Kindle or the Ipad?

A  couple of weeks ago, Steve Jobs of Apple Corporation introduced his audience and other techies to the the new gadget called the iPad. As a prelude to that fantastic presentation, he confirmed that Apple has evolved into a mobile devices corporations since it ships MacBooks, iPods, iPhones and the rest. Among the many amazing things that the iPad can do is to act as a mini computer that can handle the word processing and other applications that would include games, email access, photo storage and retrieval, music and an electronic reader. Because this blogger comes late to this issue, I will not try to sum up the many wondrous other things that the gadget is capable of.

However, the conventional wisdom of the Apple enthusiasts is that the Kindle is nearly dead because the iPad is certainly bound to replace it as the e-book reader of choice. As someone who has just recently acquired the Kindle 2 and is just reading the first book on it, I am inclined to disagree with these flowery assessments of the iPad's inevitable conquest of the market for electronic gadgets for readers. 

Judging from my considerable research and limited use of the Kindle 2, I am wont to disagree with the idea that this will completely bring Amazon's Kindle to an abrupt stop. First, I agree fully that the iPad as demonstrated by Steve jobs here is impressive because it can do a lot of things and is therefore not a dedicated instrument for readers. Instead, it does many things out of which reading e-books is merely one of them. To my mind, dedicated readers who are attracted to the Kindle for the reason that it makes reading easy and convenient will not all be impressed with the bell and whistles on the iPad. 

Additionally, my comparison of the prices for the Kindle 2 and the iPad leads me to the thought that the added features of the iPad  places it at a disadvantage in respect of the e entry-level Kindle 2. I must add that apple rarely gets its pricing wrong and that this price will predictably fall when the gadget reaches some critical mass within a couple of years. Still, at US$ 499, the price signal is that this is an Apple product that has wonderful graphics and aesthetic appeal but serious readers are used to the white page. 

In essence, I wager that the iPad will not wipe out the Kindle and that the effect that the former will have may be overstated because of the aesthetic appeal of the gadget and the surefooted legacy of the Apple corporation. As the gadget for a serious book reader, the Kindle is still the standard. I think that what this competition is a mere trumpet call to the publishers to take the industry seriously enough. I am certain that publishing will not be the same again.

GM Closes the Hummer

The Largest US corporations that manufacture automobiles had a difficult year coinciding with the financial crisis starting in 2008. Among them, General Motors suffered because a number of its models could not maintain market share once petroleum prices began to rise. One of the most recognizable of the gas guzzlers was the Hummer brand. Its aesthetics aside, it is an instantly recognizable vehicle.

Judging from its appearances in many music videos produced in the US, the Hummer such as the H3 model in the picture, was very popular with wealthy musicians. Indeed, with the exception of the Army, this model was largely a show of conspicuous consumption and suggestive of an aggressive lifestyle.

Nick Bunkley confirms that GM has made the decision to shut down further production of the Hummer brand after a Chinese corporation withdrew a bid to purchase it. To My mind, the Hummer brand was quite recognizable even outside the United States but the economics could not work because the demand for gas guzzlers has been reduced remarkably. Two lessons emerge from this story and the first echoes claims by Eliot Spitzer referred to here that these corporations responded poorly to competition from foreign firms because they chose to appease trade unions. The second idea is that the car manufacturers have not found the appropriate model for celebrity endorsements to sustain sales. (Photo may be subject to owner copyright)   

Can India's Democracy Sprint?

In the last couple of days, two pieces in the NYT have drawn me to consider my contention about how a large democracy manages the messy business of governing effectively. Reading this story covering the political economy issues facing the privatization process in India reveals the difficulty of making a definite transition from a socialist orientation towards a more market driven economy. I have no doubt that India needs to deepen economic reforms by undertaking privatization in order to ensure that resource allocation in that economy occurs through the market mechanism. No country could maintain efficient resource allocation where enterprises owned by the government collectively contribute 45% of GDP.

And yet the divestiture programme that has raised nearly US$ 3.5 billion in the last ten months alone still faces the hurdles because of the strength of political parties and monopolies that benefit from the high degree of government influence in the economy. That story suggests that in spite of the obvious success and the good timing, opposition to privatization may delay government divestiture programme. To my mind, while India is large and finally growing at impressive levels, it is unlikely to match china's growth levels unless the second generation of deep economic reforms are undertaken and the divestiture programme substantially advanced.

A second piece here tackles the related issue of large deficits and the need to curb expenditure by the Indian government. While it is clear that controlling high debt situation demands either the reduction of expenditure or hike in taxes, the Finance Minister in India seems to be at pains to sell these alternatives to politicians who are opposed to both alternatives. This situation too highlights the general frustration that people have with democracies because decision making requires wide consultation during which populism often takes over and delays sensible economic policy.

In earlier blog posts, I have often stated that my long term bets are laid with India because of the overall value that democracy confers. I maintain that bet though it is clear that given the speed of economic policy making in China, India is very slow and chaotic.

Toyoda Goes to DC

In my thinking, there is a definite problem in having a congressional panel put to task Toyota Corporation's leadership on account of the alleged failures in the electronic acceleration control system. The main reason is because a number of US automakers that are now protected and subsidized by the state are direct competitors to this firm. That aside, legislators are representatives of people and are bound to want to ask questions when the public seems to be concerned and where loss of life is attributed to these failures.

Lisa Twaronite of MarketWatch reports that Mr. Toyoda's contrition was very well read by the equity markets and this resulted in the share price outperforming the market for that day. I see this as a good signal to corporations that it does help to adopt an attitude that is not combative.

Looking at the numbers quoted in the article, I am trying to figure out how many accidents really took place because 8 million cars are recalled when the reported fatalities were 38. A fuller picture would be required to make a definite conclusion but I think the safety standards in the safety systems are quite decent noting that those cars log in millions of kilometres.

A Portrait of Paul Krugman

Of the many brilliant economists that emerge from the singularly enviable training of the American academies for economics, I am most in awe of Paul Krugman. And my admiration preceded his elevation to Nobel laureate status so I have some justification in claiming that I could see the inevitability of that prize. In reading the common blogs by ideologues and other party apologists who appropriate libertarianism as necessary, one would think that Paul Krugman never went through a first principles course in economics. It is possibly because ideology and political biases often trump rational thought and makes people more interested in attacking the man and not bad ideas.

Writing in the New Yorker Magazine, Larissa MacFarquhar has painted a sharp and immensely entertaining portrait of Paul Krugman based on a visit to the professor's home in St. Croix. While the title suggests that it is about the formation of some of Prof. Krugman's strong political ideas in the United States, I think that it presents a clear picture of the household of two scholars with solid ideas and who are accomplished in every respect. Consider that they both have graduate degrees from distinguished schools of economics, have taught in such schools, been consultants to corporations, published a text book in their subject and one bears the rare distinction of a Nobel prize in Economic Sciences.

This portrait reveals that paul's political ideas and his articles in the NYT arose from a reflection of the circumstances of the country and the denial of some facts that were evident to him. This created the need to understand and comment on how the politically dominant ideas influence society and the economy.

Paul's strident attacks of the Republican Party and its dominant paradigm makes him a loathsome target for party operators and their intellectual foot soldiers. What often gets lost in the debate is the fact that Prof. Krugman has a set of very solid intellectual credentials and an unrivalled portfolio of ideas that changed the field. The article summarizes some of these contributions in diverse areas starting with his understanding of financial crises, international trade and geography and trade. Some of these findings are now so embedded in the subject that they are taken as having been a part of the theory all along.

As would be expected of an elaborate article like this, the author would eventually ask his subject whether there are other contributions of consequence that are expected to emerge from him. Paul Krugman goes back to the history of humanity where poverty has been almost a fixed feature. His question though is why with such stability in poverty among humans do some states suddenly begin a relentless growth path toward prosperity. My hope is that Paul Krugman rediscovers the obsession that is required to fully answer this profound question.

Rise of Invention Capital

Out of all the broad categories of intellectual property, I am most troubled by patents for the reason that they amount to a monopoly in an idea for extended periods of time. In addition a whole lot of intellectual products are gaining classification as patents and thereby conferring on their owners a lot of monopoly power even when the idea itself is not altogether novel. In spite of my concern for the fact that a number of corporations hold enormous patents and use these to extracts revenues out of their monopoly, I still think that broadly stated, the intellectual property architecture is necessary for innovation.

Intellectual Ventures is a new kind of corporation that generates intellectual property and utilizes it in an entirely different way. Steven Lohr of the NYT captures the rising trend in firms that exists purely to generate ideas and collect patents. Nathan Myhrvold seems to instinctively understand that the market place of ideas will become increasingly valuable and has dedicated himself to building this this firm.

Taking the claim that the firm has paid up to US$ 315 million to inventors makes it clear that the business model is beginning to work. And perhaps as Myhrvold hopes, it is clear that corporations that rely on technology will be faced by a change in the power equation because he understands that patents do not sufficiently reward the generators of ideas. Having been at Microsoft, it is is obvious that corporations may be faced with a new environment when it comes to licensing intellectual property represented by patents. I welcome the competition and the rise of a new corporate model which makes thinking as the primary business.Needless to state, this is a category of corporations that is worth watching at close quarters.

Algorithms Can Catch Welfare Gamers

Fraud is a perennial problem for governments that provide any form of welfare assistance to citizens who are either indigent or temporarily disadvantaged due to the lack of a job or illness. Notwithstanding the concern for people who are unemployed, it is demonstrable that many welfare systems in high-income countries are so flawed that undeserving recipients game the system shamelessly. And to me this is a far more legitimate objection than the ideological arguments that I have encountered.

Deboarah Orr, writing in the Guardian here tries to understand the complex conflicts that come with being a benefits recipient. With the admission that she was also gamed the unemployment systems while holding a low-paying job, she attacks the recent proposal asking British citizens to report on benefits cheats. The sensible reason that she proffers is that there are a variety of reasons that lead people to try to gain from the system and rarely are undeserving recipients bad people trying to enrich themselves. It is difficult to believe that a one individual within a neigbourhood of people who know one another would easily snitch on others for the pecuniary benefits.

To my mind though, it is still possible to design a mechanism for finding those who game the system without asking them to betray their neighbours and friends. A better way would be to build a database of all recipients and make the data talk by building an algorithm that would sniff out the undeserving recipients. Indeed, if as this blog post stated, Steven Levitt and Ian horsely could construct a reasonable algorithm to detect individuals with a predilection towards terrorism, then I am certain that it is possible to design one for those who game welfare. So the market for devices to catch dishonest beneficiaries of welfare is just poorly designed. I would not mind giving it a try because there may be substantial gains to the public from such a system.

Large is Beautiful for Economic Policy

"Scale may enter here through several routes. One is that the quality of the civil service can be higher in a larger society simply because it can be more selective. It is around 50 times more competitive to become Permanent Secretary to the Ministry of Finance in India than in Africa and so the quality will on average be higher." Paul Collier and Tony Venables.

Keep the Pyjamas At Home

Together with the general interest in the great development achievements of the People's Republic of China, I have maintained an interest in the odd and freedom-inhibiting regulatory provisions that countries maintain. Some of these blog posts such as this, have commented on the ingenuity of China's local bosses in designing laws and provisions with interesting outcomes. I have just stumbled upon another story which confirms that city officials in Shanghai have started a campaign to dissuade Chinese citizens from wearing their pyjamas in public.

This is interesting to me for two reasons. First, my libertarian instincts lead me to ask so what if a person chooses to wear pyjamas on the side walks. Indeed, they would probably look quite odd though it is possible that they may start a fad which is helpful for a major manufacturer and exporter of textiles. As a second point, this is worrisome because while there is no law yet, it suggest that some bureaucrats are obsessed with creating impressions to foreigners and are less mindful of the implications for individual choices.

Noting that the samples of pyjamas worn by the two men in the picture accompanying that story are quite decent, I still contend that a drive to impose behaviour on individuals just because the country is hosting an international event betrays a bureaucracy that is filled with busy bodies. Given Shanghai's place in the continuing economic development miracle achieved by China, one would think that bureaucrats in that city understand the opportunity costs of raising a campaign to stop people going about the sidewalks in clothes of their choice. With tongue in cheek, would one face the same scrutiny if the choice of pyjamas was from this Piero Galante store?

Seeing Microsoft From An Insider's View

I must concede ignorance about the fact that I have never heard of Dick Brass who was VP at Microsoft for close to seven years starting from 1997. However, he is a person that I will follow more closely now for he has given a very interesting view on why Microsoft has struggled in innovation in an industry in which it was the major player for a long time. This opinion article in the NYT shows that Microsoft has faced little competition in its main business area as evidenced by the dominance of the Windows operating system and the Microsoft Office suite. As a former engineer with the firm, Dick suggests that Microsoft had such a strong lead in this area that it could afford to apply the brakes to innovation beyond these two areas.

While I am alive to the fact that this is a former employee of Microsoft, the relative seniority of his formal position at the firm leads me to think that his analysis is instructive. He concedes readily that the firm has maintained large profits and enviable reserves but that it ignored the possibility of employing its employees to develop other hardware and software products. Most painfully, he mentions that Microsoft never developed a true system for innovation and that internal corporate rivalries led to the stifling of devices that could have changed the landscape in its favor. One of the victims of this internal fights for dominance is that a new technology named ClearType with clear commercial applications was not fully developed due to internal fears of its potential for success.

I find this assertion interesting because while there was no guarantee that the new technology would be profitable, it suggests that the internal work dynamics at Microsoft were far from perfect. At the same time, one must offer credit to the reluctance to develop hardware products when the corporation's orientation was to develop a winning suite of software for PC use. Dick is certainly right when one considers that the antitrust problems that this corporation had probably affected its focus on product development much more than is realized. In all, the entire story is far from comprehensive for such a large firm but it shows how a great corporation refused to take the chance to develop new products while it had an unassailable position. One decade later, one cannot maintain that it is the predominant technology firm.

Walmart As Business Case Study

I have come to the conclusion that even the best business writers often miss the essence of the most successful enterprises that they write well about. And my suspicion is that many businesses have maintained their success because of factors that are not immediately palpable. For instance, my view about Walmart is that it is may be correct to identify it as a retailer but that is not the essence of its business. To my mind, Walmart Corporation is really a large logistics and flow management firm and I keep alert to any articles that specifically mention the word logistics or any of its variants whenever the subject is Walmart or the retail business.

Reading this article in the NYT, one finds the characterization of the firm as a leading retailer but the story is largely about management decisions about the focus on its markets. It would not be a stretch of the imagination to state that its focus on a variety of factors are with the view towards providing its customers with a product at the least cost possible. And the corporation has chosen to chase the goal of cost reduction from the logistical end by ensuring that its merchandising is well considered and store location caters to local markets.

This orientation shows that Walmart merely uses its real strength derived from understanding logistics of supply and uses that in the retail business. For that reason, the real value to its shareholders is not by itself in the stores but the thinking that matches the choice of centres with a mechanism to supply goods and ensure that consumers take them off the shelves. That's a model that would apply for many more businesses irrespective of the nature of goods r services that they supply. And while I have not written any case studies for use by business schools, I would be glad to see whether schools are able to see what the essence of a firm lies.

Futurology Meets Professional Sports

Of all the things that I find interesting, it is the one about forecasting trends and trying to imagine the future that is most fascinating to me even if I find that most of its has dubious value. This is because there are many instances of imagined effects of technology and their applications but the development of technology tends to take unprecedented and unimaginable turns with every generation. However, this reading on the forecasts by futurologists has led me to make a connection to this article about a professional sportsman's painful experience.

On the one hand, the UK government's Department for Business, Innovation and Skills spent some public money and asked futurologists to imagine what will emerge from cutting edge technology. The report says that the report was meant to determine the shape of jobs to come and would be laughable if not for the serious implications that it suggests for trade in replaceable limbs. I do not think that any government should spend any sum to come up with the fact that there will definitely be fewer butchers on a per-capita basis in the next generation.

Tracing developments in nano-technology and the advancements in understanding of anatomy, the forecasts suggest that scientists are developing technology that will allow for the replacement of limbs in their entirety. Despite my hesitation in betting against science, I am doubtful that the supply of these limbs would be available in quantities and costs that would make them available for a majority immediately.

The two separate stories are connected by the fact that Rafael Nadal, no doubt a top tennis player retired from a match on account of unbearable pain on his knees. Media reports suggests that his trouble throughout last year with his knees is the result of his style of play which makes him particularly vulnerable to joint damage. Casual prognosis suggests that his high-tempo style means that his knees will get weaker and that his professional career may be substantially shortened. It is clear that an athlete of this level, and one who would hardly lose to Andy Murray on a trouble-free day would be on the demand side for replaceable limbs. So I see clearly that the demand perhaps exists but I am sure that it will remain a niche area for at least another generation. That is unless the science has gone much further ahead than I am aware of and the economics of it means that limbs will be cheaper than I imagine. Rafael Nadal may just have to avoid hard courts for the time being.

Differentiating Democratic and Republican Populists

"Ever since I started covering politics, the Democratic ruling class has been driven by one fantasy: that voters will get so furious at people with M.B.A.’s that they will hand power to people with Ph.D.’s. The Republican ruling class has been driven by the fantasy that voters will get so furious at people with Ph.D.’s that they will hand power to people with M.B.A.’s." David Brooks

When Design Undermines Function

I took time during the Christmas holidays to read Simplexity by Jeffrey Kluger upon the recommendation of a good friend. The book holds a series of different articles arguing that simplicity and complexity are not as straightforward as is conventionally held. Reading this article by Alice Rawsthorne in the NYT has reminded me about one of the chapters that posited an explanation for the increasing complexity in electronic gadgets.

As that story illustrates, the increased tendency to design digital functionality in many ordinary gadgets has made them almost incapable of common use. I would ask that what does it benefit a person to purchase and install a faucet so sophisticated that it requires an Internet search to turn off? It appears that designers are opting for sophisticated gadgets as a primary factor and thereby delegating to second choice the question of function. Other gadgets that are getting unnecessarily complicated are the common household entertainment gadgets which have a plethora of inbuilt functions that are rarely used.

As the book suggests, the greater driver of the digitization euphoria comes from the fact that most of the software designers are designing for themselves. They forget that a majority of people want good looking things but do not wish to have to refer to a 300-page manual to install and watch their Plasma screen. There's no doubt that programmers are smart people but there's no reason to show off with my Plasma TV or mobile phone.

Bank Tax is Sensible Policy

In my thinking about regulatory policy, I have maintained that unless the purpose for regulation is consistent with the chosen instrument, then it may help not to regulate at all. With this fairly abstract factor in mind, I have wondered whether the recent intention to levy a special tax on the largest banking institutions in the US is sound policy or not. As is bound to happen increasingly, response to this initiative has been rather predictable. The bankers are arguing that imposition of a special tax would impair banking operations unnecessarily while a majority of the supporters of the special tax retort that the all-round economic pain should be shared with the banks since they have regained profitability. On the basis of what is argued in most opinion pieces, one cannot find insight except to see the ideological orientation and the prejudices rehashed.

While I avoid quoting blog pieces, I found Gregory Mankiw's explanation here for support of the piece as extremely well considered and justifiable. David Stockman, writing in the NYT also dissects the issue with a very clear idea of the dynamics of the credit markets and the failures in monetary policy that have not been fixed thus far. I am therefore persuaded by the concise arguments by both gentlemen.

Like Mankiw, I am uncomfortable with the populism that accompanies the arguments for this policy but it is clear that not all instances of financial creativity in Wall Street are useful for the economy. Instead, these are merely stunts that result in movement of money in circles but do not result in better allocation of capital. So prof. Mankiw argues correctly that it is a principle of economics that taxation of a good reduces the overall amount that is produced hence the levy will in probability cut off some of that activity. This tax also serves to restrain some banking activity that would cause further instability especially because the signalling has confirmed that very large banks will not be allowed to fail. And so having accepted the bail out, then bankers should take the full dose that goes with assurance of public support in the future. So the populist rhetoric aside and considering the subsidy that redistributed income from tax payers towards the industry, it is clear that this modest levy of 0.15% on the debts is modest even if it affects the more cautious firms that were not highly leveraged too.

Avatar is A Lesson in Economics

I have recently developed an interest in designing predictive models for important economic and business uses and intend to take a course on statistics and its applications once again. With this background and having watched the movie Avatar, I find articles such as this by Sarah Ball interesting and also of some concern. Since I read about the details of this movie, I have had a strong hunch that it would be quite successful though I could not guess what the box office figures would be. In spite of that inability, I am concerned that Sarah Ball proceeds to compare the two movies in terms of the nominal figures. To her credit, the article clearly states that the figures under comparison have not been adjusted for inflation but then goes ahead to ask whether an extra US$ 800 million of ticket sales is possible.

It is incontrovertible that every journalist must present pieces in a way that meets editorial policy and that is most easily understood by their readers. My view is that given the tendency for many professionals to substitute conventional wisdom for sound economic reasoning, the success of a movie like Avatar would present an ideal opportunity to teach readers about the time value of money. In essence, the opportunity is here to introduce the idea about inflation into the discussion without harming the comparison of the two blockbusters that many movie goers enjoyed. I have argued before that comparing a billion dollars across ten years without adjustment for inflation tells one nothing.

Political Risk and Investment in African Land

Reading this story in the Guardian, I am reminded of the fact that Africa has enormous resources in land and yet it is the continent that most advertises its problems with feeding its people. Recently, a number of corporations have sought to enter into long-term leases with African governments to bring land into more intense farming and thereby increase food production for local consumption with the possibility of exports. In the story referred to above, a number of farms are concluding leases of up to a couple of generations with the Ethiopian government in order to plant cereals for domestic and regional markets. It is clear to me that given the fairly intense farming methods that will be introduced in those areas, the farms will be very productive and the investing firms will be able to bring a lot of produce to markets thereby making enormous profits.

An earlier blog post here addressed a similar investment in the western part of Kenya and confirms the view expressed by the author of the story that many such deals are being pursued on the continent. A number of the land leases have raised concerns especially because they were meant entirely to generate food for export to the Asian countries. To my mind, the quest to expand agricultural productivity in Africa has been longstanding and the principle of investment based on factor abundance is altogether sound and worthy of support.

The one point of concern and which betrays serious naivette on the part of the managers and owners of the overwhelmingly foreign firms is the political risks that appertain to these long term leases involving land. First, it is worthy of taking into account that most of Africa is not governed by particularly transparent and democratic governments. So the leases will be seen as concluded with foreigners entirely at the behest of government and to the disadvantage of the local people. Secondly, these long-term leases involve a critical issue of land ownership which in most of these countries is a very highly politicized matter. A long-term lease of up to 80 years is almost certain to be interpreted by opportunistic politicians as an outright sale. Finally, in the quest to attract these investments, these governments that have bad reputations for corruption have negotiated lease agreements on absurdly cheap rates. Since most of these rates are nominally fixed, it is clear that because of the inflation endemic in these countries, they will in turn be ridiculously small while the profit of these firms will be rising.

The confluence of these factors suggests that most of these firms will increasingly rely on government protection or repression to ensure that the citizens of these countries do not violate their rights to the leased property. Indeed, whether there is improved public consultation or not, the population pressure and absence of other opportunities will lead to intense and nationalistic demands for surrender of the land. One would think that these firms should tread cautiously because whereas they are entitled to negotiate the best terms for themselves, that does not mean that those leases will be perpetually respected as representing fair deals.

Will Google Leave China?

I confirm that I am one of those who has been implacable about Google's decision to accept the compromise of its pure search engine by adjusting it in order to make China's politicians comfortable and thereby gain entry into that country. To start with, this flexibility displayed a betrayal of Google's longstanding and declared principles so that it may have a chance to introduce a dedicated search engine in that large market. With that background, I was quite pleasantly surprised to learn that in a statement issued on the official Google blog here, Google declared that it intended to adopt a new approach to China. The genesis of this rethink relates to a serious of stealth attacks on its corporate servers and the loss of unspecified intellectual property. Of equally great concern is the fact that the privacy of some Gmail users was compromised by persons in China. the seriousness of this public information is the statement towards the end that Google China will shortly cease to censor any searches conducted through the service and that it would shut down Goggle.cn if an amicable settlement with the government does not obtain.

As a starting point, I would think that Google and China are examples of how small corporations and a large country could build deserved success by doing things sensibly and obeying a number of laws that respect markets. However, in the approach to freedom, it is clear to me that in spite of its success, China could do a lot more to expand individual freedom to complement the many things that it has done right over three decades.

Many cynics see Google's uniquely bold action as a desperate move for a corporation that is leader in search almost everywhere save in China. I think that this reasoning is a rather naive because even a second place in a fast growing China is still a good position for Google. While I am disappointed with the political risk analysis that Google received in trying a failed placatory approach, it is important to note that Google seems to think that as business with a commitment to some ethics, it may still withdraw and forgo the market even in a large economy as China's. While I hope but would not bet that Chinese leaders would consider this issue clearly, I am obliged to agree with Nicholas Kristof that Google's exit would be China's loss in the long term. To my mind, it would reflect the fact that China's leaders are frightened by the fact that its citizens may use Gmail and the search engine. That would not provide confidence for managing an increasingly growing and complex society.

Walmart Expansion is Good for Low Income Countries

A successful corporation tends to have detractors with genuine and less justifiable complains about its business practices and other internal policies. Among the several corporations that have a committed set of detractors is Walmart, which is most often attacked for driving prices low through its bulk purchases and for its enduring reluctance to allow its employees to join trade unions. In spite of this, I maintain that Walmart has a superior business model and its success is based on the many things that it does extremely well. Andrew Clark of the Guardian provides a narrative here of a corporation managing its business extremely well and responding to inevitable setbacks intelligently. Most interestingly, Walmart is seen as trying to expand outside the US stealthily to avoid undue attention and resistance.

I have always considered that for all the successes of Google as a universal search and advert corporation, the one corporation whose benefits are acutely required in developing countries is Walmart. My argument is based on the demonstrated ability of Walmart to ensure that its customers are able to get the most competitive prices for their money. So given the levels of poverty in substantial portions of Africa, Asia and South America, Walmart would be on the list of corporations target by governments seeking investments. And yet it is clear that many governments seeking investment would be looking for corporations that would seek extensive tax waivers and merely invest in extractive industries.

The introduction of mass retailing in developing countries would be useful for Walmart because the Chinese goods that it so successfully sells are also becoming available in African urban areas. One should not fail to notice that Chinese merchandise exporters have to rely significantly on the warehousing and logistics that Walmart has built in order to maintain their competitiveness in many markets. In this way, Walmart is enabling Chinese corporate success while also making profits for its owners and providing goods that households use. Admittedly, some of the suppliers in China have treated workers poorly and even filed false returns on payments made to their employees, it does not take away the fact that the keen attention to prices is essential for low income households. It is also clear that the violations are not the result of Walmart's policy but occur because of poor enforcement of regulations in China and other countries.

How to Defy the Terrorist

No doubt it is worthy of stating again that I think that the bunch of killers who hide in mountain caves and come out once in a while to announce that they have succeeded in killing multitudes of people deserve nothing but contempt for their cowardice. What the rest of society forgets is that our reaction determined to a large extent whether such people and their followers remain as heroes or are successfully defied. This discussion is relevant following the attempt by another terrorist to blow up a passenger airliner.

True to its reputation as a broken political system, politicians in the US led with all manner of overstatement about failures that hand over the initiative to terrorists. I find that Fareed Zakaria's piece in the Washington Post here is required reading for every person who understands the purpose and objective of the cave-dwelling cowards.

My own small chance of defying terror came about when i chose to make a trip to India in December 2008 right after the Mumbai killings partly summarized on Wikipedia. As the resident of a totally different continent, I figured that the deaths had occurred but the best way to deflate the euphoria among the killers is not to change travel plans that involved going to New Delhi through Mumbai. This does not make me particularly brave but at least I refused to be terrorized by a small-minded man attempting to alter my plans through public terror.

The Predictable Fate of Kibbutzim

In a blog post not long ago, I commended the enormous strides in economic growth that Israel has made through cutting edge innovation and formation of firms that create technology. In fairness, while applauding the lessons that Israel's development miracle implied, one should have mentioned the anachronism inherent in its Kibbutz settlements. In an article in the Israeli paper Haaretz here, it is reported that the Kibbutizm system has finally collapsed in spite of great subvention from over at least three decades.

Omer Moav, a professor of economics explains that most of the Kibbutz were doomed to failure because they failed to account for individual quest for advancement. So while they provided security and stable social structures, they suffered a natural erosion by the departure of younger members. Over time, it was palpable that in spite of the ideological inclination that some may have held, the collapse of the socialist system before their eyes was the irrefutable signal of the need to change. If only those who bear political influence could be easily persuaded by empirical evidence!

Google Launches the Nexus One

The preceding blog post was a summary of some of the most impressive achievements about the Google corporation and one thing that it emphasized is the fact that this corporation has managed to do several things very well. I also alluded to the fact that in spite of its main product being a search engine, the majority of its profits are generated from leveraging that product to generated advertising revenue. Google yesterday launched a smart phone by the brand name Nexus who technical specifications are available here.

While the launch of a smart phone has been expected, the product reviews here and here suggest that while it is a sleek product, it is not as much of an industry changer as the iPod has been. What the reviews note is that the physical object itself is well-designed and will probably sell in good numbers but is unlikely to overhaul the iPhone. Indeed, the story in the NYT confirms that the Google still considers itself principally as an advertisement corporation but would like to advance the use of its Android phone software.

My prediction is that the Nexus will indeed sell in good numbers and that Google's primary purpose is not necessarily to be a major manufacturer of handsets but that it aims to place the Android in competition with other software that power mobile phones. If this is true, then that very sleek and expensive gadget is merely a delivery vehicle for that software. It is also interesting to see the choices that Google has made in terms of the sale of the gadget. It has failed to conform to the trend by availing the option for the purchase of the phone on its own as opposed to the traditional tie-ups with specified service providers that most smart phone firms have required in the US and major markets.

This is smart strategy proving that Google's managers are literate in the subject of economics because they have opted to sell only the gadget without compelling the buyer to take up a predetermined service provider. As a result, the choice of the service provider is left to the person who will pay for the product and thus circumvented the requirement that limits entry for other networks.

Google's Decade

Fortune Magazine dedicated the cover of its magazine a couple of months ago to Steve Jobs and rightly named him as the CEO of the past decade. As a person who uses a small number of Apple's products, I think that that was not an exaggeration. Unlike most CEOs it is clear that Steve Jobs understands much better what to offer to consumers than many of his peers. While Steve Jobs won hands down as the CEO of the decade, I am convinced that the large corporation of the last decade has to be Google. The phenomenal growth of the corporation aside, I am impressed with the Google corporation because it reminds me of the fact that ideas matter enormously.

Unlike many of those who regard Google as either too dominant or utterly flawless, I give this corporation credit for defining precisely what the business model for the Internet will be like. In tracing its emergence and its technology innovations, Chris Thompson highlights the number of decisive ways in which Google changed Internet commerce through offering a new product and focusing on the utility of their products. It appears that products that work very well provide ample scope for profits. However, I do not think that the report is accurate in attributing the demise of newspapers to Google though and think that it is more accurate to state that Google proved that their business model was completely outdated.

Besides having made searching the Internet fairly easy, I am most impressed with the idea that makes it clear that as much of the world's information should be made available for people to search. That is the scale of ambition that could not be drawn up by an ordinary entrepreneur. It is that kind of thinking that gives me confidence that Google will still be a major corporation for a while longer. To me, Google has also proved that modern corporations cannot be defined by 20th century industry language for its most highly used product is provided at no cost and yet it is still very profitable.

Again, I found the mechanism that its founders chose for allocating its shares to the public really fascinating. By allocating its shares during the IPO through an auction, the price was derived from the structure of demand. Google seemed to bring lessons of applied economics to the fore. And as one can tell, they did pretty well in allocating the shares in accordance with the demand. A successful corporation in this age has to do several things exceedingly well.

Costly Meal of Tiger Steak

One of the most difficult discussions to hold with conservation-minded people is that markets can be designed to ensure the survival of some endangered species. Most arguments from such conservationists is to adopt the moral arguments about the need to conserve valuable species and ensure that there is proper bio-diversity. My understanding of this is that it is possible to design sensible markets that would ensure that many species that are endangered survive in good numbers and that some appropriate stabilization would follow. I have taken this argument on this blog in respect of tigers which I think are extremely regal animals which should be conserved through commercialization because markets are tiger-friendly.

I rehash the argument because I have read in this small article in the Irish Times about a man who was jailed for having killed and eaten what could have been the last wild Indochinese tiger. So Kang Wannian from Yunnan province of China has been sentenced to a ten-year jail term but one more valuable tiger has disappeared forever. The logic of commercialization suggests that it is possible to save more tigers by assigning property rights through auctions and allowing them to be owned and re-generated in sufficient numbers. The instinctive resistance to any form of commercialization is greater harm to tiger populations and leaves evidence of its futility. Given the scarcity of tigers, they should not end up as steak on a clam-collector's dinner table.

Gaza's Underground Economy

One of the enduring lessons that comes from the study of history and economics is that it is extremely difficult to extinguish any market. Guided by political choices that may be legitimate or not, decisions are made that make the operation of markets very difficult but that tends to alter it shape and structure without necessarily extinguishing them. The fascinating example of a market for smuggled goods through the tunnels connecting Egypt and the Palestine through Gaza is one of them.

Harriet Sherwood of the the Guardian reports here that a number of entrepreneurs are taking the risk of constructing tunnels between the two ends in order to transfer tangible goods through. This is interesting to a student of applied economics because the mere political decision to stop trade does not ensure that it disappears. Instead, the ingenuity of the tunnel constructors and their willingness to take risks by conveying motorbikes and other goods is instructive.

To my mind, both the governments of Israel and the Hamas who are in charge of Gaza have created the situation where the smugglers will trade underground if they must. The literal underground economy merely proves that the bans on imports and trade are not well-targeted and they ongoing underground trade shows that there's more to be smuggled than arms. The demand for motorbikes and other goods exists and the tunnels will continue to be expanded in order to satisfy this largely legitimate demand. In the process, a new class of entrepreneurs has emerged and they have little respect for unreasonable laws. Security concerns and safety do not require a wholesale ban on trade. active underground economies prove once more that wholesale bans are a blunt instrument.

Tiger's Sponsorship Cancellation A Mistake

Notwithstanding the fact that its all in the news, I was determined not to comment on any blog about Tiger Woods' personal affairs as I consider questions of personal behaviour to be important but not the business of anyone but Tiger's family. Looking at the update on the website of Accenture, I am quite appalled at the moral posturing that firms have taken with regard to Tiger Woods' personal affairs. In my view, it is important to have good representatives to base an excellent image upon but it is mere moral posturing to suggest that a sponsorship contract is necessarily threatened by this episode. This is the opportunity to politely assert that the athlete is different from the father and family person and the commercial relationship is all about his athletic ability.

What Accenture confirms to me is what i have always suspected. The whole set of ideas about building brands becomes high-sounding nonsense. Tiger Woods is still a phenomenon on any golf course and that is what attracted Accenture to him in the first instance. It is a mistake to run at the first sign of trouble because this may be emotionally devastating but unlikely to dim the athlete's capability to work when it is done. I wonder whether Accenture would also fail to offer business advise to clients who face similar transient and personal problems. Tiger woods is not the Pope or a Bishop but a golfer. This hurried reversal is Accenture's loss because Tiger will be back.

Tribute to Paul Samuelson

I have just read the news that prof. Paul Samuelson died at his home in his home in Belmont yesterday. Which student of economics, or college student who interacts with the students of economics never got to see and perhaps go through a few paragraphs of textbooks written by prof. Samuelson. Awarded the Nobel prize in economic Sciences in 1970, he heralded the rise of US dominance in research and thinking for the discipline. His award reads that he receives the honor "for the scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science."

Suing Casinos for Lost Bets

Reading the first paragraph of this story in the online version of the Wall Stree Journal, I asked myself the question that I have posed here numerous times. That question is: How come some very wealthy people are extremely gullible and even stupid? In a blog post with similar title here, I was asking why wealthy people allowed themselves to be duped repeatedly and over several years by Bernard Madoff and other crooks.

So reading that Terrance Watanabe lost US$ 127 million over a year through gambling at casinos made me interested in what kind of man he is. From that title alone, one would assume that he is probably a spoilt man who inherited a great fortune from his parents and spends most of his time having fun and burning that cash. To my surprise, his life is so different from that ready stereotype. It is true that he lost that amount of money at gambling and especially by playing the games with the worst odds and sometimes while heavily inebriated. He also spent too much time at a specific casinos in Las Vegas and was even turned away from one because he was losing considerable sums regularly.

Terrance Watanabe is a fascinating person for me because while he received the bequest of a small corporation from his parents, he dedicated himself to work at it that the business had revenues of up to US$ 300 million when he sold it. Having put in that much time and foregone many other things, it is clear to me that he knows the value of money and was probably able to tell that the odds at casinos are tilted against the player and that regular and affluent players would be especially vulnerable to tempting offers from casino managers. In an earlier blog post it was confirmed that one of the casinos has resorted to hiring a professor of economics as a manager. So Terrance Watanabe is certainly not daft but I still find it difficult to understand why a person with such business ability decided to take such bad odds. To my mind, the same amount of money would probably buy a minority stake in the casinos in which he lost a portion of his fortune. His suit against the casino owners will definitely fail and he may face a jail time too. Not a good end for a man who built an impressive business and sold it profitably. Perhaps it is true that any person who takes on casinos probably does not value money.

DARPA Network Challenge Proves that Prizes Rule

I heard about the challenge posed by the Darpa Network Challenge on a radio programme on the BBC and was intent on checking it out earlier this week. In a nutshell, Defence Advanced Research Projects Agency put of a competition with a prize of US$ 40,000 and a nine day time limit during which teams were expected to identify the precise locations of ten weather balloons randomly placed in public places within the United States.

My interest in this was peaked especially because of an ongoing interest I market design and the use of prizes as an incentive to developing solutions to business or public affairs. While I was sure that the prize would eventually be claimed, I am amazed at how quickly the contest ended. A team of MIT scholars claimed the prize within nine hours of its start and that is really efficient. As this story in the Guardian states, the team utilized incentives by splitting up portions of the prize and promising a windfall of US$ 2000 to anyone who send a verified clue of the location of a balloon. And to ensure that even those who do not directly identify a balloon are motivated to send the information around, there were smaller prizes for guiding the ultimate identifiers to the MIT team's website.

The full results about the organization of the search are not out yet but it definitely has other applications for it is a very clever design. What I find curious is that the team was sufficiently confident that it could share up to 50% of the total prize with the identifiers of the balloon and sit and wait for the correct and accurate information to reach it. making many assumptions, I am thinking that the MIT team could still have applied a reverse auction by inviting identifiers and asking them to auction their information. This would have had interesting results because it is possible that the price for identifiers could possibly have been less than US$ 2000.

Some Effects of the Land Rush

One of the consequences of the commodities boom is the renewed interest in intensifying farming activity throughout the world. This means that the value of agricultural land has gone up considerably with Africa and other developing countries seeing a rush in investment from large agricultural businesses. On the whole, renewed investment in Africa is not only an urgent need but also one of the main ways for fighting the poverty for the people. While written with some bias, this article in the Business week captures some of the difficulties that emerge from the investments related to the purchase or lease of land in parts of Africa. In spite of that, the piece reveals that there are a valid reasons why these investments need to be carefully calibrated due to underlying political and economic issues.

The merits and demerits aside of such deals aside, many people in Kenya and other parts of Africa are very uncomfortable with them since these investment deals are often negotiated between governments on the one side and investment firms that are taking possession of land on the other. So Dominion Farm's investments are definitely required but its managers are wrong to think that having a lease approved by government is sufficient because they find out that they are viewed with suspicion and even resentment. That is not good for investor relations and it shows very poor analysis on political risks and how it affects the longer-term viability of their investments.

I also think that to ensure success, these agreements ought to be as transparent as possible because land is still a political issue in most of Africa. There is still the tension between private ownership and communal ownership but on the whole, the western Kenya belt where Dominion Farms is based is completely adjudicated and therefore its people are largely comfortable with private ownership. This means that Dominion ought to have sought to negotiate directly with individual farms owners and should publish whatever the undertakings from either side are. I find it suspicious that Mr. Burgess claims to have negotiated with tribal chiefs when nobody bears such powers to negotiate over another’s land. So the piece is either incorrect on this or someone has made this up.

As stated in the piece and reiterated by the its response here, some of the targets that were established for Dominion Farms are altogether unrealistic. My thinking is that transition from homestead agriculture is necessary for significant welfare enhancement because there are too many people farming non-viable pieces of land in Africa. So it must be expected that enhanced farming techniques would lead to fewer farmers producing more to enable productivity gains to occur. So the leases should not come with promises for a target number of jobs and so Dominion Farms was at fault for accepting such a compromise. It should insist that it is purely an investment and not a welfare scheme and that's the reason I am unimpressed with claims that it intends to build hospitals and all that.

My assessment of the land lease phenomenon is that many investors in Africa and developing countries have failed to realize that the ability of governments to coerce citizens is surely fading. This means that investment deals cannot be based on the 1960s templates involving sweeteners to local officials, undertakings to establish infrastructure and then all would be fine. While I agree that land is an economic good too, these investors ought to be clear that their missionary zeal and sermons alone will neither ensure that they are admired nor that they get good returns. Contest for land ownership in Kenya, as in most of Africa, is particularly intense and any foreigner who enters that contest banking on government support alone is unlikely to be successful. Proper political risk analysis and how it affects investment viability is required for most of the land rushing corporations. I see that many of these projects will be difficult and possibly end in grief for investors.

Dubai's Crisis

Hindsight is always 20-20 so it is obvious that anyone claiming to have known all along that the Dubai's fast growth was bound to come to an end says nothing that is useful. A full year after the international financial crisis and the chastening lessons that it delivered to business forecasters and those who claim to know where the next boom will rise, the magic of Dubai seems to be fading too. Reading Daniel Gross in Slate magazine here, he argues that Dubai is more akin to Lehman Brothers than many realize or admit. Among the reasons for stating this similarity is the fact the leaders of both the principality and the corporation have been accorded great wisdom in financial management but this myth is now unravelling in a moment of crisis.

Adding my thinking to all this, Dubai was built on the sound premise that natural resources were not necessary to create prosperity for its people. However, unlike many who have maintained the chorus of platitudes about Dubai, I found its aim of growing pretty fast to be incompatible with serious curbs on individual freedom and the rights of immigrant workers providing labour at the construction sites. Sooner than later, there was going to be a formidable clash between the quest to grow quickly and the maintenance of a police state. Secondly, it is now clear that one of the main lessons of the financial crisis last year and the Asian Crisis of a decade ago are so difficult for many business professionals to grasp that they are repeated regularly. And that lesson is that a financial services hub cannot be created by executive fiat and also that real estate construction and investment is dependent on realizable demand. Huge investments in commercial real estate are effective ways of flaunting short-term prosperity but the debts that finance them should be carefully reviewed. I would guess that a significant proportion of the money lent for commercial construction in Dubai has been lost.

Now, these conclusions do not mean that Dubai is not capable of great growth in the future. Instead, it means that the sources for its growth will have to be diversified and that there will be a real estate overhang for a long time even after the city state recovers its growth. Building the world's tallest building for its sake can guarantee prestige for a while but it could turn out to have been a waste of resources and an effective destruction of wealth.

Sowell on Scarcity of Knowledge

"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

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.

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.

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!

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.

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.

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.

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.

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.

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

Economics and Vaccination

It is important not to stretch the many uses to which knowledge of economics at any level is useful for policy design. However, as I read this NYT article by Sarah Klein and Phyllis Greenberger, it just occurred to me that economics is more useful and is surely not just about money and aggregates such as the Gross Domestic Product. In their argument, they posit the results of studies stating that there are reasons of biology which makes women and men to require different doses of vaccines in order to achieve the required effect. Because the studies that they cite show that women's bodies are more efficient at generating a protective response from vaccines as compared to men, then this factor should be employed in the analysis of demand for vaccines.

They authors of the article argue eloquently as people with an understanding of human biology and health research but they do make a subtle but interesting economic argument based on optimum use of resources. I see two clear arguments that a student of economics would be impressed by. First is that in light of the fear that the flu vaccine for the H1N1 virus may not be available in quantities to cover everyone who would be most vulnerable, the consideration of the differences in biology are essential in ensuring that the greatest effects emerge from use of a given quantity of vaccine. The second argument is that it may be useful for public health professionals to consider whether the same proportions of men and women should be receiving the vaccines. So given the loud protests from some people who are reluctant to take vaccination, it does matters whether it is a man or woman who opts not to be vaccinated.

McDonald's Pulling Out of Iceland

I have recently had an intense interest in learning to design and test small algorithms that act as predictors of certain events or phenomena. The reason for this is to attempt to see whether through modest number crunching, these models would predict sports, political or business outcomes with any degree of accuracy. Taking forward those assumption, I would have considered that the income levels of a country, the degree of urbanization and locations north of the equator and the structural composition of the GDP would be a crude but passable predictor of the existence of a McDonald's restaurant in any country today. And while trying to be clever, I would not consider the predisposition of a nation's citizens towards the consumption of beef in that model because as I posted here a while ago, there are several McDonald's restaurants in Indian cities where beef is neither easily available nor widely consumed.

I am most surprised by this story in the Guardian that the McDonald's restaurants in Iceland will be closing down in a few weeks in spite of the fact that the country meets most of the criteria that I have enumerated above. The stated reason only makes sense to me by hindsight. It's become far too costly to Icelandic consumers to buy burgers when the Icelandic Kronor has lost value in relation to the Euro. These consumers therefore feel that difference in the cost of their burgers while the franchise loses opportunity for profits.

So There's No Shortage of Engineers in the US

For quite some time now, the unquestioned view has been that the United States does not produce sufficient engineers to match the needs of its private sector. As a result, the reasoning goes, private sector in the US is losing the ability to compete favorably with firms based outside that country. at the same time, the freeze on working visas for professionals from south Asia and other parts of the world due to security concerns has been mentioned as an aggravating factor.

Much as it is with most other policy questions, a study with funding from the Alfred P. Sloan Foundation suggests that this contention is popular but largely untrue. As it is summarized in this here, the US does not suffer from an acute shortage in engineers. Instead, there are insufficient incentives within that country for its most qualified minds to go into science, technology and Mathematics (STEM) industry. Most of the best mathematicians are going to work in business consultancy and in the financial services industry.

My perusal of the report shows that STEM qualified graduates are being recruited into jobs that are not categorized as STEM. stated differently, the STEM industry is losing the competition to keep this pool of talent. So just because people are not working in the STEM does not mean that there are no qualified people, it is just that they have far more options and they are taking them. In a manner of speaking, STEM occupations cannot compete for the existing talent. That may still suggest that there is insufficient talent to serve all the purposes for which STEM graduates are in demand.

Finally, I have to read Paul Romer's paper once more to understand what this new information means. Paul Romer's contention then was that the government's technology policy appeared to be subsidizing demand for scientists by the private sector without questioning to what extent that was the most optimal approach. What Sloan study puts to rest is the assertion that US students are not sufficiently motivated to study science and mathematics. So this is one study that Thomas Friedman should review carefully before the 3.0 version of his best-selling book.

China's Ingenious Local Bosses

As a curious watcher of the development experiment going on in China, I have found the ingenuity of its public sector officials quite illuminating. I stated this here on the tendency to introduce rules and regulations without much forethought or careful design. The thought that came to my mind after reading this story in the NYT relates the immense power that local bureaucrats wield in that large country. As the story states, most of these rules are arbitrarily issued by local officials who bear substantial local power and often with very little oversight and external accountability. It is therefore not surprising that the a local official in Huangping has instructed pupils to salute all passing cars while on their way to school.

Notwithstanding the fact that it is possible to ensure traffic safety in other less intrusive ways, the officials who introduced this rule are defending it as a mechanism for instilling good etiquette and for road safety of the school children. I just wonder whether road signs, some speed bumps and training on road safety for kids is insufficient. As various instances of strange regulations show, this state of affairs merely manifest the extreme levels of discretionary powers that local party officials wield. It does not occur to them to consider equally effective and less risible ways for managing public affairs.

This state of affairs is largely consistent with claims stated in a book titled, "Will the Boat Sink the Water?", which I read a couple of months ago. Its metaphorical title aside, its authors have crafted a series of stories illustrating the level of exploitation and harassment of China's peasants in one of its provinces. In all, it tells the state of affairs that many people fail to see when they merely visit Beijing and the main industrial cities. And the poignant question in my mind is that despite the unprecedented successes that China has made, it shows that very tight and accountable authority undermines the development process. Such wide and unaccountable discretion leads to regulatory overreach and silly rules that school kids like to make fun of.

Measuring Absence in Ireland's Civil Service

One can guess that the revelation by the study discussed in this piece in the Irish Times would please the supporters of small government. The argument being that clerical officers in Ireland take an average of 16 days sick leave per year and that is evidence of lower efficiency and a slack attitude to work. Reading further, it is clear that there are variations in the total days taken up for leave. The one factor that I find worthy of examining further is the finding that up to 42% of all absences are not recommended by physicians and that most of the leave days are taken up by clerks in the Irish public service. In addition, the management would be concerned when up to 59% of all employees called in sick in a given year. In honesty, I am not sure what the right proportion should be because that number is probably important when dealing with human resources as the main cost factor.

Rightly, the report recommends that the recording of the absence is important in addition to other factors such as the grades of the employees. In this way then it will be possible to determine whether the rates of absence are too high or not. Still, I am concerned that with an economy that has been quite robust, the fact that the absence rate has moved from 3.3% towards 40% requires a proper answer. Only then would it be possible to make comparisons and determine why the clerical sections are more prone to illness or whether this reflects poor supervision.

Isaac Newton's Chair has New Occupant

I consider A Brief History of Time the one book that many bought, few read to completion and even fewer understood. In spite of all this, it is still a best selling book and one that made many people mildly aware of what black holes are. It was also a fascinating fact that the author held the chair that was occupied by Isaac Newton. His scientific accomplishments aside, Stephen Hawking's life is one to marvel at primarily because his life and the manner in which he has overcome his disability is itself worthy of proper study.

And now that prof Hawking has retired from the Lucasian Professorship of Mathematics at University of Cambridge, he is succeeded by Prof Michael Green. That the popular publications attempting to make an understanding of particle physics understandable will continue is probably not in doubt. I hope that professor Green will in time try to publish something that takes that tradition forward. My hope is based on my sensible conjecture that it is essential to produce publications that bridge the vast and growing gap between scientific thinkers and the interested laity.

Ambani Brothers Dispute Not For Courts

An article in the Times newspaper here covers the formal commencement of hearings in the legal battle between two brothers representing the most affluent of India's business families. In spite of this being described as a business dispute about the agreed price for sale of energy by one side of the firm to the other, I am skeptical that this is really a matter for the courts. The series of disputes between them that commenced after their father's demise suggests to me that this is more than a commercial matter.

Granted that there is a commercial interest for each of the brothers in the outcome of the case, to my mind, it is clear that this is a family feud related to inheritance that is being resolved in the courts. Notwithstanding the claim in the story that Mukesh and Anil Amabani are together managers of corporations that account for 5% of the Gross Domestic Product for India, I suspect that the feud between them cannot be resolved through the courts. Indeed, the proper arbiter here may still be their mother as she was the one who engineered the initial division of the property inherited from their father. Evidence that this is not entirely a commercial dispute would come in a subsequent court battle irrespective of the outcome of the present one. As a consequence therefore, the real arbiter for 5% of India's GDP is Kokilaben and she requires the wisdom of Solomon here.

Book Publishers Have Lost This Fight

In the arena of business, very few things are certain but I have been making written bets on this weblog about the arrival of Kindle and the possibility that it will change not only the delivery of books but also the economics of publishing. It is apparent to me that the arrival of the Internet led to successful distributors like Amazon and Barnes and Noble but these alone did not shake the economics of the book industry by a great deal. As it is, the same stores had to deal with the publishers and were merely trying to develop retail outlets with a wide number of titles.

That is why, the books publishing industry has been behind the curve even as the arrival of digital formats has required some degree of revision. They have failed to note that just because they have a trusted model that ensures their profitability off hard covered books does not mean that the market will continue to respect that. I argued here that it is particularly ill-advised that in spite of the clear difference in costs, they have insisted on selling digital copies at the same cost as the paper copies. Whatever the reasons given, they forgot that in the long term, the prices must draw closer towards the marginal costs.

Marion Maneker presents the best analysis I have seen following the recent price war on this year's best sellers between Amazon, Target and Walmart. In my view, a price war may not be ideal for the corporations but it is ideal for students of economics and especially for the book readers who purchase those titles. The article is incisive because it states that the economics of books publishing will change especially in the manner in which the pricing and royalties are paid. In my view, the sliding scale approach is more apt because it reduces the risk of failure for the publisher and rewards the authors in accordance with the real sales of the text. As Marion Manker argues, the publishers are more inured to the existing model and less inclined to reducing their profits per copy of the titles.

In conclusion, the publishing industry is already incrementally losing this battle and it is best to reconsider the model now than have to be supplanted completely by either Walmart, Amazon or Target. The longstanding model that worked for hard cover and which allowed a title that is published at US3 to sell for 8 times the amount will most probably survive for a large number of books. My bet is that it surely cannot be transplanted in whole as a pricing model for e-books.