Charity Boxes in Competition

I sometimes think that having read Freakonomics, its sequel Superfreakonomics, together with a whole lot of books that apply economics in non-conventional ways, I have become aware of anything that may present a natural experiment. Last week, I was attending a week-long meeting in the Cambodian city of Siem Reap and stayed at the comfortable Apsara Angkor Hotel. While there, I saw in the lobby this interesting set up which led me to question whether the size and setting of the charity boxes affects donations.

As evident in the picture, there are two boxes for two separate charities in the lobby of this hotel.The transparent box is marked with the name of a charity committed to correcting reducing child labour in urban tourism. Bear in mind that Siem Reap is a small city but has huge tourist attraction on account of the Angkor Wat complex. The second box is set up to collect money for the Cambodian Red Cross Society and is made of solid wood.

Quite aside from the fact that one of the boxes is transparent and the other opaque, there is very little difference between them as they are right next to one another. Notice that they both have the slot for enabling contribution at the top and are of roughly the same height. It therefore unlikely that one would be able to make a contribution to one purely because the other is beyond reach.

Now to the question that made me take the picture. Given that the only difference between the boxes is that one is transparent and the other opaque, is this material for the contributions received by either charity? It is clear to me that the managers at the  Apsara Angkor Hotel have unknowingly set up a fascinating experiment. With their permission, it would be interesting to compare the total contributions that the two charities receive over time in order to know whether the transparency of the box affects contributions. Of course, I make the big assumption that guests are likely to contribute to these charities equally.

An Economist Faces Price Controls

I need to take a break from writing on soccer and try to speak about applied economics for a while. A few days ago, the legislature in Kenya passed a bill that is intended to introduce price controls on a number of essential goods. With tremendous support in the Kenyan parliament, the argument was that traders charge high prices for essential commodities such as sugar, wheat, corn and cooking oil and therefore intervention through price controls would ensure that these prices remain affordable to a number of Kenyan citizens.

To start with, it is true that a majority of Kenyan citizens are extremely poor and it is understandable that legislators in Kenya who earn some of the highest wages in PPP terms should be concerned for their welfare. What worries me is whether a legislature comprised of some professionals are unable to read either history or the most basic texts in economics. Kenya has had a two decade experience with price controls that were suspended in the early 1990s and yet the country's citizens were none the richer for that. In fact, the general shortages of those same essential goods was pervasive and drove corruption and black markets in those goods.  

So i wonder why the Kenyan legislature assumes that new rice controls will yield better results today and in the future. It is just clear that this new law will be subverted both by traders and the bureaucrats who are being asked to enforce it because the Treasury is reluctant to perform that role. A second factor that offers some hope is that Kenya's president, Mwai Kibaki, is a student of economics and should proceed to  veto that bill without apologies.  I am sure that he is quite familiar with the arguments cogently presented by Lawrence Reed here.  

Why It's Time for England's FA Bosses to Read

Punditry and excuses aside, Germany completed a devastating demolition job on the English soccer team sometime yesterday. As usual, this is a traditional and emotion-laden rivalry for which newspapers and fans from both nations have gone overdrive with explanations for why one side lost and the other lost  won. Unfortunately, most of the purported explanations from the pundits and sports journalists tell make no revelations for anyone with even the simplest and objective view of the facts.

Among the explanations are a summary posited by Stephen Dubner on the Freakonomics Blog and another on the Daily Telegraph site here. And to my mind, it is understandable that English angst against foreign players is now on show on account of the fact that a number of Premier League clubs are predominantly served by non-English players.

While I do not expect that the loose punditry will lead to a firm solution, I think that many of the ideas posited are at best guesses and at worst diversions. In an earlier blog post here, i was completely skeptical that England was capable of winning the World Cup 2010. And my views were not formed out of strong conviction as much as having read through this book. It states as clearly as can be stated about England's performance in international soccer and what changes the football association would have to make to deepen the ranks from which players are recruited in addition to the scope for England's improvements. Without being a spoiler spoiling, the protectionist backlash against foreign players is not part of the solution.

I would recommend that the Football Association buy a copy for each manager, the players but that the Chairman and the board should read through it in whole. Or perhaps hire someone to present pithy summaries of its main messages to them. the tone of recriminations that i hear are proof that England will blame foreigners, the managers (especially the foreign ones) and cry for more chances for local lads. The authors, Simon Kuper and Stefan Szymanski show with data that this is unlikely to work.

World Cup 2010: Entry 2

To my mind, the first round of matches at the World Cup 2010 reveled that some teams were obviously better prepared than others and that is unsurprising. The unsurprising part is that the host nation saved its firepower for the last match and ended up with a victory that was of little consequence. So for all the goodwill from many supporters at home and abroad, the home team went out of the tournament at the first round. based on their overall performance over three matches, no sensible person would argue that their exit was unfair because Mexico and Uruguay were demonstrably better teams.  

This brings the discussion to the next "Home Teams", which are the teams from the host continent of Africa. Here too, as the SPI showed, few of them performed in a way that would suggest that African football is on a definitive rise as a force to be reckoned with in international soccer. And yet most African teams won only a single match at best and Cameroon, lost all its matches at the group stage. Apart from falling for cheap baiting by other teams, the African teams showed the inability to stay composed under pressure in addition to woeful finishing by strikers. The redeeming thing about African soccer during this tournament remains the goalkeepers who prevented them from conceding dozens of goals. Otherwise, the objective view must be that African soccer still has to resolve systemic weaknesses in team selection, managing player composure during intense pressure and better command from the skippers. Notwithstanding Ghana's qualification for the round of 16 and subsequent elimination of team USA, I do not think that it redeems the overall poor performance by the five African teams.

Finally, the fact that none of the finalists in the preceding tournament reached the round of 16 shows that four years can alter the dynamics of competition substantially. Tactics aside, I think that both France and Italy had fairly aged players though that alone cannot explain the inability to play decently. Whatever the internal divisions in either squad, they did not deserve to play beyond the first three matches. 

iPad Sales Count Reaches 3 Million Units

The consumer electronics industry has certainly entered a new phase with the announcement of release of Apple's iPad machine in 2010. While I do not make guesses about what the ales for individual items may be, I was skeptical for a while that the iPad would sell very well. Apple confirms in this statement that the iPad has sold 3 million individual units in the first eighty days since it was made available for purchase. This is an impressive sales count bearing in mind that the gadget is initially stocked only in US stores.

To have shipped out 3 million units of a gadget that has multiple purposes and which performs functions already available in other devices is an outstanding achievement. I do not study consumer electronics industry very keenly but think that Apple have managed to sell a gadget which is known for its aesthetic value and which I expected to be a niche product. It is far from a niche product now because everyone with US$ 499 to spare seems to be getting one. And the price tag suggests that nobody is buying the gadget just so they may also have one.  

Competition of the E-book Readers

In the last couple of months, its been clear that Apple has made a success of the  iPad and has exerted pressure on Amazon's Kindle and other e-book reading devices. My original thinking was that given the diverse range of capabilities built into the iPad, it would not be a direct competitor for conventional e-book readers. Added to that is the fact that the iPad was more expensive. In my view, I was partly right in my reasoning because the effect of the iPad has been markedly different from was predicted.

It is clearer now that the iPad has indeed altered the market for e-book readers first by intensifying competition between the readers such as the Kindle and the Nook reading devices. in addition, the arrangement with publishers has placed Amazon under pressure in terms of pricing of electronic versions of the books. As the story by Brad stone confirms, the major sellers of conventional readers Amazon and Barnes and Noble are engaged in competition and have reduced prices by large margins. What this implies is that the cost of the products has not only come down much sooner than was anticipated, but also that the e-reader market is getting consolidated around a recognized number of gadgets.

To my mind, this is all for the good and is a lesson to students of price theory generally and competition in particular on how markets work. What remains unresolved is the degree to which the iPad will then compete more directly with these devices. All in all,  the economics of the market for e-book readers is being driven by competition between firms making independent decisions.    

Quoting William Petty

"That which angers men most is to be taxed above their neighbors." Sir William Petty

Its the season for tax returns in the country where I live and I just encountered William Petty's quote. I feel that he speaks for me today.

World Cup 2010: Preliminary Ideas

This blog has few readers but that does not discourage me from recording that this is blog post number 450 in 3.5 years. Besides congratulating myself for telling stories largely to myself, I think that I should try and make comment on something that is more current and undeniably popular.

The largest sports spectacle in the World is at this time being held in the republic of South Africa and the initial facts show that it will be as good as any other. In the five days since, there have been some surprises, a few good matches, drab draws (like Italy vs Paraguay) and some more. So my main comment relates to the performance of the highest rated teams thus far. The defending champions are not known to start strongly but my judgement from watching Italy's first match suggests that the Azzuri is neither as organized nor as imperious as they were in 2006.

Of all the top-rated sides that have played at least a match, England were the most underwhelming in my view. Even putting aside the goalkeeping error that led to the equalizer from Clint Dempsey of the US, I think that not many people were impressed with overall performance of individual players and the whole team. Looking also at the Pool A, it is true that in spite of not winning, South Africa had a decent performance in the match against Mexico for a team regarded as the weakest host nation ever. France too seemed to punch well below its weight in terms of the calibre of players in its squad.

So with five matches played so far, the most impressive squad has been Germany. This is a surprise to many because of the substantial overhaul in the team and the absence of its long-term and dependable skipper, Michael Ballack. The self-assured demolition job against Australia a couple of days ago was impressive and may have upset the odds substantially.

In summary, I still think that there is much to go before firm favorites are confirmed and England may still reclaim its consideration by the quants here as potential champs. However, in spite of its high ranking and expectation of triumph, England does not look like champions in 2010. In all, prediction is difficult but the German teams seems to be well-conditioned and will make it to the next round.

Why Tax Policy is Politics

One of the things that I find useful about the experience of the last recession and accompanying economic crisis is the need to re-examine and distinguish between economics and business policy. The reason for stating this is that many people with a successful business background more often than not assume knowledge and competence in matters of economic policy. In addition, the economics crisis has led me to the more critical distinction between what advise a dispassionate economist may give on the one hand and other issues of policy that involve political choices.  This too is an area in which even economists mistake their political opinion for professional views.

An example of such an area of policy involves taxation generally and the application of appropriate tax rates to capital gains. Economists argue rightly that taxation of capital gains amounts to second-round taxation because these gains arise from income that was already subjected to taxation. Often the happy compromise is to subject capital gains to a lower level of taxation in comparison to other income. Sensible as ever, John Kay illustrates why capital gains is difficult to precisely define and therefore to exempt or to subject to taxation in  a rational and consistent way. His main argument is that maintenance of tax compliance requires that some capital gains taxes be levied. In emphatic terms, he states that the issue is "quite properly the subject for political compromise". This is one point that should be borne in mind as taxation policy is discussed. 

Graduates in Debt

Attending college and graduating with a degree is an expectation that many parents rightfully place on their children and many children respond by trying to meet that expectation. Needless to state though, some colleges are far more expensive than others even for the similar courses and yet the prestige of exclusive universities makes many students choose the universities with greater recognition. Ron Lieber of NYT covers in detail, the case of a student who attended the NYU and how she accumulated a large portfolio of loans that she is now struggling to service in full. Her situation reveals the paradox that in her case, her good education has left her with a massive amount of debt which affects her life in many respects.

Besides revealing the interesting paradox where good education becomes a long-standing financial burden for a graduate, the most fascinating part of the story is about the choices and incentives that students, parents and their advisers faced. A journey from the student's family to school advisers and to the financial institutions offering the loans tries to pin the blame. To my mind, Ron gets back to the critical issue towards the end of the story by revealing the inadequate preparation of students to analyze their financial options accurately. In other words, while students are prepared at very prestigious schools to undertake technical work and accomplish tasks, they often leave with very little financial literacy. So students take up loans in order to pay for their education but without an assessment of how these loans compare to the incomes that they should expect once they graduate. So what NYU should take responsibility for is the failure to let students understand how the loans that are available compare to their expected incomes.

Nadal Endorses Mille Watches

One of the marketing ideas that I have found to be based mostly on assumptions is the view that sales for certain products can be raised based on an endorsement from an individual with a high profile. I have questioned the idea that sports stars can endorse products not just out of the required skepticism for all marketing mumbo-jumbo but especially out of the view that the endorsement fees should be derived out of the real rise in sales that come from the endorsement.

Eric Wilson of NYT reports that Richard Mille, a designer of super-exclusive Mille watches brand has concluded an endorsement deal with Rafael Nadal to promote that brand of watches. To see Rafael Nadal as a compelling figure for endorsement of watches may make sense but I still wonder how the contract is structured. To my mind, the fact that the watches under consideration here are priced in the half a million US dollar range lads to the question whether popular sorts figures are able to push sales for such exclusive items.  

Undeniably, more people will be aware of the fact that the brand exists and that Rafael Nadal wears one during tournament play. Whether that drives further sales is another matter because the guys who can afford that much money for a watch may be reached in alternative ways. After all, how many people would leave a tennis match at the French Open and go straight to a dealer and take one home immediately. So I agree that Nadal is one of those who can afford and should have the exclusive time pieces but I am trying to understand how that translates into cash for the watch corporation. Perhaps it is one instance where the distinction between marketing and sales is clear.

Imperfect Competition and Immigrant Labor in Middle East

I found myself taking a very interesting position during a conversation with a Wall Street investment banker sometime last week. During a very open discussion about the nature and state of the economy in Kenya, I mentioned that the most intractable economic problem for that country in particular and a number of African countries generally is that of creating employment. Whereas official employment figures in Kenya suggest an unemployment level in the 19-20% range, my argument was that given the large number of people in seasonal and disguised unemployment, that figure was an understatement by as much as 50%.

Thinking that it was a fairly safe and sensible statement to make given that manifestation of unemployment in Kenya would be easy to demonstrate, I was completely unprepared for the demand for solutions that came from my interlocutor. My view was that increased deregulation and better education would be more effective for raising productivity and wages than would government involvement. In response to this, the Wall Street executive, who is well-travelled, asked me why the government in Kenya or other African countries have not initiated a labor export programme similar to that by south Asian countries including Bangladesh and Nepal.

Now our agreement ended at the point where I mentioned that there is a modest labor export programme but that it is unlikely that a large number of Kenyans would find employment in the Gulf states. Asked why, I stated unequivocally that many Persian Gulf residents and employers are not prepared to live side by side with a huge diaspora of Africans on a permanent basis. Now, that is not to suggest that the main reason is racism (though possibly it could be to an extent) but that culturally, it is unpalatable for many in the Middle East.

Obviously, a business person may be acquainted with Gary Becker's work suggesting that discrimination is not rational because a competitor would take advantage of prejudice to grow a business. For a libertarian, this makes sense from the economic point of view but an empirical test of this fact by two professors from the University of Chicago shows that prejudice may persist in spite of the formal models suggesting that it is not rational for businesses in the long term. Kerwin Kofi Charles and Jonathan Guryan wrote the paper reviewed here showing through an empirical test that wage gaps may persist especially in markets with imperfect competition. I suspect that the cultural issues aside, the imperfect competition for immigrant labour may lead to a disproportionate skew towards Nepali and Bangladeshi workers to the exclusion of identical Africans in manual labour in the Persian Gulf.

Now, how do I find the data to test that? I suspect this may be a good paper for the Journal of Political Economy.

      

Motorized Bikes in China

I still maintain that the world's largest experiment in human and economic development is going on in Asia and squarely involves the Chinese and Indian people. To my mind, these two countries are placed to prove to the rest of the world that large-scale human development is possible. By no means do i think that the success of either is inevitable but China in particular has done much better.

As recorded in this post a long while back, China's main cities have faced the problem of traffic congestion and opted to ban motor bikes and motorized bicycles ostensibly because they encouraged crime. It seems that in spite of the ban, motorized bicycles are still the rage in China and that there is public preference for this mode of transportation in urban areas. To my mind, this story in the Economist magazine demonstrate how difficult it is to completely kill and industry. Chinese firms are not only exporting large sums of bicycles throughout the world but local consumption and preference for them is growing.

Adding to the preference for bikes is the fact that they are perceived to contribute less to pollution in comparison to automobiles. The moral of the story is that controlling congestion requires a far more complex cost-benefit calculation than was envisaged.

Quants Claim England Will be Champs

The use of quantitative techniques in sports has spread from the US and is now employed by leading sports franchises in Europe. With the knowledge that the FIFA Football World Cup tournament is to begin in South Africa in three weeks, I have been on the lookout for any predictions of the performance of various teams. However, I have been completely surprised by the prediction mentioned here by J P Morgan that England would be the world soccer champions at the tournament in South Africa.

The reason for my surprise comes not only from my general distrust of the quant technology that many financial services firms have too much faith in, but more especially because of a book  that I read which shows that England perform in excess of what their fair expectation should be. Apart from this book, I am also skeptical of the prediction because the most persuasive algorithm that I have read about is Nate Silver's  Soccer Power Index developed for ESPN.

In a while rival algorithms will be published and their conclusions stated but I trust the SPI most because while portions of its are not available for public scrutiny, Nate Silver explains the logic behind it elaborately and it suggests that England will do well but is still well behind a number of playing countries. In other words, I like English league soccer but the national team is often overrated and I am unconvinced that the team is good enough to win the cup in July 2010.

iPads Welcome in Israel Now

I stated in this blog post that Israel's government impounded iPads from visitors and its citizens one month ago.To me, that was a totally puzzling thing considering that Israel is the Middle east's most technologically driven country. An article from the Jerusalem Post confirms that the government has reversed that policy and while I do not believe the initial reason behind that temporary ban, I still think that it has made the right decision now. True to my thinking that this is a country whose citizens welcome technology, the story confirms that it prides itself in being slightly ahead of other countries who are also launching the product.

Should the US Prepare for VAT?

Any curious person visiting the US notes very quickly that it is one country that has rejected or avoided the imposition of the Value Added Tax (VAT). While not a very perfect replacement, the US citizens pay sales taxes which vary by state and do not end up in the coffers of the federal government. The reasons for this difference between the US and a majority of OECD countries have been debated but the main contention now is whether the US will consider the introduction of a tax designed in the format of the VAT.

And this brings me to this fine piece by Gregory Mankiw addressing the question but through the lenses of a dispassionate professional economist. Mankiw demonstrates easily that viewed from first principles, the taxes pretty much have the the same with the added advantage of making tax dodging more difficult. Not that this clear explanation would resolve the arguments by ideologues. Democratic-leaning professionals are concerned about the fact that a VAT is not sufficiently progressive as a tax even if they prefer to increase government revenues for entitlement programmes. On the other hand, Republican-leaning individuals would be  opposed to VAT for the reason that it would lead to an expansion of government even if it is much akin to their favored flat tax.

From the perspective of an economist, the resolution of the question of the burden, progressivity and the size of government are purely political questions. As a result, the introduction of the VAT will depend on which side makes the more convincing political argument with voters. All an economist can do is let them know what the consequences of any choice is.

 

Where's the Data on African Firms?

Coverage of success in entrepreneurship has been enabled by the Internet to a very great extent. And yet very few businesses based in Africa have much prominence outside the continent. This may be because a disproportionate number of Africans are engaged in subsistence farming and the main exports from the continent are agricultural and extractive commodities. While there is demand for coffee, tea and other African exports, the main marketing firms are not based in the continent. The ostensible reason is that the commodities are backed with services that add value for which Africans have no developed a sufficient degree of competence and networks for retail distribution.

An article in the Economist magazine shows the rare African firm that has made inroads into the British supermarket chains in order to distribute a coffee brand that is entirely grown and distributed by a Ugandan entrepreneur. As expected of every entrepreneurial tale, Good Africa's penetration into the supermarket chains in Britain required deft manoeuvres. What these small number of entrepreneurs lack is the business linkages that would ease the information extraction process and improve their ability to supply a reasonable quality product. In other words, trust in business is one of the areas that hampers African exporters. I wonder whether a business mechanism for extracting that information is possible. There must be some way.

MP3s and the Changing Music Experience

Everyone who follows technology understands that new developments have a way of altering industrial organization fundamentally. One clear instance of this is the introduction of digital gadgets and the sale of music files digital stores such as iTunes and Amazon.  Together with others, these two have adapted to the fact that listeners today encounter music through portable devices and are prepared to purchase songs as single tracks. Having pioneered this, iTunes turned the rest into history.Music production corporations remained intransigent for a long time because they defended the CD format of sales which guaranteed substantial profits for selling a cocktail of songs. So one sees that CD sales over time have almost collapsed and that a new model for the music industry.

On the other hand, the variety of sophisticated gadgets and software that enables a wider dispersion of music at affordable costs has had its downsides. To my mind, the main one is that MP3 files allow for music portability in comparison to CD but have lost the acoustic fidelity that comes with listening to music on good quality speakers. It is undeniable that the sound quality of MP3 files is comparatively poor. Joseph Plambeck addresses this trade off in this NYT piece by arguing that the need to sell music through Internet stores led to great compression and the loss of the full range of auditory experiences. So to purists, it would seem that the success of the iPod and other portable gadgets mean that CD quality music is being lost. And yet again, many people who started listening to music only on the portable gadgets probably do not know better.

So while it would be exciting to listen to a real Stradivarius Violin through speakers that are as close to a live performance as is possible, the rise of portable gadgets means that only a minority of buyers will buy the expensive equipment that allows this to happen. The equipment will them become even more expensive and exclusive. So anyone with serious interest in high fidelity music today should shop for high end equipment like Burmester audio systems.

Quoting Gottfried Leibniz

"The sources of invention are more interesting than the inventions themselves". Gottfried W. Leibniz

Why Do So Many Policies Fail?

In my reading of applied economics and applied science, one of the things that comes through to me is the fact that most people have confidence in ideas that are not very well considered. This can be demonstrated in the number of business ideas and policy ideas that are wrong-headed but which have enthusiastic support and popularity. I am particularly reminded of the need for modesty in designing public policy by this article by David Brooks in the NYT today.  As expected of David Brooks, he is skeptical of most claims that differences in outcomes between people can find resolution through public policy, however considered.

Citing the interesting cases in the same outcomes among the Swedish immigrants in the US and the rest of the Swedish nation, David comes to the predictable conclusion that culture matters more than many acknowledge. His unstated view is that environment does not matter much and government cannot create success for laggards.

This is especially interesting because I think that David Brooks makes a point that is worthy of more careful review than he admits. To my mind, it is also worth noting that while the Asian American community in the US is made up of achievers, it is notable that there is no equalization in the poverty levels between the large Indian diaspora in the US and those at home. I suspect therefore that the US citizens of Swedish origin make for a biased sample on account of the fact that they arrived under different circumstances and conditions. My explanation for the record of failure of most policy is that the advocates tend to have a vicarious interest that leads to blinkers regarding its obvious failures. It is just proof of human fallibility and brashness.

Buy Soccer Players Now

One of the most fascinating things for sports fans is how the main the managers and coaches make decisions for recruitment of players. related to this is how fans and enthusiastic team owners judge the performance of players. Recently, I read this book by Simon Kuper and Stefan Szymanski and confirmed a number of things about the management and economics of soccer. The authors use as data analysis approach to answer a number of questions that many soccer fans and club managers consider as obvious.

Among the nuggets of wisdom is that the choice of players is not as objective as should be because clubs overpay for blond players and those who have performed well in a major international tournaments.  with this in mind, I have been setting my eyes to see whether managers will again be fooled by performances during the World Cup tournament in South Africa in June. Arsene Wenger, the manager of the Arsenal Football Club has just confirmed that he has commenced negotiations for players and expects to conclude discussion before commencement of that tournament. Indeed, he states publicly that his intention is to avoid the inflated prices that would result from performances during the tournament. the authors mention that this is one of the mangers who trusts data and his economics reasoning above the conventional wisdom. What surprises me is that there will be the inevitable scramble for a few players who perform well after that tournament while the information shows that that is a poor predictor of longer-term performance.

Full of PowerPoint

One thing for which I give credit for professionals in the military is that they understand the need for clear communication. I am not surprised therefore to read here that the US military uses PowerPoint presentations a lot in explaining strategy and for information across ranks. And yet the story emphasizes that a number of officers are frustrated with the uses of PowerPoint as a tool because it fails to capture detailed connections between separate ideas.

As I see it, one is bound to suffer frustration with a tool such as PowerPoint for a number of reasons. the first one is that many people who use the facility forget that it does not dispense with the need to communicate clearly. And so choice of flashy slides is good but that still requires that the presenter should understand the substance. So I cannot be as sure as some people are that Power point is the problem though I have seen enough people forget that it is a tool for communication that should be used with a lot of forethought.  I favour power point in situations where there is limited time as it may help one to construct the presentation by thinking in a sequence. It may just be that the tool is inappropriate for certain levels of communication.

My Forgotten Mathematician

In the last blog post here, I referred to an article in the Guardian that classified the author's mathematicians of all time. In addition, I commented on the fact that there were a number of mathematicians that i would include in the list in addition to mentioning the paucity of female mathematicians and higher order thinkers on that list. Having reviewed that hurriedly-written blog post, I note immediately that I mentioned two mathematicians that would fit in that list. This was an incomplete list because John Nash Jr. and John Von Neumann are contemporary scholars of the subject and whose works are largely related.

So I would like to add the mathematician known as the "Father of Algebra" whose contributions to the study and documentation of mathematics are enormous. Besides contributions to algebra, cartography and astronomy, this individual is credited with the introduction of Indian numerals and the decimal number system to mathematics. The significance of the decimal system and algebra makes him worthy of as much recognition as many on the list on which my last post was based. To my mind though, I am most pleased that one of my favourite words, "Algorithm" is derived from the name Al-Kwarizmi, the scholar from the House of Wisdom in old Baghdad. His contributions were recognized by the Soviet Union in the issuance of the commemorative stamp for Al-Kwarizmi's estimated 1200^th birthday.

Guardian's List of Best Mathematicians

A couple of weeks ago, Alex Bellos put together this interesting list of mathematicians whose works he considered revolutionary. I notice that the list is merely placed in a chronological order but its contents are still interesting for a number of reasons. First is the fact that Pythagoras is recognized as one of the earliest mathematicians whose discoveries are still relevant and recognizable for students in formative school years in spite of the fact that most of his papers were lost and none is available for study today.

Secondly, it is noteworthy that the list has included a woman who would be recognized perhaps by only students of history of science or pure mathematicians. Political correctness aside, it is essential that the role that women have played in development of higher order thought be acknowledged purely as a matter of historical record. Hypatia is worthy of being on the list.

Thirdly, I recognize a good number of contemporary mathematicians starting with Paul Erdos and Georg Cantor whose works would be readily available today even if a very small number would be able to plough through them. Unsurprisingly, Grisha Perelman is on the list and I am sure that his recent contributions and reaction to certain awards ensure that he will be in many lists for a long time.

Asking myself who I would add to the list makes a number of names run through my mind. Among them is Teano, who was Pythagoras' wife and co-thinker in the academy. More recently, I would highly consider John Nash Jr. and his colleague John Von Neumann who made the subject of game theory an important part of modern thinking and scholarship.  

Confronting African Involvement in The Slave Trade

Many people who read dispassionate accounts of slavery are invariably appalled and shocked by the cruelty that accompanied the commoditization and sale of human beings by others. The phenomenon of slavery is one that makes me take a step back to ask where ethics and markets intersect. And any knowledgeable person also knows that the US paid a huge price in the Civil War before the issue was resolved in part. Many people in the US accept the moral error that led to the enslavement of Africans shipped onto the continent and were owned by a number of families and individuals.  An enduring though impractical argument has been that some reparations are due to the descendants of the slaves on account of this moral crime.

In this article, Henry Louis Gates Jr. has confronted the less acknowledged side to the story of the huge market of slavery before abolition in Europe and the American continents. That truth is that a large number of African kingdoms willingly conducted raids and built fortunes through running huge slave markets. As the article reiterates, most of the slave merchants simply appeared on the ports and few ever entered into the interior in large numbers. Understandably, this complicates the demand for reparations because all of Africa has cast itself as a victim of the great injustice based entirely on racial prejudice. Still, I find that while Henry Louis Gates Jr. has exposed the ability of Africans to stand eyeball to eyeball with the contradiction with the main powers from Europe bearing most of the shame. The missing story is that of Arab collaboration in the slavery movement especially in the North and eastern coasts of Africa. To my mind, too often the equally brutal role of the Arabs in Africa is easily forgotten or subsumed in the story about the transatlantic slavery. Unlike the professor, I am less confident that President Obama's involvement will end the blame game and so I only wager that the history be taught with high fidelity to facts.

Rent or Purchase

Granted that the discipline of economics assumes rationality on the part of most individuals most of the time, there are still a large number of myths and legends that inform people's action in markets. Reading through David Leonhardt's piece in the NYT reminds me of one that is most pervasive. Several months after the economic crises that engulfed most of the economies whose citizens earn high incomes, it is still taken as an article of faith that home ownership is much preferable to renting at any time.  I find that it is just so difficult to convince people that rental and ownership are alternatives that are dependent on the circumstances both of the individual and the overall market conditions.

In the piece, the author states that rental versus outright ownership requires a rough calculation of the ratio of rental to that of purchase. While it is not an iron law, it easily demonstrates that by dividing the purchase prices to the annual cost of rental is a good guide about the better decision to make. An index beyond 20 shows that the rental may be a better decision on the margin than ownership. So the instinct to purchase and be a home owner is strong but that should not make one opt to own a house by all means. And this is not advise that only favours the individual who is considering purchase because the same index suggests that an owner may sell to an unwise buyer when the ratio would call for renting instead.  

Bring No iPad Here

If someone asked a question about which state would try to impede the use of the iPad by its citizens, I would not think that Israel would be it. And yet this story in the Washington Post reports that the Middle East's most astute government in economic policy has just done that. I do not fully accept Israel's policies in the political field but its economics and approach to technology is something that I have lauded here before. And that is why I find the reason given for refusing to allow entry of the iPad into the country completely puzzling for its wrongheadedness. What's really happening?  

A Study on African Land Deals

A while ago, I wrote to blog posts here and here on the trend for corporations to approach governments in Africa to allow investments in agriculture through long-term leases. As I called, it then, this land rush was a new area and one in which the investment model was particularly susceptible to local politics and related political risks. I may not have stressed sufficiently but it was clear that this was one area of international public affairs that had not been more incisively examined.

I have just encountered a most professional attempt to by the IIED here to create an understanding of the phenomenon of huge investments in farming through land leases in Africa. The study confirms my thinking that the political risks are real and will ultimately determine the returns to the investments in addition to the fact that the credibility of the governments is questionable because the contracts are highly secretive. This lack of transparency undermines the good faith that citizens of these nations may have for a new investor.

Less convincing is the suggestion that governments should ask hard questions of investors in addition to determining whether land acquisition is meant for speculative purposes. My view is that most governments will have an incentive to record any new investment and that added to the lack of disclosure on the agreements raises the likelihood that the agreements will be skewed and the lease terms will be very low. Overall, the dearth of information on the subject makes the report immensely informative even if its prescriptions are not wholly palatable to me.

Absurdity of Gene Patenting Demonstrated

Following my blog post here on the judgement that gave a much appreciated push-back against broad patenting of genes, I have come across a number of other comments on the implications. Ben Goldacre's article in the Guardian makes me revisit the question because he cites a data-based study that demonstrated the absurdity of allowing such broad ownership over pre-existing genetic matter in humans. In short, the paper that he cites suggests that the patenting of this single genetic sequence makes it impossible to conduct research not only on breast cancer but on a wide number of other genes in every human being. In short, the genetic sequence and its components occur so regularly that it extends to virtually every gene in every single human being.  If one needed evidence from data and basic science that this form of patenting is absurd, then there it is.

Hidden Subsidy and Corporate Perks

One of the most interesting things about any tax allowances is that it does not necessarily eliminate that tax but most likely would transfer it to a separate payer. This fact has been aptly demonstrated in this NYT article by Richard Schmalbek and Jay Soled. The essence of their correct argument is that the decision to allow corporations to deduct the purchase price of baseball tickets from their taxes has not only altered the nature of the crowds attending sports events in the US, but has also driven the inexorable upward trend in ticket prices.

The complete argument goes that these firms are less sensitive to the prices of tickets because they can make total deductions of the prices from their overall tax liability. The unintended consequence is that best seats for sports events are purchased by these competing corporations, with the higher prices of seats conditioning sports franchises to create profits while reducing the sizes of the sports arenas. In spite of the soundness of the economic reasoning in the piece, I am less convinced that the reform of this distortion is necessary primarily to alter the composition of the individuals attending games. The best argument is that government ought not to redistribute taxes through firms that are trying to entertain their clients.

This case of applied economics shows how difficult it is to design tax breaks and how the resulting distortions  can have indefensible consequences.  

Gary Becker on Interest Groups

"The idea that interest groups can derive specific, concentrated benefits from the political system—yes, that's a very important insight," he says. "But you can have competing interest groups. Look at the automobile industry. The domestic manufacturers in Detroit want protectionist policies. But the auto importers want free trade. So they fight it out. Now sometimes in these fights the dark forces prevail, and sometimes the forces of light prevail. But if you have competing interest groups you don't end up with a systematic bias toward bad policy."- Gary Becker 

Push-back on Genes as Property

As a start, I support the idea of individual or corporate property rights as an irreducible question of freedom. This is based on the belief that ownership comes with choices and clearly defined rights are merely ways of according arrangement to a right that is inherent. That notwithstanding, the radical extension of intellectual property rights sometimes leads sensible people to question to what extent the assertion may go. Practitioners and scholars have argued for close to two decades now about the ability of firms or individuals to assert property rights through the legal instrument of patents, on biological organisms or portions such as genes.

It is mostly biotechnology firms that have tended to assert patent rights on genetic material by arguing that the isolation of genes creates a property interest in them. A judge in a US District Court appears to have momentarily put the brakes to a biotechnology company's claims to patent a couple of genes that it isolated as predisposing factors to breast and cervical cancer. To my mind, the judgement is correct primarily because the discovery f genetic material such as genes that already existed does not meet the test of having created it. True that it is a great service to isolate the genes but there are scientists who discovered blood groups and rhesus factors but cannot sensibly claim patents on those.

Secondly, my thinking is that because intellectual property rights recognized by the legal instrument of patents create monopolies around knowledge, the test for granting them should be strict indeed. This is not to say that they ought not to exists but rather that the isolation of the two genes by itself has led to an identification of a factor but that should not extend to ownership of those genes which precludes research in alternative ways of conducting tests to determine risk factors. A balance of these factors against the need to provide incentives for basic research leads me to the conclusion that the judgement was correct. As the story states, Myriad genetics was already using the patent to charge patients high fees for tests with full knowledge that the patent meant that there would be no alternative test based on the same genes.        

Banning Poker in Russia

One would think that of all things that governments realize today, it is the lesson that a multitude of rules does not  guarantee improvements in welfare. But bureaucrats have this tendency to ascribe the possibility of armageddon to any activity that some people are drawn to. True to its statist history, the government of Russia has announced a ban on playing poker for cash. This was accomplished by the de-listing of poker as a sport and therefore cannot be played for money.

Besides the annoyance that this creates in people who play poker with their friends for small wager, just what does this new rule accomplish? To my mind, the response form those who wish to circumvent the rule would probably be to keep records away from the playing tables. However, this rule is completely silly because these bureaucrats in Russia seem to be unaware of Partygaming and other online gaming corporations. But pragmatism is not a forte of most bureaucrats and in spite of the certainty that enforcement will fail, they would rather try.

Figuring Out Grisha's Incentives

In the last post, I mentioned that Grisha Perleman treated the fact that he was awarded a prize for having solved the Poincare Conjecture with nonchalance.  And I contrasted this to my strong belief that financial prizes especially are a superior way of organizing for intellectual work directed towards the solution of scientific, technical or policy problems. Searching around for any explanations from professional economists to explain Grisha's rejection of both the Fields medal and the Award that comes with a US$ 1 million prize led me to a talk by Steven Levitt. In it he says that financial incentives are demonstrably overrated because people acclimate to them quickly and they fail to provide incentives thereafter. Granted that prof. Levitt was discussing financial incentives as used by businesses, it is still worth noting that designing incentive systems is difficult.

So that leaves the possibility that Grisha Perelman is surfeit with the "psychic income" emanating from solving difficult mathematical problems. Still, the mystery is that Grisha found the prestige that comes with the Fields Medal and the singular distinction of acclamation from the Clay Mathematics Institute to be unimpressive. Perhaps he just want to solve problems in mathematics and be left alone.

Gregory Perelman Demands No Pay

Grisha Perelman is a mathematician who generated a solution to the Poincaire Conjecture, one of the more difficult problems in mathematics. Sylvia Nasar and David Gruber provide a background to this problem in a profound and revealing piece in the New Yorker Magazine a while back.  Grisha Perelman provided the proof by uncharacteristically publishing it on a website without bothering to send it to the formal mathematical journals. Later, he was deservedly awarded the Fields Medal by the International Mathematics Union and he declined the invitation almost contemptuously. 

 I learn every day that all the principles of economics are very strong and can be objectively demonstrated but also that some have definite limits. To start with, I have argued on this blog that one of the best ways to get solutions for academic or policy problems is to assign adequate prizes for them. The argument being that the financial reward mimics the market mechanism by presenting an incentive towards the development of the solution. About a week ago, the Clay Mathematics Institute announced that it awarded the Millenium Prize for the Poincaire Conjecture to Grisha was confirmed and he was therefore entitled to the US$ 1 million prize. 

Surprisingly, Grisha has neither  acknowledged the prize nor accepted the financial award in spite of evidence that he is not materially wealthy.  It may well be that there are a small number of people whose reward is the conquest of a longstanding and difficult problem and that the solution may be its own reward. 

Misuse of Airport Scanners

It is altogether understandable that concern for security has led to an introduction of procedures for passengers in order to ensure that air travel is as safe as possible. This concern with security has gone to such ridiculous levels that all reason has been abandoned in the quest to show that someone is doing something to protect vulnerable travellers. I think this need to strip belts, take off shoes and undergo a number of searches is just beginning to speak for itself. And all it says is that there is the the introduction of rules every now and again without much thought about whether it really reduces the security risks.

Right after an incident during a flight to the US in December, a number of airports rachetted upwards the security processes. Among the new rules was the full introduction of scanners that can see through clothing. Well, a case in the United Kingdom here shows that airport security officials who use the scanners have been using it to amuse themselves at the expense of passengers and their female colleagues. My purpose is to show that security thinking needs to be based on more sense than the fear.

Is Obama Still A Novice?

Irrespective of one's ideological orientation, a truly historic event took place in the US over the last couple of days. That event was the passage of a substantive health reform bill despite partisan divisions and with the conventional wisdom having been shown to be wrong again. While I have libertarian orientation, I was most displeased with the racist and obstructionist approach that replaced dispassionate analysis of the proposals of the bill. Having done some reading on history and political thinking, I thought that the socialist tag from partisans opposed to the bill was altogether cheap and dishonest.

The main part of this blog post however is to note a factor that many pundits and professionals fail to see about politics in general and the incumbent US president particularly. President Obama is a far more reflective and competent politician than his critics admit in their cynicism. Needless to mention, he got the stimulus package passed, accomplished a good record on economic management in a bad environment to get the markets up by a margin that is impressive and has now got his main domestic policy initiative passed. All this while many still consider him as a novice.

The more substantive issue is what this achievement means for President Obama's leadership. Daniel Gross summarizes the undeclared fact that it is dangerous to short Obama. His explanation for the reason that most of those who have questioned Obama's economic management capability have got it wrong comes from the composition of the self-selected crowd. And to an extent, most of them are Wall Street insiders and some corporate people who are known to have strong ideological orientation against state action but that does not work for positive political judgement. Judging from the group think that still dominates, I agree with Daniel Gross that this crowd has learnt little from this huge miss.

Format for E-reader Referencing

No need to confirm that I have been quite enthusiastic about the availability of electronic books generally and the e-book reader the Kindle in particular. After a couple of weeks of assessment of the device, I am still convinced that while the iPad will be out in a short while, I will not consider buying a more expensive gadget while the Kindle is still available. However, I am faced with a dilemma regarding the use of the Kindle and I am wondering whether there is any solution out there yet.

This dilemma comes from my thinking that most owners of the Kindle so far are probably voracious readers of books of all kinds. A number of them are definitely academics with a substantial proportion comprised of professionals who may even require the gadget for the performance of their regular work. These users of the Kindle have the ability  its users have access to a clipping facility in addition to wide storage of texts. Noting that the Kindle has understandably replaced pagination with a location facility has led me to wonder whether there is a mechanism for referencing pieces from the texts available in Kindle format. What happens when one needs to write an article and the article to be referred to is available in Kindle format. To my mind, this is not a trivial question because e-readers will be a facility for using text books and professional journals soon.

More on Merida Initiative

Blake Hounshell of the foreign Policy Magazine posts on his blog here about the wrong-headed approach to the drugs control policy in the America's. Similar to the views expressed in the last post on this blog, he says that its clear that a doubling up in a failed policy will yield no better results. Militarization of the fight works perfectly into the hands of the cartels. It is pretty clear that the failures are clear to many in the administration but nobody will broach the issue of abandoning the fight in its present form. The worst policy is to fail to accept when faced with a failed policy.

War on Drugs is Like Pushing a String

Perhaps there is no single subject that I have consistently posted opinions on this blog about than that of the appropriate policy approach to drug control. To my mind, the existing enforcement and militarized approach has nothing much to show in terms of good results other than a rise in violent death for innocent citizens and law enforcers. Painfully though, the deaths take place as the cartels and major drug trading enterprises continue to make enormous profits that enable them to destabilize low-income states. This trend continues as the last weekend saw the attack leading to death of two citizens of the United States and their Mexican associate in the Mexican City of Ciudad Juarez.

Obviously upset by the continued violence from the drug cartels, both President Calderon and Obama seem to have decided that more of the same will create the needed change. This NYT story states that the Mexican president visited and commisserated with the families and thereafter promised a more focussed military onslaught on the drug cartels. This is not new at all and will obviously not work even if it is spruced up with some judicial reform and social welfare expenditure. On the other hand, president Obama is to announce the expenditure of more money on joint military units and more law enforcement. This is consistent with the Merida Initiative that was predictably going to fail and from which no lessons seem to be absorbed.

So I offer some recycled simple advise regarding the Merida Initiative. Stop pushing that string.

Exploring Income Inequality on Data Explorer

I use a large amount of Google's products and I consider a number of them quite useful and very well designed. However, I have a growing interest and competence in manipulation and rendition of data in ways that allow for the extraction of meaning and the Gapminder site has been a wonder for me. I cannot recall accurately but I have been aware of its acquisition by Google and so I was not surprised when Google's version of Public Data Explorer was launched.

The chart on this post represents my first use of this impressive facility. However, I am not merely intent on showing the discovery of a new toy but to see what that data illustrates. Based on 2005 data, all the BRICs seems to have a skewed distribution of income with the income share of the lowest 20% of the population being below 10%. I picked Bangladesh for the purposes of comparison and it is evident that in spite of the fact that it has the lowest per capita income levels and the smallest GDP, the bottom 20% of its population earns 9.3% of the total income.

Differences in income alone do not tell much but taken together with other socioeconomic and political factors, it is clear that for all the miracles of their growth, most of the BRICs will be developing nations for a while longer. That chart also reveals that for all its poverty, Asia exhibits lower levels of income disparity than South America.

The Overconfident Investor

Political correctness is so rife today that it is very dangerous to make comparisons between races, people and especially between men and women. Larry Summers last tried to make a sensible distinction and ended up having to leave Harvard University without succeeding in taking required discussions forward. To my mind, political correctness of the worst kind allows for stereotypes and other associations to remain intact without their being subjected to proper scientific discourse.

One of the industries that is palpably under male domination world over is that of investment management. the explanations often given are about the glass ceilings that women and other minorities face. many of the men who undertake most investment decisions are characterized in the media and by business commentaries as extremely masculine and driven by adrenaline. be that as it may, a study by a mutual fund known as Vanguard, suggests that male investors indeed adhere to the stereotype but they often have nothing to show for all the swagger and overconfidence. The argument seems to suggest that unlike female investors, the overconfidence by males leads to errors of frequency of trade and timing entry and exits out of investments instruments and with that losses that would be avoidable. 

Taking forward the discussion about differences in investment behavior between the sexes, Jeff Sommer of NYT refers to studies that confirm that even in that heavy hitter's transaction of mergers and acquisitions, male executives tends to overpay for acquisitions. Now, that sends me dizzy because being a skeptic of most acquisitions and mergers, I already know that they tend to be value destroyers. If men do that badly here too, then perhaps business schools would do well to restructure curriculum for male MBAs. Now this does not in itself give me the license to state that women are "intrinsically" better businesspeople, but its clear that at the margin, the data shows that female managers may be better.       

Is Monsanto Price Gouging on Seeds?

Many people who are suspicious of genetically engineered organisms (GMOs) regularly mention that the commercial seeds industry is an area to watch. The argument being that most of the genetic modification on seeds is motivated by the quest by the largest firms to establish substantial market power and to use this to keep farmers forever beholden to them. On my part, I think that it is unjustifiable to impute malicious intent on firms just because the possibility of future dominance of a market is possible.  

Richard Neumann of the NYT reports that the US Department of Justice has commenced an investigation on the dominant player in the seed industry because of the unrelenting rise in seed prices. While a rise on its own is insufficient evidence to support a finding of dominance and abuse of the same, I too think that the rise in prices well beyond the Consumer Price Index is a curious fact about the seeds market in the US. Indeed, any student of economics would think that such a sustained price rise is only possible for a corporation with solid market power. 

Needless to mention, the corporation under investigation is Monsanto, a leading biotechnology innovator with lucrative licenses and patents on seeds such as cotton, corn and soya beans.  While the story suggests that Monsanto's managers are not worried, the market behavior of this firm will be under especial scrutiny since it has been the firm that faced the most strident, if often unfair, criticism on GMO innovation and marketing strategies. Indeed, a large number of organizations seem to exist merely to attack this firm. While Monsanto may correctly ignore the majority of its detractors, it will again be in the limelight given that the DOJ investigation will attract new concerns about its behavior towards its customers and the competitors. I hope that the firm receives good regulatory and political risk advise because if the farmers quoted in the piece accurately represent the views of many, then Monsanto seems to have lost the support of its most important constituency. That would be make the winded investigation and any court cases unbelievably difficult.  

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.