beyond the fixation with a reduction in carbon emissions. I still have not made up my mind whether SuperFreakonomics is really better than its predecessor. One only has to make the decision whether it is worthy of spending the cover price on. My view is that it is definitely worthy of the sum since I do not own a Kindle 2 yet.
To my mind, besides annoying the environmental activists who have reduced the issue to a near dogmatic one, the book has also bettered the first by posing a challenge to its readers. The best chapter is the one covering the forensic work conducted by one Ian Horsely and Steven Levitt in trying to identify individuals with connections to terrorism from a data-set of a financial services institution. By describing the variables considered in whittling down the numbers in order to focus on the most likely suspects, it makes the reader really peer into the minds of both men. They go ahead to justify why indicators such as the purchase of life insurance is a valuable one for the algorithm and why other factors are not particularly helpful. Having considered a number of metrics, the authors describe how a certain variable "X" dramatically sharpened the algorithm and led to a group of 30 individuals with a high probability of involvement in terrorist activity.
The only clue offered is that the variable "X" is a qualitative one that measures the intensity of a certain banking activity. I have spent time trying to think about what this variable is and have not convinced myself that I nailed it. As far as trivia go, this is one that would capture the attention of many book clubs. Its only a pity that unlike the trivia questions appearing on the Amazon site, this one cannot be confirmed by the authors. On the other hand, anyone who is bright enough to deduce what it is would probably draw algorithms that would be useful in other ways. So I will keep thinking and will post my guesses here with the reasoning behind it. No terrorists need fear yet!
To my mind, besides annoying the environmental activists who have reduced the issue to a near dogmatic one, the book has also bettered the first by posing a challenge to its readers. The best chapter is the one covering the forensic work conducted by one Ian Horsely and Steven Levitt in trying to identify individuals with connections to terrorism from a data-set of a financial services institution. By describing the variables considered in whittling down the numbers in order to focus on the most likely suspects, it makes the reader really peer into the minds of both men. They go ahead to justify why indicators such as the purchase of life insurance is a valuable one for the algorithm and why other factors are not particularly helpful. Having considered a number of metrics, the authors describe how a certain variable "X" dramatically sharpened the algorithm and led to a group of 30 individuals with a high probability of involvement in terrorist activity.
The only clue offered is that the variable "X" is a qualitative one that measures the intensity of a certain banking activity. I have spent time trying to think about what this variable is and have not convinced myself that I nailed it. As far as trivia go, this is one that would capture the attention of many book clubs. Its only a pity that unlike the trivia questions appearing on the Amazon site, this one cannot be confirmed by the authors. On the other hand, anyone who is bright enough to deduce what it is would probably draw algorithms that would be useful in other ways. So I will keep thinking and will post my guesses here with the reasoning behind it. No terrorists need fear yet!
Friday, November 13, 2009
Will IT Centers Move to Rural India?
India and China are the countries on which forecasters and many other students of economics and development have cast their eyes for the next decade at the least. And to the many who are observing the great development experiment, India is cast as the country whose recent race into high economic growth is based on an services such as software development and business process outsourcing. China's huge advantage in manufactured exports is casually contrasted to India's intermediate dominance in export of services.
A major concern with India's development has been the fact that a large proportion of of its population is rural-based. So the service industries have been based in the main urban centers and therefore provided jobs to a minority of the labor force. Rightly speaking therefore, it is not clear whether India would be able to hinge its development entirely on the technology-driven service industries because they have so far not generated jobs in high quantities. Indeed, Mira Kamdar states in this book, Planet India that India's highly adulated information technology industry employed a mere 1 million people in 2007.
Lydia Polgreeen of the NYT has captured a new trend in India's technology industry. It appears that in the permanent quest for lower cost and the availability of literate people in India's less urbanized regions, firms are establishing offices away from Bangalore and Gurgaon, the traditional technology cities. Given the facts revealed in that story, there is internal competition for the most basic work and this drives the volumes towards the cheaper cities. To my mind therefore, there's anew dynamic in job creation in the technology industry and this will not only intensify competition within India's firms, but deliver greater efficiencies for firms that are outsourcing that work. So while there are no guarantees in development, this new frontier for IT work in India will lift more Indians from poverty.
A major concern with India's development has been the fact that a large proportion of of its population is rural-based. So the service industries have been based in the main urban centers and therefore provided jobs to a minority of the labor force. Rightly speaking therefore, it is not clear whether India would be able to hinge its development entirely on the technology-driven service industries because they have so far not generated jobs in high quantities. Indeed, Mira Kamdar states in this book, Planet India that India's highly adulated information technology industry employed a mere 1 million people in 2007.
Lydia Polgreeen of the NYT has captured a new trend in India's technology industry. It appears that in the permanent quest for lower cost and the availability of literate people in India's less urbanized regions, firms are establishing offices away from Bangalore and Gurgaon, the traditional technology cities. Given the facts revealed in that story, there is internal competition for the most basic work and this drives the volumes towards the cheaper cities. To my mind therefore, there's anew dynamic in job creation in the technology industry and this will not only intensify competition within India's firms, but deliver greater efficiencies for firms that are outsourcing that work. So while there are no guarantees in development, this new frontier for IT work in India will lift more Indians from poverty.
Wednesday, November 11, 2009
Google's Dilemma: Buy or Make
Even putting aside the fact that this blog is largely made possible by a facility that Google makes possible, one could still dispassionately say that the corporation's employees are creative and display good business acumen. Reading this story in the NYT about Google's offer to purchase AdMob in exchange for shares worth US$ 750 million got me thinking about business strategy. To start with, it is clear that the Google seeks to expand the range of its revenues into as many personal devices as is possible and that has inevitably led to mobile phones. And so what Google has done is to conduct surveillance of the landscape and determine whether it needed to build a new device or acquire a separate corporation.
From the point of view of one interested in how businesses weigh decisions, I am wondering how these corporations strike a balance between building up a new service from scratch or acquiring a different entity at a fair cost. In the case under discussion, Google's offer is to take over the new corporation through a share swap hence with no cash changing hands. What draws my attention to this is that google will offer more than a million shares at today's price of US$ 566.7 per share in exchange for a corporation as it chases the opportunity to take up some space in the battle for shares in advertisements for mobile phones. Given the large number of engineers that google has, the calculations that inform this acquisition are unclear to me. I suspect that good managers are capable of considering when an acquisition would be a better deal than a complete buildup from scratch. In spite of this, I am intent to watch this transaction keenly as it would be important to se how Google leverages from computers onto the mobile phone advertisement space.
Related to the story of this transaction is the concern that Google is becoming the behemoth of the technology world and its competitors and detractors would like to see its freedom to make acquisitions checked. It is not clear to me that an acquisition of whatever kind would in itself guarantee Google continued dominance and therefore would not be particularly concerned about the quest to expand its footprint in the digital world. As Peter Osnos writes in The Atlantic, recent history suggests that Google is in a stage where it will have to be more careful to prevent overreach and concentrating on innovation.
From the point of view of one interested in how businesses weigh decisions, I am wondering how these corporations strike a balance between building up a new service from scratch or acquiring a different entity at a fair cost. In the case under discussion, Google's offer is to take over the new corporation through a share swap hence with no cash changing hands. What draws my attention to this is that google will offer more than a million shares at today's price of US$ 566.7 per share in exchange for a corporation as it chases the opportunity to take up some space in the battle for shares in advertisements for mobile phones. Given the large number of engineers that google has, the calculations that inform this acquisition are unclear to me. I suspect that good managers are capable of considering when an acquisition would be a better deal than a complete buildup from scratch. In spite of this, I am intent to watch this transaction keenly as it would be important to se how Google leverages from computers onto the mobile phone advertisement space.
Related to the story of this transaction is the concern that Google is becoming the behemoth of the technology world and its competitors and detractors would like to see its freedom to make acquisitions checked. It is not clear to me that an acquisition of whatever kind would in itself guarantee Google continued dominance and therefore would not be particularly concerned about the quest to expand its footprint in the digital world. As Peter Osnos writes in The Atlantic, recent history suggests that Google is in a stage where it will have to be more careful to prevent overreach and concentrating on innovation.
Monday, November 09, 2009
Why Intel Should Negotiate a Settlement
Few people who watch technology very keenly are unaware that Intel corporation has been facing law suits in relation to its conduct towards PC makers. The variety of technical claims are complicated but in short, they suggest that this corporation has been paying PC makers not to use its competitors chips in their machines. The direct effect of this is that it forestall competition at the assembly stage and thereby harms the consumers of computers. As the story here states,the corporation has defended itself both in the EU and Japan but has faced heavy fines in both jurisdictions. That notwithstanding, the Attorney General of New York has also instituted a lawsuit against Intel on similar grounds.
As would be expected, the story reveals here the ongoing discussion because there are institutions and professionals pitching on both sides on the merits of the case. Judging from the outcome of the cases in both Europe and Japan, I think that the probability of Intel emerging from this case completely unscathed is low. And while I am reluctant to accept that business targets should of necessity be determined by courts, I think that the management and shareholders of the corporation should consider whether a vigorous battle in court is in the corporation's interest.
Again, in spite of my inability to tell fully how the case will be determined and what the size of any fines may be, I consider that Intel should negotiate with the DOJ and New York's AG. The reason for this is that the corporation will remain a strong competitor in the computer chips market and it should preserve its strength and management focus towards that. This view is informed also by the degree of disclosures that have been made about the conduct of the firm's employees which showed that they were aware that some of the business conduct was questionable. Finally, considering that the lawyers are properly schooled in competition law and would represent the firm competently, the history of these actions suggests that the case will probably be long and take up large sums of money.
So the advise is not to cut and run but rather to admit that management's time over the next few years should not be consumed with a trial of this kind. It is clear that in spite of its big fights in the same places, Microsoft did not do any better. Intel's management should show some intelligence here and choose its fights.
As would be expected, the story reveals here the ongoing discussion because there are institutions and professionals pitching on both sides on the merits of the case. Judging from the outcome of the cases in both Europe and Japan, I think that the probability of Intel emerging from this case completely unscathed is low. And while I am reluctant to accept that business targets should of necessity be determined by courts, I think that the management and shareholders of the corporation should consider whether a vigorous battle in court is in the corporation's interest.
Again, in spite of my inability to tell fully how the case will be determined and what the size of any fines may be, I consider that Intel should negotiate with the DOJ and New York's AG. The reason for this is that the corporation will remain a strong competitor in the computer chips market and it should preserve its strength and management focus towards that. This view is informed also by the degree of disclosures that have been made about the conduct of the firm's employees which showed that they were aware that some of the business conduct was questionable. Finally, considering that the lawyers are properly schooled in competition law and would represent the firm competently, the history of these actions suggests that the case will probably be long and take up large sums of money.
So the advise is not to cut and run but rather to admit that management's time over the next few years should not be consumed with a trial of this kind. It is clear that in spite of its big fights in the same places, Microsoft did not do any better. Intel's management should show some intelligence here and choose its fights.
Friday, November 06, 2009
Cash for Clunkers Reassessed
Writing this blog post a while back, I stated that the Cash for Clunkers programme was a lesson in applied economics because it revealed that the subsidy itself revealed the preference for car models by Asian manufacturing firms in addition to the fact that the surrendered models were disproportionately those made by US car manufacturers. That blog post was incomplete to the extent that it makes the assumption that the overall programme was otherwise a successful one.
Well, I am now completely chastised, having read from no less than Steven Levitt here, that overall, the cash for clunkers programme was not an unqualified success. Referring to this data based analysis, it is clear the unquestioned attribution the entire set of sales to the programme is incorrect. As he states, there are a large number of acquisitions that would have occurred regardless of the programme. So what happened is that the subsidy merely led to a change in the moment of purchase for the individuals who already made plans to purchase new cars anyway. Taking account of this shift, the Cash for Clunkers programme ends up as a waste of resources.
Well, I am now completely chastised, having read from no less than Steven Levitt here, that overall, the cash for clunkers programme was not an unqualified success. Referring to this data based analysis, it is clear the unquestioned attribution the entire set of sales to the programme is incorrect. As he states, there are a large number of acquisitions that would have occurred regardless of the programme. So what happened is that the subsidy merely led to a change in the moment of purchase for the individuals who already made plans to purchase new cars anyway. Taking account of this shift, the Cash for Clunkers programme ends up as a waste of resources.
Monday, November 02, 2009
A Sober Take on Ayn Rand
Among the most difficult things to communicate about popular books is that it is possible for an otherwise average author to tackle a profound subject brilliantly. And so while I define myself as a person who appreciates the profound insights by Ayn Rand, I am often left to wonder whether I read the same books as some of her greatest admirers did. My view of her books is that she writes about very profound matters through impressive characterization but I find her prose style a bit drab. And that does not then mean that her books are unworthy of reading, it is only that perhaps no writer could be gifted with all three qualities. In my view, the story telling is important because some of the most popular of Ayn Rand books are huge tomes and may be especially taxing when the prose is uninviting.
That notwithstanding, I find that Ayn Rand's books and especially the Anthem, The Fountainhead and Atlas Shrugged tackle profound issues that are of significance for those wondering about the organization of society. With this in mind, I agree that some of the most strident arguments against her books are overstated while some of the adherents to her philosophy are equally exaggerators of her writing ability.
Governor Mark Stanford makes the same argument in this piece in the Newsweek Magazine where he starts by saying that he was equally impressed with the weight of the issues that the were covered in Ayn Rand's most popular titles. To my mind, the idea of individual ability and freedom should not be controversial and one that the books have examined in detail. Starting with the appropriate metaphorical ring of Atlas Shrugged, the books by this author address very profound issues regarding individual initiative and freedom as compared to statism and collectivism. I am less convinced of her absolute rejection of the role of government in public affairs but still think that the overall belief in freedom for the individual is an extremely valuable and empirically valid point. So while the Governor indicates that Ayn Rand too exhibited authoritarian traits within the organization that she formed, I respond with the view that this is a an equally profound manifestation of the contradictions of her life without negating the potency of a majority of her ideas.
That notwithstanding, I find that Ayn Rand's books and especially the Anthem, The Fountainhead and Atlas Shrugged tackle profound issues that are of significance for those wondering about the organization of society. With this in mind, I agree that some of the most strident arguments against her books are overstated while some of the adherents to her philosophy are equally exaggerators of her writing ability.
Governor Mark Stanford makes the same argument in this piece in the Newsweek Magazine where he starts by saying that he was equally impressed with the weight of the issues that the were covered in Ayn Rand's most popular titles. To my mind, the idea of individual ability and freedom should not be controversial and one that the books have examined in detail. Starting with the appropriate metaphorical ring of Atlas Shrugged, the books by this author address very profound issues regarding individual initiative and freedom as compared to statism and collectivism. I am less convinced of her absolute rejection of the role of government in public affairs but still think that the overall belief in freedom for the individual is an extremely valuable and empirically valid point. So while the Governor indicates that Ayn Rand too exhibited authoritarian traits within the organization that she formed, I respond with the view that this is a an equally profound manifestation of the contradictions of her life without negating the potency of a majority of her ideas.
No Business is Too Special or Too Big To Fail
"It is impossible for regulators to prevent business failure, and undesirable to pursue that objective. The essential dynamic of the market economy is that good businesses succeed and bad ones do not". John Kay
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