Duncan Watts Explains Market Bubbles

Reading Duncan Watts piece in Slate Magazine a couple of days back, I was reminded about one of the blog posts a while back on social media. To my mind, it is almost certain that the potential of social media as a whole is being overstated but the enthusiasm for investors and users makes this a difficult argument to make. The poignant point in Duncan Watts' argument is that it is not possible to tell what will constitute success for a firm and so the valuations and assessments on profitability are in many instances just guesses cushioned with convenient justification and hope. It is this enthusiasm that in turn leads to market bubbles irrespective of the industry.

Thus the limits of human ability to tell the future is part of the factors that generate bubbles. Hence by the time everyone agrees to the fact that an industry went through a bubble, it is merely because there has been a backward connection of dots to include stories that make the outcomes almost inevitable. As he concludes, the only certainty at the end of the bubble is that many people suffered genuine confusion and it is the subsequent neat story that is less credible and contrived.

And that explains why his book, Everything is Obvious will probably be one of the business books of the year. And that's because we will be referring to its sometime soon after the social media space has gone through the cycle described in the article. 

Story From A Lost Picture Now Found

Six years ago, I visited the city of Bangkok in Thailand for the first time and was fortunate to have a day to spare as a tourist. In my minimum travel, I concentrate on taking pictures of places of worship and was lucky to have camera around to take pictures at the The Grand Palace complex that neighbors the Wat Phra Kaew. The picture accompanying this blog post was taken during that trip and because I do not take notes, I could not recall the real name until I referred to a guide book today. However, I could still remember clearly that it was a set of temples near the palace and that one of the beautifully decorated temples held the most sacred statue in Thailand, the Emerald Buddha. 

In a separate place nearby is an abandoned palace for the royal family in Thailand. Both the temple and the palace side of the complex bear perfectly manicured lawns.

As I recall, the place was so full of tourists and guides and there are portions of the temple that require the removal of shoes with warnings that they are not always safe there is no guarantee that one will find a pair left behind. Somewhere within the temple complex is a very well-crafted and accurate model of the Angkor Wat complex in stone. It is only upon my visit to the latter, four  five years later did I recall the craftsmanship and its apparent accuracy. The enduring question in my mind then is why palaces and temples are either very close or combined in a single complex as in both Wat Phra Kaew and the Angkor Wat.

Economics: Barrier to Faster Commercial Flight

Writing in Slate Magazine, Brian Palmer presents an extremely informative and correct argument for the fact that in spite of the development of flying capability, airlines are not getting passengers faster to their destinations. The argument is simply that fuel costs limit the speeds at which these airlines would operate since faster machines that are already available, would run on more fuel.As it is argued, a 10% gain in flight speed results in 21% increment in fuel consumption. What this means is that mass raising the speed of getting airlines to travel between cities is not a matter of technology but economics. In other words, it is possible to substantially shrink the time between cities such as London and New York but the time gained would not be worthy of the additional costs of fuel.

Meaning that planes will not cross continents much faster and will instead get more comfortable. How's that for a lesson on trade offs and opportunity costs?

  

Is College Education For All?

In my libertarian stance, one of the few areas in which I concede to the need for government to spend public money is in public education. A republic of educated people is probably going to do better with respecting rights of individuals than any other alternative. And yet I am easily frustrated by the simple arguments about whether everyone should go for a four year college education or not. To my mind, this question is an obvious red herring because clearly, not everyone who is capable of going through the college curriculum thinks it worthy of his time.

My sense of worry that policy debates in education are getting increasingly pedantic was elevated when I read this article under the title, "Should All Kids Go to College?". Granted that questions like these are often posed so that the author could tackle both sides of a difficult and polarized subject, it is clear that it adds to the confusion.  It is abundantly evident that not all kids should go to college because not all kids want to and because one does not have to attend college at a pre-set time.

In conclusion, primary and high school education are worthy of worrying about in terms of the numeracy and literacy of minors. I am not sure that it is a policy issue to worry about the specific drop out rates in college since universal completion at college rates should not be expected. At the same time, the crude argument that there is an inherent and real distinction between vocational training and academic training is patronizing to poor kids and outrightly preposterous. Many people who maintain the argument that certain classes or people ought not to be taken through academically rigorous courses assume that competence is one equals inability in the other and cite the greatly admired apprenticeship system in Germany. Well, they are probably wrong because I have met a German professor of political economy who is also an apprentice in carpentry.  

Facebook Needs Revenues More Than New Subscriptions

It is a fair question to ask whether there is a return to a technology bubble as happened in the early part of this century. The only difference this time may be that it is driven entirely by what technology pundits and the press have aptly named as the social media. Clearly, the leader in this is Facebook which has accummulated more than half a billion users. Charles Arthur of the Guardian cites information here suggesting that it is beginning to plateau in the US, Russia and parts of Europe.

While I claim no special knowledge of the economics and drivers of the industry, I think it is unlikely that the reduction in the pace of growth of new users should worry Facebook's management. To my mind, the strong pace of growth over the last  few years is itself remarkable and was bound to reach saturation at some time in the future. The critical thing that social media corporations must worry about now is to build on the back of their strong subscriptions, the appropriate revenue models that begin to show profits. Students of business should keep a keen eye on this industry.  

The Outlier in The Middle East

Governments in the Middle East and Northern Africa have approached the clamour for political and social change in very similar ways and with little success and at great cost to lives of innocent people. The exception seems to be the Kingdom of Saudi Arabia where the monarchy has responded by opening the treasury and expanded welfare programmes and redistribution of the rents from petroleum to citizens through a variety of methods. As Neil MacFarquhar of the NYT states, it is clear that the strategy is to disarm the calls for political reforms by redistributing oil money from the state to citizens through increased construction of housing, raises in pay and contributions to clerics who are friendly to the establishment.

This approach is understandable since Saudi Arabia has comparatively large oil reserves and receives substantial rents for that every year. It is therefore capable of maintaining this distribution to placate citizens and momentarily quell any rising discontent. It is less clear that this approach is bound to work for a long time especially as public expenditures must have a limit and affects the development of private sector. That aside, this political trick should worry watchers of the oil markets because if this approach is maintained into the medium term, then it affects the incentives in the country to play Saudi Arabia's conventional role as the moderator of oil prices. I hope that the monarchy sees this as an opportunity to buy some time and start its reforms because it is unlikely that perpetual appeasement is a good trade off for reforms.

Quoting Gary Kasparov

Reading Garry Kasparov's book, How Life Imitates Chess, I underlined very many passages in the book and now find myself having to choose only one for this post. It is found on page 212 of the paperback version.

"When preference overrides objectivity to too great a degree, our growth is inhibited."

Walmart's Final Frontier

Many households in sub-Saharan Africa are especially vulnerable to shocks generated by rising costs of food and fuel. the reason for this is that in spite of the recent economic growth registered in many African countries, the majority of people still live on very low incomes. That the south African competition Commission and the Tribunal have allowed the formal entry of Walmart to take over a leading grocery chain in that country is both fascinating and portentous of good things to come. As argued here, South African unions may be concerned about the entry of Walmart into that country but its lower income people would benefit immensely from this.

The entry of Walmart in a continent that requires serious retail market development is understandably causing concern but increased competition in retail markets is a precondition for further growth. let African urban centers be the final frontier for Walmart. I hope to follow its progress in future blog posts.   

Boris Johnson Argues That Rugby Causes Less Violent Crime

Sometime last week, the UEFA Champions League finals took place in Wembley Stadium in London. The general conclusion was that on that day, the better club, FC Barcelona of Spain won the trophy. As is expected, the punditry went out to express opinions and theories on why FC Barcelona completely dominated the match and what that implies about the football tradition of England, where the vanquished team is based. As usual, most of the commentary was not worthy of reading, leave alone taking seriously.

In my view, the standout analysis of the match and its outcomes came from the Mayor of London, Boris Johnson. His article is definitely worthy of reading and reflection upon. And yet, he too missed a delicate point and made a common error. By way of summary, his argument is that the dominance of FC Barcelona suggests that the approaches chosen by English teams is manifestly inferior. Going further, he posits that England may be better suited for rugby, the sport in which it has produced a recent world beating team. No errors so far, except that he alludes to the fact that rugby is a distinct sport in the sense that areas with the highest participation in rugby are also areas with the lowest levels of crime.

Be that as it may, it is still a leap in abstraction unless he can prove that the direction of causality heads from Rugby towards low violence. Is it not just possible that areas that experience low levels of violence in the first instance are attracted to rugby? Mayor Johnson, correlation is not causation.