Quoting Charlie Munger

"The cash register did more for human morality than the congregational church. It was a really powerful phenomenon to make an economic system work better, just as, in reverse, system that can be easily defrauded ruins a civilization. A system that’s very hard to defraud, like a cash register, helps the economic performance of a civilization by reducing vice, but very few people within economics talk about it in those terms." Charlie Munger, Vice Chairman of Berkshire Hathaway

The above quote is taken from the address by Charlie Munger during the Undergraduate Lecture to students of the University of California (Santa Barbara) on the 3rd October 2003. While the quote itself states how innovations assist the development of business and human progress agood proportion of the 25 page document is a reminder that microeceonomics( I prefer Price Thoery) is far more useful than is often acknowledged and is deserving of a higher profile than macroeceonomics. In addition, it states the very valid point that quantitative analysis added rigour to the discipline of economics but that the complexity of human interaction ensures that the pursuit of certainty is not entirely possible.

However, I categorically reject his view that the endevaour for free trading with China would lead to differential rates of economic growth in China's favour and therefore the ultimate supplantation of the US by China. He assumes that China's growth and domination is a given and that is an assumption that history, together with dispassionate analysis and simple use of an algorithm suggests to be an overstated but unlikely matter. I would bet against him on that.

Is Google taking on Microsoft?

A number of software corporations that tried to frontally compete against Microsoft did not succeed much but that may have as much to do with the latter's business ability than the aggressive tactics that many claim that the largest software firm employs. Still, my understanding of any market is that no corporation can enjoy the extreme dominance that Microsoft does regarding any service without attracting an equally capable firm sooner than later.

An article in the NYT reports here that Google is the latest firm to frontally seek to compete with Microsoft. In itself the story is an interesting case of industry reporting because it exposes the different views that the two companies have about the future of computing in general. the story suggests that Google considers that most work processes will move to the internet and therefore it is considering the placement of applications that may be accessed through that medium. On the other hand, Microsoft does appear to consider the internet as a mechanism for supporting computing services and considers the high regard that Google is reported to place on Cloud Computing as ill-informed.

To my mind, I see in this the possibility of Microsoft's hubris in considering that cloud computing has no chance. It ought to review the intelligent decisions institutions such as universities are taking in moving a host of services onto the internet. secondly, since university campuses constitute the places in which the per capita use of a variety of computer applications does take place, Google's experiment is not as bad as one may think. This does not necessarily imply that most computing services will shift wholesome to the net and into Google's palms but it is possible that a substantial number of them will be efficiently delivered through the web.

In addition, the article exposes one of the distinguishing facts about Google's creative style and that is tied to speedy execution. Because Microsoft has the sustained tendency for the late release of products, it should be less sanguine about facing a corporation whose creative talents operate on a five month cycle. Whichever way the battle goes, all users of software products and services will benefit from the intense competition between two firms with immense reserves of cash and human resources. My guess is that a good proportion of the applications will migrate to the web in the medium term and that some of that will continue to be provided by Microsoft.

China's Measured at Today's Prices

For a country that is growing comparatively fast and very highly populated, the most appropriate measurement of China's Gross Domestic Product remains an unsettled matter for a number of dispassionate economists. News articles in recent years have suggested that that China's GDP has been underestimated and that the economy is therefore substantially larger than official statistics indicate.

Eduardo Porter mentions here, that a crucial weakness in the conventional estimates failed to take account of the price changes in the 1980s makes it clear that the economy in comparative terms is substantially smaller. Comparing against the most updated prices in China shows that the Chinese economy is indeed large but is not as close to other economies whose size is measured with more recent prices. From this situation, it is clear that considering Purchasing Power Parity (PPP) is not an abstraction and ought to be taken into account if meaningful comparison of economies is to be used in public discussion. It is also clear that future demand for energy in China would probably be higher than anticpated to ensure that it maintains the level of expansion as it is still very efficient. On the positive side is that fact that the need for an effeicient alternative to petroleum remains in the comercial intrest of both china and India.

Price Fixing by UK Supermarkets

The Office of Fair Trading of the UK has levied fines totaling £116 million against Sainsbury's and Asda following their admission to having engaged in price fixing for dairy products. Given that these firms have admitted to the charges and opted to settle the matter, one cannot reasonably argue about the size of the fine itself or the punitive nature of that settlement. As this story states, a number of other supermarkets in the UK have not reached an agreement hence investigations will continue against them.

It is noticeable however that the offenses for which the firms are charged occurred between 2002 and 2003. This leads to the thinking that either the OFT is more inclined to act after firms have benefited from the offenses or that timely detection of price fixing is particularly difficult. Given the enormous sums that it raises while levying fines, the OFT should consider the development of a random price tracking algorithm to detect movements in price that suggest price fixing. Put forensic economists to work here because it is seems that price fixing is more prevalent than is immeditely evident.

Why Make Use of the iphone a Nuisance?

Apple has gone from a corporation that designs and makes computers and related software and into other successful electronics products such as the iPod and the iphone. it is while bearing this in mind that I keep wondering why this corporation enters into agreements with mobile phone companies in order to tie the sale of the iPhone to specific networks and thereby restrict their use to networks that the phone manufacturer approves.

This anti-competition device is particularly ill-informed since it effectively compels purchasers of the product to use it on pre-selected networks. This news item on the BBC news site reports on the penalty that users who wish to buy an unlocked phone have to pay. That customers have chosen to pay an 87% "tax" to ensure the retention of the freedom of choice of network should be instructive to the networks but especially to Apple Inc. iphone owners will search for an alternative mechanism to unblock the device and this will happen pretty quickly as has already happened.

Recalling an earlier post here in which Steve Jobs argued against the futility of the DRM, it may make sense for him to review the numbers and the additional costs that is imposed on purchasers through this anti-competitive device. Mr. Jobs knows what the outcome of this unnecessary and expensive imposition will be. My hint: consumers will circumvent it.

Quoting Edward Glaeser

"Over the past 230 years, the definition of economics has changed from topic to method. While economics was originally defined by the task of running a government and then the understanding of formal markets, the field has come to define itself by a scientific approach to human society". Edward Glaeser

Wrong Advise for Africa

Advise to developing countries in particular and to Africans in generall comes at the rate of a dime for a a dozen. In this piece from a South African newspaper is a rather curious set of prescriptions that show only that there's a correct appreciation of the problems of poverty but hardly an understanding of the proper approach to creating growth. Among these is the the obsession with self reliance and the big role for agriculture and use of tariffs for protecting industries.

While I must be cautious because the story may have reported carefully, I can wager that this approach is bound to lead to failure. Given the large informal sector there, it is evident that deliberate effort to increase informality in the economy is just poorly informed. Structural reform of African economies is an imperative and it must lead away from the distorted informal economies towards freer trade. As John Kay states, the insistence on regional and decoupling from the world is equally wrong-headed. Africa's citizens must not miss the glaring lessons of history. Slogan alone do not a high income create.

Rolling Stone Assesses the War on Drugs

Ben Wallace-Wells of Rolling Stone magazine dissects the effects of the War on drugs and laments the great waste of nearly half a trillion US dollars. Essentially, it argues correctly that the war on drugs has little to show for the enormous sums spent, property destroyed and lives consumed. For anyone with a little exposure to dispassionate analysis of both the theory and the examination of the empirical facts, this is not new but is a pointer to what ideologically-driven policy often leads to: disaster and waste of resources.

As if this requires repaet on this blog, I will rehash what is clearly evident from that piece and others. First, the best approach to narcotics use reduction policy should concentrate not on outright ban but on treatment of addicts who consume a disproportionate amount of the drugs. A second lesson is that manufacture, distribution and retail of drugs requires a highly organized corporate structure and is often responsive to changes and effects of the eradication efforts. Disruption of supply simply drives up price in the short term and this creates an incentive for increased supply while wrong theories are used to keep the fight going. Finally, as stated in the book Freakonomics, the gangs make a deliberate calculation about when to confront their competitors and when cooperation is more desirable. There's no reason to work harder at a failed policy.

OFCOM Supports Number Portability

A statement released by the Office of Communications in the UK has made one of the most cogent and reasonable arguments for number portability. Given that phones are now used more widely and reliance on them has grown, the losses that could accrue from change of service providers are a part of the consideration that individuals make. So while this blogger is generally tolerant of very minimal regulation, here is one regulatory measure that has unequivocal support.

The primary reason for my support is that measures to ensure seamless number portability for consumers is great for competition. Transfer of calls to a new network is expected to occur within a couple of hours following a formal communication of change of providers.

Paying for India's Blood Banks

India has recently instituted a plan to restock its blood banks and improve the quality of donations by reducing the proportion of blood that is contaminated with HIV. A report on the iGovernment site describes some of the approaches contained in the plan. Further, the government of India invites private corporations to assist with the safe blood initiative.

This story does not fully state the design of the plan besides emphasis thatblood banks are to be established in 600 districts, I am inclined to think the most cost effective approach. An interesting advantage is India's youthful population who ought then to be encouraged to consider contribution to the blood banks. While this blogger understands that the quality of the supply of blood may also vary by the eligible population, a direct cash payment to the healthy donors would provide an appropriate incentive to ensure that the donors whose contributions expose recipients to the least risks are compensated. That is the assistance that corporate sponsors of the programme should concentrate on as opposed to funding the bureaucracy.

Has Google Heard of Steorn?

In spite of being a regular user of its technology products, I am still unable to define precisely what conventional category of corporations Google would fall in. What I am certain of is that to classify this immensely successful corporation as a provider of search and advertisement services is insufficient. Its interest go to beyond provision of information as evidence of the book digitization project shows and now into deploying the creativity of its human resources towards a search for energy sources that are cheaper than coal-generated power.

An article in the NYT reports that through its philanthropy subsidiary Google is pursuing investments in a number of promising start ups. Knowing that this is a corporation not given to a reckless approach in its business ventures, this search is probably well-considered hence could lead to very high returns.

However, considering the claims by the technology firm Steorn that it had discovered a mechanism for generating free energy, perhaps Google's advisors could consider a review of the ongoing validation of the firm's energy technology. Then again, Google's founders are capable engineers and understand that the claim by Steorn to generate free energy interminably is not only highly improbable but not worth a second look. When this blog first posted here on Steorn, the blogger considered the chances of its success at about 5% and since Google seems not have considered it, then perhaps it ought to be downgraded further. Otherwise, Google has missed the excellent opportunity for the acqusition of a firm that would not only supply the technology to ensure that it not only achieves the goal of renewable energy but limtless and free energy.

Brazil Discovers Oil and Opts for OPEC

Recent Media reports stated that the South American nation of Brazil discovered an appreciable amount of oil deposits within its territory. Estimated at between 5 to 8 billion barrels of crude petroleum and natural gas, this new find is important because it suggests that the peak petroleum supply hypothesis is not the last word yet. However, the reaction of the Brazilian president shows that its approach to this new find is typical of any developing nation that is lucky to discover viable deposits.

As this dated NYT piece by Alexei Barrionuevo confirms, the find has added a bounce to the gait of the Brazilian president and his comments suggest that besides the massive contribution to state revenues, petroleum will be an important factor in its foreign policy goals and public affairs in general. More interestingly, having been a victim of the use of energy fuels as a political weapon, President Lula has unequivocally stated that Brazil will join the OPEC. So much for solidarity among developing nations especially because it is such nations that are most affected by the cartel arrangement. It is commendable however that the commitment to alternative fuels has been retained. Discovery of the Tupi oil field should get Brazil thinking more like Norway and less like the members of that price fixing bunch known as OPEC.

EU Fails Another Audit

Given a choice, I am inclined to favor a smaller as opposed to a large government though this blogger has no strong views about what the ideal size of government should be in the overall. Supra-governments such as the EU seeks to become are therefore an interesting phenomenon for examination.

This news item on the BBC News site documents the significant fact that the financial auditors of the EU have failed to approve and sign the accounts for the 13th consecutive year. It is noteworthy though that the major weakness regarding the accounts is not necessarily related to financial fraud but the failure to adhere to technical requirements. A critical area of failure is the Common Agricultural Policy which is essentially a welfare program for EU farmers. This obviously unsound program is responsible for 40% of the EU expenditure and that suggests where the solution should lead. Scrap the thing and save tax payers the cost of duplicated governments.

Quoting Friedrich von Hayek

" If we are to safeguard the reputation of science, and to prevent the arrogation of knowledge based on a superficial similarity of procedure with that of the physical sciences, much effort will have to be directed toward debunking such arrogations, some of which have by now become the vested interests of established university departments". Friedrich von Hayek on the Occassion of Nobel Prize Lecture on 11 December 1974.

NYMEX and Crude Prices

As petroleum prices have been on an upward trend over the last few weeks, there is understandable panic that this could adversely affect growth in the whole world. No doubt, the rise in the recent days has been more than substantial and it increasingly appears that the US $100 price may be breached during this year. However, the real reasons for the rise in prices are not appreciated widely as this is attributed not only to steady demand from India and China, lack of refining capacity and the effects of the OPEC cartel.

While all these reasons are fairly common, increasingly the idea that speculative behaviour is also a contributor is being mentioned. This means that solutions have come around from price controls within countries, an expansion of refinery capacity and measures to prevent price gouging and into a very bad idea by India's Secretary for petroleum. Mr. Srinavasan is quoted by Heather Timmons of the NYT stating that there should be decisive action to stop trading of crude petroleum on exchanges.

True that speculative action and endeavours to profit from further rises may lead to the rush to buy, it certainly is unimaginative for a person to consider the abolition of a market facility because its price signals are not the right ones. One would imagine that India's brilliant economists would inform the honourable secretary that this is not an effective response. The oil trading facilities as NYMEX merely provide a platform for the revelation of the spot price.

Narcotics Fight Goes Underwater

As if further evidence is really necesary to show that drug control and eradication policy is presently crippled by bad thinking, this report in the LA Times shows that traffickers are using increasingly sophisticated methods to transport drugs north from Colombia. Discovery of the shipyard in which crude submarines were being constructed is an important one for the police. A different interpretation may be that it demonstrates the versatility of traffickers in general hence is not as much a sign of success as demonstration that the fight is moving to the seas.

The success in ensuring the capture of tonnes of drugs that the report means that prices will rise and provide incentives for more production, transportation and sale of narcotics. Essentially therefore, the cat and mouse game persists.

Arbitrage for Models

This blog is certainly not the appropriate place to discuss the profession of modelling. However, news on the BBC News site here shows that even models have began to understand that differences in currency are worthy of consideration while negotiating pay. Gisele Bundchen is reportedly the highest earning model and having opted to negotiate contracts in Euros as opposed to US dollars is in the present circumstances demonstration of sensible economics. It is consistent with rational behaviour in covering future income by pricing in the currency that increases purchasing power. That's a pretty smart model who thinks in the same waves as Warren Buffet.

Further Evidence of Failing Drugs Policy in Afghanistan

Apart from demonstrating ably that state building from scratch can be a particularly difficult task, the state of Afghanistan today may just have the unintended consequence of opening up the discussion on international narcotics policy. At the risk of repetition, this blogger has commented in earlier posts that state that the attempts at the eradication of opium poppy in Afghanistan are ill-informed and bound for failure. Different stories on the International Herald Tribune and BBC news here support that claim in interesting ways. The IHT story states that drug cultivation has not only returned in full force in Balkh province of Afghanistan where it was considered eradicated, but that the farmers have instead opted for cultivation of cannabis. The stated reasons are interesting and relate to price incentives. These are that cannabis is less laborious and more cost-effective to grow in an arid area in addition to a higher yield for acreage. The BBC story states reports that the Senlis Council has taken the initiative to establish an experiment to legalize the cultivation of opium for the production of pharmaceuticals.

Together, these reports are fascinating because the first provides a reminder that the eradication of drug cultivation is increasingly fraught with problems while the other is that a mechanism to get some of those plants to market may be more helpful. I grant that the experiment Senlis Council is worthy of consideration though I suspect that the attempt to limit all production for processing into pharmaceuticals will only establish competition with alternative uses and leakage of drugs to that sub-market would arise over time.

Nevertheless, this shows that substantial steps towards legalization and regulation would be more useful since those simple farmers already understand that their land and labour put together would lead to a very high value product. They would most probably be prepared to pay a tax (which presently is appropriated by the Taliban) than cultivate crops that are obviously less lucrative. Constitutional provisions that bar cultivation will hardly change that reality but will only ensure that the policy is not reviewed appropriately and that poor citizens of that nation will merely see that law as really idiotic.

Quote of the day

"Academics and think-tanks need to be reminded that generating publicity is not a legitimate research objective". John Kay

Warren Buffet Asks to Pay More Income Tax

A story in the Guardian site today quotes Warren Buffet unequivocally stating that he should pay more tax. Reading the piece and having followed Warren Buffet's claims in recent years, he seems genuinely concerned that he presently pays a far lower income tax rate than his employees do. Of the top ten billionaires in the world, I am certain that he is alone not only in commenting on the matter and further that he is intent on giving to philanthropy while being prepared to pay taxes too. He is also unique in not appointing tax planners with the view to reducing his overall tax burden.

As a normative discussion, it is very difficult to reconcile approaches about how to distribute the tax burden and given that fact, perhaps warren Buffet ought to advocate for a reduction of the income tax rates for all his employees to the 17.7% level. This would certainly be far better for them than to merely have Warren Buffet's income tax rate increased.